<PAGE>
As filed with the Securities and Exchange Commission on August , 1999
Registration No. 333-80141
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
----------
AMENDMENT NO. 3 TO
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
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DSL.net, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 4813 06-1510312
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction Classification Code Number) Identification Number)
of incorporation or
organization)
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DSL.net, Inc.
545 Long Wharf Drive
New Haven, CT 06511
(203) 772-1000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
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David Struwas, President and Chief Executive Officer
DSL.net, Inc.
545 Long Wharf Drive
New Haven, CT 06511
(203) 772-1000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
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Copies to:
Mark H. Burnett, Esq. Stephen Zamansky, Esq. Ellen B. Corenswet, Esq.
Testa, Hurwitz & DSL.net, Inc. Babak Yaghmaie, Esq.
Thibeault, LLP 545 Long Wharf Drive Brobeck, Phleger &
125 High Street New Haven, Connecticut 06511 Harrison LLP
Boston, Massachusetts (203) 772-1000 1633 Broadway, 47th Floor
02110 New York, New York 10019
(617) 248-7000 (212) 581-1600
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after this registration statement becomes effective.
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If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [X]
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The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this registration
statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the registration statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+We will amend and complete the information in this prospectus. Although we +
+are permitted by U.S. federal securities laws to offer these securities using +
+this prospectus, we may not sell them or accept your offer to buy them until +
+the documentation filed with the SEC relating to these securities has been +
+declared effective by the SEC. This prospectus is not an offer to sell these +
+securities or our solicitation of your offer to buy these securities in any +
+jurisdiction where that would not be permitted or legal. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION -- August , 1999
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Prospectus
August , 1999
9,600,000 Shares
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DSL.net, Inc.: The Offering:
. We provide high- . We are offering
speed data 9,600,000 shares
communications of our common
services and stock.
Internet access
using digital . Staples, Inc. has
subscriber line indicated an
technology to interest in
small and medium purchasing the
sized businesses lesser of
in select second $5,000,000 of
and third tier common stock or 5%
cities. of the shares sold
in this offering
Proposed Symbol & directly from us
Market: at the initial
public offering
. DSLN price in
connection with
. Nasdaq National Market this offering,
although it is not
bound to do so.
. The underwriters
have an option to
purchase up to an
additional
1,371,818 shares
to cover over-
allotments.
. This is the
initial public
offering of our
common stock. We
anticipate that
the initial public
offering price
will be between
$10.00 and $12.00
per share.
. Closing: September , 1999.
<TABLE>
<CAPTION>
----------------------------------------
Per Share Total
----------------------------------------
<S> <C> <C>
Public offering price: $ $
Underwriting fees:
Proceeds to DSL.net:
----------------------------------------
</TABLE>
This investment involves risk. See "Risk
Factors" beginning on page 9.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
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Donaldson, Lufkin & Jenrette
Deutsche Banc Alex. Brown
Lehman Brothers
DLJdirect Inc.
<PAGE>
[Map of United States highlighting the states in which DSL.net is certified
to provide high-speed access and communications services as of August 27, 1999
and where it expects to be certified by December 31, 1999. In addition, the map
indicates those cities where DSL.net is currently or expects to offer service
by year end 1999 and those cities where DSL.net expects to offer service by
March 31, 2000.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 9
Special Note Regarding Forward-
looking Statements and Certain
Other Information.................. 20
Use of Proceeds..................... 21
Dividend Policy..................... 21
Capitalization...................... 22
Dilution............................ 23
Selected Financial and Other Data... 25
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 27
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Business......................... 36
Management....................... 54
Certain Transactions............. 60
Principal Stockholders........... 64
Description of Capital Stock..... 67
Shares Eligible for Future Sale.. 74
Underwriting..................... 76
Legal Matters.................... 79
Experts.......................... 79
Additional Information........... 79
Index to Financial Statements.... F-1
</TABLE>
3
<PAGE>
PROSPECTUS SUMMARY
This summary highlights certain important information regarding our business
and this offering. You should read this entire prospectus, including the "Risk
Factors" and the financial statements and all related notes, before deciding to
purchase our common stock. All share information reflects all stock splits
effected prior to the date of this prospectus. Except as otherwise indicated,
the information in this prospectus assumes that:
. the underwriters will not exercise their over-allotment option; and
. all outstanding shares of our preferred stock will be converted into
35,759,798 shares of our common stock.
DSL.net
Our Business
We provide high-speed data communications and Internet access services using
digital subscriber line, or DSL, technology to small and medium sized
businesses. We target select second and third tier cities, generally with
populations of less than 900,000. Our networks enable data transport over
existing copper telephone lines at speeds of up to 1.5 megabits per second. Our
services, marketed under the NETgain brand name, offer customers high-speed
digital connections at prices that are attractive compared to the cost and
performance of alternative data communications services.
We offer our customers a single point of contact for a complete business
solution that includes all of the necessary equipment and services for high-
speed data communications. We currently provide service or have installed
equipment in 34 cities. We intend to continue our network expansion into a
total of more than 90 cities, the majority of which will be in the eastern half
of the United States, by year end. Our primary services include Internet
access, e-mail and hosting our customers' Web sites and we also support
networks that interconnect our customers' offices or connect our customers with
their suppliers. Key elements of our services include:
. high-speed digital connections at prices that are attractive compared to
the cost and performance of alternative data communications services;
. connections that allow for data transmission to and from the customer at
the same high- speed, known as symmetric connections;
. connections that allow customers to access the Internet continuously
without having to dial into the network for each use;
. a network designed to reduce the possibility of unauthorized access and
to permit the secure transmission of sensitive information and
applications; and
. high quality customer support 24 hours a day, seven days a week, with
continuous network and customer connections monitoring.
4
<PAGE>
Our Strategy
Our objective is to become the leading provider of DSL-based services to
small and medium sized businesses in second and third tier cities throughout
the United States. Several DSL service providers have taken advantage of the
opportunity created by the rapidly growing data communications industry by
providing DSL-based services in large metropolitan areas. However, second and
third tier cities remain a significant underserved market. Key elements of our
strategy are to:
. be the first DSL-based service provider in select second and third tier
cities throughout the United States;
. utilize our rapid deployment model and leverage our centralized network
management to implement our rollout plan quickly and cost effectively;
. establish relationships in each local market with select local and
regional integrators of computer networks and systems and consultants
who can help market our services and provide us with customer referrals;
. develop direct relationships with customers in order to better
understand and serve their needs; and
. leverage our systems and network design to capitalize on the cost
efficiencies of DSL technology.
Another key component of our strategy is to develop relationships with
companies that provide complementary products and services or that can assist
us in attracting our target customers. In July 1999, we entered into separate
strategic arrangements with Staples, Inc. and Microsoft Corporation. As part of
our strategic relationships, Microsoft and Staples invested $15 million and
$3.5 million, respectively. Staples has also indicated its interest in
purchasing the lesser of $5 million of common stock or 5% of the shares sold in
this offering directly from us at the initial public offering price in
connection with this offering, although it is not bound to do so. The Staples
marketing agreement designates us as their exclusive supplier of the types of
DSL services we provide in each of our markets. Our services will be co-branded
and made available to Staples customers through their stores, catalogs, direct
sales force and Web site. In our Microsoft arrangement, we will jointly market
a co-branded version of the Microsoft Network (MSN) service to our customers
and Microsoft intends to use its existing channels and sales force to augment
our own marketing efforts.
Our History
We were incorporated in Delaware on March 3, 1998. Our principal executive
offices are located at 545 Long Wharf Drive, New Haven, Connecticut 06511, and
our telephone number is (203) 772-1000. We maintain a corporate Web site at
www.dsl.net. The contents of our website are not part of this prospectus.
We own a federal supplemental registration and claim rights in the name
DSL.NET. This prospectus also refers to trade names and trademarks of other
companies.
5
<PAGE>
The Offering
Common stock offered........ 9,600,000 shares
Common stock to be
outstanding after the
offering................... 59,639,561 shares
Use of proceeds............. To continue building our network and for working
capital and other general corporate purposes. We
may also use a portion of the proceeds to acquire
complementary businesses.
Proposed Nasdaq National
Market symbol.............. DSLN
The shares of common stock to be outstanding after the offering exclude, as
of July 31, 1999:
. 12,364,200 shares of common stock reserved for issuance under our stock
option plan, of which 5,265,350 shares with a weighted average exercise
price of $0.72 per share were subject to outstanding options;
. 300,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
. 194,556 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $0.68 per share.
Staples has indicated an interest in purchasing the lesser of $5,000,000 of
common stock or 5% of the shares sold in this offering directly from us at the
initial public offering price in connection with this offering, although it is
not bound to do so.
6
<PAGE>
Summary Financial Data
You should read the following summary financial data together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the related notes included
elsewhere in this prospectus. We were incorporated on March 3, 1998 and
commenced operations on March 28, 1998.
As reflected in the pro forma as adjusted information, the Company's
redeemable, convertible preferred stock, included in the Balance Sheet Data
below, will convert into 35,759,798 shares of common stock upon completion of
the offering. Prior to the offering, the redeemable, convertible preferred
stock is only redeemable upon certain acquisitions, mergers or consolidations.
The pro forma balance sheet information below reflects each of the following
items, all of which occurred after June 30, 1999:
. the issuance of 939,086 shares of Series E preferred stock for net
proceeds of approximately $18,468,000; and
. the repayment of a note receivable from one of our officers of
approximately $1,000,000 on July 16, 1999.
The pro forma as adjusted information adjusts the pro forma information to
give effect to the conversion of all outstanding preferred stock into common
stock and the sale of 9,600,000 shares of common stock offered by us at an
assumed initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and offering expenses. See
"Use of Proceeds."
<TABLE>
<CAPTION>
Period
from Inception
Period from Inception (March 3, 1998)
(March 3, 1998) through through Six Months Ended
December 31, 1998 June 30, 1998 June 30, 1999
<S> <C> <C> <C>
Statement of Operations
Data:
Total revenue........... $ 31,533 $ 3,489 $ 184,173
Operating loss.......... (2,785,026) (2,509) (6,704,862)
Net loss................ (2,789,637) (2,741) (6,497,247)
Net loss per common
share.................. $ (0.55) $ (0.00) $ (2.02)
Pro forma net loss per
common share........... (0.55) (0.00) (0.24)
Other Data:
EBITDA.................. $(2,779,282) $(2,509) $ (5,603,935)
Capital expenditures.... 290,082 4,847 6,133,618
Cash Flow Data:
Used in operating activ-
ities.................. $ (153,505) $(1,427) $ (2,766,896)
Used in investing activ-
ities.................. (290,082) (4,847) (11,661,709)
Provided by financing
activities............. 483,066 49,133 44,859,829
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities.......................... $ 35,998,794 $ 55,466,699 $152,974,699
Total assets......................... 43,575,321 63,043,226 160,551,226
Long-term obligations (including cur-
rent portion)....................... 1,725,090 1,725,090 1,725,090
Redeemable convertible preferred
stock............................... 56,564,972 75,032,966 --
Total stockholders' equity .......... (17,081,973) (16,082,062) 156,458,904
</TABLE>
7
<PAGE>
EBITDA, shown above under "Other Data," consists of net loss excluding net
interest, taxes, depreciation of capital assets and amortization of deferred
compensation expense. Other companies, however, may calculate it differently
from us. We have provided EBITDA because it is a measure of financial
performance commonly used for comparing companies in the telecommunications
industry in terms of operating performance, leverage, and ability to incur and
service debt. EBITDA is not a measure determined under generally accepted
accounting principles. EBITDA should not be considered in isolation from, and
you should not construe it as a substitute for:
. operating loss as an indicator of our operating performance,
. cash flows from operating activities as a measure of liquidity,
. other consolidated statement of operations or cash flows data presented
in accordance with generally accepted accounting principles,
. or as a measure of profitability or liquidity.
8
<PAGE>
RISK FACTORS
You should consider carefully the following risks, together with all other
information included in this prospectus before you decide to buy our common
stock. Please keep these risks in mind when reading this prospectus, including
any forward-looking statements appearing in this prospectus. If any of the
following risks actually occurs, our business, financial condition or results
of operations would likely suffer materially. As a result, the trading price of
our common stock may decline, and you could lose all or part of the money you
paid to buy our common stock.
Risks relating to our business
Our extremely limited operating history makes it difficult to evaluate our
business and prospects
We commenced operations in March 1998 and only recently began to market and
sell our services. We began offering commercial service in Stamford,
Connecticut in May 1998. Accordingly, you have limited information about our
company with which to evaluate our business, strategies and performance and an
investment in our common stock.
Because the high-speed data communications industry is new and rapidly
evolving, we cannot predict its future growth or ultimate size
The high-speed data communications industry is in the early stages of
development and is subject to rapid and significant technological change. Since
this industry is new and because the technologies available for high-speed data
communications services are rapidly evolving, we cannot accurately predict the
rate at which the market for our services will grow, if at all, or whether
emerging technologies will render our services less competitive or obsolete. If
the market for our services fails to develop or grows more slowly than
anticipated, our business, prospects, financial condition and results of
operations could be materially adversely affected. Many providers of high-speed
data communication services are testing products from numerous suppliers for
various applications, and these suppliers have not broadly adopted an industry
standard. In addition, certain industry groups are in the process of trying to
establish standards which could limit the types of technologies we could use.
Certain critical issues concerning commercial use of DSL technology for
Internet access, including security, reliability, ease and cost of access and
quality of service, remain unresolved and may impact the growth of these
services.
We have incurred losses and have experienced negative operating cash flow to
date and expect our losses and negative operating cash flow to continue and to
increase
We have incurred significant losses and experienced negative operating cash
flow for each month since our formation. We expect to continue to incur
significant losses and negative operating cash flow for the foreseeable future.
If our revenue does not grow as expected or capital and operating expenditures
exceed our plans, our business, prospects, financial condition and results of
operations will be materially adversely affected. As of June 30, 1999, we had
an accumulated deficit of approximately $11,689,000. We cannot be certain if or
when we will be profitable or if or when we will generate positive operating
cash flow. We expect our operating expenses to increase significantly as we
expand our business. In addition, we expect to make significant additional
capital
9
<PAGE>
expenditures during the remainder of 1999 and in subsequent years. We also
expect to substantially increase our operating expenditures, particularly
network and operations and sales and marketing expenditures, as we implement
our business plan. However, our revenue may not increase despite this
increased spending.
Our business model is unproven, and may not be successful
We do not know whether our business model and strategy will be successful.
If the assumptions underlying our business model are not valid or we are unable
to implement our business plan, achieve the predicted level of market
penetration or obtain the desired level of pricing of our services for
sustained periods, our business, prospects, financial condition and results of
operations could be materially adversely affected. We have adopted a different
strategy than other DSL providers. We focus on selling directly to small and
medium sized businesses in second and third tier cities. In contrast, other DSL
providers sell services primarily to Internet service providers and others who,
in turn, resell these services to end users through their sales forces. In
addition, many other DSL providers are currently focused primarily on offering
their services in large metropolitan areas. Certain of our target markets are
within the larger metropolitan areas where other DSL providers are focused on
providing service. Our unproven business model makes it difficult to predict
the extent to which our services will achieve market acceptance. To be
successful, we must deploy our network in a significant number of our selected
markets and convince our target customers to utilize our service. We currently
provide service or have installed equipment in only 34 cities. It is possible
that we may never be able to deploy our network as planned, achieve significant
market acceptance, favorable operating results or profitability.
Our failure to achieve or sustain market acceptance at desired pricing levels
could impair our ability to achieve profitability or positive cash flow
Prices for digital communication services have fallen historically, a trend
we expect will continue. Accordingly, we cannot predict to what extent we may
need to reduce our prices to remain competitive or whether we will be able to
sustain future pricing levels as our competitors introduce competing services
or similar services at lower prices. Our failure to achieve or sustain market
acceptance at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would have a material adverse effect
on our business, prospects, financial condition and results of operations.
If we fail to recruit qualified personnel in a timely manner and retain our
employees, we will not be able to execute our business plan
To meet our business plan, we need to hire a substantial number of qualified
personnel, particularly sales and marketing personnel. If we are unable to
recruit qualified personnel in a timely manner or to retain our employees, we
will not be able to execute our business plan. Our industry is characterized by
intense competition for, and aggressive recruiting of, skilled personnel, as
well as a high level of employee mobility. Many of our future employees must be
recruited to work locally in the new markets where we intend to establish a
presence. The combination of our local sales and marketing strategy and the
competitive nature of our industry may make it difficult to hire qualified
personnel on a timely basis and to retain our employees.
10
<PAGE>
Our management team has little experience working together, and the loss of
key personnel could adversely affect our business
We depend on a small number of executive officers and other members of
senior management to work effectively as a team, to execute our business
strategy and business plan, and to manage employees who will be located
throughout the United States. The loss of key managers or their failure to work
effectively as a team could have a material adverse effect on our business and
prospects. We do not have employment agreements with any of our executive
officers, so any of these individuals may terminate his employment at any time.
Our failure to establish the necessary infrastructure to support our business
and to manage our growth could strain our resources and adversely affect our
business and financial performance
Our business plan anticipates that we will service in a significant number
of new cities and add a significant number of new employees in geographically-
dispersed areas. This rapid growth will continue to place a significant strain
on our management, financial controls, operations, personnel and other
resources. Our failure to manage our rapid growth could have a material adverse
effect on our ability to integrate expanding operations, the quality of our
services and our ability to recruit, manage and retain key personnel. If we do
not institute adequate financial and reporting systems, managerial controls,
and procedures to manage and operate from multiple geographically-dispersed
locations, our operations will be materially and adversely affected. We are
currently implementing operations support systems to help manage customer
service, bill customers, process customer orders and coordinate with vendors
and contractors. Implementation of each of these systems, which we expect to be
substantially completed by the end of 1999, and subsequent enhancements and
integration of these systems, could be delayed or, when implemented, could
cause disruptions in service or billing. In addition, we have recently
implemented a new financial and reporting system which will interact with our
operations support systems. To manage our growth effectively, we must
successfully implement these systems on a timely basis, and continually expand
and upgrade these systems as our operations expand.
Disappointing quarterly revenue or operating results could cause the price of
our common stock to fall
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or security
analysts, the price of our common stock could fall substantially. Our quarterly
revenue and operating results may fluctuate as a result of a variety of
factors, many of which are outside our control, including:
. amount and timing of expenditures relating to the rollout of our
infrastructure and services;
. ability to obtain and the timing of necessary regulatory approvals;
. rate at which we are able to attract customers within our target markets
and our ability to retain these customers at sufficient aggregate
revenue levels;
. ability to deploy our network on a timely basis;
. availability of financing to continue our expansion;
11
<PAGE>
. technical difficulties or network downtime;
. availability of space in traditional telephone companies' central
offices and timing of the installation of our equipment in those spaces;
and
. introduction of new services or technologies by our competitors and
resulting pressures on the pricing of our service.
The failure of our customers to pay their bills on a timely basis could
adversely affect our cash flow
Our target customers consist of small and medium sized businesses. We
anticipate having to bill and collect numerous relatively small customer
accounts. We may experience difficulty in collecting amounts due on a timely
basis. Our failure to collect accounts receivable owed to us by our customers
on a timely basis could have a material adverse effect on our business,
financial condition and cash flow.
Our failure to develop and maintain good relationships with marketing partners
in a local service market could adversely affect our ability to obtain and
retain customers in that market
In addition to marketing through our direct sales force, we rely on
relationships with local marketing partners, such as integrators of computer
systems and networks and consultants. These partners recommend our services to
their clients, provide us with referrals and help us build a local presence in
each market. We may not be able to identify, and maintain good relationships
with, quality marketing partners or assure you that they will recommend our
services rather than our competitors' services to their customers. Our failure
to identify, and maintain good relationships with, quality marketing partners
could have a material adverse effect on our ability to obtain and retain
customers in a market and, as a result, our business would suffer.
Our success depends on negotiating and entering into interconnection
agreements with traditional telephone companies
We must enter into and renew interconnection agreements with traditional
telephone companies in each of our target markets in order to provide service
in that market. These agreements govern, among other things, the price and
other terms regarding our location of equipment in the telephone companies'
central offices and our lease of copper telephone lines that connect those
central offices to our customers. To date, we have entered into agreements with
Ameritech, Bell Atlantic, BellSouth, GTE, SBC Communications and US West, which
govern our relationships in 43 states and the District of Columbia. Delays in
obtaining interconnection agreements would delay our entrance into target
markets and could have a material adverse effect on our business and prospects.
Our interconnection agreements have limited terms of one to two years and we
cannot assure you that new agreements will be negotiated or that existing
agreements will be extended on terms favorable to us. Interconnection
agreements must be approved by state regulators and are also subject to
oversight by the FCC and the courts. These governmental authorities may modify
the terms or prices of our interconnection agreements in ways that could
adversely affect our ability to deliver service and our business and results of
operations.
12
<PAGE>
Failure to negotiate interconnection agreements with the traditional local
telephone companies could lead to costly and lengthy arbitration which may not
be resolved in our favor
Under federal law, traditional telephone companies have an obligation to
negotiate with us in good faith to enter into interconnection agreements. If no
agreement can be reached, either side may petition the applicable state
telecommunications regulators to arbitrate remaining disagreements. Arbitration
is a costly and lengthy process that could delay our entry into markets and
could harm our ability to compete. Interconnection agreements resulting from
arbitration must be approved by state regulators We cannot assure you that a
state regulatory authority would resolve disputes in our favor. Currently, FCC
rules governing pricing standards for access to the networks of the traditional
telephone companies are currently being challenged in federal court.
Failure to obtain space for our DSL equipment in the local telephone
companies' central offices in our target markets could adversely affect our
business
Our strategy requires us to obtain space for our DSL equipment in those
central offices of the traditional telephone companies that already serve a
large number of our target customers. Failure to obtain required space to
locate our equipment on a timely basis could have a material adverse effect on
our business. In addition to negotiating and entering into interconnection
agreements with traditional telephone companies, we must negotiate and enter
into collocation agreements for each central office in which we locate
equipment. We may not be able to secure collocation space in the central
offices of our choice on a timely basis. We expect that central office space
will become increasingly scarce as demand increases. In addition, the terms of
our collocation agreements are one to two years and are subject to certain
renegotiation, renewal and termination provisions.
Our success depends on traditional telephone companies providing acceptable
transmission facilities and copper telephone lines
We interconnect with and use the networks of traditional telephone companies
to provide our services to our customers. We cannot assure you that these
networks will be able to meet the telecommunications needs of our customers or
maintain our service standards. We also depend on the traditional telephone
companies to provide and maintain their transmission facilities and the copper
telephone lines between our network and our customers' premises. Our dependence
on traditional telephone companies could cause delays in establishing our
network and providing our services. Any such delays could have a material
adverse effect on our business. We lease copper telephone lines running from
the central office of the traditional telephone companies to each customer's
location. In many cases, the copper telephone lines must be specially
conditioned by the telephone company to carry digital signals. We may not be
able to lease a sufficient number of acceptable telephone lines on acceptable
terms, if at all. Traditional telephone companies often rely on unionized labor
and labor-related issues have in the past, and may in the future, adversely
affect the incumbent carriers' provision of services.
We compete with the traditional local telephone companies on whom we depend
Many of the traditional local telephone companies, including those created
by AT&T's divestiture of its local telephone service business, are conducting
technical or market trials or have begun deploying DSL-based services. In
addition, these companies also currently offer high-speed
13
<PAGE>
data communications services that use other technologies. Consequently, these
companies have certain incentives to delay:
. our entry into, and renewals of, interconnection agreements with them,
. our access to their central offices to install our equipment and provide
our services,
. providing acceptable transmission facilities and copper telephone lines,
and
. our introduction and expansion of our services.
Any such delays would negatively impact our ability to implement our business
plan and harm our competitive position, business and prospects.
We depend on long distance carriers to connect our network
Data is transmitted across our network via transmission facilities that we
lease from a long distance carrier. Failure of the carrier to provide service
or to provide quality service may interrupt the use of our services by our
customers. Currently, we have an agreement with MCI WorldCom to provide this
service. Recently, the service provided by MCI WorldCom was interrupted for
several days by a failure of their communications network. We cannot be sure
that the MCI service will not be interrupted in the future. Prior to this
failure, we had initiated a process to evaluate additional long distance
carriers to provide this service but there can be no assurance that we will be
able to negotiate an agreement on acceptable terms with any other long distance
carriers or that the service provided by these carriers will not be
interrupted.
Our success depends on contractors who install the equipment and wiring
necessary to utilize our service in the central offices of traditional
telephone companies and at our customers' premises
We primarily utilize contractors to install necessary equipment and wiring
in the central offices of traditional telephone companies and at our customers'
premises. These installations must be completed on a timely basis and in a
cost-efficient manner. Failure to retain experienced contractors to install the
equipment and wiring or failure to complete these installations on a timely,
cost-efficient basis could materially delay our growth or damage our
reputation, our business and prospects and results of operations. If we are
unable to retain contractors to provide these services, we will have to
complete these installations ourselves, probably at a greater cost and with
delay. We may be required to utilize numerous contractors as we expand our
operations, which may divert management attention and result in delays in
installations, increased costs and lower quality.
Intense competition in the high-speed data communication services market may
negatively affect the number of our customers and the pricing of our services
The high-speed data communication services market is intensely competitive.
If we are unable to compete effectively, our business, prospects, financial
condition and results of operations would be adversely affected. We expect the
level of competition to intensify in the future, due, in part, to increasing
consolidation in our industry. Our competitors use various high speed
communications technologies for local access connections such as integrated
services digital network, or ISDN, frame relay, T1, DSL services and wireless,
satellite-based and cable networks. We expect significant competition from:
. Other providers of DSL-based services like us, including Covad, Network
Access Solutions, NorthPoint and Rhythms NetConnections;
14
<PAGE>
. Internet service providers, such as America Online, Concentric Network
and Flashcom, which have begun to develop high-speed access capabilities
to leverage their existing products and services.
. Traditional local telephone companies, including the traditional
telephone companies created by AT&T's divestiture of its local telephone
service business, some of which have begun deploying DSL-based services
and which provide other high-speed data communications services;
. National long distance carriers, such as AT&T and MCI WorldCom, which
are beginning to offer competitive DSL-based services;
. Cable modem service providers, such as At Home, which are offering high-
speed Internet access over cable networks and have positioned themselves
to do the same for businesses;
. Providers utilizing alternative technologies, such as wireless and
satellite-based data service providers.
Many of our current and potential competitors have longer operating
histories, greater brand name recognition, larger customer bases and
substantially greater financial, technical, marketing, management, service
support and other resources than we do. Therefore, they may be able to respond
more quickly than we can to new or changing opportunities, technologies,
standards or customer requirements. See "Business --Competition."
We may not be able to continue to grow our business if we do not obtain
significant additional funds on acceptable terms by 2001
The actual amount and timing of our future capital requirements will depend
on the demand for our services and regulatory, technological and competitive
developments which could differ materially from our estimates. We may not be
able to raise sufficient debt or equity capital on terms that we consider
acceptable, if at all. If we are unable to obtain adequate funds on acceptable
terms, our ability to deploy and operate our network, fund our expansion or
respond to competitive pressures would be significantly impaired.
We may incur significant amounts of debt in the future to implement our
business plan and, if incurred, this indebtedness will create greater financial
and operating risk and limit our flexibility
We intend to seek additional debt financing in the future. We are not
generating sufficient revenue or operating cash flow to fund our operations or
to repay existing or expected debt. We may not be able to repay our current
debt or any future debt. In addition, the terms of any future debt would likely
contain additional restrictive covenants that would limit our ability to incur
additional indebtedness and place other operating restrictions on our business.
If we incur additional debt, we will be required to devote increased amounts of
our cash flow to service indebtedness. This could require us to modify, delay
or abandon the capital expenditures and other investments necessary to
implement our business plan.
We may be subject to risks associated with future acquisitions
We may acquire complementary businesses, although we have no definitive
agreements to do so at this time. An acquisition may not produce the revenue,
earnings or business synergies that we
15
<PAGE>
anticipate, and an acquired business might not perform as we expect. If we
pursue any acquisition, our management could spend a significant amount of time
and effort in identifying and completing the acquisition and may be distracted
from the operation of our business. If we complete an acquisition, we would
probably have to devote a significant amount of management resources to
integrating the acquired business with our existing operations, and that
integration may not be successful.
Our services are subject to federal, state and local regulation and changes in
laws or regulations could adversely affect the way we operate our business
The facilities we use and the services we offer are subject to varying
degrees of regulation at the federal, state and/or local levels. Changes in
applicable laws or regulations could, among other things, increase our costs,
restrict our access to the central offices of the traditional telephone
companies, or restrict our ability to provide our services. For example, the
1996 Telecommunications Act, which, among other things, requires traditional
telephone companies to unbundle network elements and to allow competitors to
locate their equipment in the telephone companies' central offices, is the
subject of ongoing administrative proceedings at the federal and state levels,
litigation in federal and state courts, and legislation in federal and state
legislatures. We cannot predict the outcome of the various proceedings,
litigation and legislation or whether or to what extent these proceedings,
litigation and legislation may adversely affect our business and operations. In
addition, decisions by the FCC and state telecommunications regulators will
determine some of the terms of our relationships with traditional
telecommunications carriers, including the terms and prices of interconnection
agreements, and access fees and surcharges on gross revenue from interstate and
intrastate services. State telecommunications regulators determine whether and
on what terms we will be authorized to operate as a competitive local exchange
carrier in their state. In addition, local municipalities may require us to
obtain various permits which could increase the cost of services or delay
development of our network. Future federal, state and local regulations and
legislation may be less favorable to us than current regulations and
legislation and may adversely affect our businesses and operations. See
"Business -- Governmental Regulations."
A recent U.S. Supreme Court decision has raised questions about our ability to
obtain interconnection facilities from the traditional telephone companies
which could hurt our business
A January 1999 decision by the U.S. Supreme Court could adversely affect our
business because it has raised questions about whether we will be able to
obtain certain interconnection facilities from the traditional telephone
companies that we need in order to provide our services. In that decision, the
Supreme Court invalidated an FCC rule which defines the particular parts of a
traditional telephone company's network that must be provided to competitors
like us, and it sent the matter back to the FCC with instructions to consider
further the question of which parts of a traditional telephone company's
network must be provided to competitors. The FCC recently initiated a
proceeding to develop a new standard for determining which portions of the
telephone companies' network elements must be made available to competitors
like us. The FCC has stated that it plans to issue a new decision on this
matter later this year. This new standard may change the parts of the telephone
companies' networks to which companies like us have access. If this occurs, our
ability to implement our business plan will be adversely affected.
16
<PAGE>
An FCC proposal to permit the traditional local telephone companies to offer
DSL services through a less-regulated subsidiary could, if adopted, adversely
affect our business plan by altering our relationship with the local telephone
companies upon whose equipment we depend for access to customers
In August 1998, the FCC proposed that incumbent carriers should be permitted
to create separate affiliates for the provision of DSL services that would
operate under the relaxed regulatory treatment available to competitive DSL
carriers. Under the separate affiliate proposal, traditional local telephone
companies would be required to provide wholesale service to competitor DSL
carriers at the same rates, terms and conditions that it provided to its
separate affiliate. The outcome of this proceeding remains uncertain. Any final
decision in this proceeding that alters our relationship with the traditional
local telephone companies could adversely affect our ability to provide DSL
services at a competitive price.
Uncertain tax and other surcharges on our services may increase our payment
obligations to federal and state governments
Telecommunications providers are subject to a variety of federal and state
surcharges and fees on their gross revenues from interstate and intrastate
services. These surcharges and fees may be increased and other surcharges and
fees not currently applicable to our services could be imposed on us. In either
case, the cost of our services would increase and that could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
A breach of our network security could result in liability to us and deter
customers from using our services
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Any of the foregoing problems could result in
liability to us and deter customers from using our service. Unauthorized access
could jeopardize the security of confidential information stored in the
computer systems of our customers. Eliminating computer viruses and alleviating
other security problems may require interruptions, delays or cessation of
service to our customers, cause us to incur significant costs to remedy the
problem, and divert management attention. We can provide no assurance that the
security measures we have implemented will not be circumvented or that any
failure of these measures will not have a material adverse effect on our
ability to obtain and retain customers. Any of these factors could have a
material adverse effect on our business and prospects.
Our failure to adequately protect our proprietary rights may adversely affect
our business
We rely on unpatented trade secrets and know-how to maintain our competitive
position. Our inability to protect these secrets and know-how could have a
material adverse effect on our business and prospects. We protect our
proprietary information by entering into confidentiality agreements with
employees and consultants and potential business partners. These agreements may
be breached or terminated. In addition, third parties, including our
competitors, may assert infringement claims against us. Any such claims, could
result in costly litigation, divert management's attention and resources,
require us to pay damages and/or to enter into license or similar agreements
under which we would be required to pay license fees or royalties.
17
<PAGE>
Our failure and the failure of third parties to be Year 2000 compliant could
negatively impact our business
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. The use of software and
computer systems that are not Year 2000 compliant could result in system
failures or miscalculations and may result in disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities. We are subject to
potential Year 2000 problems affecting our services and our business systems,
the systems of the traditional local telephone companies and other vendors, and
our customers' systems. Any of these Year 2000 problems could have a material
adverse effect on our business, financial condition and results of operations.
Year 2000 errors or defects may be discovered in our internal software or other
systems and, if such errors or defects are discovered, the costs of making
those systems Year 2000 compliant may be material. Year 2000 errors or defects
in the internal systems maintained by the traditional local telphone companies
and other vendors, could require us to incur significant unanticipated expenses
to remedy any problems or, if possible, replace affected vendors. Furthermore,
Year 2000 problems of our target customers could negatively impact their
decision to buy our services. See "Management's Discussion and Analysis and
Results of Operations--Impact of Year 2000."
Risks relating to ownership of our common stock
The price of our common stock after this offering may be lower than the price
you pay
Prior to this offering, there has been no public market for our common
stock. After this offering, an active trading market in our stock might not
develop or continue. If you purchase shares of our common stock in this
offering, you will pay a price that was not established in a competitive
market. Rather, you will pay a price that we negotiated with the
representatives of the underwriters. The price of our common stock that will
prevail in the market after this offering may be higher or lower than the price
you pay.
Our executive officers, directors and principal stockholders own a significant
percentage of our company and will be able to exercise significant influence
over our company, which could have a material and adverse effect on the market
price of our common stock
After this offering, our executive officers, directors and principal
stockholders and their affiliates will together control approximately 61.3% of
our outstanding common stock. As a result, these stockholders, if they act
together, will be able to control all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, and will continue to have significant influence over our affairs.
This concentration of ownership may have the effect of delaying, preventing or
deterring a change in control, could deprive our stockholders of an opportunity
to receive a premium for their common stock as part of a sale and might affect
the market price of our common stock.
Certain provisions of our charter, by-laws and Delaware law make a takeover
difficult
Our corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These provisions include a
staggered board of directors, limitations
18
<PAGE>
on persons authorized to call a special meeting of stockholders and advance
notice procedures required for stockholders to make nominations of candidates
for election as directors or to bring matters before an annual meeting of
stockholders. These provisions might discourage, delay or prevent a change of
control or a change in our management. These provisions could also discourage
proxy contests and make it more difficult for you and other stockholders to
elect directors and take other corporate actions. The existence of these
provisions could limit the price that investors might be willing to pay in the
future for shares of common stock and could deprive you of an opportunity to
receive a premium for your common stock as part of a sale.
The market price of our common stock may drop significantly when the
restrictions on resale by our existing securityholders lapse
Following this offering, we will have approximately 59,600,000 shares of
common stock outstanding. Approximately 50,000,000 shares, or 83.90%, of our
outstanding common stock will be subject to restrictions on resale under U.S.
securities laws. In addition, holders of a majority of these shares have agreed
not to sell these shares for at least 180 days following the date of this
prospectus. As these restrictions on resale end beginning in March 2000, the
market price of our common stock could drop significantly if holders of these
shares sell them or are perceived by the market as intending to sell them.
These sales also may make it difficult for us to sell equity securities in the
future at a time and price that we deem appropriate. See "Shares Eligible for
Future Sale."
We will have discretion as to the use of the proceeds of this offering, which
we may not use effectively
We have not committed the net proceeds of this offering to any particular
purpose. As a result, our management will have significant flexibility in
applying the net proceeds of this offering and could apply them in ways with
which stockholders may disagree. If we do not apply the funds we receive
effectively, our accumulated deficit will increase and we may lose significant
business opportunities. See "Use of Proceeds."
Investors will experience immediate and substantial dilution in the book value
of their investment
If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution because the price you pay will be
substantially greater than the net tangible book value per share of the shares
you acquire. This dilution is due, in large part, to the fact that our current
investors paid substantially less than the public offering price when they
purchased their shares of common stock. You will experience additional dilution
upon the exercise of outstanding stock options and warrants to purchase common
stock.
19
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
AND CERTAIN OTHER INFORMATION
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Business" and elsewhere in this prospectus constitute forward-
looking statements. These statements relate to future events or our future
financial performance, and are identified by terminology such as "may,"
"might," "will," "should," "expect," "scheduled," "plan," "intend,"
"anticipate," "believe," "estimate," "potential," or "continue" or the negative
of such terms or other comparable terminology. These statements speak only as
of the date of this prospectus and are only predictions. Actual events or
results may differ materially. In evaluating these statements, you should
specifically consider various factors, including the risks outlined under "Risk
Factors." These factors, among others, may cause our actual results to differ
materially from any forward-looking statement. Although we believe that the
expectations reflected in the forward-looking statements are reasonable, we
cannot guarantee future results, levels of activity, performance or
achievements.
We use market data and industry forecasts throughout this prospectus, which
we have obtained from internal surveys, market research, publicly available
information and industry publications. We believe that the surveys and market
research we or others have performed is reliable, but we have not independently
verified this information. Such information may not be accurate.
20
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of common stock in this
offering will be approximately $97,508,000, based upon an assumed offering
price per share of $11.00 and after deducting estimated underwriting discounts
and commissions and estimated offering expenses. If the underwriters' over-
allotment option is exercised in full, we estimate that such net proceeds will
be approximately $111,542,000. See "Underwriting."
We intend to use the net proceeds from this offering to continue building
our network and for working capital and other general corporate purposes. We
may also use a portion of the net proceeds to acquire complementary businesses,
although we have no definitive agreements to do so at this time. The amounts
actually expended for these purposes will vary significantly depending on a
number of factors, including revenue growth, if any, and the extent and timing
of our entry into target markets and capital expenditures. In addition to the
intended uses of the net proceeds, the principal purposes of the offering are
to create a public market for our common stock, enhance our ability to use our
common stock as a means of attracting, motivating and retaining key employees,
and facilitate our future access to public equity markets.
Prior to the application of the net proceeds from the offering as described
above, these proceeds will be invested in marketable, investment-grade
securities.
DIVIDEND POLICY
We have never declared or paid cash dividends. We do not anticipate
declaring or paying cash dividends for the foreseeable future. Instead, for the
foreseeable future, we will retain our earnings, if any, for the future
operation and expansion of our business. In addition, our credit agreement with
our bank prohibits the payment of cash dividends.
21
<PAGE>
CAPITALIZATION
The following table shows our capitalization at June 30, 1999 on an actual
basis, a pro forma basis and a pro forma as adjusted basis.
As reflected in the pro forma as adjusted information, the Company's
redeemable, convertible preferred stock will convert into 35,759,798 shares of
common stock upon completion of the offering. Prior to the offering, the
redeemable, convertible preferred stock is only redeemable upon certain
acquisitions, mergers or consolidations.
The pro forma balance sheet information below reflects each of the following
items, all of which occurred after June 30, 1999:
. the issuance of 939,086 shares of Series E preferred stock; and
. the repayment of a note receivable from one of our officers on July 16,
1999.
The pro forma as adjusted information adjusts the pro forma information to
give effect to the conversion of each outstanding share of preferred stock into
2.666 shares of common stock and the sale of 9,600,000 shares of common stock
offered by us at an assumed initial public offering price of $11.00 per share,
after deducting estimated underwriting discounts and commissions and offering
expenses. See "Use of Proceeds."
<TABLE>
<CAPTION>
June 30, 1999
-----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Cash, cash equivalents and market-
able securities.................... $ 35,998,794 $ 55,466,699 $152,974,699
============ ============= ============
Long-term debt, including current
portion............................ 1,725,090 1,725,090 1,725,090
------------ ------------- ------------
Redeemable convertible preferred
stock:
Convertible preferred stock, $.001
par value; 18,962,500 shares au-
thorized; 18,962,500 shares au-
thorized pro forma; 20,000,000
shares authorized pro forma as
adjusted;
Series A -- 225,000 issued and
outstanding;
225,000 issued and outstanding
pro forma and none issued and
outstanding pro forma as
adjusted........................ 225,000 225,000 --
Series B -- 6,500,000 issued and
outstanding; 6,500,000 issued
and outstanding pro forma; none
issued and outstanding pro forma
as adjusted..................... 15,424,999 15,424,999 --
Series C -- 2,785,516 issued and
outstanding; 2,785,516 issued
and outstanding pro forma; none
issued and outstanding pro forma
as adjusted..................... 9,941,104 9,941,104 --
Series D -- 2,963,672 issued and
outstanding; 2,963,672 issued
and outstanding pro forma; none
issued and outstanding pro forma
as adjusted..................... 30,973,869 30,973,869 --
Series E -- none issued and
oustanding; 939,086 issued and
outstanding pro forma; none
issued and outstanding pro forma
as adjusted..................... -- 18,467,994 --
------------ ------------- ------------
Total redeemable convertible
preferred stock................ 56,564,972 75,032,966 --
------------ ------------- ------------
Stockholders' equity:
Common stock, $.0005 par value;
55,925,000 shares authorized;
55,925,000 shares authorized pro
forma; 200,000,000 shares
authorized pro forma as adjusted;
14,129,800 shares issued and
outstanding; 14,129,800 issued
and outstanding pro forma;
59,489,589 shares issued and
outstanding pro forma
as adjusted...................... 7,065 7,065 29,745
Additional paid-in capital........ 8,039,317 8,039,317 180,557,603
Note receivable from officer...... (999,911) -- --
Deferred compensation............. (12,439,562) (12,439,562) (12,439,562)
Accumulated deficit............... (11,688,882) (11,688,882) (11,688,882)
------------ ------------- ------------
Total stockholders' equity...... $(17,081,973) $ (16,082,062) $156,458,904
------------ ------------- ------------
Total capitalization............ $ 41,208,089 $ 60,675,994 $158,183,994
============ ============= ============
</TABLE>
22
<PAGE>
DILUTION
As of June 30, 1999, our pro forma net tangible book value was $58,767,860,
or $1.17 per share of common stock. Pro forma net tangible book value is the
amount of total tangible assets less total liabilities. Pro forma net tangible
book value per common share is pro forma net tangible book value divided by the
number of shares of common stock outstanding, assuming the issuance of our
Series E preferred stock and the payment of a note receivable from one of our
officers which occurred after June 30, 1999 and the conversion of all shares of
preferred stock into common stock.
After giving effect to the sale of the common stock offered by us at an
assumed initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and offering expenses payable
by us, and the receipt of the net proceeds of approximately $97,508,000
therefrom, our pro forma net tangible book value at June 30, 1999 would have
been $156,276,000, or $2.62 per share of common stock. This represents an
immediate increase in pro forma net tangible book value of $1.45 per share of
common stock to existing stockholders, and an immediate dilution in pro forma
net tangible book value of $8.38 per share of common stock to new investors
purchasing our common stock in this offering. The following table illustrates
this per share dilution.
<TABLE>
<S> <C> <C>
Assumed initial public offering price per common share........ $11.00
------
Pro forma net tangible book value per share at June 30,
1999....................................................... $1.17
Increase in pro forma net tangible book value per share
attributable to new investors.............................. 1.45
-----
Pro forma net tangible book value per share after this
offering..................................................... 2.62
------
Dilution per share to new investors........................... $ 8.38
======
</TABLE>
The following table summarizes on a pro forma basis as of June 30, 1999:
. the number of shares of our common stock purchased by existing
stockholders, the total consideration and the average price per share
paid to us for these shares;
. the number of shares of our common stock purchased by new investors, the
total consideration and the price per share paid for these shares,
valuing them at an assumed initial public offering price of $11.00 per
share; and
. the percentage of shares of our common stock purchased by the existing
stockholders and new investors and the percentage of consideration paid
to us for these shares.
<TABLE>
<CAPTION>
Total
Shares Purchased Consideration
------------------ -------------------- Average Price
Number Percent Amount Percent Per Share
<S> <C> <C> <C> <C> <C>
Existing stockholders..... 50,039,561 83.9% $ 63,406,899 37.5% $ 1.27
New investors............. 9,600,000 16.1 105,600,000 62.5 11.00
---------- ----- ------------ -----
Total................... 59,639,561 100.0% $169,006,899 100.0%
========== ===== ============ =====
</TABLE>
This table assumes that none of the stock options or the warrants
outstanding upon the closing of this offering will be exercised, which as of
July 31, 1999 include:
. 5,265,350 shares of common stock issuable upon exercise of outstanding
stock options at a weighted average exercise price of $0.72 per share
and subject to the vesting schedule of our 1999 stock plan; and
23
<PAGE>
. 194,556 shares of common stock issuable upon exercise of outstanding
warrants at a weighted average exercise price of $0.68 per share.
To the extent any of these stock options or warrants are exercised, new
investors will experience further dilution. If all of these stock options and
warrants are exercised, the number of shares held by new investors will be
reduced to 14.7% of the shares purchased for which new investors will have paid
61.4% of the total consideration for shares purchased. Based on our pro forma
net tangible book value as of June 30, 1999 described above and giving effect
to the exercise of all of these stock options and warrants, the dilution per
share to new investors would be $8.60.
24
<PAGE>
SELECTED FINANCIAL AND OTHER DATA
We were incorporated on March 3, 1998 and commenced operations on March 28,
1998. We present below summary financial and other data for our company. The
following data at December 31, 1998 and for the period from inception (March 3,
1998) through December 31, 1998, except for "Other Data," has been derived from
our financial statements audited by PricewaterhouseCoopers LLP, independent
accountants. The balance sheet at December 31, 1998 and the related statements
of operations, changes in stockholders' equity and cash flows for the period
from inception (March 31, 1998) to December 31, 1998 and notes thereto appear
elsewhere in this prospectus. The balance sheet data as of June 30, 1999 and
the statement of operations and other data for the period from inception (March
3, 1998) through June 30, 1998 and the six months ended June 30, 1999 have been
derived from our unaudited financial statements that are included elsewhere in
this prospectus. The unaudited financial statements include, in the opinion of
our management, all adjustments, consisting of normal, recurring adjustments,
necessary for a fair presentation of the information set forth.
As reflected in the pro forma as adjusted information, the Company's
redeemable, convertible preferred stock, included in the Balance Sheet Data
below, will convert into 35,759,798 shares of common stock upon completion of
the offering. Prior to the offering, the redeemable, convertible preferred
stock is only redeemable upon certain acquisitions, mergers or consolidations.
The pro forma information gives effect to each of the following items, all
of which occurred after June 30, 1999:
. the issuance of 939,086 shares of Series E preferred stock.
. the repayment of a note receivable from one of our officers of $999,911
on July 16, 1999.
The pro forma as adjusted information adjusts the pro forma information to
give effect to the conversion of all outstanding preferred stock into common
stock and the sale of 9,600,000 shares of common stock offered by us at an
assumed initial public offering price of $11.00 per share, after deducting
estimated underwriting discounts and commissions and offering expenses. See
"Use of Proceeds."
You should refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the more complete financial
information included elsewhere in this prospectus. The results for the six
months ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the full year.
<TABLE>
<CAPTION>
Period
Period from Inception from Inception
(March 3, 1998) (March 3, 1998)
through through Six Months Ended
December 31, 1998 June 30, 1998 June 30, 1999
(unaudited) (unaudited)
<S> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 31,533 $ 3,489 $ 184,173
Operating expenses:
Network and
operations........... 127,054 705 1,482,628
General and
administrative....... 230,272 3,896 1,554,013
Sales and marketing... 35,961 1,397 1,235,589
Stock compensation.... 2,423,272 -- 2,616,805
----------- ------- -----------
Total operating
expenses........... 2,816,559 5,998 6,889,035
----------- ------- -----------
Operating loss.......... (2,785,026) (2,509) (6,704,862)
Interest expense (in-
come) ................. 4,611 232 (207,615)
----------- ------- -----------
Net loss................ $(2,789,637) $(2,741) $(6,497,247)
=========== ======= ===========
</TABLE>
25
<PAGE>
<TABLE>
<CAPTION>
Period
Period from Inception from Inception
(March 3, 1998) (March 3, 1998)
through through Six Months Ended
December 31, 1998 June 30, 1998 June 30, 1999
(unaudited) (unaudited)
<S> <C> <C> <C>
Net Loss per Common
Share Data:
Net loss per common
share.................. $ (0.55) $ (0.00) $ (2.02)
=========== ========== ============
Shares used in computing
net loss per share..... 5,118,342 5,089,634 9,151,630
Pro forma net loss per
common share........... (0.55) (0.00) (0.24)
Shares used in computing
pro forma net loss per
share.................. 5,118,342 5,089,634 26,561,277
Other Data:
EBITDA.................. $(2,799,282) $ (2,509) $ (5,603,935)
Capital expenditures.... 290,082 4,847 6,133,618
Cash Flow Data:
Used in operating activ-
ities.................. $ (153,505) $ (1,427) $ (2,766,896)
Used in investing activ-
ities.................. (290,082) (4,847) (11,661,709)
Provided by financing
activities............. 483,066 49,133 44,859,829
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
----------------------------------------
December 31, Pro Forma
1998 Actual Pro Forma as Adjusted
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents
and marketable
securities............. $ 39,479 $ 35,998,794 $ 55,466,699 $152,974,699
Total assets............ 369,980 43,575,321 63,043,226 160,551,226
Long-term obligations,
including current
portion................ 433,161 1,725,090 1,725,090 1,725,090
Redeemable convertible
preferred stock........ -- 56,564,972 75,032,966 --
Total stockholders' eq-
uity (deficit)......... (315,865) (17,081,973) (16,082,062) 156,458,904
</TABLE>
EBITDA, shown above under "Other Data," consists of net loss excluding net
interest, taxes, depreciation of capital assets and amortization of deferred
compensation expense. Other companies, however, may calculate it differently
from us. We have provided EBITDA because it is a measure of financial
performance commonly used for comparing companies in the telecommunications
industry in terms of operating performance, leverage, and ability to incur and
service debt. EBITDA provides an alternative measure of cash flow from
operations. EBITDA should not be considered in isolation from, and you should
not construe it as a substitute for:
. operating loss as an indicator of our operating performance,
. cash flows from operating activities as a measure of liquidity,
. other consolidated statement of operations or cash flows data presented
in accordance with generally accepted accounting principles, or
. as a measure of profitability or liquidity.
26
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of the financial condition and results
of operations should be read in conjunction with "Selected Financial and Other
Data" and our financial statements and related notes appearing elsewhere in
this prospectus.
Overview
We provide high-speed data communications services and Internet access to
small and medium sized businesses in second and third tier cities. We began
providing service in May 1998 and we currently provide service or have
installed equipment in 34 cities. We intend to continue our network expansion
into a total of more than 90 cities by the end of 1999.
Since inception on March 3, 1998, our principal activities have included:
. developing criteria for market selection and analyzing potential markets
against these criteria;
. obtaining required governmental authorizations;
. negotiating and entering into interconnection agreements with
traditional telephone companies;
. acquiring space in traditional telephone companies' central offices and
installing our network equipment in those offices;
. launching service in target markets;
. selling and marketing to, and installing service for, customers in
markets where we have established service;
. hiring management and other personnel;
. raising capital; and
. developing and implementing our operations support systems and other
information systems.
We have incurred operating losses and net losses for each month since our
formation. For the periods ended December 31, 1998 and June 30, 1999, we have
experienced net cash outflows for operating and investment activities. As of
December 31, 1998 and June 30, 1999, we had an accumulated deficit of
approximately $2,790,000 and $11,689,000, respectively. We intend to
substantially increase our operating expenses and capital expenditures in an
effort to rapidly expand our network infrastructure and service areas. We
expect to incur substantial operating losses, net losses and net operating cash
outflows during our network build-out and during the initial penetration of
each new market we enter. Our losses and net operating cash outflows are
expected to continue and to increase as we expand our operations.
We incur network and operations expenses, sales and marketing expenses and
capital expenditures when we enter a new market. After selecting a target
market, we apply for space in the traditional telephone company's central
office from which we intend to provide service. The availability of space in
these central offices and the timing and cost of our obtaining that space
varies by location and by telephone company. Based on our experience to date,
if space is available in a desired central office, the time for us to obtain
the required local approvals and deploy our equipment
27
<PAGE>
in that space has typically ranged from five to ten months. To date, our
initial cost for obtaining space in each central office and interconnection to
the telephone company's network has typically averaged less than $50,000. In
addition to this initial cost, we pay monthly fees for maintenance, utilities
and continued access to the telephone company's network, which vary by location
and are substantially lower than the initial cost for obtaining space. Once we
have deployed our network in a market, the majority of our additional capital
expenditures depend on orders to connect new end users. These additional
capital expenditures include the costs of additional DSL equipment that is
installed in the central offices and additional modems that are installed in
customers' sites. In addition to the capital expenditures required to enter a
market, we are required to fund each market's cash flow deficit as we build our
customer base.
Our financial performance will vary, and whether and when we achieve
profitability will depend on a number of factors, including:
. development of the high-speed data communications industry and our
ability to compete effectively;
. amount, timing and pricing of customer revenue;
. cost and timing of the deployment of our network, including installation
of equipment in traditional telephone companies' central offices;
. commercial acceptance of our service and attaining expected penetration
within our target markets;
. timely recruitment of qualified personnel, particularly sales and
marketing personnel;
. upfront sales and marketing expenses;
. our ability to retain contractors to install equipment and wiring at
customer premises on a timely and cost-effective basis;
. cost and utilization of our network components which we lease from other
telecommunications providers;
. our ability to establish and maintain relationships with marketing
partners;
. successful implementation of financial, information management and
operations support systems to efficiently and cost-effectively manage
our growth; and
. outcome of federal and state regulatory proceedings and related judicial
proceedings, including proceedings relating to the 1996
Telecommunications Act.
Factors Affecting Future Operations
Revenues. We derive our revenues from installation charges and monthly fees
paid by customers for our NETgain services, which vary based on the speed of
the connection. The current monthly fee includes all phone line charges,
Internet access charges, the cost of the modem installed at the customer's site
and the other services we generally provide. During the six months ended June
30, 1999, monthly fees represented more than 80% of our revenue and
installation charges, including activation fees, represented less than 20% of
our revenue. We expect that, as the number of customers using our services
increases, monthly fees will continue to increase, and that installation
charges will continue to decrease, as a percent of revenue.
We seek to price our services competitively. The market for high-speed data
communications services and Internet access is rapidly evolving and intensely
competitive. While many of our competitors and potential competitors enjoy
competitive advantages over us, we are pursuing a
28
<PAGE>
significant market that, we believe, is currently underserved. Although pricing
will be an important part of our strategy, we believe that direct relationships
with our customers and consistent, high quality service and customer support
will be key to generating customer loyalty. During the past several years,
market prices for many telecommunications services and equipment have been
declining, a trend that we believe will likely continue. As prices decline for
any given speed of service, we expect that the total number and proportion of
our customers purchasing our higher-speed, higher-priced services will
increase. The majority of the cost to upgrade a customer's speed is generally
comprised of increased utilization of our network capacity.
Network and Operations. Our network and operations expenses include costs
related to personnel, monthly rental for telecommunications lines between
customers, central offices and network service providers, customer line
installation, Internet access, certain depreciation and amortization expenses
and other costs. The costs of providing a customer's copper telephone line and
the related monthly leased line costs, which typically range from $10 to $30
per month, are expensed as incurred. Our total costs for leasing lines will
increase as we lease additional lines to service additional customers. In
addition, we lease high-speed fiber-optic lines and other network capacity to
connect our central office equipment with our network and the Internet and
incur costs to connect to the Internet. We expect these costs to increase as
the volume of data communications traffic generated by our customers increases.
The majority of our capital expenditures relate to building our network and
delivering service to customers. Accordingly, the majority of our depreciation
and amortization expense, excluding deferred compensation expense, is included
in our network and operations expenses. This expense includes:
. Depreciation of network and operations equipment and DSL modems
installed at customer sites;
. Depreciation of information systems, and computer hardware and software;
and
. Amortization and depreciation of the costs of obtaining, designing and
building our collocation space and corporate facilities.
We expect depreciation and amortization expense to increase significantly as
more of our network becomes operational and as we increase capital expenditures
to expand.
General and Administrative. Our general and administrative expenses consist
primarily of costs relating to personnel, customer service, finance, billing,
administrative services, recruiting, insurance, bad debts, legal services and
depreciation expense. As we have been implementing our business plan, we have
hired and expect to continue to hire additional employees. As a result, we
expect these expenses to increase as the number of employees increases.
Sales and Marketing. Our sales and marketing expenses consist primarily of
expenses for personnel, the development of our NETgain brand name, promotional
materials, advertising and sales commissions. Sales and marketing expenses are
expected to increase significantly as we continue to expand our business into
new markets.
We recently entered into strategic business relationships with Staples and
Microsoft. The Staples marketing agreement designates us as their exclusive
supplier of the types of DSL services we provide in each of our markets. The
Microsoft arrangement allows us to jointly market a co-branded
29
<PAGE>
version of the Microsoft Network (MSN) service to our customers and Microsoft
intends to use its existing channels and sales force to augment our own
marketing efforts.
Stock Compensation. We have incurred stock compensation expenses as a result
of the granting of stock and stock options to employees and others with
exercise prices per share subsequently determined to be below the fair values
per share of our common stock for financial reporting purposes at the dates of
grant. The stock compensation is being charged immediately or is being
amortized over the vesting period of the applicable options, which is generally
48 months.
Taxation. We have not generated any taxable income to date and, therefore,
have not paid any federal income taxes since inception. Use of our net
operating loss carryforwards, which begin to expire in 2003, may be subject to
limitations. We have recorded a full valuation allowance on a deferred tax
asset, consisting primarily of net operating loss carryforwards, because of
uncertainty regarding their recoverability.
Results of Operations
Revenue. We first introduced services in May 1998. Revenue in 1998 was
approximately $32,000. Revenue increased to approximately $184,000 for the six
months ended June 30, 1999 from approximately $3,500 for the period from
March 3, 1998 (inception) to June 30, 1998. The increase in revenue was
primarily due to the increased number of customers subscribing for our
services.
Network and operations. Network and operations expenses in 1998 were
approximately $127,000. Network and operations expenses increased to
approximately $1,483,000 for the six months ended June 30, 1999 from
approximately $700 for the period from March 3, 1998 (inception) to June 30,
1998. The increase in these expenses between the 1998 and 1999 interim periods
was primarily due to the increased number of customers subscribing for our
services and other increased costs resulting from the addition of personnel,
the expansion of our network and legal costs incurred in connection with our
applications for regulatory approvals in various states.
Depreciation and amortization expense, excluding amortization of deferred
compensation, in 1998 was approximately $6,000. Depreciation and amortization
expense, excluding amortization of deferred compensation, increased to
approximately $191,000 for the six months ended June 30, 1999 from $0 for the
period from March 3, 1998 (inception) to June 30, 1998. This expense increased
as more of our network became operational and we increased capital expenditures
to expand.
General and administrative. General and administrative expenses in 1998 were
approximately $230,000. General and administrative expenses increased to
approximately $1,554,000 for the six months ended June 30, 1999 from
approximately $3,900 for the period from March 3, 1998 (inception) to June 30,
1998. The increases in general and administrative expenses were principally the
result of increases in the number of employees.
Sales and marketing. Sales and marketing expenses in 1998 were approximately
$36,000. Sales and marketing expenses increased to approximately $1,236,000 for
the six months ended June 30, 1999 from approximately $1,400 for the period
from March 3, 1998 (inception) to June 30, 1998. These expenses increased
primarily as a result of the increase in marketing and promotional activities
and increases in sales and marketing personnel.
30
<PAGE>
Stock compensation. We incurred stock compensation expenses of approximately
$2,423,000 in 1998. Stock compensation expenses were approximately $2,617,000
for the six months ended June 30, 1999 compared to $0 for the period from March
3, 1998 (inception) to June 30, 1998. Expenses incurred in 1998 consisted of
current period charges related to common stock issued to certain officers. The
expenses incurred in the six months ended June 30, 1999 consisted of:
. amortization related to stock options granted during the first half of
1999, which amounted to approximately $549,000;
. amortization of restricted stock to senior management during the first
quarter of 1999, which amounted to approximately $1,480,000; and
. a current period charge related to common stock granted to an executive
for which there is no vesting requirement, which amounted to
approximately $588,000.
The unamortized balance of approximately $12,440,000 as of June 30, 1999
will be amortized over the remaining vesting period of each grant, which ranged
from 33 to 45 months. As of June 30, 1999, options to purchase 5,042,739 shares
of common stock were outstanding, which were exercisable at a weighted average
exercise price of $0.25 per share.
Interest expense (income), net. Interest income was approximately $208,000
for the six months ended June 30, 1999 compared to interest expense of
approximately $200 for the period from March 3, 1998 (inception) to June 30,
1998. This increase was primarily due to an increase in our cash balances as a
result of the issuance of preferred stock in 1999 and the repayment of debt
with the proceeds therefrom. Interest expense in 1998 was approximately $5,000,
and related primarily to a note payable which was paid in full in January 1999.
Net loss. Net loss for 1998 totaled approximately $2,790,000. Net loss
increased to approximately $6,497,000 for the six months ended June 30, 1999
from approximately $2,700 for the period from March 3, 1998 (inception) to June
30, 1998.
Liquidity and Capital Resources
We have financed our capital expenditures and operations primarily with the
proceeds from stock issuances and borrowings. As of June 30, 1999, on a pro
forma basis giving effect to the sale of shares of Series E preferred stock to
Microsoft and Staples and the repayments of a note receivable from one of our
officers which occurred in July 1999, we had cash, cash equivalents and
marketable securities of approximately $55,467,000 and working capital of
approximately $53,197,000.
Net cash provided by financing activities in 1998 and for the six months
ended June 30, 1999 was approximately $483,000 and $44,860,000, respectively.
This cash primarily resulted from the sale of preferred stock, amounts borrowed
under our lease facility and short-term bridge financings. We have used, and
intend to continue using, the proceeds from these financings primarily to
implement our business plan and for working capital.
In August 1998, we issued a $100,000 demand note which bore interest at the
annual rate of 5.56%. As of December 31, 1998, $66,667 of principal of this
note remained outstanding. This note was repaid in full in January 1999.
31
<PAGE>
In November 1998, we received $350,000 from a short-term bridge note and
warrant financing. These notes had an aggregate principal amount of $350,000
and bore interest at annual rates of 5.56% or 6%. These notes were exchanged
into shares of our Series A preferred stock in January 1999.
During 1998, we also received $50,500 from the sale of capital stock to our
founders.
In January 1999 we received net proceeds of approximately $3,302,000 from
the sale of shares of Series A preferred stock and certain warrants to a new
stockholder. In April 1999, we received net proceeds of approximately
$9,941,000 from the sale of shares of Series C preferred stock to our principal
stockholders and others. In May 1999, we received net proceeds of approximately
$29,974,000 from the sale of shares of Series D preferred stock to our
principal stockholders and others. In addition, in July, 1999, we received net
proceeds of approximately $18,468,000 from the sale of shares of Series E
preferred stock to two strategic marketing partners. In addition, we received
approximately $1,007,000 in connection with repayment of a note, including
interest at 6.0%, from an officer in connection with the purchase of Series D
preferred stock in June 1999. Upon completion of the sale of common stock in
this offering, all outstanding shares of our preferred stock will convert
automatically into shares of common stock.
In March 1999, we entered into a 36-month lease facility to finance the
purchase of up to an aggregate of $2,000,000 of equipment. Amounts financed
under this lease facility bear an interest rate of 8% or 9%, depending on the
type of equipment, and are secured by the financed equipment. There was
approximately $504,000 outstanding on this lease facility at June 30, 1999. In
addition, during the six months ended June 30, 1999, we purchased certain
software and equipment under capital leases approximating $499,000 which are
being repaid over periods ranging from 24 months to 36 months. There was
approximately $434,000 outstanding on these capital leases at June 30, 1999.
In May 1999, we established a line of credit which allows us to borrow up to
an aggregate of $5.0 million. This line of credit expires in May 2000, at which
time amounts outstanding will convert into a term loan, which will be repayable
over 36 months. Amounts borrowed under this line of credit generally bear
interest at the sum of 1% plus the higher of the bank's prime rate of interest
and the federal funds rate plus .5%. As of June 30, 1999, amounts outstanding
under this line of credit bore interest at the annual rate of 8.75% and are
secured by a lien on certain of our equipment. Borrowings under the line of
credit are restricted based on the value of the equipment securing the line of
credit. In addition, the line of credit also contains certain covenants,
including covenants requiring us to maintain certain financial ratios and
limitations relating to, among other things, new indebtedness, the creation of
liens, types of investments, mergers, consolidations and the transfer of all or
substantially all of our assets. As of June 30, 1999, approximately $4,200,000
was available under this line of credit.
We are currently negotiating another credit arrangement with a bank that
would provide an estimated $30,000,000 revolving line of credit to be used for
general corporate purposes and for the issuance of letters of credit. Borrowing
availability and rate of interest under the proposed line of credit are
expected to vary depending upon specified financial ratios. The interest rate
may be prime or LIBOR-based.
32
<PAGE>
In 1998 and for the six months ended June 30, 1999, the net cash used in our
operating activities was approximately $154,000 and $2,767,000, respectively.
This cash was used for a variety of operating expenses, including salaries,
consulting and legal expenses, network operations and overhead expenses. Our
net operating cash outflows are expected to continue and to increase as we
expand our operations.
Net cash used in investing activities in 1998 and for the six months ended
June 30, 1999 was approximately $290,000 and $11,662,000, respectively. This
cash was used primarily for the purchase of equipment and payment of
collocation costs and purchase of marketable securities.
In February 1999, we leased office space in New Haven, Connecticut. Annual
minimum lease payments under this lease are approximately $192,000 for 1999,
approximately $745,000 for each of the years 2000 through 2004, and
approximately $279,000 for 2005.
The development and expansion of our business requires significant capital
expenditures. The principal capital expenditures incurred to enter each market
include the procurement, design and construction of the space in traditional
telephone companies' central offices where we deploy our equipment, and the
purchase and installation of all necessary equipment. Capital expenditures,
including collocation fees, were approximately $290,000 and $6,134,000 in 1998
and for the six months ended June 30, 1999, respectively. We currently
anticipate spending approximately $20,000,000 and $50,000,000 for capital
expenditures for the second half of 1999 and for 2000, respectively. Our
planned capital expenditures for 1999 include approximately $8,000,000 for our
information and management systems, including our operations support systems.
The remaining planned capital expenditures are primarily for the procurement,
design and construction of central office spaces and the purchase and
installation of the equipment necessary for us to provide our services. The
actual amounts and timing of our capital expenditures will vary depending on
the speed at which we are able to expand and implement our network and could
differ materially both in amount and timing from our current plans.
We believe that the net proceeds from this offering, together with our
existing cash and short-term investments, amounts available under our equipment
lease and credit facilities, and cash generated from operations, will be
sufficient to fund our operating losses, capital expenditures, lease payments
and working capital requirements through 2000. We estimate that the net
proceeds from the sale of common stock in this offering will be approximately
$97,508,000, based upon an assumed offering price per share of $11.00 and after
deducting estimated underwriting discounts and commissions and estimated
offering expenses. We currently anticipate that our cash and short-term
investments will exceed $152,000,000 after completion of this offering. We
intend to use these cash resources, including the net proceeds from this
offering, to continue building our network and for working capital and other
general corporate purposes. We may also use a portion of the net proceeds to
acquire complementary businesses, although we have no definitive commitments or
agreements to do so at this time. The amounts actually expended for these
purposes will vary significantly depending on a number of factors, including
revenue growth, if any, planned capital expenditures, and the extent and timing
of our entry into target markets.
We expect our operating losses, net operating cash outflows and capital
expenditures to increase substantially as we expand our network. We expect that
additional financing will be required in the
33
<PAGE>
future. We may attempt to raise financing through some combination of
commercial bank borrowings, leasing, vendor financing and the sale of equity or
debt securities.
Our capital requirements may vary based upon the timing and the success of
implementation of our business plan and as a result of regulatory,
technological and competitive developments or if:
. demand for our services or our cash flow from operations is less than or
more than expected;
. our development plans or projections change or prove to be inaccurate;
. we make any acquisitions; or
. we accelerate deployment of our network or otherwise alter the schedule
or targets of our business plan implementation.
We cannot assure you that we will be able to raise sufficient debt or equity
capital on terms that we consider acceptable, if at all. If we are unable to
obtain adequate funds on acceptable terms, our ability to deploy and operate
our network, fund our expansion or respond to competitive pressures would be
significantly impaired.
We have not entered into any financial instruments that expose us to
material market risk.
Impact of Year 2000
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. In order to distinguish
21st century dates from 20th century dates, the date code field needs to be
expanded to 4 digits. As a result, many companies' software and computer
systems may need to be upgraded or replaced in order to comply with these Year
2000 requirements. The use of software and computer systems that are not Year
2000 compliant could result in system failures or miscalculations resulting in
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in normal business
activities.
Since we have been recently organized, we have been able to build our
internal business systems with Year 2000 compliance in mind. In the future, we
will seek assurance from vendors that new business systems which we purchase
will be Year 2000 compliant. We have not reviewed our non-information
technology systems for year 2000 issues relating to embedded microprocessors.
Our current service offerings are not date sensitive and do not rely on, and
do not need to process, date-related information in order to function as
designed, either prior to and after the year 2000.
Based on the foregoing, we have no reason to believe that our current
service offerings and our business systems will not be Year 2000 compliant.
Failure of our business systems or current service offerings to operate
properly with regard to the Year 2000 and thereafter could require us to incur
significant unanticipated expenses to remedy any problems or replace affected
vendors and could have a material adverse effect on our business, operating
results and financial condition.
We can provide no assurance that the traditional local telephone companies
and other vendors will be Year 2000 compliant or that Year 2000 problems among
our target customers will not
34
<PAGE>
negatively impact their decision to buy our service. We will initiate a Year
2000 compliance check of traditional local telephone companies. Any Year 2000
related disruption of operations of the traditional local telephone companies
or other providers would likely have a material adverse impact on our business,
operation results, and financial condition. Furthermore, Year 2000 issues may
affect the purchasing decisions of our customers as companies expend
significant resources to correct their current systems for Year 2000
compliance.
To date, we have not incurred significant costs in order to comply with Year
2000 requirements and we do not believe we will incur significant costs in the
foreseeable future. We plan to determine the risks associated with a reasonably
likely worse-case scenario and will formulate a contingency plan prior to
December 31, 1999 to address these risks.
Recently Issued Accounting Pronouncements
In 1998, we adopted Statement of Financial Accounting Standards No. 131,
Disclosures about Segments of an Enterprise and Related Information. SFAS No.
131 supersedes SFAS 14, Financial Reporting for Segments of a Business
Enterprise, replacing the "industry segment" approach with the "management"
approach. The management approach designates the internal organization that is
used by management for making operating decisions and assessing performance as
the source of our reportable segments. We operate in one segment: high-speed
data communication services. SFAS No. 131 also requires disclosures about
products and services, geographic areas, and major customers. The adoption of
SFAS No. 131 had no impact on our financial statements for the periods
presented.
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use. SoP 98-1 provides guidance for
determining whether computer software is internal-use software, and on
accounting for proceeds of computer software originally developed or obtained
for internal use and then subsequently sold to the public. It also provides
guidance on capitalization of the costs incurred for computer software
developed or obtained for internal use. The adoption of SoP 98-1 had no impact
on our financial statements for the periods presented.
In April 1998, the Accounting Standards Executive Committee issued SoP 98-5,
Reporting on the Costs of Start-Up Activities, which provides guidance on the
financial reporting of start-up costs and organizational costs. It requires
costs of start-up activities and organizational costs to be expensed as
incurred. SoP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998. As we have not capitalized such costs to
date, the adoption of SoP 98-5 is not expected to have an impact on our
financial statements.
35
<PAGE>
BUSINESS
Overview
We provide high-speed data communications and Internet access services using
digital subscriber line, or DSL, technology to small and medium sized
businesses. We target select second and third tier cities, which generally have
populations of less than 900,000. Our networks enable data transport over
existing copper telephone lines at speeds of up to 1.5 megabits per second. Our
services, marketed under the NETgain brand name, offer customers high-speed
digital connections at prices that are attractive compared to the cost and
performance of alternative data communications services.
Industry Background
We believe that a substantial business opportunity has been created by the
convergence of several factors:
. growth in demand for high-speed data communications;
. increased demand for Internet access by small and medium sized
businesses;
. limitations of existing telecommunications services to meet these
demands; and
. emergence of low-cost, DSL-based solutions.
Growth in High-Speed Data Communications. Data communications is the fastest
growing segment of the telecommunications industry. Forrester Research, Inc.
projects that the total market for data networking services and Internet access
will grow from $6.2 billion in 1997 to approximately $49.7 billion by 2002,
with approximately $27.9 billion to come from services to businesses. To remain
competitive, companies require high-speed connections to maintain complex
Internet sites, to access critical information and business applications, and
to communicate more efficiently with employees, customers and suppliers. In
addition, businesses are increasingly using the Internet to market and sell
their products and services.
Increased Demand for High-Speed Internet Access by Small and Medium Sized
Businesses. Small and medium sized businesses are increasingly using the
Internet to enable them to compete more effectively with larger organizations.
According to International Data Corporation/LINK, Internet access among small
businesses--those with under 100 employees--grew from 19.7% in 1996 to 38.8% in
1997. The following table illustrates the historical and estimated growth in
Internet use by these small businesses:
<TABLE>
<CAPTION>
1996 1997 1998E 1999E 2000E 2001E
<S> <C> <C> <C> <C> <C> <C>
Total small businesses (000s).......... 7,065 7,240 7,382 7,531 7,684 7,842
Percentage of small businesses with
Internet access....................... 19.7% 38.8% 43.9% 47.8% 51.3% 54.5%
Percentage of small businesses with
home pages............................ 2.1% 7.1% 9.1% 11.7% 15.0% 16.6%
</TABLE>
Source: International Data Corporation/LINK
Currently, many small and medium sized businesses use the Internet to
exchange e-mails and files with customers, suppliers and other business
partners and to disseminate and obtain industry, product and market
information. Many of these businesses also have begun to use the Internet to
36
<PAGE>
market and sell their products and services, to make purchases from suppliers
and for other commerce-related activities. For example, the percentage of small
businesses with home pages more than tripled from 1996 to 1997. To take full
advantage of electronic commerce applications and the Internet, these
businesses would benefit from high-speed, secure and affordable digital data
communications connections.
Limitations of Existing Telecommunications Network. The growing demand for
high-speed Internet access and data communications services is straining the
capacity of the existing telecommunications network, particularly the local
access portion. The long distance portion of the network typically consists of
fiber-optic cables and other equipment that enable high-speed connections
between the offices of the traditional telephone companies from which local
telephone service is provided, known as central offices. In contrast, the local
access portion of the network, also known as the last mile, typically consists
of copper telephone wire that connects end users' locations to the nearest
central office. This last mile of copper telephone wire was not originally
designed for the transmission of high-speed digital signals, but has been
historically used for the transmission of low-speed, analog voice signals. Most
data transmission solutions to the last mile problem, including dial-up modems,
frame relay, integrated services digital network (ISDN) and T1 lines, are
relatively slow, hard to obtain or expensive.
Emergence of DSL-based Solutions. As a result of technological developments
and regulatory changes, DSL technology has emerged as a commercially available,
cost-effective means of providing high-speed data transmission using existing
copper telephone lines. DSL technology enables the transmission of digital
signals over existing copper telephone wires. DSL technology enables the
transmission of packets of data over a telecommunications network, which allows
multiple users to simultaneously transmit and receive data over a single
connection. DSL equipment, when deployed at each end of a standard copper
telephone line, increases the data carrying capacity of the line to speeds to
and from the user of up to 1.5 megabits per second, depending on the distance
between the user and the central office and the quality of the copper telephone
line.
The deployment of DSL-based solutions by competitive telecommunications
companies has been facilitated by changes in the regulatory framework in recent
years. Under the 1996 Telecommunications Act, traditional telephone companies
are generally required to lease telephone lines to competitive
telecommunications companies on a wholesale basis through resale or unbundling
and to allow these competitive telecommunications companies to locate certain
of their equipment in the traditional telephone companies' central offices. By
using existing facilities and copper lines, DSL providers avoid the
considerable up-front fixed costs necessary to deploy alternative high-speed
digital communications technologies, such as cable, wireless and satellite
networks. As a result, a significant portion of the investment in a DSL network
is incurred only as customers order the service. In addition, we anticipate
that continued advances in DSL technologies and transmission speeds, as well as
advances in DSL equipment manufacturing efficiencies, will further reduce the
cost of deploying a DSL-based network.
Market Opportunity
We believe that the demand for affordable high-speed Internet access and
data communications services and the limited availability of these services
outside of large metropolitan areas have created an opportunity to provide DSL-
based services to a significant, underserved market -- small and
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medium sized businesses located in second and third tier cities. These
businesses increasingly require high-speed data communications capabilities to
compete effectively. Traditional telephone companies have generally offered
ISDN, frame relay or T1 lines as high-speed alternatives in these markets, but
these services are typically at a higher cost or lower speeds than DSL-based
services.
The DSL.net Solution
Our services, marketed under the NETgain brand name, provide small and
medium sized businesses in second and third tier cities with high-speed
Internet access and data services using DSL technology. Key elements of our
solution are:
High-Speed, Symmetric Connections. We offer Internet access at speeds of up
to 1.5 megabits per second. Our network is designed to provide data
transmission at the same speed to and from the customer, known as symmetric
data transmission. We believe that symmetric data transmission is best suited
for business applications, because business users require fast connections both
to send and receive information. This compares to other DSL services which use
asymmetric data transmission, which only permits users to send information at
speeds much slower than they can receive information.
Complete Business Solution. We offer our customers a single point of contact
for a complete solution that includes all of the necessary equipment and
services to establish and maintain digital data communications. Our primary
services include Internet access, e-mail, assisting our customers in obtaining
Internet addresses, and hosting our customers' Web sites and support networks
that connect customers' various offices and connect our customers to their
suppliers, customers and others. Through independent suppliers, we also intend
to provide Web site design and development and applications enabling electronic
commerce. Our network is designed to enable us to individually configure each
customer's service remotely. As a result, our customers are able to upgrade to
higher speeds without adding networking equipment and without an on-site visit
from technical personnel.
Always-On Connections. With our service, customers can access the Internet
continuously without having to dial into the network for each use. These
"always-on" connections provide customers with the ability to readily access
the Internet and transfer information. Despite the always-on connection, we
charge our customers a flat fee per month rather than billing them based on
usage.
Attractive Value Proposition. Our NETgain services offer customers high-
speed digital connections at prices that are attractive compared to the cost
and performance of alternative data communications services, such as dial-up,
T1, ISDN or frame relay lines. We believe that our services also increase the
productivity of network users by decreasing the time they spend connecting to
the Internet and waiting for information downloads and transfers.
Secure Connections. Our network is designed to reduce the possibility of
unauthorized access to our customers' internal applications and information and
to allow them to safely transmit sensitive information and applications.
Customer Support. We provide customer service 24 hours a day, seven days a
week. This support is important to many of our small and medium sized business
customers because they do not typically have dedicated internal support staff.
With our remote monitoring and troubleshooting capabilities, we continuously
monitor our network and our customers' connections. This enables us
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to identify and enhance network quality, service and performance and address
network problems promptly.
The DSL.net Strategy
Our objective is to become the leading provider of DSL-based services to
small and medium sized businesses in second and third tier cities throughout
the United States. To achieve this objective, we plan to:
Establish Service in Select Markets Throughout the United States. We seek to
be the first DSL-based service provider in select second and third tier cities
throughout the United States. We currently provide service or have installed
equipment in 34 cities. We intend to continue our expansion into more than 60
cities, the majority of which will be in the eastern half of the United States,
by the end of 1999. Before entering a market, we carefully analyze the
competitive environment, the composition of the small and medium sized
businesses located in the market, the location, cost and availability of
collocation space in the local telephone company's central offices, and the
proximity of our target customers to those central offices. Our goal is to
locate our equipment in central offices with a high density of small and medium
sized businesses that we believe will use our services. We are currently
authorized to operate as a competitive local exchange carrier, which is an
entity authorized to provide local and long-distance telecommunication services
and is subject to federal and state regulation, in 38 states and the District
of Columbia. We are seeking to have regulatory approval in all 50 states, the
District of Columbia and Puerto Rico, and to have entered into interconnection
agreements with the major traditional local telephone companies, by the end of
1999.
Utilize Our Rapid Deployment Model. Once we have selected a market to enter,
we deploy our network using an operating and strategic model that we believe is
replicable across the country and leverages our centralized network management
capabilities. We deploy a standard package of pre-configured equipment at each
central office. We utilize third-party field service organizations, who have
the required authorizations from traditional telephone companies, as well as
our own internal personnel to install this equipment in central offices.
Through centralized network management, standardized configuration of our
equipment, the assistance of third-party service providers and on-site
inspection of central office installations, we believe we can implement our
rollout plan quickly and cost effectively.
Establish Local Referral Networks. We seek to establish relationships in
each local market with select local and regional technology-related
professionals, such as integrators of computer networks and systems and
consultants, who market our services and provide customer referrals. These
local marketing partners typically understand their clients' technology
requirements and capabilities and can provide valuable insights into customers'
needs. We also work with other local organizations which serve the business
community and refer customers to us. We use these relationships to leverage our
general advertising, direct mail and telemarketing efforts, which are directed
at decision makers in local businesses.
Develop Relationships Directly with Customers. Our strategy emphasizes
direct relationships with our customers. These relationships enable us to learn
information from our customers about their needs and preferences and help us
expand our service offerings to include additional value-added services based
on customer demand. We believe that these customer relationships increase
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customer loyalty and reduce turnover. In addition, our existing customers have
provided customer referrals and we believe strong relationships will result in
customer referrals in the future.
Leverage our Systems and Network. Our network and operations support systems
have been designed to leverage the economies of DSL technology and to grow with
our business. Because DSL technology uses existing copper telephone lines,
implementing a DSL-based network generally requires a lower initial capital
investment than that needed for alternative technologies. Once we install our
pre-configured equipment in a central office, our subsequent capital
investments to expand service from that location are directly related to the
number of customers who order our service, thereby reducing our overall capital
expenditures until additional paying customers have ordered our service. In
addition, the design of our network and the operations support systems that we
are in the process of implementing is intended to allow us to expand capacity
as it is needed to support additional customers and markets.
Our NETgain Services
We utilize DSL technology to provide reliable and cost-effective service to
our customers under the NETgain brand. As part of our service offerings, we
function as our customer's Internet service provider and deliver a broad range
of Internet-based, value-added solutions. We currently provide service or have
installed equipment in 34 cities.
Our goal is to deliver services which:
. provide reliable, always-on, secure, high-speed Internet connections
with transmission speeds up to 1.5 megabits per second;
. are easily upgradable to higher speeds with simple software changes that
can be affected remotely from our offices;
. are more reliable and enable greater productivity than dial-up modems;
and
. are easier to provision, install and support than existing high-speed
data communications alternatives.
Our NETgain services currently include all necessary equipment, software and
lines required to establish and maintain a digital Internet connection. Our
primary services include Internet access, e-mail, assisting our customers in
obtaining Internet addresses and hosting our customers' Web sites. We also
support networks that connect customers' various offices and connect our
customers to their suppliers, customers and others. In addition, through
independent suppliers, we intend to offer Web site design and development, as
well as a suite of applications enabling electronic commerce.
The following table lists our primary Internet access service offerings:
<TABLE>
<CAPTION>
Maximum Speed*
----------------- Maximum
To From Distance from
Services Customer Customer Central Office
<S> <C> <C> <C>
NETgain Standard......................... 416 kb/s 416 kb/s 18,000 feet
NETgain Plus............................. 784 kb/s 784 kb/s 14,000 feet
NETgain Pro.............................. 1.2 mb/s 1.2 mb/s 12,000 feet
NETgain Premium.......................... 1.5 mb/s 1.5 mb/s 9,000 feet
</TABLE>
- ---------------------
* The speed and effectiveness of the DSL connection varies based on a number
of factors, including the distance of the customer from the central office
and the condition of the copper line that connects the customer to the
central office. Speed is measured in kilobits per second, or kb/s, or
megabits per second, or mb/s.
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Currently, customers typically pay an installation charge and a monthly fee
for the NETgain service. The monthly fee does not vary by number of users or
usage, although it does vary based on the speed of the connection. The fee
includes the cost of the modem installed at the customer's site, all phone line
charges, and general Internet access services, including e-mail, assistance in
obtaining Internet addresses and services related to the registration of these
addresses with various administrative bodies. Generally, customers subscribe to
our NETgain services for at least one year and are billed for our services on a
monthly basis. We also intend to offer customers the ability to have their
monthly service fees charged directly to their credit cards.
We plan to continue expanding our network features and applications to meet
customer demand by working closely with leading hardware, software and
networking companies. We expect to focus on many applications, including
combining voice and data communications, increasing our directory and security
capabilities, and providing businesses with the ability to access their
important applications from remote locations. Using these network-enabled
features and applications, we will continue to provide a complete solution to
meet our business customers' needs.
Customers
Our target customers are small and medium sized businesses in second and
third tier cities in which we offer our services. In particular, we believe the
following are especially attractive customers:
. businesses currently using other high-speed data communications
services, such as T1, ISDN and frame relay services, or low-speed dial-
up Internet access;
. professional or service-based firms that have multiple Internet service
provider accounts and phone lines;
. branch offices located in second and third tier cities that require
transmission of large files between locations;
. businesses with a substantial amount of revenue from mail order or
Internet sales from customers outside their immediate geographic
territory; and
. businesses that use data-intensive applications, such as financial
services, technology, and publishing.
None of our customers accounted for more than 5% of our total revenues in
1998 or during the first six months of 1999.
Sales and Marketing
Our marketing professionals have developed a methodology to identify the
businesses that would benefit from our services. Once we identify businesses in
a target market, we employ a targeted local marketing strategy utilizing a
variety of mediums, including direct mail, print and radio. In addition, we
sponsor local promotional events, such as information technology or
telecommunications seminars, to assist our local sales professionals.
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Direct Sales Channels. Our direct sales efforts are centered around
telemarketing personnel and city managers, who are assigned to one or more
local areas. These city managers are responsible for assessing business
opportunities and identifying marketing partners to assist us in the sale of
our NETgain services. In addition, city managers work with local business
associations to identify potential customers and build brand awareness.
Our telemarketing personnel follow up on our direct mail marketing
campaigns. Unlike large corporations, decision-makers in small and medium sized
businesses generally decide over the phone and in a relatively short time
whether to initiate data communications service with us. We believe our
telemarketing personnel are effective in following up with those businesses
that have received direct mailings from us.
Marketing Partners. Our city managers also identify local information
technology professionals, such as integrators of computer networks and systems
and consultants, to assist in the sale of our NETgain services. We select
marketing partners based on several factors, including brand name, local market
presence, complementary technology or product lines, and a strong distribution
channel. Our local marketing partners understand the technology needs and
capabilities of their clients and are in position to recommend us to their
clients and provide us with referrals. We compensate our marketing partners for
each referral of a customer who purchases our services. We believe that
relationships with marketing partners are important in establishing a long-term
presence in the local community and leveraging our direct sales force.
Strategic Relationships
We have entered into strategic relationships that we believe are valuable
because they provide additional marketing capabilities and distribution
channels, in addition to capital investment. We anticipate that we will enter
into additional strategic relationships with others in the future.
Our current strategic relationships include:
Staples. In July 1999, we entered into a strategic relationship with Staples
pursuant to which, among other things:
. Staples Investment. Staples invested $3,500,000 in return for shares of
our Series E preferred stock which will convert into 473,655 shares of
our common stock upon the closing of this offering. In addition, Staples
has indicated an interest in purchasing the lesser of $5,000,000 of our
common stock or 5% of the shares sold in this offering directly from us
at the initial public offering price in connection with this offering,
although it is not bound to do so.
. Marketing Services through Staples. Staples has agreed to market our
services to their small and medium sized business customers. Staples
intends to offer our services for sale and refer potential customers to
us through their retail stores, direct marketing sales force, catalog
and Web site. We have agreed to compensate Staples for each sale of our
services generated through these channels. We intend to offer our
customers the ability to connect over the Internet directly to Staples
for their business supply purchases.
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. Mutual Exclusivity. During the term of our agreement, which is initially
for one year with the potential for annual renewals, we have agreed not
to offer our services through another national office supply company. In
turn, Staples has agreed to offer our services exclusively to its
customers in all of the markets we serve.
Microsoft. In July 1999, we entered into a strategic relationship with
Microsoft pursuant to which, among other things:
. Microsoft Investment. Microsoft invested $15,000,000 in us in return for
shares of our Series E preferred stock which will convert into 2,029,949
shares of common stock upon the closing of this offering.
. Co-branding for Our Customers. During the term of our agreement, which
is initially for two years with the potential for annual renewals,
Microsoft has agreed to jointly market with us a co-branded version of
the Microsoft Network service (MSN). We have agreed to provide and
market the co-branded MSN service to our new and existing customers. We
and Microsoft have agreed to share any advertising revenue generated
through the co-branded MSN service.
. Joint Marketing of Our Services. Microsoft has agreed to market and
provide our services through its sales force as well as to its
Microsoft-approved certified systems integrators and consultants.
Customer Support and Operations
Our customer support professionals work to minimize the complexity and
inconvenience of data communications and Internet access for our customers.
They provide our customers with a single point of contact for implementation,
maintenance and operations support.
Implementation. We manage the implementation of our service for each
customer. We lease the copper telephone lines from the local telephone company.
These lines run from our equipment located in the telephone company's central
office to our customer. We test these lines to determine whether they meet our
specifications and work with the local telephone company to correct any
problems identified by our testing. Field service technicians, typically
outside contractors, install the modem and any necessary wiring inside our
customers' offices and test the modem and connection over our network.
Maintenance. Our network operations center provides network surveillance
for all equipment in our network. We are able to detect and correct many of our
customers' maintenance problems remotely, often before our customer is aware of
the problem. Customer-initiated maintenance and repair requests are managed and
resolved primarily through our help desk. Our information management system,
which generates reports for tracking maintenance problems, allows us to
communicate maintenance problems from the customer service center to our
network operations center 24 hours a day, seven days a week.
Operations Support Systems. We are in the process of implementing operations
support systems that will improve many of our business processes, including
customer billing, service activation, inventory control, customer care reports
and maintenance reports. These operations
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support systems have been designed to provide us with accurate, up-to-date
information in these areas. We expect that the implementation of each of these
systems will be substantially completed by the end of 1999, with additional
enhancements and integration to be implemented in 2000. We believe that our
operations support systems will provide us with the flexibility to add
additional services for our customers as well as to meet our expansion goals.
Our Network
Our network delivers high-speed Internet access and data communication
services. It offers scaleability, reliability, security and high performance.
Network Design. The key design principles of our network are:
. Intelligent End-to-End Network Management. Our network is designed to
allow us to monitor network components and customer traffic from a
central location. Because we control the lines to the customer, we can
perform network diagnostics and equipment surveillance continuously.
From our network operations center, we have visibility across our entire
network, allowing us to identify and address network problems quickly
and to provide quality service and performance.
. Consistent and Scaleable Performance. We believe that networks that use
technology that transmits packets of information, such as ours, will
eventually replace networks that use current switching technology. We
have designed our network to leverage the economics of DSL technology,
to grow with our business and to provide consistent performance. New
capacity is added automatically as each new user receives a line. We
also use asynchronous transfer mode equipment in our network, which
implements high-speed, high volume transmission of data directly in
integrated circuits.
. Security. Our network is designed to reduce the possibility of
unauthorized access and to allow our customers to safely transmit and
receive sensitive information and applications. The modems we install on
our customers' premises are designed with enhanced security features and
work in conjunction with installed security systems and network servers
in an effort to provide safe connections to the Internet and a secure
operating environment.
Network Components. The primary components of our network are:
. DSL Modems and On-Site Connections. We purchase DSL modems and provide
them to our customers as part of the service contract. We configure the
DSL modem and arrange for the installation of the modem and on-site
wiring needed to connect the modem to the copper telephone line that we
lease. We contract with independent field service organizations to
perform these services, in addition to using a small internal staff.
. Copper Telephone Lines. We lease a copper telephone line running to each
customer from our equipment in the local telephone company's central
office under terms specified in our interconnection agreements with
these companies. Each copper line must be specifically conditioned by
the local telephone company to carry digital signals, typically for an
additional charge. If we are unable to lease, or experience delays in
leasing, a sufficient number of acceptable telephone lines on acceptable
terms, our business will be harmed.
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. Central Office Collocation. Through our interconnection agreements, we
seek to secure space to locate our equipment in the central offices of
traditional local telephone companies and offer our services from these
locations. These collocation spaces are designed to offer the same high
reliability and availability standards as the telephone companies' other
central office spaces. We install the equipment necessary to provide
high-speed DSL signals to our customers in these spaces. We have
continuous access to these spaces to install and maintain our equipment.
We expect that space in central offices will become increasingly scarce
as competitive telecommunications companies vie for this space. We may
not be able to secure space to install our equipment on a timely basis,
which could delay our roll-out plan and adversely affect our business
and prospects.
. Backbone Network. Network traffic gathered at each central office is
routed to one of our regional hubs and then to the Internet. In certain
areas where we offer service from more than one central office, network
traffic is routed from each central office in that area to a local hub
which aggregates its traffic and the traffic from the other central
offices located in that area and routes this traffic to a regional hub.
Our hubs contain extra equipment and backup power to provide backup
facilities in the event of an equipment failure and are actively
monitored from our network operations center. We lease space for our
hubs in facilities designed to host network equipment. Our hubs are
connected to one another via fiber-optic cables and other high speed
data communications technologies. Currently this service is provided by
MCI WorldCom. Recently, the service provided by MCI WorldCom was
interrupted for several days by a failure of their network. We have
received and are currently evaluating proposals from five long distance
carriers and expect to select at least one additional service provider
before the end of 1999. Our network connects to the Internet through
multiple Internet-access providers.
. Network Operations Center. Our network is managed from our network
operations center located in New Haven, Connecticut. We provide end-to-
end network management 24 hours a day, seven days a week. This enhances
our ability to address performance and service issues before they affect
the customer. From the network operations center, we can monitor
individual customer lines and the equipment and circuits in each
regional network and central office.
. Private Regional Network. We anticipate that, at some point in the
future, we will operate our own private regional networks in certain
geographic areas. We believe our regional networks will consist of high-
speed telecommunications equipment that will connect our hubs to our
equipment in individual central offices. Private networks of this type
typically operate at speeds of 45 to 155 megabits per second.
Competition
We face competition from many companies with significantly greater financial
resources, well-established brand names and large installed customer bases.
Although we believe competition in many second and third tier cities is less
intense than competition in larger cities, we expect the level of competition
in our markets to intensify in the future. We expect significant competition
from:
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Other DSL Providers. Certain competitive carriers, including Covad, Network
Access Solutions, NorthPoint and Rhythms NetConnections, offer DSL-based
services. The 1996 Telecommunications Act specifically grants competitive
telecommunications companies, including other DSL providers, the right to
negotiate interconnection agreements with traditional telephone companies,
including interconnection agreements which may be identical in all respects to,
or more favorable than, our agreements. Several of the large telecommunications
companies and computer companies, such as Microsoft and Intel, have made
investments in DSL service providers.
Internet Service Providers. Several national and regional Internet service
providers, including America Online, Concentric Network, Flashcom, Mindspring,
PSINet and Verio, have begun developing high-speed access capabilities to
leverage their existing products and services. These companies generally
provide Internet access to residential and business customers over the
traditional telephone companies' networks at higher speeds. However, some
Internet service providers have begun offering DSL-based access using another
carrier's DSL service or, in some cases, building their own DSL networks. Some
Internet service providers combine their significant and even nationwide
marketing presence with strategic or commercial alliances with DSL-based
competitive telecommunications companies.
Traditional Local Telephone Companies. Many of the traditional local
telephone companies, including those created by AT&T's divestiture of its local
telephone service business, are conducting technical or market trials or have
begun deploying DSL-based services. These companies have established brand
names and reputations for high quality in their service areas, possess
sufficient capital to deploy DSL equipment rapidly, have their own copper
telephone lines and can bundle digital data services with their existing voice
services to achieve a competitive advantage in serving customers. We believe
that the traditional telephone companies have the potential to quickly deploy
DSL services. In addition, these companies also offer high-speed data
communications services that use other technologies. We depend on these
traditional local telephone companies to enter into agreements for
interconnection and to provide us access to certain unbundled network elements.
Although the traditional local telephone companies are required to negotiate in
good faith in connection with these agreements, future interconnection
agreements may contain less favorable terms and result in a competitive
advantage to the traditional local telephone companies.
National Long Distance Carriers. National long distance carriers, such as
AT&T, MCI WorldCom, Qwest and Sprint, have deployed large-scale data networks,
sell connectivity to businesses and residential customers, and have high brand
recognition. They also have interconnection agreements with many of the
traditional telephone companies and are beginning to offer competitive DSL
services.
Other Fiber-Based Carriers. Companies such as Allegiance, ChoiceOne,
e.spire, Intermedia and Williams have extensive fiber networks in many
metropolitan areas, primarily providing high-speed data and voice circuits to
small and large corporations. They also have interconnection agreements with
the traditional telephone companies under which they have acquired collocation
space in many large markets.
Cable Modem Service Providers. Cable modem service providers, such as At
Home and its cable partners, are offering or preparing to offer high-speed
Internet access over cable networks to consumers. @Work, a division of At Home,
has positioned itself to do the same for businesses.
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Where deployed, these networks provide high-speed local access services, in
some cases at speeds higher than DSL service. 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.
Wireless and Satellite Data Service Providers. Several new companies,
including Advanced Radio Telecom, Teligent and WinStar Communications, are
emerging as wireless data service providers. In addition, other companies,
including Motorola Satellite Systems and Hughes Communications, are emerging as
satellite-based data service providers. These companies use a variety of new
and emerging technologies to provide high-speed data services.
We may be unable to compete successfully against these competitors. The most
significant competitive factors include: transmission speed, service
reliability, breadth of product offerings, price/performance, network security,
ease of access and use, content bundling, customer support, brand recognition,
operating experience, capital availability and exclusive contracts with
customers, including Internet service providers and businesses with multiple
offices. We believe our services compete favorably within our service markets
with respect to transmission speed, price/performance, ease of access and use
and customer support. Many of our competitors enjoy competitive advantages over
us based on their brand recognition, breadth of product offerings, operating
experience and exclusive contracts with customers.
Interconnection Agreements with Traditional Local Telephone Companies
We are required to enter into and implement interconnection agreements
covering each of our target markets with the traditional local telephone
company in that market in order to provide service. These agreements govern,
among other things:
. the price and other terms under which we locate our equipment in the
telephone company's central offices,
. the price we pay to lease copper telephone lines,
. the special conditioning of these copper lines that the traditional
telephone company provides to enable the transmission of DSL signals,
. the price we pay to access the telephone company's transmission
facilities, and
. certain other terms and conditions of our relationship with the
telephone company.
Under the 1996 Telecommunications Act, the traditional local telephone
companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to certain unbundled network
elements. This interconnection process is subject to review and approval by the
state regulatory commissions. We have signed interconnection agreements with
Ameritech, Bell Atlantic, BellSouth, GTE, SBC Communications and US West, which
govern our relationships in 43 states and the District of Columbia. Certain of
our interconnection agreements govern our relationship with the traditional
telephone company throughout its service areas and others relate only to
individual states. In addition, we are currently negotiating additional
agreements with some of these carriers covering additional states, as well as
agreements with Alltel, Cincinnati Bell, Frontier, Sprint and certain other
carriers. Future interconnection agreements may contain terms and conditions
less favorable to us than those in our current agreements and could increase
our costs of operations.
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During these interconnection negotiations, either the telephone company or
we may submit disputes to the state regulatory commissions for mediation and,
after the expiration of the statutory negotiation period set forth in the 1996
Telecommunications Act, we may submit outstanding disputes to the states for
arbitration, as well as ask the state regulatory commissions to arbitrate a new
agreement or particulars thereof.
Under the 1996 Telecommunications Act, states have begun and, in a number of
cases, completed regulatory proceedings to determine the pricing of unbundled
network elements and services, and the results of these proceedings will
determine the price we pay for, and whether it is economically attractive for
us to use, these elements and services.
Our interconnection agreements have terms of one or two years. Therefore, we
will have to renegotiate our existing agreements when they expire. Although we
expect to renew our interconnection agreements and believe the 1996
Telecommunications Act limits the ability of traditional telephone companies
not to renew these agreements, we may not succeed in extending or renegotiating
our interconnection agreements on favorable terms. Additionally, disputes have
arisen and will likely arise in the future as a result of differences in
interpretations of the interconnection agreements. These disputes have delayed
our deployment of our networks. They have also adversely affected our service
to our customers and our ability to enter into additional interconnection
agreements with the traditional telephone companies in other states. Finally,
the interconnection agreements are subject to state regulatory commission, FCC
and judicial oversight. These government authorities may modify the terms of
the interconnection agreements in a way that hurts our business.
Government Regulations
A significant portion of the services that we offer will be subject to
regulation at the federal and/or state levels. The Federal Communications
Commission, or FCC, and state public utility commissions regulate
telecommunications common carriers, which are companies that offer
telecommunications services to the public or to all prospective users on
standardized rates and terms. Our data transport services are common carrier
services.
The FCC exercises jurisdiction over common carriers, and their facilities
and services, to the extent they are providing interstate or international
communications. The various state utility commissions retain jurisdiction over
telecommunications carriers, and their facilities and services, to the extent
they are used to provide communications that originate and terminate within the
same state. The degree of regulation varies from state to state.
In recent years, the regulation of the telecommunications industry has been
in a state of flux as the United States Congress and various state legislatures
have passed laws seeking to foster greater competition in telecommunications
markets. The FCC and state commissions have adopted many new rules to implement
those new laws and to encourage competition. These changes, which are still
incomplete, have created new opportunities and challenges for us and our
competitors. Certain of these and other existing federal and state regulations
are currently the subject of judicial proceedings, legislative hearings and
administrative proposals which could change, in varying degrees, the manner in
which this industry operates. Neither the outcome of these proceedings nor
their impact upon the telecommunications industry or us can be predicted at
this time. Indeed, future federal or state regulations and legislation may be
less favorable to us than current regulations and legislation and therefore
have a material and adverse impact on our business and financial prospects by
undermining
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our ability to provide DSL services at competitive prices. In addition, we may
expend significant financial and managerial resources to participate in
proceedings setting rules at either the federal or state level, without
achieving a favorable result.
Federal Regulation and Legislation
We must comply with the requirements of a common carrier under the
Communications Act of 1934, as amended, to the extent we provide regulated
interstate services. These requirements include an obligation that our charges,
terms and conditions for communications services must be "just and reasonable"
and that we may not make any "unjust or unreasonable discrimination" in our
charges or terms and conditions. The FCC also has jurisdiction to act upon
complaints against common carriers for failure to comply with their statutory
obligations. We are not currently subject to price cap or rate of return
regulation at the federal level and are not currently required to obtain FCC
authorization for the installation, acquisition or operation of our facilities.
The FCC has established different levels of regulation for dominant and non-
dominant carriers. Of domestic carriers, only the large traditional local
telephone companies are classified as dominant carriers and all other providers
of domestic common carrier service, including us, are classified as non-
dominant carriers. As a non-dominant carrier, we are subject to less FCC
regulation than are dominant carriers.
In November 1998, the FCC ruled that DSL and other advanced data services
provided as dedicated access services in connection with interstate services
such as Internet access are interstate services subject to the FCC's
jurisdiction. Accordingly, we could offer DSL services without state regulatory
authority, so long as we do not also provide local or intrastate telephone
services via our network. This decision allows us to provide our DSL services
in a manner that potentially reduces state regulatory obligations. This
decision is currently subject to reconsideration and appeal.
Comprehensive changes to the Communications Act were made by the 1996
Telecommunications Act, enacted on February 8, 1996. It represents a
significant milestone in telecommunications policy by establishing competition
in local telephone service markets as a national policy. The 1996
Telecommunications Act removes many state regulatory barriers to competition
and forecloses state and local governments from creating laws preempting or
effectively preempting competition in the local telephone service market.
The 1996 Telecommunications Act places substantial interconnection
requirements on the traditional local telephone companies.
. Traditional local telephone companies are required to provide physical
collocation, which allows companies such as us and other interconnectors
to install and maintain their own network termination equipment in the
central offices of traditional local telephone companies, and virtual
collocation only if requested or if physical collocation is demonstrated
to be technically infeasible. This requirement is intended to enable us
and other competitive carriers to deploy our equipment on a relatively
convenient and economical basis.
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. Traditional local telephone companies are required to unbundle
components of their local service networks so that other providers of
local service can compete for a wide range of local service customers.
This requirement is designed to provide us flexibility to purchase only
the equipment we require to deliver our services.
. Traditional local telephone companies are required to establish
"wholesale" rates for their services to promote resale by competitive
local exchange carriers and other competitors.
. Traditional local telephone companies are required to establish number
portability, which allows a customer to retain its existing phone number
if it switches from the traditional local telephone companies to a
competitive local service provider.
. Traditional local telephone companies are required to establish dialing
parity, which ensures that customers will not detect a quality
difference in dialing telephone numbers or accessing operators or
emergency services.
. Traditional local telephone companies are required to provide
nondiscriminatory access to telephone poles, ducts, conduits and rights-
of-way. In addition, the 1996 Telecommunications Act requires
traditional local telephone companies to compensate competitive carriers
for traffic originated by them and terminated on the competitive
carrier's network.
The 1996 Telecommunications Act in some sections is self-executing. The FCC
issues regulations interpreting the 1996 Telecommunications Act that impose
specific requirements upon which we and our competitors rely. The outcome of
various ongoing FCC rulemaking proceedings or judicial appeals of such
proceedings could materially affect our business and financial prospects by
increasing the cost or decreasing our flexibility in providing DSL services.
The FCC prescribes rules applicable to interstate communications, including
rules implementing the 1996 Telecommunications Act, a responsibility it shares
in certain respects with the state regulatory commissions. As part of its
effort to implement the 1996 Telecommunications Act, the FCC issued an order
governing interconnection in August 1996. A federal appeals court for the
Eighth Circuit, however, reviewed the initial rules and overruled some of their
provisions, including some rules on pricing and nondiscrimination. In January
1999, the United States Supreme Court reversed elements of the Eighth Circuit's
ruling, finding that the FCC has broad authority to interpret the 1996
Telecommunications Act and issue rules for its implementation, specifically
including authority over pricing methodology. The Supreme Court upheld the
FCC's directive to the traditional local telephone companies to combine
unbundled elements for competitors, and to allow competitors to pick and choose
among provisions in existing interconnection agreements. The Supreme Court also
found that the FCC's interpretation of the rules for establishing unbundled
elements was not consistent with standards prescribed in the 1996
Telecommunications Act, and required the FCC to reconsider and better justify
its delineation of unbundled elements. The pick and choose rule permits a
competitive carrier to select individual provisions of existing interconnection
agreements yet still tailor its interconnection agreement to its individual
needs by negotiating the remaining provisions. The FCC implemented a public
rulemaking seeking comment on these issues, including particularly, which
network elements should be offered on an unbundled basis by traditional local
telephone companies, and a decision is expected later this year. Although the
FCC has tentatively concluded
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that local copper telephone lines should continue to remain available as an
unbundled element, there is no certainty as to the FCC's outcome on this issue
or as to other network elements which the traditional local telephone companies
will be required to unbundle. Moreover, this proceeding, as well as a companion
FCC rulemaking, addresses related issues of significant importance to us,
including:
. the manner in which copper telephone lines should be subject to
unbundling;
. compatibility among DSL services and between DSL and non-DSL services;
and
. the sharing of copper telephone lines between DSL data services offered
by one provider and voice services offered by another provider.
In addition, some traditional telephone companies may take the position that
they have no obligation to provide unbundled elements, including copper
telephone lines, until the FCC issues new rules, which could adversely affect
our ability to expand our network in accordance with our roll-out plan and
therefore adversely affect our business.
In March 1998, several traditional local telephone companies petitioned the
FCC for relief from certain regulations applicable to their provision of DSL
and other advanced data services, including their obligations to provide
unbundled copper telephone lines and resold DSL services to DSL carriers. In
October 1998, the FCC concluded that DSL services are telecommunications
services subject to the requirements of the 1996 Telecommunications Act and
that therefore the traditional local telephone companies are required to
unbundle and offer for resale DSL services. This proceeding remains pending,
however, because in August 1998 the FCC issued a notice of proposed rulemaking
seeking comments on its tentative conclusion that traditional local telephone
companies should be permitted to create separate affiliates to provide the DSL
services that would operate under the relaxed regulatory treatment available to
other DSL carriers. Under the separate affiliate proposal, traditional local
telephone companies would be required to provide wholesale service to other DSL
carriers at the same rates, terms and conditions that it provided to its
separate affiliate. The outcome of this proceeding remains uncertain. Any final
decision in this proceeding that alters our relationship with the traditional
local telephone companies could adversely affect our ability to provide DSL
services at a competitive price.
In March 1999, the FCC adopted regulations that require the traditional
local telephone companies to permit other carriers to collocate all equipment
necessary for interconnection. This requirement includes equipment that we use
to provide DSL data services. The FCC also adopted limits on the construction
standards and other conditions for collocation that may be imposed by
traditional local telephone companies. These rules should reduce our
collocation costs and expedite the provision of our service to new areas. There
is no guarantee that these new rules will be implemented fully by the
traditional local telephone companies. Therefore, the benefits of these rules
may be delayed pending interpretation and enforcement by state and federal
regulators. These rules are currently subject to appeal by several traditional
local telephone companies.
The 1996 Telecommunications Act also directs the FCC, in cooperation with
state regulators, to establish a universal service fund that will provide
subsidies to carriers that provide service to individuals in high-cost areas. A
portion of carriers' contributions to the universal service fund also will be
used to provide telecommunications related facilities for schools, libraries
and certain rural
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health care providers. The FCC released its initial order in this context in
June 1997, which requires all telecommunications carriers to contribute to the
universal service fund. The FCC's implementation of universal service
requirements remains subject to judicial and additional FCC review. Additional
changes to the universal service regime, which could increase our costs, could
have an adverse affect on us.
Although not required for our existing DSL data service offering, on August
6, 1999 we obtained authority from the FCC to provide facilities-based and
resold international telecommunications services originating from the United
States.
State Regulation
In November 1998, the FCC deemed pure data transmission to the Internet as
interstate services subject only to federal jurisdiction. However, this
decision is currently subject to reconsideration and appeal. Also, some of our
services that are not limited to interstate access potentially may be
classified as intrastate services subject to state regulation. All of the
states where we operate, or intend to operate, require some degree of state
regulatory commission approval to provide certain intrastate services and
maintain ongoing regulatory supervision. In most states, intrastate tariffs are
also required for various intrastate services, although our services are not
subject to price or rate of return regulation. Actions by state public utility
commissions could cause us to incur substantial legal and administrative
expenses and adversely affect our business.
To date, we have been able to obtain authorizations to operate as a
competitive local exchange carrier in 38 states and the District of Columbia,
and we have filed for competitive local exchange carrier status in the
remaining states. Although we expect to obtain certifications in all states,
there is no guarantee that these certifications will be granted or obtained in
a timely manner.
Local Government Regulation
In certain instances, we may be required to obtain various permits and
authorizations from municipalities, such as for use of rights-of-way, in which
we operate our own local distribution facilities. Whether various actions of
local governments over the activities of telecommunications carriers such as
ours, including requiring payment of franchise fees or other surcharges, pose
barriers to entry for competitive local exchange carriers which violate the
1996 Telecommunications Act or may be preempted by the FCC is the subject of
litigation. While we are not a party to this litigation, we may be affected by
the outcome. If municipal governments impose conditions on granting permits or
other authorizations or if they fail to act in granting such permits or other
authorizations, the cost of providing DSL services may increase or negatively
impact our ability to expand our network on a timely basis and adversely affect
our business.
Intellectual Property
We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. There can be no assurance these methods will be
sufficient to protect our technology and intellectual property. We also
generally enter into confidentiality agreements with our employees and
consultants, and generally control access to and distribution of our
documentation and other proprietary information.
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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. Effective
patent, copyright, trademark and trade secret protection may be unavailable or
limited in certain foreign countries, and the global nature of the Internet
makes it virtually impossible to control the ultimate destination of our
proprietary information. There can be no assurance that the steps we have taken
will prevent misappropriation or infringement of our technology. In addition,
litigation may be necessary in the future to enforce our intellectual property
rights, to protect our trade secrets or to determine the validity and scope of
the proprietary rights of others. Such litigation could result in substantial
costs and diversion of resources and could have a material adverse effect on
our business, operating results and financial condition. In addition, some of
our information, including our competitive carrier status in individual states
and our interconnection agreements, is a matter of public record and can be
readily obtained by our competitors and potential competitors, possibly to our
detriment.
Employees
As of July 31, 1999, we had approximately 91 employees. We believe that our
future success will depend in part on our continued ability to attract, hire
and retain qualified personnel. Competition for such personnel is intense, and
we may be unable to identify, attract and retain such personnel in the future.
None of our employees are represented by a labor union or are the subject of a
collective bargaining agreement. We have never experienced a work stoppage and
believe that our employee relations are good.
Properties
Our headquarters consists of 31,500 square feet in an office building in New
Haven, Connecticut, which we occupy under a lease that expires in May 2005.
This lease may be extended for two additional five-year periods. We also lease
office space for local sales personnel and space for network equipment
installations in a number of other locations. With respect to our arrangements
to use space in traditional telephone companies' central offices, please see
"Interconnection Agreements with Traditional Local Telephone Companies."
Legal Proceedings
From time to time we are involved in legal proceedings, claims and
litigation arising in the ordinary course of business, the outcome of which, in
the opinion of management, would not have a material adverse effect on us. We
are also a party to legal proceedings related to regulatory approvals. We are
subject to state commission, FCC and court decisions as they relate to the
interpretation and implementation of the 1996 Telecommunications Act, the
interpretation of competitive carrier interconnection agreements in general and
our interconnection agreements in particular. In some cases, we may be deemed
to be bound by the results of ongoing proceedings of these bodies. We therefore
may participate in proceedings before these regulatory agencies or judicial
bodies that affect, and allow us to advance, our business plans.
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MANAGEMENT
Directors and Executive Officers
The directors and executive officers of DSL.net are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Paul K. Sun............. 39 Chairman of the Board and Chief Technology Officer
David F. Struwas........ 51 President, Chief Executive Officer and Director
Raymond C. Allieri...... 39 Senior Vice President, Sales and Marketing
Robert Q. Berlin........ 33 Chief Financial Officer and Vice President, Strategic Planning
Alan A. Bolduc.......... 44 Vice President, Operations
John M. Jaser........... 40 Vice President, Technology
Stephen Zamansky........ 29 Vice President and General Counsel
Robert Gilbertson(1).... 58 Director
William J. Marshall(1).. 44 Director
James D. Marver......... 49 Director
William Seifert(1)...... 49 Director
</TABLE>
- ---------------------
(1) Member of the audit committee
Currently we have six members on our board of directors. These directors
were elected in accordance with an amended and restated voting agreement which
terminates upon the closing of the offering. Each of these directors will hold
office until the next annual meeting of our stockholders. Commencing at the
next annual meeting of our stockholders, our board of directors will be divided
into three classes. The members of each class will be determined by the board
of directors prior to that meeting. At that meeting, our stockholders will
elect one class of directors for a term expiring in one year, a second class of
directors for a term expiring in two years, and a third class of directors for
a term expiring in three years. Thereafter, each director will be elected for a
three-year term, with one class of directors being elected at each annual
meeting. Each director holds office until that director's successor is elected
and qualified.
Paul K. Sun has served as a director since January 1999 and Chairman of the
board of directors since February 1999. In addition, he has also served as
Chief Technology Officer since December 1999. From February 1997 to December
1998, Mr. Sun was a Director at PairGain Technologies, Inc. From December 1995
to February 1997, he was President and Chief Executive Officer of Avidia
Systems, Inc., an ATM switch vendor, which was acquired by PairGain
Technologies, Inc. in February 1997. From 1989 to 1995, Mr. Sun held various
positions at TranSwitch Corporation, a now-public telecommunications-oriented
semiconductor company, most recently as Manager of ATM Development.
David F. Struwas joined DSL.net in August 1998 and has served as our
President and Chief Executive Officer since November 1998 and as a director
since January 1999. From January 1997 to August 1998, Mr. Struwas was a General
Manager for Brooks Fiber-Worldcom. From May 1980 to January 1997, Mr. Struwas
held various positions at Southern New England Telephone, most recently as
Director of Marketing.
Raymond C. Allieri has served as Senior Vice President, Sales and Marketing
since June 1999. From 1988 to 1999, Mr. Allieri held various positions at MCI
WorldCom Communications Corporation, most recently as Senior Vice President,
Local Market Strategy and Development.
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Robert Q. Berlin has served as Chief Financial Officer and Vice President,
Strategic Planning since July 1999, as Vice President, Strategic Planning since
May 1999 and as Executive Director, Strategic Planning from January 1999 to May
1999. From December 1997 to January 1999, Mr. Berlin was Managing Director of
Rice Sangalis Toole & Wilson, a private investment firm. From August 1994 to
December 1997, he held various positions, including Managing Director at GE
Capital Corporation. From June 1991 to August 1994, Mr. Berlin was a principal
at CHF Capital Partners, a private investment firm.
Alan A. Bolduc has served as Vice President, Operations since November 1998.
From June 1998 to November 1998, Mr. Bolduc was Managing Director of
Cablevision Lightpath of CT, Inc., a competitive carrier subsidiary of
Cablevision. From January 1995 to May 1998, he was a General Manager at Brooks
Fiber Communications of CT, Inc. From April 1992 to January 1995, Mr. Bolduc
held various positions at Sprint Communications, most recently as National
Account Manager.
John M. Jaser has served as Vice President, Technology since May 1999. Mr.
Jaser served as our President from March 1998 to November 1998 and was
responsible for business development from November 1998 to May 1999. From
January 1992 to March 1998, Mr. Jaser was the President and Chief Executive
Officer of FutureComm, Inc., a consulting firm specializing in network
planning, architecture and design.
Stephen Zamansky has served as Vice President and General Counsel since May
1999. From August 1997 to May 1999, Mr. Zamansky was an associate at Day, Berry
& Howard LLP. From October 1995 to August 1997, he was an associate at Sullivan
& Cromwell. From August 1994 to August 1995, Mr. Zamansky was a legal clerk for
a justice at the Supreme Judicial Court of Massachusetts.
Robert Gilbertson has served as a director since January 1999. Mr.
Gilbertson has been the President and Chief Executive Officer of Network
Computing Devices, Inc. since May 1997. From April 1996 to April 1997, Mr.
Gilbertson served as Chairman of Avidia Systems Inc. From January 1992 to May
1996, Mr. Gilbertson served as President and a director of CMX Systems, Inc., a
manufacturer of precision measurement and positioning products.
William J. Marshall has served as a director since January 1999. Mr.
Marshall has been a Managing Partner at VantagePoint Venture Partners since
1998 and served as Senior Advisor from 1996 to 1998. From 1985 to 1996, Mr.
Marshall was the Senior Managing Director and Chief Technology Officer of the
Communications Technologies Group at Bear Stearns & Co. Inc. Mr. Marshall is a
Co-Founder of the ATM Forum and was also a Board member of the Securities
Industry Association Technology Committee.
James D. Marver has served as a director since April 1999. Mr. Marver has
been a Managing Partner at VantagePoint Venture Partners since co-founding the
firm in 1996. From 1988 to 1996, Mr. Marver was Senior Managing Director and
Head of the Global Technology Group at Bear Stearns & Co. Inc., as well as Head
of the San Francisco Investment Banking office.
William Seifert has served as a director since April 1999. Mr. Seifert has
been a General Partner of Prism Ventures Partners II, L.P. since October 1998.
From November 1997 to October 1998,
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Mr. Seifert was a consultant and private investor. Mr. Seifert founded Agile
Networks, Inc. in November 1991 and served as its Chief Executive Officer until
November 1997. Mr. Seifert is a director of Digital Lightwave, Inc.
Committees of the Board of Directors
Our board of directors reviews and evaluates the salaries and incentive
compensation of our management and key employees. In addition, our board of
directors administers our 1999 stock plan and 1999 employee stock purchase
plan. We currently do not have a compensation committee.
Our audit committee consists of Messrs. Gilbertson, Marshall and Seifert. It
is responsible for reviewing the scope of annual audits, considering specific
problems and questions that arise during the course of audits, monitoring the
adequacy of accounting and audit controls, and such other functions as the
board of directors may from time to time delegate to it. Our audit committee
must report to the board of directors when asked to do so.
Director Compensation
We currently do not provide cash compensation, other than reimbursement of
expenses, to any member of our board of directors. In February 1999, our board
of directors approved the grant of non-qualified stock options to purchase
333,250 shares of our common stock to each of Mr. Gilbertson and Mr. Marshall
for their services as directors and 79,980 shares to Mr. Marver for his service
as our advisor, in each case at an exercise price of $0.0375 per share. In July
1999, our board approved an additional grant of a non-qualified stock option to
purchase 53,320 shares of our common stock to Mr. Marver for his service as a
director at an exercise price of $7.3875 per share. This option provides that
all shares subject to the option are immediately exercisable subject to our
right to repurchase all of the shares up until one year following the date of
grant, at which time our right to repurchase terminates with respect to 25% of
the shares originally granted. Thereafter, our right to repurchase terminates
monthly over the next 36 months with respect to 2.08% of the shares originally
granted under the option. The board of directors has also provided that our
right to repurchase shares relating to an option granted under the 1999 stock
plan to a member of our board of directors or certain of our advisors will
terminate immediately upon a change of control. In addition, the option granted
to Mr. Gilbertson provides that his option will become immediately exercisable
in full in the event he is removed as a director for any reason other than in
connection with a change of control of DSL.net. See "Management--Stock Plans."
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Executive Compensation
The following summary compensation table sets forth the total compensation
paid or accrued for the period from our inception on March 3, 1998 through
December 31, 1998 for David Struwas, our Chief Executive Officer at December
31, 1998, and John M. Jaser, our Vice President, Technology, who served as our
chief executive officer from March 1998 to November 1998 (the "named executive
officers"). No other executive officer or employee had compensation in excess
of $100,000 during the year ended December 31, 1998.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------
All Other
Name and Principal Position Salary Bonus Compensation
<S> <C> <C> <C>
David Struwas................................... $29,867(1) $35,000 $6,682
President and Chief Executive Officer
John M. Jaser................................... 20,975(2) -- 955
Vice President, Technology(3)
</TABLE>
- ---------------------
(1) Mr. Struwas' annual salary for fiscal year 1999 is $95,000.
(2) Mr. Jaser's annual salary for fiscal year 1999 is $90,000.
(3) Mr. Jaser served as President from March 1998 to November 1998.
All other compensation consists of an amount equal to the fair market value
of common stock, as determined by our board of directors, purchased in December
1998 by each named executive officer in exchange for a promissory note. The
notes were subsequently cancelled in full satisfaction of our obligation to pay
additional compensation under agreements entered into in December 1998. Based
on subsequent events such as the issuance of the Series A preferred stock and
our decision to proceed with this offering, we have recorded aggregate stock
compensation of $1,023,272 relating to these shares of common stock. See
"Certain Transactions."
Option Grants
No stock options or appreciation rights were granted during the year ended
December 31, 1998 to Mr. Struwas or Mr. Jaser.
Stock Plans
1999 Stock Plan. Our stock plan was adopted by the board of directors in
February 1999 and approved by the stockholders in March 1999. A total of
12,364,200 shares of common stock have been authorized and reserved for
issuance under the stock plan. As of July 31, there were outstanding options
for the purchase of a total of 5,265,350 shares of common stock at a weighted
exercise price of $0.71. All options have been issued at the fair market value
of our common stock at the time of issuance. All options granted after this
offering will be at the fair market value of our common stock on the date of
grant. No shares have been issued pursuant to the exercise of options. Under
the terms of the stock plan, we are authorized to grant incentive stock options
as defined under the Internal Revenue Code, non-qualified options, stock
appreciation rights, stock awards or opportunities to make direct purchases of
common stock to officers, directors, consultants and other employees of ours
and our subsidiaries.
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The stock plan is administered by our board of directors. The board selects
the individuals to whom options or other awards will be granted and determines
the option exercise price and other terms of each award, subject to the
provisions of the stock plan. The President and Chief Executive Officer may
approve options to non-officers in accordance with guidelines approved by our
board of directors. Options generally provide that 25% of the shares
exercisable under each option will vest one year following either the date of
grant or the optionee's date of employment and thereafter vest in equal monthly
installments over the next 36 months. However, certain options granted under
our stock plan to directors and certain officers and consultants are
immediately exercisable subject to our right to repurchase 100% of the shares
until one year following the date of grant or the one year employment
anniversary of the person, at which time our right to repurchase terminates
with respect to 25% of the shares originally granted. Thereafter, our right to
repurchase terminates monthly over each the next thirty-six months with respect
to approximately 2.08% of the shares originally granted under the option. In
addition, upon termination of employment without cause of certain executive
officers, our right to repurchase shares granted under an option to that person
will terminate with respect to all shares for which our right to repurchase
would have terminated one year following the date of termination. The option
exercise price may be paid in cash or in shares of common stock valued at fair
market value on the exercise date. We may also allow the option to be exercised
through a same-day sale program without any cash outlay by the optionee. The
stock plan also provides that, if at any time following a change in control we
terminate an optionee's business relationship with DSL.net or any of our
subsidiaries without cause or the optionee terminates his or her business
relationship with us for good reason, all options and other awards held by that
optionee will immediately vest and become exercisable. In addition, the board
of directors has provided that our right to repurchase shares subject to an
option granted under the stock plan to any person serving as president, chief
executive officer, senior vice president, chief financial officer, chief
technology officer, chairman of our board of directors, a member of our board
of directors, a member of our advisory board and certain vice presidents will
terminate immediately upon a change in control. An option is not transferable
by the recipient except by will or by the laws of descent and distribution, or,
in the case of non-qualified stock options, is only transferable to the extent
set forth in the agreement relating to the non-qualified stock option or
pursuant to a valid domestic relations order. The term of the stock plan is ten
years, unless sooner terminated by vote of our board of directors.
1999 Employee Stock Purchase Plan. The purchase plan was adopted by the
board of directors and received stockholder approval in July 1999. The purchase
plan provides for the issuance of up to an aggregate of 300,000 shares of
common stock to participating employees.
The purchase plan is administered by our board of directors. Generally, all
employees who have completed three months of employment and whose customary
employment is more than 20 hours per week and for more than five months in any
calendar year are eligible to participate in the purchase plan. The right to
purchase common stock under the purchase plan will be made available through a
series of offerings. On the first day of an offering period, we will grant to
each eligible employee who has elected in writing to participate in the
purchase plan an option to purchase shares of common stock. The employee will
be required to authorize an amount, between 1% and 10% of the employee's
compensation, to be deducted from the employee's pay during the offering
period. On the last day of the offering period, the employee will be deemed to
have exercised the option, at the option exercise price, to the extent of
accumulated payroll deductions. Under the terms of the
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<PAGE>
purchase plan, the option exercise price is an amount equal to 85% of the fair
market value of one share of common stock on either the first or last day of
the offering period, whichever is lower. No employee may be granted an option
that would permit the employee's rights to purchase common stock to accrue in
excess of $25,000 in any calendar year. The first offering period under the
purchase plan will commence upon the initial offering of the common stock to
the public and continues through February 2000. Thereafter, the offering
periods will begin on each March 1 and September 1. Options granted under the
purchase plan terminate upon an employee's voluntary withdrawal from the plan
at any time or upon termination of employment. No options have been granted to
date under the purchase plan.
Compensation Committee Interlocks and Insider Participation
Our board of directors reviews salaries and incentive compensation for our
employees and consultants and administers and grants stock options pursuant to
the stock plan and the purchase plan. Each of John Jaser, a founder and our
Vice President, Technology, and Mr. Struwas, our President and Chief Executive
Officer, participated in deliberations of our board of directors concerning
executive compensation in 1998.
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CERTAIN TRANSACTIONS
Upon completion of this offering, each outstanding share of preferred stock
will convert into 2.666 shares of common stock, with the aggregate number of
shares of common stock to be issued to each stockholder to be rounded up to the
nearest whole share. The Series A, B, C, D and E preferred stockholders are
entitled to receive noncumulative cash dividends of $0.08, $0.0430768, $0.2872,
$0.8368 and $1.576 per share per annum when and as declared by our board of
directors. No dividends have been nor do we anticipate that any dividends will
be declared on the preferred stock by our board of directors.
Organization of DSL.net
In connection with our formation in 1998, we issued and sold 2,544,817
shares of common stock for a purchase price of $250 to John Jaser, a founder
and currently our Vice President, Technology. In addition, we issued and sold
2,544,817 shares of common stock for a purchase price of $250 to Felix Tang, a
founder and currently our Director of Network Engineering.
In addition, we issued 20,000 shares of a prior series A preferred stock for
an aggregate of $50,000 to another founder, Paul Sun, who currently is the
Chairman of the board of directors and Chief Technology Officer.
In anticipation of the Series A preferred financing, in December 1998 Mr.
Sun exchanged 20,000 shares of a prior series A preferred stock for 7,634,451
shares of our common stock and in January 1999, Mr. Tang purchased 8 shares of
common stock for an aggregate purchase price of $0.02.
Issuance of Notes and Warrants
In November 1998, we issued a convertible promissory note in the aggregate
principal amount of $41,667 and a warrant to purchase 10,416 shares of Series A
preferred stock at an exercise price of $1.00 per share to VantagePoint Venture
Partners, 1996, L.P. In addition, we issued a convertible promissory note in
the aggregate principal amount of $83,333 and a warrant to purchase 20,834
shares of Series A preferred stock at an exercise price of $1.00 per share to
VantagePoint Communications Partners, L.P., an affiliate of VantagePoint
Venture Partners. Messrs. Marver and Marshall, two of our directors, are
members of the general partners of each of these VantagePoint entities.
Each of the notes issued to the VantagePoint entities provided for interest
at 6.0% and was repayable on demand beginning on January 8, 1999. Each of these
notes was cancelled in January 1999 in connection with the Series A preferred
stock financing described below.
Upon completion of this offering, the warrants will be exercisable in whole
or in part, at any time or from time to time, until November 18, 2003, for an
aggregate of 83,314 shares of common stock at an exercise price of $0.375 per
share.
Issuance of Notes and Rights to Warrants
Concurrently with the issuance of the convertible promissory notes and
warrants to the VantagePoint entities, we issued three convertible promissory
notes in the aggregate principal amount of $225,000 and contractual rights to
warrants to purchase an aggregate of 56,250 shares of Series A
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preferred stock at an exercise price for $1.00 per share. Of that amount, one
convertible demand promissory note in the principal amount of $100,000 and a
contractual right to a warrant to purchase 25,000 shares of Series A preferred
stock was issued to Robert Gilbertson, one of our directors.
These convertible promissory notes provided for interest at 5.56% and were
repayable on demand if we failed to issue equity securities having an aggregate
purchase price of at least $1,000,000 on or before September 30, 2000. These
notes were automatically converted into an aggregate of 225,000 shares of
Series A preferred stock in January 1999, of which Mr. Gilbertson was issued
100,000 shares. Upon completion of this offering, the 225,000 shares of Series
A preferred stock will be converted into 599,850 shares of common stock.
The contractual rights to the warrants granted in November 1998 were
exercised and, as a result, warrants to purchase an aggregate 56,250 shares of
Series A preferred stock at an exercise price of $1.00 per share were issued.
Of this amount, a warrant to purchase 25,000 shares of Series A preferred stock
at an exercise price of $1.00 per share was issued to Mr. Gilbertson. The
warrant issued to Mr. Gilbertson may be exercised in whole or in part, at any
time or from time to time, until the completion of this offering, after which
the warrant will terminate and no longer be exercisable.
Issuance of Stock
In December 1998, we issued 508,963 shares of common stock to Mr. Jaser in
exchange for his promissory note in the principal amount of $955 and 3,562,744
shares of common stock to David Struwas in exchange for his promissory note in
the principal amount of $6,682. Simultaneously with the issuance of this common
stock, we entered into agreements with each of Mr. Jaser and Mr. Struwas that
provided for additional compensation, after taxes, in the amount of $955 and
$6,682, respectively, plus interest of 5.56% from the date of the agreement
until the date of payment. The promissory notes of each of Mr. Jaser and Mr.
Struwas were cancelled in January 1999 in full satisfaction of our obligations
under each of these agreements.
In January 1999, we issued 1,166,667 shares of Series A preferred stock and
a warrant to purchase 1,166,667 shares of a prior series B preferred stock to
VantagePoint Venture Partners 1996, L.P. for aggregate consideration of
$1,166,667. These shares and warrants were subsequently exchanged in April
1999, for 2,166,667 shares of Series B preferred stock. In addition, we issued
2,333,333 shares of Series A preferred stock and a warrant to purchase
2,333,333 shares of a prior series B preferred stock to VantagePoint
Communications Partners, L.P. for aggregate consideration of $2,333,333. These
shares and warrants were subsequently exchanged in April 1999 for 4,333,333
shares of Series B preferred stock. A portion of the aggregate consideration
paid by VantagePoint Venture Partners 1996, L.P. and VantagePoint
Communications Partners, L.P. was in the form of the cancellation of each of
the convertible promissory notes issued by DSL.net in November 1998. At the
time of the exchange, the exchange rate was below the deemed fair market value
of the stock. In addition, in January 1999, certain shares of common stock
owned by Messrs. Jaser, Struwas, Tang and Sun were made subject to vesting
based on tenure and certain performance criteria under a stockholders'
agreement described below.
In March 1999, we issued 436,256 shares of common stock to Mr. Struwas
having a fair market value as determined by our board of directors at the time
of issuance of approximately $29,455. Based on subsequent events, we recorded
compensation expense of $587,457 related to this issuance.
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In April 1999, in connection with a recapitalization to adjust the share
ownership of each stockholder and the removal of certain vesting restrictions
based on performance criteria contained in the stockholders' agreement
described below, Mr. Jaser surrendered 867,660 shares of common stock, Mr. Tang
surrendered 731,945 shares of common stock and Mr. Sun surrendered 1,502,651
shares of common stock to DSL.net.
In April 1999, we issued an aggregate of 2,785,516 shares of Series C
preferred stock at a price of $3.59 per share, for aggregate consideration of
$10,000,002. Of that amount, we issued 185,701 shares to VantagePoint Venture
Partners 1996, L.P., 371,402 shares to VantagePoint Communications Partners,
L.P. and 1,392,758 shares to Prism Venture Partners II, L.P. Mr. Seifert, one
of our directors, is a managing director of the general partner of Prism
Venture Partners II, L.P. We also issued 819,778 shares to Oak Investment
Partners VIII, L.P. and 15,877 shares to Oak VIII Affiliates Fund L.P.
In May 1999, we issued an aggregate of 2,868,069 shares of Series D
preferred stock at a purchase price of $10.46 per share, for aggregate
consideration of $30,000,002, including a secured promissory note of
VantagePoint Venture Partners III, L.P., an affiliate of VantagePoint Venture
Partners 1996, L.P. and VantagePoint Communications Partners, L.P., in an
aggregate principal amount of $5,999,429. Messrs. Marver and Marshall are
members of the general partner of this VantagePoint entity. Of that amount, we
issued 191,204 shares to VantagePoint Venture Partners, 1996, L.P., 382,410
shares to VantagePoint Communications Partners, L.P., 573,614 shares to
VantagePoint Venture Partners III, L.P. and 95,602 shares to Prism Venture
Partners II, L.P. We also issued 515,823 shares of Series D preferred stock to
Oak Investment Partners VIII, L.P. and 9,990 shares of Series D preferred stock
to Oak VIII Affiliates Fund, L.P. VantagePoint Venture Partners III, L.P. paid
the secured promissory note in full on May 28, 1999.
In June 1999, we issued an aggregate of 95,603 shares of Series D preferred
stock to Raymond C. Allieri, our Senior Vice President, Sales and Marketing, at
a purchase price of $10.46 per share, for aggregate consideration of
$1,000,007, including a secured promissory note in an aggegate principal amount
of $999,911. The promissory note provided for interest at 6.00% per annum and
was paid in full on July 16, 1999.
In January 1999, Messrs Jaser, Tang, Sun and Struwas entered into a
shareholders' agreement which subjected 1,266,350, 1,055,291, 3,060,347 and
1,477,410 shares, respectively, to vesting pro-rata over 38 months. In
addition, 1,454,181, 1,211,825, 3,635,451 and 1,696,544 shares of common stock,
respectively, became subject to vesting over 84 months, or earlier if certain
gross revenue and EBITDA targets were achieved. In April 1999, the vesting
provisions relating to the shares vesting over 84 months were removed in
connection with an amended and restated shareholders' agreement and the
recapitalization discussed above. In addition, the shareholders' agreement
provides that all unvested shares will vest and the right to repurchase will
terminate upon a change in control.
In connection with the preferred stock financings, we entered into an
investors rights agreement in which we granted registration rights to certain
holders of preferred stock and common stock and which contained certain other
covenants which will terminate upon the completion of this offering. See
"Description of Capital Stock--Registration Rights."
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We also entered into a voting agreement under which the parties agreed to
elect nominees of certain holders to the board of directors. In addition, we
entered into a right of first refusal and co-sale agreement which gave us and
certain stockholders a right of first refusal and a right to sell shares in
connection with any sale of shares held by Messrs. Jaser, Struwas, Sun and
Tang. Each of these agreements will terminate upon the completion of this
offering.
Issuance of Options
In February 1999, we issued options to purchase 333,250 shares of our common
stock to each of Messrs. Gilbertson and Marshall and options to purchase 79,980
shares of our common stock to Mr. Marver. Each option has an exercise price of
$0.0375 per share, the fair market value of the common stock at the time of
grant as determined by the board of directors. In July 1999, our board approved
an additional grant of a non-qualified stock option to purchase 53,320 shares
of our common stock to Mr. Marver for his service as a director at an exercise
price of $7.3875 per share, the fair market value of the common stock at the
time of grant as determined by the board of directors. See "Management--
Director Compensation."
Other
In January 1999, we entered into an agreement with FutureComm, Inc., a
Connecticut corporation, under which FutureComm, Inc. transferred and assigned
all of its interest in certain equipment, agreements, licenses and intellectual
property in return for payment of approximately $28,000. Mr. Jaser is the sole
stockholder and director of FutureComm, Inc. and Mr. Jaser and Mr. Tang are
officers of FutureComm, Inc.
We are party to an agreement, dated as of April 1, 1999, with DMW Worldwide,
Inc. under which we license software for use in connection with our operations
support systems. In addition, DMW will install and modify the software, and
provide training, maintenance and support services in connection with the
software. We are currently renegotiating the terms of this agreement. Two of
our stockholders, VantagePoint Venture Partners 1996, L.P. and VantagePoint
Communications Partners, L.P., in the aggregate, own in excess of 5% of the
capital stock of DMW. Mr. Marshall and Mr. Marver, affiliates of VantagePoint
Venture Partners 1996, L.P. and VantagePoint Communications Partners, L.P., are
also members of our board of directors. In addition Mr. Marver is a director of
DMW.
We have adopted a policy whereby all future transactions between us and our
officers, directors and affiliates will be on terms no less favorable to us
than could be obtained from unaffiliated third parties and will be approved by
a majority of the disinterested members of our board of directors.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of July 31, 1999, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by:
. each person known by us to be the beneficial owner of more than 5% of
our common stock;
. each named executive officer;
. each of our directors; and
. all named executive officers and directors as a group.
Unless otherwise noted below, the address of each person listed on the table
is c/o DSL.net, Inc., 545 Long Wharf Drive, New Haven, CT 06511, and each
person has sole voting and investment power over the shares shown as
beneficially owned except to the extent authority is shared by spouses under
applicable law.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock issuable by us to a
person pursuant to options or warrants which may be exercised within 60 days
after July 31, 1999 are deemed to be beneficially owned and outstanding for
purposes of calculating the number of shares and the percentage beneficially
owned by that person. However, these shares are not deemed to be beneficially
owned and outstanding for purposes of computing the percentage beneficially
owned by any other person.
For purposes of calculating the percentage beneficially owned by any person,
the number of shares deemed outstanding before the offering includes:
. shares of common stock outstanding as of July 31, 1999;
. shares of common stock issuable upon the conversion of preferred stock
outstanding as of July 31, 1999; and
. shares of common stock issuable upon the exercise of options and
warrants which may be exercised by that person within 60 days of July
31, 1999.
For purposes of calculating the percentage beneficially owned by any person,
the number of shares deemed outstanding after the offering includes:
. all shares deemed to be outstanding before the offering and
. shares being sold in this offering, assuming no exercise of the
underwriters' over-allotment option.
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<TABLE>
<CAPTION>
Percent of Common
Shares Stock Outstanding
Beneficially ------------------------------
Owned Before Offering After Offering
<S> <C> <C> <C>
David Struwas...................... 3,999,000 8.02% 6.71%
John Jaser......................... 2,186,120 4.38 3.67
Robert Gilbertson(1)............... 666,500 1.33 1.11
James D. Marver(2)................. 22,089,363 44.09 36.90
William J. Marshall(3)............. 22,289,313 44.31 37.11
William Seifert(4)................. 3,967,968 7.95 6.65
Paul Sun........................... 3,097,892 6.21 5.19
The VantagePoint Entities(5)....... 21,956,063 43.80 36.76
1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
Prism Venture Partners II, L.P..... 3,967,968 7.95 6.65
100 Lowder Brook Drive
Suite 2500
Westwood, MA 02090
The Oak Entities(6)................ 3,629,675 7.28 6.09
One Gorham Island
Westport, CT 06830
Stephen K. Gellman and Cecila S. 3,033,908 6.08 5.09
Wu(7).............................
Shipman & Goodwin L.L.P.
One American Row
Hartford, CT 06103
All executive officers and
directors as a group
(11 persons)(8)................... 37,931,790 72.70% 61.32%
</TABLE>
- ---------------------
(1) Includes 266,600 shares held by Mr. Gilbertson and 333,250 shares issuable
in connection with options that are currently exercisable. Also includes
66,650 shares of common stock issuable upon exercise of a warrant held by
Mr. Gilbertson.
(2) Includes 133,300 shares issuable to Mr. Marver in connection with options
that are currently exercisable. Also includes shares beneficially owned by
the VantagePoint entities as set forth in footnote 5. Mr. Marver is a
member of the general partner of each of the VantagePoint entities. Mr.
Marver may be deemed to share voting and investment power with respect to
such shares and disclaims beneficial ownership of such shares.
(3) Includes 333,250 shares issuable to Mr. Marshall in connection with options
that are currently exercisable. Also includes shares beneficially owned by
the VantagePoint entities as set forth in footnote 5. Mr. Marshall is a
member of the general partner of each of the VantagePoint entities. Mr.
Marshall may be deemed to share voting and investment power with respect to
such shares and disclaims beneficial ownership of such shares.
(4) Includes 3,967,968 shares held by Prism Venture Partners II, L.P., of which
Prism Investment Partners II, L.P. is the general partner, of which Prism
Venture Partners II, L.L.C. is the general partner. Mr. Seifert is a
managing director of Prism Venture Partners II, L.L.C. Mr. Seifert may be
deemed to share voting and investment power with respect to such shares and
disclaims beneficial ownership of such shares.
(5) Includes 6,781,164 shares and warrants to purchase 27,770 shares held by
VantagePoint Venture Partners 1996, L.P., of which VantagePoint Associates,
LLC is the general partner. Also includes 13,562,330 shares and warrants to
purchase 55,544 shares held by VantagePoint Communications Partners, L.P.,
of which VantagePoint Communications Associates, LLC is the general partner
and 1,529,255 shares held by
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VantagePoint Venture Partners III, L.P., of which VantagePoint Ventures
Associates III, LLC is the general partner.
(6) Includes 3,560,713 shares held by Oak Investment Partners VIII, L.P., of
which Oak Associates VIII, LLC is the general partner. Also inlcudes 68,962
shares held by Oak VIII Affiliates Fund, L.P., of which Oak VIII Affiliates
Fund, LLC is the general partner.
(7) Includes an aggregate of 101,308 shares held in trust for Mr. Sun's
children, of which Mr. Gellman and Ms. Wu are co-trustees, and 2,932,600
shares held in trust for Mr. Sun, of which Mr. Gellman and Ms. Wu are co-
trustees. Each of Mr. Gellman and Ms. Wu may be deemed to share voting and
investment power with respect to such shares and each disclaims beneficial
ownership of such shares.
(8) See Notes 1 through 5. Also includes shares owned by executive officers and
shares issuable to executive officers in connection with options which are
currently exercisable.
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DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, our authorized capital stock
will consist of 200,000,000 shares of common stock, with a par value of $.0005
per share, and 20,000,000 shares of preferred stock, with a par value of $.001
per share.
Common Stock
As of July 31, 1999 there were 49,889,598 shares of common stock outstanding
and held of record by 24 stockholders, after giving effect to the conversion of
all outstanding shares of preferred stock upon the closing of this offering.
Three of our current stockholders also hold warrants to purchase 149,963 shares
of common stock which terminate upon the closing of this offering. See "--
Warrants".
Based upon the number of shares outstanding as of July 31, 1999 and giving
effect to the issuance of the shares of common stock offered by us hereby,
there will be 59,639,561 shares of common stock outstanding upon the closing of
this offering and the exercise of warrants which terminate upon the closing of
this offering. In addition, as of July 31,1999, there were outstanding stock
options for the purchase of a total of 5,265,350 shares of common stock at a
weighted average exercise price of $0.72, and outstanding warrants for the
purchase of a total of 129,226 shares of Series A preferred stock at a weighted
average exercise price of $1.45. Upon completion of this offering warrants to
purchase 56,250 shares of Series A preferred stock will terminate and the
remaining warrants will be exercisable for 194,556 shares of common stock.
Holders of common stock are entitled to one vote per share for each share
held of record on all matters submitted to a vote of stockholders. The holders
of common stock are entitled to receive ratably such lawful dividends as may be
declared by our board of directors. However, these dividends are subject to
preferences that may be applicable to the holders of any outstanding shares of
preferred stock. In the event of a liquidation, dissolution or winding up of
the affairs of DSL.net, whether voluntary or involuntary, the holders of common
stock will be entitled to receive pro rata all of our remaining assets
available for distribution to our stockholders. Any such pro rata distribution
would be subject to the rights of the holders of any outstanding shares of
preferred stock. The common stock has no preemptive, redemption, conversion or
subscription rights. The rights, powers, preferences and privileges of holders
of common stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of preferred stock which we may designate
and issue in the future.
Preferred Stock
Upon completion of this offering, each outstanding share of preferred stock
will be converted into 2.666 shares of our common stock, with the aggregate
number of shares of common stock to be issued to each stockholder to be rounded
up to the nearest whole share. No cash dividends have been declared or are
anticipated to be declared on the preferred stock. A new certificate of
incorporation will be filed immediately after the completion of this offering
and will delete all references to the Series A, B, C, D and E preferred stock.
Our board of directors will be authorized, subject to any limitations
prescribed by Delaware law, without further stockholder approval, to issue from
time to time up to 20,000,000 shares of preferred
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stock, in one or more series. Our board of directors will be also authorized,
subject to the limitations prescribed by Delaware law, to establish the number
of shares to be included in each series and to fix the voting powers,
preferences, qualifications and special or relative rights or privileges of
each series. Our board of directors will be authorized to issue preferred stock
with voting, conversion and other rights and preferences that could adversely
affect the voting power or other rights of the holders of common stock.
We have no current plans to issue any preferred stock following this
offering. However, the issuance of preferred stock or of rights to purchase
preferred stock could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
a majority of our outstanding voting stock.
Warrants
As of July 31, 1999, we had outstanding six warrants to purchase an
aggregate of 129,226 shares of Series A preferred stock:
. Two warrants provide for the purchase of an aggregate of 31,250 shares
of Series A stock at an exercise price of $1.00 per share, and are
exercisable, in whole or in part, at any time or from time to time,
until November 18, 2003. Upon completion of this offering, these
warrants will be exercisable for an aggregate of 83,314 shares of common
stock at an exercise price of $.375 per share.
. Three warrants are to purchase an aggregate of 56,250 shares of Series A
stock at an exercise price of $1.00 per share and are exercisable, in
whole or in part, at any time or from time to time, until the date on
which we complete our initial public offering.
. The sixth warrant is to purchase an aggregate of 41,726 shares of Series
A preferred stock at an exercise price of $2.40 per share and is
exercisable, in whole or in part, at any time or from time to time until
three years following the date on which we complete our initial public
offering. Upon completion of this offering, this warrant will be
exercisable for 111,242 shares of common stock at an exercise price of
$0.90 per share.
All of the outstanding warrants contain certain protections against dilution
resulting from stock splits, stock dividends and our consolidation or merger
with or into another person or sale of all or substantially all of our assets.
Registration Rights
Under the terms of the amended and restated investors' rights agreement
dated as of July 16, 1999, holders of an aggregate of 49,289,748 shares of
common stock, including shares issuable upon conversion of the outstanding
preferred stock, are entitled to certain rights with respect to the
registration of these shares under the Securities Act.
If we propose to register any of our securities under the Securities Act,
either for our own account or for the account of other security holders, the
holders of registration rights are entitled to notice of such registration.
These holders are also entitled to include their shares of common stock in
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such registration. However, in the event of a registration pursuant to an
underwritten public offering of common stock, the underwriters have the right,
subject to certain conditions, to limit the number of shares included in such
registration.
The holders of at least 40% of the then-outstanding shares of common stock
held by all of the holders of registration rights are entitled, at any time
following 180 days after the date of this prospectus, to request that we file a
registration statement under the Securities Act covering the sale of the shares
held by the requesting holders of registration rights. Upon the receipt of such
a request, we must use commercially reasonable efforts to effect such
registration. We are not required to effect more than two such demand
registrations.
Once we have qualified to use Form S-3 to register securities under the
Securities Act, the holders of registration rights have the right to request
that we file a registration statement on Form S-3 or any successor thereto for
a public offering of all or any portion of their shares, provided that the
reasonably anticipated aggregate price to the public of such offering would not
be less than $1,000,000. We are not required to effect a registration in this
manner more than once in any six-month period.
In general, all fees, costs and expenses of such registrations will be borne
by us. We have agreed to indemnify the holders of registration rights against,
and provide contribution with respect to, certain liabilities relating to any
registration in which any shares of these holders are sold under the Securities
Act.
Anti-Takeover Effects of Provisions of our Certificate of Incorporation and By-
Laws and Delaware General Corporation Law
Our certificate of incorporation and by-laws and the Delaware General
Corporation Law contain certain provisions that could be deemed to have anti-
takeover effects. These provisions could discourage, delay or prevent a change
in control of DSL.net or an acquisition of DSL.net at a price which many
stockholders may find attractive. The existence of these provisions could limit
the price that investors might be willing to pay in the future for shares of
our common stock.
Certificate of Incorporation and By-Laws
Our new certificate of incorporation will be filed immediately after the
closing of this offering and our by-laws will be amended prior to the offering.
The following description relates to the new certificate of incorporation and
the amended by-laws. Our certificate of incorporation provides that beginning
on the date of the first annual meeting of stockholders following completion of
this offering, the board will be divided into three classes as nearly equal in
size as possible with staggered three year terms. In addition, our certificate
of incorporation provides that at any time prior to the date on which we have a
classified board of directors, any director may be removed without cause only
by the vote of at least 75% of the shares entitled to vote for the election of
directors or with cause by the vote of at least a majority of such shares. On
or after the date on which we have a classified board, our certificate of
incorporation will provide that any director may be removed, but only for
cause, by the vote of at least 75% of the shares entitled to vote for the
election of directors. These provisions could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of DSL.net.
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Our by-laws provide that, except as otherwise provided by law or our
certificate of incorporation, newly created directorships resulting from an
increase in the authorized number of directors or vacancies on our board of
directors may be filled only by:
. a majority of the directors then in office, even if less than a quorum
is then in office; or
. the sole remaining director.
These provisions prevent a stockholder from enlarging our board of directors
and filling the new directorships with such stockholder's own nominees without
board of directors approval.
These provisions of our certificate of incorporation and by-laws may have
the effect of discouraging a third party from initiating a proxy contest,
making a tender offer or otherwise attempting to gain control of DSL.net, or of
attempting to change the composition or policies of the Board, even though such
attempts might be beneficial to DSL.net or its stockholders.
Our by-laws provide that, unless otherwise prescribed by law or the
certificate of incorporation, only a majority of our board of directors, the
Chairman of the board of directors or the President is able to call a special
meeting of stockholders. Our certificate of incorporation and by-laws also
provide that, unless otherwise prescribed by law or our certificate of
incorporation, stockholder action may be taken only at a duly called and
convened annual or special meeting of stockholders and may not be taken by
written consent. These provisions, taken together, prevent stockholders from
forcing consideration by the stockholders of stockholder proposals over the
opposition of our board of directors, except at an annual meeting.
Our by-laws also establish an advance notice procedure for stockholders to
make nominations of candidates for election as director, or to bring other
business before an annual meeting of our stockholders. Under the notice
procedure, notice of stockholder nominations or proposals to be made at an
annual meeting or a special meeting in lieu of an annual meeting generally must
be received by us not less than 120 days nor more than 150 days prior to the
first anniversary of the date of the proxy statement delivered to the
stockholders in connection with the preceding year's annual meeting. However,
if the number of directors to be elected to our board of directors is increased
and there is no public announcement by us naming all of the nominees for
director or specifying the size of the increased board of directors at least 70
days prior to the first anniversary of the preceding year's annual meeting,
then notice must be received not later than the 10th day following the day such
public disclosure was made. The notice will be timely only with respect to any
director nominees for any position caused by the increase in our board of
directors. Notice of stockholder nominations or proposals to be made at a
special meeting called by our board of directors for the purpose of electing
one or more directors (other than a special meeting in lieu of an annual
meeting), must be received not earlier than the 90th day prior to such special
meeting nor later than the close of business on the 60th day prior to such
special meeting or, if later, the 10th day following the day such public
disclosure was made. These notices must contain certain prescribed information.
The notice procedure affords our board of directors an opportunity to
consider the qualifications of proposed director nominees or the merit of
stockholder proposals, and, to the extent deemed appropriate by our board of
directors, to inform stockholders about such matters. The notice
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procedure also provides a more orderly procedure for conducting annual meetings
of stockholders. Our by-laws do not give our board of directors any power to
approve or disapprove stockholder nominations for the election of directors or
proposals for action. However, the notice procedure may prevent a contest for
the election of directors or the consideration of stockholder proposals. This
could deter a third party from soliciting proxies to elect its own slate of
directors or to approve its own proposal if the proper advance notice
procedures are not followed, without regard to whether consideration of such
nominees or proposals might be harmful or beneficial to DSL.net and its
stockholders.
Delaware General Corporation Law
As provided in Section 203 of the Delaware General Corporation Law, our
certificate of incorporation authorizes the board of directors, when
considering a tender offer or merger or acquisition proposal, to take into
account factors in addition to potential economic benefits to stockholders.
Such factors may include:
. the interests of our stockholders, including the possibility that these
interests might be best served by the continued independence of DSL.net;
. whether the proposed transaction might violate Federal or state laws;
. the consideration being offered in the proposed transaction in relation
to the then current market price for our outstanding capital stock, as
well as in relation to the market price for our capital stock over a
period of years, the estimated price that might be achieved in a
negotiated sale of DSL.net as a whole or in part or through orderly
liquidation, the premiums over a market price for the securities of
other corporations in similar transactions, current political, economic
and other factors bearing on securities prices and our financial
condition and future prospects; and
. the social, legal and economic effects upon employees, suppliers,
customers, creditors and others having similar relationships with
DSL.net, upon the communities in which we conduct our business and upon
the economy of the state, region and nation.
The foregoing provisions could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party acquiring,
control of DSL.net. We are subject to Section 203 of the Delaware General
Corporation Law which, subject to certain exceptions, prohibits a Delaware
corporation from engaging in any business combination with any interested
stockholder for a period of three years following the date that such
stockholder became an interested stockholder.
Section 203 does not apply if:
. prior to such time, the board of directors of the corporation approved
either the business combination or the transaction which resulted in the
stockholder becoming an interested stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction commenced, excluding for purposes
71
<PAGE>
of determining the number of shares outstanding those shares owned by
persons who are directors and also officers and by employee stock plans
in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered
in a tender or exchange offer; or
. at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
The application of Section 203 may limit the ability of stockholders to
approve a transaction that they may deem to be in their best interests.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation to or with the interested stockholder;
. subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series
of the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as any entity or
person who beneficially owns 15% or more of the outstanding voting stock of the
corporation or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the past three years, and any entity or person associated with,
affiliated with or controlling or controlled by such entity or person.
Limitation of Liability
Our certificate of incorporation provides that no director or officer of
DSL.net shall be personally liable to us or to our stockholders for monetary
damages for breach of fiduciary duty as a director or officer, except for
liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption
of stock; or
. for any transaction from which the director derives an improper personal
benefit.
72
<PAGE>
Our certificate of incorporation further provides for the indemnification
of, and advancement of expenses to, our directors and officers to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law,
including circumstances in which indemnification is otherwise discretionary. A
principal effect of these provisions is to limit or eliminate the potential
liability of our directors and officers for monetary damages arising from
breaches of their duty of care, subject to certain exceptions. These provisions
may also shield directors and officers from liability under federal and state
securities laws.
Stock Transfer Agent
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, Inc.
73
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could fall. These
sales also might make it more difficult for us to sell equity or equity-related
securities in the future at a time and price that we deem appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
59,639,561 shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants. If the underwriters' over-allotment is exercised in full, we will
have outstanding an aggregate of 61,011,379 shares of our common stock,
assuming no exercise of outstanding options or warrants. As of July 31, 1999,
we had approximately 24 holders of our common stock. Of these shares, all of
the shares sold in this offering will be freely tradeable without restriction
or further registration under the Securities Act, unless such shares are
purchased by "affiliates" as that term is defined in Rule 144 under the
Securities Act. This leaves 50,039,561 shares eligible for sale in the public
market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
------------------- ---------------------------------
<C> <S>
0 After the date of this
prospectus.
14,729,650 After 180 days from the date of
this prospectus (subject, in some
cases, to volume limitations).
35,309,911 At various times after 180 days
from the date of this prospectus.
</TABLE>
Lock-Up Agreements. All of our officers and directors and substantially all
of our stockholders have signed lock-up agreements under which they agreed not
to transfer or dispose of, directly or indirectly, any shares of our common
stock or any securities convertible into or exerciseable or exchangeable for
shares of our common stock other than shares purchased in the open market
following the completion of this offering, for a period of 180 days after the
date of this prospectus. Transfers or dispositions can be made sooner:
. with the prior written consent of Donaldson, Lufkin & Jenrette
Securities Corporation;
. in the case of gifts or estate planning transfers where the donee signs
a lock-up agreement; or
. in the case of distributions to stockholders or affiliates of the
stockholders where the recipient signs a lock-up agreement.
Donaldson, Lufkin & Jenrette Securities Corporation has advised us that it
has no current intention to consent to any disposition of shares covered by
these lock-up agreements, but will consider each request for its consent at the
time and under the circumstances of the request.
Rule 144. In general, under Rule 144 as currently in effect, beginning 90
days after the date of this prospectus, a person who has beneficially owned
shares of our common stock for at least one year would be entitled to sell
within any three-month period a number of shares that does not exceed the
greater of:
74
<PAGE>
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 596,395 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information about
us.
Rule 144(k). Under Rule 144(k), a person who is not deemed to have been one
of our affiliates at any time during the three months preceding a sale, and who
has beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Therefore,
unless otherwise restricted, Rule 144(k) shares may be sold immediately upon
the completion of this offering. None of the shares of common stock that will
be outstanding after completion of this offering will be eligible to be sold
under Rule 144(k) until at least March 19, 2000.
Rule 701. In general, under Rule 701 of the Securities Act as currently in
effect, any of our employees, consultants or advisors who purchases shares of
our common stock from us in connection with a compensatory stock or option plan
or other written agreement is eligible to resell those shares 90 days after the
effective date of this offering in reliance on Rule 144, but without compliance
with some of the restrictions, including the holding period, contained in Rule
144.
As of July 31, 1999, there were outstanding warrants to purchase an
aggregate of 129,226 shares of Series A preferred stock at a weighted average
exercise price of $1.45, all of which are presently exercisable. Warrants to
purchase 56,250 shares of Series A preferred stock will terminate upon
completion of this offering. Upon the closing of this offering, warrants to
purchase 72,976 shares of Series A preferred stock will convert into warrants
to purchase 194,556 shares of common stock at a weighted average exercise price
of $0.68. In addition, as of July 31, 1999, there were outstanding stock
options to purchase an aggregate of 5,398,650 shares of common stock at a
weighted average exercise price of $0.72, of which 2,690,924 are presently
exercisable or exercisable within 60 days.
On or about the effective date of the registration statement of which this
prospectus is a part, we intend to file a registration statement under the
Securities Act covering 300,000 shares of common stock issuable in connection
with our employee stock purchase plan and 12,364,200 shares of common stock
issued upon the exercise of stock options, subject to outstanding options or
reserved for issuance under the stock plan. Accordingly, shares registered
under such registration statements will, subject to Rule 144 provisions
applicable to affiliates, be available for sale in the open market, except to
the extent that such shares are subject to vesting restrictions or the
contractual restrictions described above. See "Management--Stock Plans."
In addition, the holders of an aggregate of shares of 49,289,748 common
stock, including shares issuable upon conversion of the outstanding preferred
stock, are entitled to certain rights with respect to the registration of these
shares. See "Description of Capital Stock--Registration Rights."
75
<PAGE>
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
dated , 1999, the underwriters named below, who are represented by
Donaldson, Lufkin & Jenrette Securities Corporation, Deutsche Bank Securities
Inc., Lehman Brothers Inc. and DLJdirect Inc. have severally agreed to purchase
from us the number of shares opposite their names below:
<TABLE>
<CAPTION>
Number
Underwriters: of Shares
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.............
Deutsche Bank Securities Inc....................................
Lehman Brothers Inc.............................................
DLJdirect Inc...................................................
---
Total.........................................................
===
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares included in this
offering are subject to approval of certain legal matters and to certain other
conditions. The underwriters are obligated to purchase and accept delivery of
all the shares, other than those shares covered by the over-allotment option
described below, if they purchase any of the shares.
The underwriters propose to initially offer some of the shares directly to
the public at the initial public offering price on the cover page of this
prospectus and some of the shares to certain dealers at the initial public
offering price less a concession not in excess of $ per share. The
underwriters may allow, and such dealers may re-allow, a concession not in
excess of $ per share on sales to other dealers. After the initial offering
of the shares to the public, the representatives may change the public offering
price and such concessions. The underwriters do not intend to confirm sales to
any accounts over which they exercise discretionary authority.
Staples has indicated an interest in purchasing the lesser of $5,000,000 of
common stock or 5% of the shares sold in this offering directly from us at the
initial public offering price in connection with this offering, although it is
not bound to do so. The sale of shares of common stock to Staples will be made
on the same terms and conditions available to the public, except that:
. they will purchase the shares directly from us at the initial public
offering price applicable to shares sold to the public;
. they have agreed not to sell any shares of common stock that they may
acquire in connection with the offering for a period of 180 days from
the date of this prospectus; and
. no underwriting discount or commissions will be paid on the shares sold
to Staples.
These shares might not be purchased by Staples. Any shares not purchased by
Staples will not be offered to the general public on the same basis as the
other shares offered hereby.
In addition, the underwriters have reserved up to 460,000 additional shares
of common stock for sale to our directors, employees and associates. There can
be no assurance that any of the reserved
76
<PAGE>
shares will be so purchased. The number of shares available for sale to the
general public in the offering will be reduced by the number of reserved shares
sold. Any reserved shares not so purchased will be offered to the general
public on the same basis as the other shares offered hereby.
The following table shows the underwriting fees to be paid to the
underwriters by us in connection with this offering. These amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase additional shares of our common stock.
<TABLE>
<CAPTION>
Paid by Us
-----------------
No Full
Exercise Exercise
<S> <C> <C>
Per share..................................................... $ $
Total.........................................................
</TABLE>
We will pay the offering expenses, estimated to be $1,050,000.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to 1,371,818 additional shares at
the initial public offering price minus the underwriting fees. The underwriters
may exercise this option solely to cover over-allotments, if any, made in
connection with this offering. To the extent that the underwriters exercise
this option, each underwriter will become obligated, subject to certain
conditions, to purchase a number of additional shares approximately
proportionate to that underwriter's initial purchase commitments.
We have agreed to indemnify the underwriters against certain civil
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect any of
those liabilities.
We, our executive officers and directors, and substantially all of our
stockholders have agreed, for a period of 180 days from the date of this
prospectus, not to, without the prior written consent of Donaldson, Lufkin &
Jenrette:
. offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock,
regardless of whether any of the transactions is to be settled by the
delivery of common stock, or such other securities, in cash or
otherwise; or
. enter into any swap or other arrangement that transfer all or a portion
of the economic consequences associated with the ownership of any common
stock, regardless of whether any of the transactions is to be settled by
the delivery of common stock, or such other securities, in cash or
otherwise.
None of the restrictions set forth above shall apply to any shares of common
stock purchased in the open market following the completion of this offering.
However, we may:
. grant stock options or stock awards under the 1999 stock plan and the
employee stock purchase plan;
. issue shares of our stock upon the exercise of options, warrants or
rights or the conversion of outstanding securities; and
77
<PAGE>
. issue, offer and sell shares of our common stock or securities
convertible, exercisable or exchangeable for common stock in
transactions not involving a public offering, as long as each recipient
of the securities agrees in writing to be bound by the restrictions in
this paragraph.
In addition, during this period, we have agreed not to file any registration
statement with respect to, and each of our executive officers and directors and
a significant majority of our stockholders have agreed not to make any demand
for, or exercise any right with respect to, the registration of any shares of
common stock or any securities convertible into or exercisable or exchangeable
for common stock, without the prior written consent of Donaldson, Lufkin &
Jenrette.
We have applied for quotation of our common stock on the Nasdaq National
Market under the symbol "DSLN."
Other than in the United States, no action has been taken by us or the
underwriters that would permit a public offering of the shares of our common
stock included in this offering in any jurisdiction where action for that
purpose is required. The shares included in this offering may not be offered or
sold, directly or indirectly, nor may this prospectus or any other offering
material or advertisement in connection with the offer and sale of any these
shares be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of that jurisdiction. Persons who receive this prospectus are
advised to inform themselves about and to observe any restrictions relating to
the offering of our common stock and the distribution of this prospectus. This
prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of our common stock included in this offering in any jurisdiction where
that would not be permitted or legal.
In connection with this offering, certain underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of our
common stock. Specifically, the underwriters may overallot this offering,
creating a syndicate short position. In addition, the underwriters may bid for
and purchase shares of our common stock in the open market to cover syndicate
short positions or to stabilize the price of our common stock. These activities
may stabilize or maintain the market price of our common stock above
independent market levels. The underwriters are not required to engage in these
activities and may end any of these activities at any time.
Prior to this offering, there has been no established public market for our
common stock. The initial public offering price for the shares of our common
stock offered by this prospectus will be determined by negotiation between us
and the representatives of the underwriters. The factors to be considered in
determining the initial public offering price include:
. our history and the prospects for the industry in which we compete;
. our past and present operations;
. our historical results of operations;
. our prospects for future earnings;
. the recent market prices of securities of generally comparable
companies; and
. the general conditions of the securities market at the time of the
offering.
78
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Testa, Hurwitz & Thibeault, LLP, Boston, Massachusetts. Certain
legal matters will be passed upon for the underwriters by Brobeck, Phleger &
Harrison LLP.
EXPERTS
The financial statements as of December 31, 1998 and for the period from
inception (March 3, 1998) through December 31, 1998 included in this prospectus
have been so included in reliance on the report of PricewaterhouseCoopers LLP,
independent accountants, given on the authority of said firm as experts in
auditing and accounting.
ADDITIONAL INFORMATION
We have filed with the SEC a registration statement, including exhibits,
schedules and amendments. This prospectus is a part of the registration
statement and includes all of the information which we believe is material to
an investor considering whether to make an investment in our common stock. We
refer you to the registration statement for additional information about us,
our common stock and this offering, including the full texts of the exhibits,
some of which have been summarized in this prospectus. After this offering, we
will be subject to the informational requirements of the Securities Exchange
Act. We will be required to file annual and quarterly reports, proxy statements
and other information with the SEC.
You can inspect and copy our registration statement, reports and other
information at the SEC's Public Reference Room at 450 Fifth Street, N.W.,
Washington, D.C. 20549. You may obtain information about the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the
SEC maintains an Internet site that contains our registration statement,
reports and other information. The address of the SEC's Internet site is
"http://www.sec.gov."
We intend to furnish our stockholders annual reports containing financial
statements audited by our independent accountants.
79
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1998 and June 30, 1999 (unaudited)...... F-3
Statements of Operations for the period from inception (March 3, 1998)
through December 31, 1998, for the period from inception (March 3, 1998)
through June 30, 1998 (unaudited) and for the six months ended June 30,
1999 (unaudited)......................................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the period
from inception (March 3, 1998) through December 31, 1998 and for the six
months ended June 30, 1999 (unaudited)................................... F-5
Statements of Cash Flows for the period from inception (March 3, 1998)
through December 31, 1998, for the period from inception (March 3, 1998)
through June 30, 1998 (unaudited) and for the six months ended June 30,
1999 (unaudited)......................................................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Stockholders of DSL.net, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of DSL.net, Inc. (a
development stage company) at December 31, 1998 and the results of its
operations and its cash flows for the period from inception (March 3, 1998)
through December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Hartford, Connecticut
May 26, 1999, except for the
July 1999 stock dividend
described in Note 8 which is as
of July 21, 1999
F-2
<PAGE>
DSL.net, Inc.
BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, 1999
--------------------------
December 31, Pro Forma
1998 Actual (Note 2)
(unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents........... $ 39,479 $ 30,470,703 $ 30,470,703
Marketable securities............... -- 5,528,091 5,528,091
Accounts receivable (net of
allowance of $17,000 at June 30,
1999).............................. 30,597 66,037 66,037
Prepaid expenses and other current
assets............................. -- 413,418 413,418
----------- ------------ ------------
Total current assets.............. 70,076 36,478,249 36,478,249
Fixed assets, net (Note 3)............ 284,338 6,185,168 6,185,168
Other assets.......................... 15,566 911,904 911,904
----------- ------------ ------------
Total assets...................... $ 369,980 $ 43,575,321 $ 43,575,321
=========== ============ ============
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable.................... $ 231,073 $ 1,430,065 $ 1,430,065
Accrued liabilities................. 16,219 906,889 906,889
Deferred revenue.................... 5,392 30,278 30,278
Current portion of capital lease
payable (Note 5)................... 16,494 382,123 382,123
Current portion of notes payable
(Note 4)........................... 66,667 -- --
----------- ------------ ------------
Total current liabilities......... 335,845 2,749,355 2,749,355
Long-term portion of capital lease
payable (Note 5)..................... -- 556,060 556,060
Notes payable (Note 4)................ 350,000 786,907 786,907
----------- ------------ ------------
Commitments and contingencies (Note 5)
Total liabilities................. 685,845 4,092,322 4,092,322
----------- ------------ ------------
Redeemable convertible preferred stock
(Note 7):
Convertible preferred stock, $0.001
par value; 18,962,500 shares
authorized;
Series A convertible preferred
stock; 0, 225,000 and 0 shares
issued and outstanding,
respectively....................... -- 225,000 --
Series B convertible preferred
stock; 0, 6,500,000 and 0 shares
issued and outstanding,
respectively....................... -- 15,424,999 --
Series C convertible preferred
stock; 0, 2,785,516, and 0 issued
and outstanding, respectively...... -- 9,941,104 --
Series D convertible preferred
stock; 0, 2,963,672 and 0 issued
and outstanding, respectively...... -- 30,973,869 --
----------- ------------ ------------
Total redeemable convertible
preferred stock.................. -- 56,564,972 --
----------- ------------ ------------
Stockholders' equity (deficit) (Notes
7 and 9):
Common stock, $0.0005 par value;
508,963,394, 55,925,000 and
55,925,000 shares authorized;
16,795,800, 14,129,800 and
47,385,985 shares issued and
outstanding........................ 8,398 7,065 23,693
Additional paid-in capital............ 2,465,374 8,039,317 64,587,661
Note receivable from officer.......... -- (999,911) (999,911)
Deferred compensation................. -- (12,439,562) (12,439,562)
Accumulated deficit................... (2,789,637) (11,688,882) (11,688,882)
----------- ------------ ------------
Total stockholders' (deficit)
equity........................... (315,865) (17,081,973) 39,482,999
----------- ------------ ------------
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity............. $ 369,980 $ 43,575,321 $ 43,575,321
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DSL.net, Inc.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
From Inception For the Period
(March 3, 1998) From Inception
Through (March 3, 1998) Six Months
December 31, through Ended
1998 June 30, 1998 June 30, 1999
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenue......................... $ 31,533 $ 3,489 $ 184,173
----------- ---------- ------------
Operating expenses:
Network and operations........ 127,054 705 1,482,628
General and administrative.... 230,272 3,896 1,554,013
Sales and marketing........... 35,961 1,397 1,235,589
Stock compensation............ 2,423,272 -- 2,616,805
----------- ---------- ------------
Total operating expenses.... $ 2,816,559 $ 5,998 $ 6,889,035
----------- ---------- ------------
Operating loss.................. $(2,785,026) $ (2,509) $ (6,704,862)
----------- ---------- ------------
Interest expense (income), net.. 4,611 232 (207,615)
----------- ---------- ------------
Net loss.................... $(2,789,637) $ (2,741) $(6,497,247)
=========== ========== ============
Exchange of preferred stock
(Note 8)....................... -- -- 11,998,000
----------- ---------- ------------
Loss applicable to common
stock.......................... $(2,789,637) $ (2,741) $(18,495,247)
=========== ========== ============
Net loss per share-basic and
diluted........................ $ (0.55) $ (0.00) $ (2.02)
=========== ========== ============
Shares used in computing net
loss per share................. 5,118,342 5,089,634 9,151,630
=========== ========== ============
Pro forma net loss per common
share (unaudited).............. $ (0.55) $ (0.00) $ (0.24)
=========== ========== ============
Pro forma shares used in
computing net loss per common
share (unaudited).............. 5,118,342 5,089,634 26,561,277
=========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DSL.net, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Note
Preferred Stock Common Stock Additional Receivable
---------------- ------------------- Paid-in from Deferred Accumulated
Shares Amount Shares Amount Capital Officer Compensation Deficit Total
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
capitalization,
including
retroactive
effect of stock
splits......... 20,000 $50,000 5,089,634 $ 500 $ -- $ (500) $ -- $ -- $ 50,000
Exchange of
preferred stock
for common
stock.......... (20,000) (50,000) 7,634,451 5,862 1,444,138 -- -- -- 1,400,000
Issuance of
common stock... -- -- 4,071,715 2,036 1,021,236 -- -- -- 1,023,272
Repayment of
note receivable
from officer... -- -- -- -- -- 500 -- -- 500
Net loss........ -- -- -- -- -- -- -- (2,789,637) (2,789,637)
------- ------- ---------- ------- ------------ --------- ------------ ------------ ------------
Balance at
December 31,
1998........... -- $ -- 16,795,800 $ 8,398 $ 2,465,374 $ -- $ -- $ (2,789,637) $ (315,865)
Issuance of
warrants....... -- -- -- -- 1,155,000 -- -- -- 1,155,000
Deferred
compensation--
restricted
stock.......... -- -- -- -- 3,733,854 -- (3,733,854) -- --
Stock
compensation... -- -- 436,256 218 587,239 -- -- -- 587,457
Deferred
compensation--
stock options.. -- -- -- -- 11,514,694 -- (11,514,694) -- --
Amortization of
deferred
compensation... -- -- -- -- -- -- 858,806 -- 858,806
Issuance of
warrants....... -- -- -- -- 112,000 -- -- -- 112,000
Surrender of
common stock... -- -- (3,102,256) (1,551) (778,087) -- 779,638 -- --
Acceleration
associated with
surrender...... -- -- -- -- -- -- 1,170,542 -- 1,170,542
Exchange of
redeemable
preferred
stock.......... -- -- -- -- (10,750,757) -- -- (2,401,998) (13,152,755)
Note receivable
from officer... -- -- -- -- -- (999,911) -- -- (999,911)
Net loss........ -- -- -- -- -- -- -- (6,497,247) (6,497,247)
------- ------- ---------- ------- ------------ --------- ------------ ------------ ------------
Balance at June
30, 1999
(unaudited).... -- -- 14,129,800 $ 7,065 $ 8,039,317 $(999,911) $(12,439,562) $(11,688,882) $(17,081,973)
======= ======= ========== ======= ============ ========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DSL.net, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the
For the Period Period From
From Inception Inception
(March 3, 1998) (March 3, 1998) For the Six
through through Months Ended
December 31, June 30, June 30,
1998 1998 1999
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(2,789,637) $(2,741) $(6,497,247)
Adjustments to reconcile net loss
to net cash used by
operating activities:
Depreciation and amortization... 5,744 -- 236,282
Noncash compensation expense.... 2,423,272 -- 2,616,805
Changes in operating assets and
liabilities:
Increase in accounts
receivable.................... (30,597) (1,361) (35,440)
Increase in prepaid expenses
and other current assets...... -- -- (304,912)
Increase in other assets....... (15,566) -- (896,338)
Increase in accounts payable... 231,073 -- 1,198,993
Increase in accrued
liabilities................... 16,814 2,675 890,075
Increase in deferred revenue... 5,392 -- 24,886
----------- ------- -----------
Net cash used in operating
activities................... (153,505) (1,427) (2,766,896)
----------- ------- -----------
Cash flows from investing
activities:
Purchases of fixed assets...... (290,082) (4,847) (6,133,618)
Purchases of marketable
securities.................... -- -- (5,528,091)
----------- ------- -----------
Net cash used in investing
activities................... (290,082) (4,847) (11,661,709)
----------- ------- -----------
Cash flows from financing
activities:
Initial capitalization......... 50,500 -- --
Proceeds from bridge
financing..................... 350,000 -- --
Proceeds from equipment credit
facility...................... -- -- 786,907
Proceeds from equipment notes
payable....................... 124,000 -- 980,370
Proceeds from preferred stock
issuance...................... -- 50,000 43,217,305
Payments on equipment notes
payable....................... (41,434) -- (66,667)
Principal payments under
capital lease obligation...... -- (867) (58,086)
----------- ------- -----------
Net cash provided by financing
activities................... 483,066 49,133 44,859,829
----------- ------- -----------
Net increase in cash and cash
equivalents...................... 39,479 42,859 30,431,224
Cash and cash equivalents at
beginning of period.............. -- -- 39,479
----------- ------- -----------
Cash and cash equivalents at end
of period........................ $ 39,479 $42,859 $30,470,703
=========== ======= ===========
Supplemental disclosure:
Cash paid (received):
Interest........................ $ 2,524 $ 232 $ (207,615)
=========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Formation and Operations of the Company
DSL.net, Inc. (the "Company") was incorporated in Delaware on March 3, 1998
and operations commenced March 28, 1998. The Company was formed to provide
dedicated high-speed digital communications services using digital subscriber
line (DSL) technology. During the period ended December 31, 1998, the Company
was considered a development stage company in accordance with Statement of
Financial Accounting Standard No. 7. As of June 30, 1999, the Company is no
longer considered a development stage enterprise.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of these
financial statements are as follows:
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 and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The markets
for the Company's services are characterized by intense competition, rapid
technological development, regulatory changes, and frequent new product
introductions, all of which could impact the future value of the Company's
assets.
Unaudited interim financial statements
The unaudited balance sheet as of June 30, 1999, the unaudited statements of
operations and cash flows for the six months ended June 30, 1999 and for the
period from inception through June 30, 1998, and the unaudited statement of
changes in stockholders equity for the six months ended June 30, 1999, have
been prepared in accordance with generally accepted accounting principles for
interim financial information and Article 10 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles. In the opinion of management, all adjustments
(consisting of only normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the six months ended
June 30, 1999 are not necessarily indicative of results that may be expected
for the year ending December 31, 1999.
Unaudited pro forma balance sheet
Upon the closing of DSL's anticipated initial public offering, each
outstanding share of preferred stock will automatically convert into 2.666
shares of common stock, with the aggregate number of shares of common stock to
be issued to each stockholder to be rounded up to the nearest whole share. This
conversion has been reflected in the unaudited pro forma balance sheet as of
June 30, 1999.
F-7
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Cash equivalents and marketable securities
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The carrying
value of cash equivalents at June 30, 1999 was approximately $24,430,000.
The Company considers its investment portfolio to be available-for-sale
securities as defined in Statement of Financial Accounting Standards ("SFAS")
No. 115. Marketable securities as of June 30, 1999 consist of debt securities
and certificates of deposit with maturities of five months to a year.
Securities are available for sale and are carried at fair value. The unrealized
or realized gains/losses earned on the securities as of June 30, 1999 were de
minimus.
Fixed assets
Fixed assets are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets, which are between 3 and 5
years. Leasehold improvements are amortized over the shorter of the term of the
related lease or the useful life of the asset. Maintenance and repairs are
charged to expense as incurred. Collocation space improvements represent
payments to carriers for infrastructure improvements within their central
offices to allow the Company to install its equipment, which allows the Company
to interconnect with the carrier's network. These payments are being amortized
over their estimated useful lives of five years.
Income taxes
The Company uses the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities and
net operating loss carryforwards, all calculated using presently enacted tax
rates.
Revenue recognition
Revenue is recognized pursuant to the terms of each contract on a monthly
service fee basis. Deferred revenue represents payments received in advance of
the services provided. Revenue related to installation and activation fees are
recognized to the extent of direct costs incurred. Any excess installation and
activation fees over direct costs are deferred and amortized to revenue over
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.
Long-lived assets
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
requires that long-lived assets and certain intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate
F-8
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
that the carrying amount may not be recoverable. If undiscounted expected
future cash flows are less than the carrying value of the assets, an impairment
loss is to be recognized based on the fair value of the assets. No impairment
losses have been recognized to date.
Segment information
In 1998, the Company adopted Statement of Financial Accounting Standards No.
131, Disclosures about Segments of an Enterprise and Related Information (SFAS
No. 131). SFAS No. 131 supersedes SFAS No. 14, Financial Reporting for Segments
of a Business Enterprise, replacing the "industry segment" approach with the
"management" approach. The management approach designates the internal
organization that is used by management for making operating decisions and
assessing performance as the source of the Company's reportable segments. The
Company operates in one segment: high-speed Internet access and data
communications services. SFAS No. 131 also requires disclosures about products
and services, geographic areas, and major customers. The adoption of SFAS No.
131 had no impact on the Company's financial statements for the periods
presented.
Stock compensation
The Company applies Accounting Principles Board Opinion No. 25 (APB 25) and
related interpretations in accounting for its stock option plan and stock
awards with the disclosure provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123). Under APB 25, compensation expense is computed to
the extent that the fair market value of the underlying stock on the date of
grant exceeds the exercise price of the employee stock option or stock award.
Compensation so computed is then recognized over the vesting period. The
Company accounts for equity instruments issued to nonemployees in accordance
with SFAS 123 and Emerging Issues Task Force ("EITF") 96-18.
Stock compensation expense includes amortization of deferred compensation
and charges related to stock grants which are not subject to vesting
requirements. Stock compensation expense for the period from inception (March
3, 1998) to December 31, 1998 and for the six months ended June 30, 1999
totaled $2,423,272 and $2,616,805, respectively.
Earnings (loss) per share
The Company computes net loss per share pursuant to Statement of Financial
Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is
computed by dividing income or loss applicable to common stockholders by the
weighted average number of shares of the Company's common stock outstanding
during the period. Diluted net loss per share is determined in the same manner
as basic net loss per share except that the number of shares is increased
assuming exercise of dilutive stock options and warrants using the treasury
stock method and dilutive conversion of the Company's preferred stock.
F-9
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
During the year ended December 31, 1998 and the six month period ended June
30, 1999, options to purchase no shares and 5,042,739 shares of common stock,
respectively, preferred stock convertible into no shares and 33,256,194 shares
of common stock, respectively, and warrants to purchase 233,277, and 344,519
shares of common stock, respectively, were excluded from the calculation of
earnings per share since their inclusion would be antidilutive for all periods
presented.
Pro forma basic and diluted earnings per share have been calculated assuming
the conversion of all outstanding shares of preferred stock into common stock,
as if the shares had converted immediately upon their issuance.
Comprehensive Income
The Company has adopted the accounting treatment prescribed by Statement of
Financial Accounting Standards No. 130, Comprehensive Income. The adoption of
this statement had no material impact on the Company's financial statements for
the periods presented.
Recently issued accounting pronouncements
In April 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use (SoP 98-1). SoP 98-1 provides guidance
for determining whether computer software is internal-use software, and
guidance on accounting for the proceeds of computer software originally
developed or obtained for internal use and then subsequently sold to the
public. It also provides guidance on capitalization of the costs incurred for
computer software developed or obtained for internal use. The Company has not
yet determined the impact of adopting SoP 98-1, which will be effective for the
Company's year ending December 31, 1999.
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position 98-5 (SoP 98-5), Reporting on the Costs of Start-Up Activities,
which provides guidance on the financial reporting of start-up costs and
organizational costs. It requires costs of start-up activities and
organizational costs to be expensed as incurred. SoP 98-5 is effective for
financial statements for fiscal years beginning after December 15, 1998. As the
Company has not capitalized such costs to date, the adoption of SoP 98-5 is not
expected to have an impact on the financial statements of the Company.
3. Fixed Assets
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
(unaudited)
<S> <C> <C>
Network equipment.................................. $161,814 $ 2,987,960
Furniture, fixtures, office equipment and
software.......................................... 61,535 1,412,753
Vehicles........................................... -- 75,697
Collocation costs.................................. 66,733 1,947,290
-------- -----------
290,082 6,423,700
Less: accumulated depreciation and amortization.. 5,744 238,532
-------- -----------
$284,338 $ 6,185,168
======== ===========
</TABLE>
F-10
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
As of December 31, 1998 and June 30, 1999, the recorded cost of the
equipment under capital lease was $22,699 and $860,754 (unaudited),
respectively. Accumulated amortization for this equipment under capital lease
was $1,265 and $140,830 (unaudited) as of December 31, 1998 and June 30, 1999,
respectively.
Depreciation and amortization expense related to fixed assets was $5,744 and
$232,788 (unaudited) for the period from inception March 3, 1998 to December
31, 1998 and for the six months ended June 30, 1999, respectively.
4. Debt
Notes payable
In August 1998, the Company issued a $100,000 demand note payable for
funding capital expenditures and operating expenses. The note was originally
payable October 1, 1998, and bore interest at 5.56% per annum. At December 31,
1998, $66,667 remained unpaid. The amount was paid in January 1999.
In November 1998, the Company entered into a series of Note and Warrant
Purchase Agreements pursuant to which the Company received $350,000 and issued
$350,000 principal amount of secured convertible promissory notes (the "Bridge
Notes") and warrants (the "Bridge Warrants") to acquire 87,500 shares of Series
A Preferred Stock. The Notes, which originally expired in January 1999 or
September 2000, bore interest at 5.56% or 6.0% per annum, depending upon the
holder, and were convertible into preferred shares at a rate equal to the
Company's next qualified equity financing. A total of $225,000 of the Bridge
Notes converted into 225,000 shares of Series A Preferred Stock in January
1999. The remaining $125,000 was deducted from proceeds received by the Company
in the January 1999 issuance of Series A Preferred Stock. The Bridge Warrants,
valued at approximately $18,000, are exercisable at $0.375 per share ($1.00 per
share on a pre-split basis) for a period of five years or, in the case of
certain of the warrants, until an initial public offering of the Company's
common stock.
Credit Facility
In May 1999, the Company entered into a secured credit facility (the "Credit
Facility") with a bank which will provide up to $5.0 million for the purchase
of telecommunications and office equipment and vehicles. The Credit Facility
expires in May 2000, at which time amounts outstanding will convert to a term
loan payable over 36 months. The Credit Facility bears interest on outstanding
borrowings at 1% over the higher of the bank's prime rate or the federal funds
rate plus 0.5%. The Credit Facility is secured by a lien on certain equipment
and vehicles owned by the Company located at its principal office, and imposes
certain financial and other covenants requiring us to maintain certain
financial ratios and limits new indebtedness, the creation of liens, types of
investments, mergers, consolidations and the transfer of all or substantially
all of our assets. The amount outstanding was $786,907 as of June 30, 1999.
Financing costs associated with the Credit Facility of $83,868 were deferred
over the four year life of the facility and term loan payable. Amortization
expense recorded on the deferred costs was $3,494 for the six months ended June
30, 1999.
F-11
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Commitment and Contingencies
Leases
Rent expense under operating leases was approximately $14,275 and $179,783
(unaudited), for the period from inception (March 3, 1998) through December
31, 1998 and for the six months ended June 30, 1999.
The Company is obligated under a capital equipment lease expiring in May
2000.
The present value of future minimum lease payments as of December 31, 1998
is as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
<S> <C> <C>
1999...................................................... $225,318 $12,444
2000...................................................... 378,588 5,185
2001...................................................... 99,000 --
2002...................................................... 99,000 --
2003...................................................... 90,750 --
Thereafter................................................ -- --
-------- -------
Total................................................... $892,656 17,629
========
Less--Amount representing interest........................ 1,135
-------
Present value of future minimum lease payments............ $16,494
=======
</TABLE>
In September 1998, the Company entered into an operating lease agreement
for office space in Norwalk, Connecticut. The table above indicates the
minimum lease payments due under that lease. In February 1999, the Company
cancelled the Norwalk lease and entered into an operating lease for office
space in New Haven, Connecticut. Annual minimum lease payments under this
lease are $192,283 (unaudited) in 1999 and $745,290 (unaudited) for each of
the years 2000 through 2004, and $279,484 in 2005. Costs related to exiting
the Norwalk lease were $42,900 and were expensed as incurred.
In March 1999, the Company entered into a master lease agreement to provide
up to $2,000,000 for capital equipment purchases over an initial twelve month
period, subject to renewal options. Individual capital leases are amortized
over 30 or 36 month terms and bear interest at 8% to 9% per annum. The
outstanding balance under this agreement at June 30, 1999 was $503,832
(unaudited).
Litigation
The Company is involved in litigation concerning claims arising in the
ordinary course of its business. The Company does not believe any of the legal
claims or proceedings will result in a material adverse effect on its
business, financial position, results of operations or cash flows.
F-12
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Other Matters
As part of the master lease agreement, the Company issued 41,726 warrants
(the "Lease Warrants") to the lessor to purchase Series A Preferred Stock at a
formula-based price equal to approximately $2.40 per share. The warrants are
exercisable until the earlier of March 4, 2006 or three years after an initial
public offering of the Company's common stock. The value of these warrants is
approximately $112,000 and is being amortized to interest expense over the life
of the capital lease obligation. Interest expense related to the warrants was
$9,333 for the six months ended June 30, 1999.
The Company has entered into interconnection agreements. The agreements have
terms of one to two years and are subject to certain renewal and termination
provisions by either party generally upon 30 day notification. The table above
includes the Company's obligation under its interconnection agreements over
their initial terms. The Company anticipates that it will renew such agreements
beyond their initial terms.
6. Related Party Transactions
In January 1999, the Company entered an Asset Transfer Agreement with
FutureComm, Inc. whose sole shareholder is an officer and founder of the
Company. The amount paid by the Company in exchange for certain equipment,
agreements, licenses and intellectual property was approximately $28,000.
In May 1999, the Company entered into an agreement to license and implement
components of an operations support system from a software vendor. Two
stockholders of the Company, in the aggregate, own 16% of the outstanding
capital stock of the software vendor.
7. Redeemable Convertible Preferred Stock
In January 1999, the Company issued 3,500,000 shares of convertible voting
preferred stock designated as Series A Preferred Stock, together with warrants
to purchase 3,500,000 shares of a prior Series B Preferred Stock (the
"Warrants"), at an exercise price of $1.00 per share, for an aggregate of
$3,500,000. A total of $1,155,000 of the related proceeds has been allocated to
the Warrants.
The Warrants, which were exercisable for a period of 5 years, were subject
to a repurchase right by the Company contingent upon a specified rate of return
upon an initial public offering or acquisition of the Company. If the Company
had exercised its repurchase right, it would have been obligated to pay the
holder the original exercise price plus interest from the date of exercise at
8% per annum.
In January 1999, the holders of $225,000 of Bridge Notes (Note 4) converted
$225,000 of the Bridge Notes into 225,000 shares of Series A Preferred Stock.
The remaining $125,000 of Bridge Notes reduced the proceeds paid to the Company
for the Series A Preferred Stock.
F-13
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In April 1999, certain holders of the Series A Preferred Stock exchanged
3,500,000 shares of Series A Preferred Stock and the Warrants for 6,500,000
shares of Series B Preferred Stock. This exchange, which was not contemplated
in the original Series A Preferred Stock purchase agreement, afforded the
holders an exchange rate of $0.54 per share which was lower than the deemed
fair market value of the preferred stock at the time of exchange of $3.59 per
share. The difference between the carrying value and the deemed fair market
value has been included in the calculation of net loss per common share,
although no assets of the Company were expended. The exchange, which reduces
additional paid-in capital and increases the carrying value of the Series B
Preferred Stock, was approximately $11,998,000 for the six month period ended
June 30, 1999. The exchange will be given no other accounting treatment in the
1999 financial statements of the Company.
In April 1999, the Company issued 2,785,516 shares of convertible voting
preferred stock designated as Series C Preferred Stock at $3.59 per share for
net proceeds of $9,941,104 (unaudited).
In May and June 1999, the Company issued 2,963,672 shares of convertible
voting preferred stock designated as Series D Preferred Stock at $10.46 per
share for net proceeds of $29,973,864 (unaudited) plus a note receivable from
an officer of $999,911.
The following represents the Company's issuance of shares of preferred
stock for the periods ended December 31, 1998 and June 30, 1999:
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Preferred Preferred Preferred Preferred
Stock Stock Stock Stock
---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Beginning Balance..................... -- -- -- --
Issuance............................ 20,000 -- -- --
Exchange............................ (20,000) -- -- --
---------- --------- --------- ---------
Balance, 12/31/98..................... -- -- -- --
Issuance............................ 3,725,000 -- 2,785,516 2,963,672
Exchange............................ (3,500,000) 6,500,000 -- --
---------- --------- --------- ---------
Balance, 6/30/99 (unaudited).......... 225,000 6,500,000 2,785,516 2,963,672
========== ========= ========= =========
</TABLE>
Rights and preferences
The Series A, Series B, Series C, Series D and Series E Preferred
stockholders are entitled to receive noncumulative cash dividends of
approximately $0.08 per share, $0.04 per share, $0.29 per share, $0.84 per
share and $1.58 per share, respectively, per annum when and as declared by the
Board of Directors. In the event of any voluntary or involuntary liquidation
of the Company, the Preferred stockholders shall be entitled to the original
per share issuance price, plus any declared but unpaid dividends. Remaining
assets, if any, shall be distributed to the Preferred and Common stockholders
on a pro rata basis assuming full conversion of all such Preferred Stock.
Under the terms of the Certificate of Incorporation, any acquisition, merger
or consolidation which results in a majority ownership change will be deemed
to be a liquidation of the Company, resulting in the
F-14
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
redemption of the remaining preferred shareholder interest. Management does
not consider any of the events that would trigger redemption to be probable.
At the option of the Preferred stockholders, their shares may be converted
to common stock at the rate of 2.666 shares of common stock for one share of
Preferred Stock, which has been adjusted for certain subsequent dilutive
issuances and stock splits. The Preferred Stock shall automatically convert
into shares of common stock upon the sale of the Company's Common Stock in a
firm commitment public offering pursuant to which the public offering proceeds
are not less than approximately $7.50 per share of common stock, and the
aggregate net proceeds are not less than $30 million.
The Series A, Series B, Series C, Series D and Series E Preferred
stockholders shall have voting rights similar to common shareholders and other
rights (on an as-converted basis), including the power to elect directors to
the seven member board as follows: Series A and B (as a class) elect two
directors, Series C elects one director, and Series A, B, C, D and E together
with common shareholders elect two directors. In addition, the holders of
common stock elect two directors.
8. Stockholders' Equity
Capital stock transactions
In March 1998, the Company's founding stockholders were issued 5,089,634
shares of common stock and 20,000 shares of a prior series A preferred stock
for $50,500.
In December 1998, the Company's Board of Directors declared a 50:1 reverse
stock split. The accompanying financial statements have been restated to
reflect this stock split. Concurrently, the preferred shareholder exchanged
all the then outstanding Series A Preferred Stock for 7,634,451 shares of
common stock, adjusted for stock splits. The value attributed to this
exchange, which provided 3.75 shares of common stock for every split-effected
share of preferred stock, was approximately $1.4 million which has been
charged to compensation expense.
In December 1998, the Company issued 4,071,715 shares of common stock to
two officers in exchange for promissory notes totaling $7,637. Such notes were
subsequently forgiven by the Company. Compensation expense of $1,023,272, or
$0.25 per share, has been recognized related to this issuance.
The following table indicates the issuance of shares of capital stock
through December 31, 1998:
<TABLE>
<CAPTION>
Issued Preferred Common
Date to: Stock Stock
---- -------- --------- ----------
<S> <C> <C> <C>
March 1998................................ Founders 20,000 5,089,634
December 1998............................. Founders (20,000) 7,634,451
December 1998............................. Founders -- 508,971
December 1998............................. Officers -- 3,562,744
------- ----------
Total..................................... -- 16,795,800
======= ==========
</TABLE>
F-15
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1999, the Company's Board of Directors declared a stock split of
1,909.09 shares for every outstanding common share. The accompanying financial
statements have been restated to reflect this stock split. In conjunction with
this split and sale of Series A Preferred Stock described above, certain
employment tenure and performance criteria were required of management in order
to fully vest in a portion of their original founders' shares. The value
attributed to these 14,857,397 nonvested shares is reflected in deferred
compensation of approximately $3,734,000, or $0.25 per share, and is being
amortized over the related employment term, which may be accelerated based upon
the likelihood of attaining certain performance measures.
In March 1999, the Company issued 436,256 shares of common stock to an
executive officer of the Company, adjusted for stock splits. Compensation
expense of $587,457 has been recognized related to this issuance.
In April 1999, the Company's founding shareholders surrendered 3,102,256
shares of common stock. Such stock was previously made subject to certain
employment tenure and performance vesting criteria. In exchange, the vesting
criteria on other restricted common stock owned by the founders was removed.
This share surrender and acceleration of vesting resulted in a compensation
charge of approximately $1.2 million in the second quarter of 1999 and
eliminated approximately $780,000, or $0.25 per share, from deferred
compensation.
In May 1999, the Company declared a 2:1 stock split of its common stock. The
accompanying financial statements have been restated to reflect this stock
split.
In July 1999, the Company declared a 0.333:1 stock dividend on its common
stock. The accompany financial statements have been restated to reflect this
stock dividend.
Common stock reserved
The Company has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
(unaudited)
<S> <C> <C>
Conversion of Preferred stock....................... -- 33,256,194
1999 Stock Plan..................................... -- 12,364,200
Conversion of promissory notes...................... 933,100 --
Stock warrants...................................... 233,277 344,519
--------- ----------
1,166,377 45,964,913
========= ==========
</TABLE>
F-16
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock warrants
At December 31, 1998 and June 30, 1999 the Company had outstanding stock
purchase warrants to purchase shares of preferred stock which are convertible
into 233,277 and 344,519 (unaudited) shares of common stock, respectively:
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
(unaudited)
<S> <C> <C>
Lease Warrants for Series A Preferred Stock......... -- 111,242
Bridge Warrants for Series A Preferred Stock........ 233,277 233,277
------- -------
233,277 344,519
======= =======
</TABLE>
9. Income Taxes
The Company's gross deferred tax assets and liabilities were comprised of
the following:
<TABLE>
<CAPTION>
December 31,
1998
<S> <C>
Gross deferred tax asset:
Net operating loss carryforwards.............................. $1,076,382
Other......................................................... 53,599
----------
1,129,981
Gross deferred tax liability:
Depreciation.................................................. 8,054
----------
1,121,927
Valuation allowance............................................. (1,121,927)
----------
Net deferred taxes.............................................. $ --
==========
</TABLE>
The Company has provided a valuation allowance for the full amount of the
net deferred tax asset, since management has not determined that these future
benefits will more likely than not be realized as of December 31, 1998.
At December 31, 1998, the Company had approximately $2.7 million of federal
net operating loss carryforwards that begin to expire in 2018, and $2.7 million
of state net operating loss carryforwards that expire in 2003.
The amount of the net operating carryforwards that may be utilized annually
to offset future taxable income and tax liability will be limited as a result
of certain ownership changes pursuant to Section 382 of the Internal Revenue
Code.
10. Incentive Stock Award Plan
In February 1999, the Company's Board of Directors adopted the 1999 Stock
Plan (the "Plan") under which employees, directors, advisors and consultants
can be granted any or all of the following: stock options, including incentive
stock options and non-qualified stock options, stock appreciation rights, and
stock awards. A total of 9,864,200 shares were authorized under the Plan.
F-17
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Options generally vest 25% after one year, then ratably over the next
thirty-six months and are exercisable once vested for ten years from the date
of grant.
A summary of activity under the Plan as of June 30, 1999 (unaudited) is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
--------------
Number of Fair Exercise
Shares Value Price
<S> <C> <C> <C>
Outstanding at Inception.......................... -- $ -- $ --
Granted........................................... 6,109,139 2.09 0.23
Exercised......................................... -- -- --
Canceled.......................................... (1,066,400) 1.35 (0.07)
---------- ----- -----
Outstanding at June 30, 1999 (unaudited).......... 5,042,739 $2.24 $0.25
========== ===== =====
</TABLE>
The following summarizes the outstanding and exercisable options under the
Plan as of June 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- --------------------------
Exercise Number Weighted Avg Weighted Avg Number Weighted Avg
Price Outstanding Remaining Life Exercise Price Exercisable Exercise Price
<S> <C> <C> <C> <C> <C>
$0.04 -
0.07 2,530,034 9.68 $0.05 -- --
$0.39 -
0.53 2,512,705 9.88 $0.46 -- --
--------- ---- ----- --- ---
5,042,739 9.78 $0.25 -- --
========= ==== ===== === ===
</TABLE>
If compensation expenses had been recognized based on the fair value of the
options at their grant date, in accordance with Financial Accounting Standard
No. 123 ("FAS 123"), the results of operations for the six months ended June
30, 1999 (unaudited) would have been as follows:
<TABLE>
<S> <C>
Net loss:
As reported.................................................. $(6,497,247)
Pro forma under FAS 123...................................... (6,471,911)
Basic and diluted net loss per share:
As reported.................................................. $ (2.02)
Pro forma under FAS 123...................................... $ (2.02)
</TABLE>
The estimated fair value at date of grant for options granted for the six
months ended June 30, 1999 (unaudited) ranged from $0.23 to $3.69. The minimum
value of each option grant is estimated on the date of grant using the Black-
Scholes option pricing model with the following weighted average assumptions
(unaudited):
<TABLE>
<S> <C>
Risk free interest rate........................................ 4.88% - 5.64%
Expected dividend yield........................................ None
Expected life of option........................................ 10 years
Expected volatility............................................ .0001%
</TABLE>
As additional options are expected to be granted in future years and the
options vest over several years, the above pro forma results are not
necessarily indicative of future pro forma results.
F-18
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Deferred compensation of approximately $11,515,000 (unaudited) has been
attributed to those common stock options granted during the six months ended
June 30, 1999, with an exercise price below estimated fair value. Stock
compensation expense is recognized over the four year vesting period and
totaled $2,616,805 (unaudited) for the six months ended June 30, 1999.
11. Subsequent Events (unaudited)
In July 1999, the Company's Board of Directors adopted the 1999 Employee
Stock Purchase Plan (the "Purchase Plan") under which employees can purchase
common shares during designated offering periods for an amount equal to 85% of
the fair market value of the underlying common stock. The first offering period
will commence upon an initial public offering of common stock and continue
through February 2000. There are 300,000 shares reserved under this plan.
In July 1999, the Company issued 306,591 options to purchase shares of
common stock at an exercise price of $7.39 per share to employees under the
1999 Stock Plan.
In July 1999, the Company issued 939,086 shares of convertible voting
preferred stock designated as Series E Preferred Stock at $19.70 per share for
net proceeds of approximately $18,468,000.
The Series E Preferred stockholders have rights and preferences similar to
those of the Series A, B, C, and D Stockholders described in Note 7.
F-19
<PAGE>
[Picture of the DSL.net network design and the routing of network traffic from
the customer back to the network operations center and the Internet]
Text:
. DSL.net Network Design
. Internet
. Network Operation Center
. Multiple Connections to Internet
. DSL.net New York Regional Center
. To Atlanta DSL.net Regional Center (In development)
. To Chicago DSL.net Regional Center (In development)
. To Other Central Offices
. To Other Central Offices
. High-Speed Network Connections
. Local Center (Aggregates Local Network Traffic)
. Leased Fiber
. DSL Equipment (Collocated at Central Office)
. DSL Equipment (Collocated at Central Office)
. Leased Copper
. Customer Branch Office
. Customer Sm/Med Business
. Customer Sm/Med Business
. Leased Copper
. Customer Sm/Med Business
. Customer Sm/Med Business
. Customer Branch Office
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
9,600,000 Shares
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Deutsche Banc Alex. Brown
Lehman Brothers
DLJdirect Inc.
- --------------------------------------------------------------------------------
We have not authorized any dealer, salesperson or other person to give you
written information other than this prospectus or to make representations as to
matters not stated in this prospectus. You must not rely on unauthorized
information. This prospectus is not an offer to sell these securities or our
solicitation of your offer to buy the securities in any jurisdiction where that
would not be permitted or legal. Neither the delivery of this prospectus nor
any sales made hereunder after the date of this prospectus shall create an
implication that the information contained herein or the affairs of DSL.net
have not changed since the date hereof.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Until , 1999 (25 days after the date of this prospectus), all dealers that
effect transactions in these shares of common stock may be required to deliver
a prospectus. This is in addition to the dealer's obligation to deliver a
prospectus when acting as an underwriter and with respect to their unsold
allotments or subscriptions.
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
Estimated expenses (other than underwriting discounts and commissions)
payable in connection with the sale of the common stock offered hereby are as
follows:
<TABLE>
<S> <C>
SEC registration fee.......................................... $ 36,602
NASD filing fee............................................... 12,000
Nasdaq National Market listing fee............................ 95,000
Printing and engraving expenses............................... 175,000
Legal fees and expenses....................................... 350,000
Accounting fees and expenses.................................. 350,000
Blue Sky fees and expenses (including legal fees)............. 5,000
Transfer agent and registrar fees and expenses................ 5,000
Miscellaneous................................................. 21,398
----------
Total....................................................... $1,050,000
==========
</TABLE>
DSL.net will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and the certificate of incorporation of
DSL.net that will become effective immediately following this offering and the
by-laws as amended prior to this offering will provide for indemnification of
our directors and officers for liabilities and expenses that they may incur in
such capacities. In general, directors and officers will be indemnified with
respect to actions taken in good faith in a manner reasonably believed to be
in, or not opposed to, the best interests of DSL.net and, with respect to any
criminal action or proceeding, actions that the indemnitee had no reasonable
cause to believe were unlawful. Reference is made to our Amended and Restated
Certificate of Incorporation and Amended and Restated By-Laws filed as Exhibits
3.02 and 3.04 hereto, respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of DSL.net against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1.01 hereto.
In addition, we have an existing directors and officers liability insurance
policy.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act:
(a) Issuances of Capital Stock, Notes and Warrants
In March 1998, DSL.net issued and sold an aggregate of (i) 5,089,634 shares
of common stock for an aggregate of $500 and (ii) 20,000 shares of a prior
Series A preferred stock for an aggregate of $50,000.
II-1
<PAGE>
In August 1998, DSL.net issued a promissory note in the aggregate principal
amount of $100,000.
In November 1998, DSL.net issued five convertible promissory notes in the
aggregate principal amount of $350,000, two warrants to purchase an aggregate
31,250 shares of Series A preferred stock at a price of $1.00 per share and
rights to warrants to purchase 56,250 shares of Series A preferred stock at a
price of $1.00 per share.
In December 1998, DSL.net issued and sold an aggregate of (i) 7,634,451
shares of common stock in exchange for 20,000 shares of a prior series A
preferred stock and (ii) 4,071,707 shares of common stock in exchange for
promissory notes in an aggregate principal amount of $7,637.
In January 1999, DSL.net issued and sold 3,500,000 shares of Series A
preferred stock and warrants to purchase 3,500,000 shares of a prior series B
preferred stock for an aggregate of $3,500,000, a portion of which was paid by
the cancellation of two convertible promissory notes in the aggregate principal
amount of $125,000. In addition, DSL.net issued three warrants to purchase
56,250 shares of Series A preferred stock at a price of $1.00 per share in
exchange for the rights to warrants to purchase 56,250 warrants of Series A
preferred stock. DSL.net also issued an aggregate of 225,000 shares of Series A
preferred stock in conversion of three convertible promissory notes in the
aggregate principal amount of $225,000. Each outstanding share of Series A
preferred stock is convertible into 2.666 shares of common stock. Finally,
DSL.net issued 8 shares of common stock for aggregate consideration of $0.02.
In March 1999, DSL.net issued and sold an aggregate of 436,256 shares of
common stock for services valued at $29,455. Based on subsequent events,
DSL.net recognized compensation expense of $587,457 in connection with the
issuance of these shares. In addition, DSL.net issued one warrant to purchase
41,726 shares of Series A preferred stock at an exercise price of $2.40 per
share.
In April 1999, DSL.net issued and sold an aggregate of 6,500,000 shares of
Series B preferred stock in exchange for 3,500,000 shares of Series A preferred
stock and the cancellation of warrants to purchase 3,500,000 shares of a prior
series B preferred stock. In addition, in April 1999, DSL.net issued and sold
an aggregate of 2,785,516 shares of Series C preferred stock for aggregate
consideration of $10,000,002. Each outstanding share of preferred stock is
convertible into 2.666 shares of common stock.
In May 1999, DSL.net issued and sold an aggregate of 2,868,069 shares of
Series D preferred stock for aggregate consideration of $30,000,001, including
a secured promissory note in an aggregate principal amount of $5,999,429, which
note has since been paid in full. Each outstanding share of Series D preferred
stock is convertible into 2.666 shares of common stock.
In June 1999, DSL.net issued an aggregate of 95,603 shares of Series D
preferred stock for aggregate consideration of $1,000,007, including a secured
promissory note in an aggregate principal amount of $999,912. The note, which
contained an interest rate of 6.00%, was paid in full on July 16, 1999. In
addition, in July 1999, DSL.net issued an aggregate of 939,086 shares of Series
E preferred stock for aggregate consideration of $18,499,994. Each outstanding
share of Series D and E preferred stock is convertible into 2.666 shares of
common stock.
II-2
<PAGE>
(b) Grants and Exercises of Stock Options
As of July 31, 1999, DSL.net has granted options to purchase an aggregate of
5,265,350 shares of common stock under the 1999 stock plan at exercise prices
ranging from $.04 to $7.39 for an aggregate purchase price of approximately
$3,909,097. No shares of common stock have been issued in connection with the
exercise of options.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act set forth in Section 4(2) thereof relative to sales by an
issuer not involving any public offering or the rules and regulations
thereunder, or, in the case of certain options to purchase common stock and
employee stock grants, Rule 701 under the Securities Act. All of the foregoing
securities are deemed restricted securities for purposes of the Securities Act.
II-3
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
1.01+ Form of Underwriting Agreement.
3.01+ Amended and Restated Certificate of Incorporation of DSL.net, as
amended.
3.02+ Form of Second Amended and Restated Certificate of Incorporation of
DSL.net (to be filed immediately after the closing of the offering).
3.03+ By-Laws of DSL.net.
3.04+ Amended and Restated By-laws of DSL.net (to be effective immediately
after the closing of the offering).
4.01 Specimen Certificate for shares of DSL.net's Common Stock.
4.02+ Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibit 3.02).
4.03 Form of Stock Purchase Warrant dated as of November 18, 1998 between
DSL.net and certain investors, as amended.
4.04* Form of Stock Subscription Warrant dated as of January 8, 1999
between DSL.net and certain investors.
4.05* Stock Subscription Warrant dated as of March 4, 1999 by and between
DSL.net and Comdisco, Inc.
5.01+ Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.01+** 1999 Stock Plan.
10.02+** 1999 Employee Stock Purchase Plan
10.03 Amended and Restated Investors' Rights Agreement dated as of July 16,
1999 between DSL.net and the purchasers named therein.
10.04 Master Lease Agreement dated as of March 4, 1999 between Comdisco,
Inc. and DSL.net, as modified by the Addendum thereto.
10.05* Credit Agreement dated as of May 12, 1999 by and between DSL.net and
Fleet National Bank.
10.06* Security Agreement dated as of May 12, 1999 by and between DSL.net
and Fleet National Bank.
10.07 Lease Agreement dated February 5, 1999 by and between DSL.net and
Long Wharf Drive, LLC., as amended.
10.08 Amended and Restated Shareholders' Agreement, as amended, by and
among DSL.net and certain investors.
10.09 Note and Warrant Purchase Agreement dated November 18, 1998 by and
among DSL.net and VantagePoint Venture Partners.
10.10 Form of Subscription Agreement dated as of October 28, 1998 by and
among DSL.net and certain stockholders.
10.11 Series A Preferred Stock and Warrant Purchase Agreement dated January
8, 1999 by and among DSL.net and the investors named therein.
10.12 Securities Exchange and Subscription Agreement dated April 15, 1999
by and between DSL.net, VantagePoint Venture Partners 1996, L.P. and
VantagePoint Communications Partners, L.P.
10.13 Series C Preferred Stock Purchase Agreement dated March 31, 1999 by
and among DSL.net and the investors named therein.
10.14 Series D Preferred Stock Purchase Agreement dated May 12, 1999 by and
among DSL.net and the investors named therein.
10.15 Preferred Stock Purchase Agreement dated June 2, 1999 by and between
DSL.net and Raymond C. Allieri.
10.16 Series E Preferred Stock Purchase Agreement dated July 6, 1999 by and
between DSL.net and Microsoft Corporation.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
10.16 Series E Preferred Stock Purchase Agreement dated July 16, 1999 by and
between DSL.net and Staples, Inc.
10.17** Additional Compensation Agreement dated as of December 29, 1998
between DSL.net and David Struwas.
10.18** Additional Compensation Agreement dated as of December 29, 1998
between DSL.net and John Jaser.
23.01+ Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.01).
23.02 Consent of PricewaterhouseCoopers, LLP.
24.01* Power of Attorney.
27.01* Financial Data Schedule.
</TABLE>
- ---------------------
+ To be filed by amendment.
* Previously filed.
** Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) Financial Statement Schedules
Schedule II
All other schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and (3) that for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this Amendment No. 3 to the Registration Statement
(File No. 333-80141) to be signed on its behalf by the undersigned, thereunto
duly authorized, in New Haven, Connecticut on August 27, 1999.
DSL.NET, INC.
By: /s/ Stephen Zamansky
---------------------------------
Stephen Zamansky
Vice President and General
Counsel
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
* President, Chief Executive August 27, 1999
______________________________________ Officer and Director
David F. Struwas (Principal Executive
Officer)
* Chief Financial Officer August 27, 1999
______________________________________ and Vice President,
Robert Q. Berlin Strategic Planning
(Principal Financial and
Accounting Officer)
* Director August 27, 1999
______________________________________
Robert Gilbertson
* Director August 27, 1999
______________________________________
William J. Marshall
* Director August 27, 1999
______________________________________
William Seifert
* Director August 27, 1999
______________________________________
James D. Marver
* Director August 27, 1999
______________________________________
</TABLE> Paul K. Sun
/s/ Stephen Zamansky
*By: ___________________________
Stephen Zamansky
as Attorney-in-Fact
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
1.01+ Form of Underwriting Agreement.
3.01+ Amended and Restated Certificate of Incorporation of DSL.net, as
amended.
3.02+ Form of Second Amended and Restated Certificate of Incorporation of
DSL.net (to be filed immediately after the closing of the offering).
3.03+ By-Laws of DSL.net.
3.04+ Amended and Restated By-laws of DSL.net (to be effective immediately
after the closing of the offering).
4.01 Specimen Certificate for shares of DSL.net's Common Stock.
4.02+ Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibit 3.02).
4.03 Form of Stock Purchase Warrant dated as of November 18, 1998 between
DSL.net and certain investors, as amended.
4.04* Form of Stock Subscription Warrant dated as of January 8, 1999
between DSL.net and certain investors.
4.05* Stock Subscription Warrant dated as of March 4, 1999 by and between
DSL.net and Comdisco, Inc.
5.01+ Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.01+** 1999 Stock Plan.
10.02+** 1999 Employee Stock Purchase Plan.
10.03 Amended and Restated Investors' Rights Agreement dated as of July 16,
1999 between DSL.net and the purchasers named therein.
10.04 Master Lease Agreement dated as of March 4, 1999 between Comdisco,
Inc. and DSL.net, as modified by the Addendum thereto.
10.05* Credit Agreement dated as of May 12, 1999 by and between DSL.net and
Fleet National Bank.
10.06* Security Agreement dated as of May 12, 1999 by and between DSL.net
and Fleet National Bank.
10.07 Lease Agreement dated February 5, 1999 by and between DSL.net and
Long Wharf Drive, LSL., as amended.
10.08 Amended and Restated Shareholders' Agreement, as amended, by and
among DSL.net and certain investors, as amended.
10.09 Note and Warrant Purchase Agreement dated November 18, 1998 by and
among DSL.net and VantagePoint Venture Partners.
10.10 Form of Subscription Agreement dated as of October 28, 1998 by and
among DSL.net certain investors.
10.11 Series A Preferred Stock and Warrant Purchase Agreement dated January
8, 1999 by and among DSL.net and the investors named therein.
10.12 Securities Exchange and Subscription Agreement dated April 15, 1999
by and between DSL.net, VantagePoint Venture Partners 1996, L.P. and
VantagePoint Communications Partners, L.P.
10.13 Series C Preferred Stock Purchase Agreement dated March 31, 1999 by
and among DSL.net and the investors named therein.
10.14 Series D Preferred Stock Purchase Agreement dated May 12, 1999 by and
among DSL.net and the investors named therein.
10.15 Preferred Stock Purchase Agreement dated June 2, 1999 by and between
DSL.net and Raymond C. Allieri.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
10.16 Series E Preferred Stock Purchase Agreement dated July 6, 1999 by and
between DSL.net and Microsoft Corporation.
10.17 Series E Preferred Stock Purchase Agreement dated July 16, 1999 by and
between DSL.net and Staples, Inc.
10.18 Additional Compensation Agreement dated as of December 29, 1998
between DSL.net and David Struwas.
10.19 Additional Compensation Agreement dated as of December 29, 1998
between DSL.net and John Jaser.
23.01+ Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.01).
23.02 Consent of PricewaterhouseCoopers, LLP.
24.01* Power of Attorney.
27.01* Financial Data Schedule.
</TABLE>
- ---------------------
+ To be filed by amendment.
* Previously filed.
** Indicates a management contract or any compensatory plan, contract or
arrangement.
<PAGE>
Exhibit 4.01
dsl.net, Inc. transferable on the books of the Company by the holder hereof in
person or by its duly authorized attorney upon surrender of this Certificate
properly endorsed or assigned. This Certificate and the shares represented
hereby are issued and shall be held subject to the laws of the State of Delaware
and the provisions of the Certificate of Incorporation and the By-laws of the
Company, as amended from time to time, to which the holder by acceptance hereof
assents. This Certificate is not valid unless countersigned and registered by
the Transfer Agent and Registrar.
Witness and facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated: President
Secretary
Dsl.net, Inc.
The Company is authorized to issue more than one call or series of stock.
Upon written request the Company will furnish without charge to each stockholder
a copy of the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
For value received,________________ hereby sell, assign and transfer unto
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
____________________________________________________________ Shares of the
common stock represented by the within Certificate, and do hereby irrevocably
constitute and appoint _______________________________________ Attorney to
transfer the said stock on the books of the within named Company with full power
of substitution in the premises.
Dated: ________________________
SIGNATURE(S) GUARANTEED:
________________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR
INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS
AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.
<PAGE>
EXHIBIT 4.03
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THEY MAY NOT BE
SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT OF 1933, OR AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR UNLESS SOLD
PURSUANT TO RULE 144 UNDER SUCH ACT.
Void after
November 18, 2003
STOCK PURCHASE WARRANT
----------------------
This Warrant is issued to ____________________________ by dsl.net, inc., a
Delaware corporation (the "Company"), pursuant to the terms of that certain Note
and Warrant Purchase Agreement (the "Purchase Agreement") dated as of November
18, 1998, in connection with the Company's issuance to the holder of this
Warrant of a Convertible Promissory Note dated as of November 18, 1998 (the
"Note"), for the principal amount of One Hundred and Twenty-Five Thousand
Dollars ($125,000).
1. Purchase of Shares. Subject to the terms and conditions hereinafter set
------------------
forth and set forth in the Agreement, the holder of this Warrant is entitled,
upon surrender of this Warrant at the principal office of the Company (or at
such other place as the Company shall notify the holder hereof in writing), to
purchase from the Company up to that number of fully paid and nonassessable
shares of preferred stock or equity securities of the Company, as more fully
described below (the "Preferred Stock"), that equals the quotient obtained by
dividing (a) Thirty-One Thousand Two Hundred and Fifty (31,250), by (b) the
price per share of equity securities sold to investors in the Company's next
transaction or series of related transactions in which the Company sells equity
securities and in which the gross proceeds to the Company equal or exceed One
Million Dollars ($1,000,000) (excluding the aggregate amount of debt securities
converted into equity securities upon conversion of this Note and other notes
outstanding as of the date hereof) (the "Next Equity Financing"). The Company
currently has shares of Series A Preferred Stock authorized; however, the
Company currently anticipates that such series of Preferred Stock will be
converted into shares of Common Stock prior to the Next Equity Financing. After
giving effect to such conversion, the Company currently anticipates that the
securities issuable to investors in the Next Equity Financing will be shares of
a newly authorized series of Preferred Stock to be designated Series A Preferred
Stock. Except as otherwise provided above, the class of capital stock or series
of Preferred Stock issuable upon exercise of this Warrant shall be the same
class or series as shall be issued in the Next Equity Financing. Accordingly,
if the Company issues Series A Preferred Stock to the investors in the Next
Equity Financing, this Warrant shall be exercisable for shares of the Company's
Series A Preferred Stock. Conversely, if the Company issues another series of
Preferred Stock or another class of capital stock to the investors in the Next
Equity Financing, this Warrant shall be exercisable for such other series of
<PAGE>
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the Company's Preferred Stock or such other class of the Company's capital
stock, as the case may be. The shares of Preferred Stock issuable pursuant to
this Section 1 (the "Shares") shall also be subject to adjustment pursuant to
Section 8 hereof. If the securities issuable to investors in the Next Equity
Financing are not Preferred Stock, all references in this Warrant to "Preferred
Stock" shall be deemed to be adjusted accordingly.
2. Purchase Price. The purchase price for the Shares shall be the price per
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share of equity securities sold to investors in the Company's Next Equity
Financing. Such price shall be subject to adjustment pursuant to Section 8
hereof (such price, as adjusted from time to time, is herein referred to as the
"Exercise Price").
3. Exercise Period. This Warrant shall become exercisable upon the closing of
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the Next Equity Financing and it shall remain so exercisable until and including
November 18, 2003.
4. Method of Exercise. While this Warrant remains outstanding and exercisable
------------------
in accordance with Section 3 above, the holder may exercise, in whole or in
part, the purchase rights evidenced hereby. Such exercise shall be effected by:
(i) the surrender of the Warrant, together with a duly executed
copy of the form of subscription attached hereto, to the Secretary of the
Company at its principal offices; and
(ii) the payment to the Company of an amount equal to the aggregate
Exercise Price for the number of Shares being purchased.
5. Net Exercise. In lieu of cash exercising this Warrant, the holder of this
------------
Warrant may elect to receive shares equal to the value of this Warrant (or the
portion thereof being canceled) by surrender of this Warrant at the principal
office of the Company together with notice of such election, in which event the
Company shall issue to the holder hereof a number of shares of Preferred Stock
computed using the following formula:
Y (A-B)
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X= A
Where
X -- The number of shares of Preferred Stock to be issued to the
holder of this Warrant.
Y -- The number of shares of Preferred Stock purchasable under
this Warrant.
A -- The fair market value of one share of the Company's
Preferred Stock.
B -- The Exercise Price (as adjusted to the date of such
calculations).
For purposes of this Paragraph 5, the fair market value of Preferred Stock shall
mean the average of the closing bid and asked prices of the Preferred Stock
quoted in the over-the-counter market in which the Preferred Stock is traded, or
the closing price quoted on any exchange on which the Preferred Stock is listed,
whichever is applicable, as published in the New York Edition of The Wall Street
--- -----------
Journal for the ten (10) trading days prior to the date of determination of fair
- -------
market
<PAGE>
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value (or such shorter period of time during which such stock was traded over-
the-counter or on such exchange). If the Preferred Stock is not traded on the
over-the-counter market or on an exchange, the fair market value shall be the
price per share that the Company could obtain from a willing buyer for shares of
Preferred Stock sold by the Company from authorized but unissued shares, as such
prices shall be determined in good faith by the Company's Board of Directors.
6. Certificates for Shares. Upon the exercise of the purchase rights
-----------------------
evidenced by this Warrant, one or more certificates for the number of Shares so
purchased shall be issued as soon as practicable thereafter, and in any event
within thirty (30) days of the delivery of the subscription notice.
7. Issuance of Shares. The Company covenants that the Shares, when issued
------------------
pursuant to the exercise of this Warrant, will be duly and validly issued, fully
paid and nonassessable and free from all taxes, liens, and changes with respect
to the issuance thereof.
8. Adjustment of Exercise Price and Number of Shares. The number of and kind
-------------------------------------------------
of securities purchasable upon exercise of this Warrant and the Exercise Price
shall be subject to adjustment from time to time as follows:
(a) Subdivisions, Combinations and Other Issuances. If the Company
----------------------------------------------
shall at any time prior to the expiration of this Warrant subdivide its
Preferred Stock, by split-up or otherwise, or combine its Preferred Stock,
or issue additional shares of its Preferred Stock or Common Stock as a
dividend with respect to any shares of its Preferred Stock, the number of
Shares issuable on the exercise of this Warrant shall forthwith be
proportionately increased in the case of a subdivision or stock dividend,
or proportionately decreased in the case of a combination. Appropriate
adjustments shall also be made to the purchase price payable per share, but
the aggregate purchase price payable for the total number of Shares
purchasable under this Warrant (as adjusted) shall remain the same. Any
adjustment under this Section 8(a) shall become effective at the close of
business on the date the subdivision or combination becomes effective, or
as of the record date of such dividend, or in the event that no record date
is fixed, upon the making of such dividend.
(b) Reclassification, Reorganization and Consolidation. In case of
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any reclassification, capital reorganization, or change in the Preferred
Stock of the Company (other than as a result of a subdivision, combination,
or stock dividend provided for in Section 8(a) above), then. as a condition
of such reclassification, reorganization, or change, lawful provision shall
be made, and duly executed documents evidencing the same from the Company
or its successor shall be delivered to the holder of this Warrant, so that
the holder of this Warrant shall have the right at any time prior to the
expiration of this Warrant to purchase, at a total price equal to that
payable upon the exercise of this Warrant, the kind and amount of shares of
stock and other securities and property receivable in connection with such
reclassification, reorganization, or change by a holder of the same number
of shares of Preferred Stock as were purchasable by the holder of this
Warrant immediately prior to such reclassification, reorganization, or
change. In any such case appropriate provisions shall be made with respect
to the rights and interest of the holder of this Warrant so that the
provisions hereof shall thereafter be applicable with respect to any shares
of stock or other securities and property deliverable upon exercise hereof,
and appropriate adjustments shall be made to the purchase price per share
payable hereunder, provided the aggregate price shall remain the same.
<PAGE>
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(c) Notice of Adjustment. When any adjustment is required to be
--------------------
made in the number or kind of shares purchasable upon exercise of the
Warrant, or in the Exercise Price, the Company shall promptly notify the
holder of such event and of the number of shares of Preferred Stock or
other securities or property thereafter purchasable upon exercise of this
Warrant.
9. Fractional Shares or Scrip. No fractional shares or scrip representing
--------------------------
fractional shares shall be issued upon the exercise of this Warrant, but in lieu
of such fractional shares the Company shall make a cash payment therefor on the
basis of the Exercise Price then in effect.
10. No Stockholder Rights. Prior to exercise of this Warrant, the holder
---------------------
shall not be entitled to any rights of a stockholder with respect to the Shares,
including (without limitation) the right to vote such Shares, receive dividends
or other distributions thereon, exercise preemptive rights or be notified of
stockholder meetings, and such holder shall not be entitled to any notice or
other communication concerning the business or affairs of the Company.
11. Successors and Assigns. The terms and provisions of this Warrant and the
----------------------
Purchase Agreement shall inure to the benefit of, and be binding upon, the
Company and the holders hereof and their respective successors and assigns.
12. Amendments and Waivers. Any term of this Warrant may be amended and the
----------------------
observance of any terms of this Warrant may be waived (either generally or in a
particular instance and either retroactively or prospectively), with the written
consent of the Company and the holder.
<PAGE>
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14. Governing Law. This Warrant shall be governed by the laws of the State of
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California as applied to agreements among California residents made and to be
performed entirely within the State of California.
dsl.net, inc.
By: /s/ John M. Jaser
-----------------
Title: President
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Address: 50 Washington Street
Norwalk, CT 06854
<PAGE>
Amendment to Stock Purchase Warrant
With respect to each of the Stock Purchase Warrant between DSL.net, Inc.
(the "Company") and VantagePoint Venture Partners 1996, L.P. issued pursuant to
the terms of that certain Note and Warrant Purchase Agreement dated as of
November 18, 1998 (the "Purchase Agreement") by and between the Company and
VantagePoint Venture Partners and the Stock Purchase Warrant between the Company
and VantagePoint Communications Partners, L.P. issued pursuant to the terms of
the Purchase Agreement (each a "Warrant" and collectively the "Warrants"), the
Warrants be, and hereby are, amended to add a Section 13 to read as follows:
SECTION 13. Conversion of Preferred Stock. In the event that the Preferred
-----------------------------
stock is a class or type of security which is convertible into Common Stock of
the Company, as now as hereafter constituted ("Common Stock"), then, at such
time as there are no outstanding shares of Preferred Stock (due to conversion
into Common Stock or otherwise), this Warrant, without any action of the
Company, shall automatically be converted into a warrant to purchase such number
of shares of Common Stock equal to the number of shares of Common Stock issuable
upon conversion of the shares of Preferred Stock for which this Warrant could
have been exercised immediately prior to the time that the Preferred Stock
ceased to be outstanding. Thereafter, all references to (i) "Preferred Stock"
shall mean "Common Stock", and (ii) "Shares" shall refer to shares of "Common
Stock" rather than shares of "Preferred Stock". Notwithstanding any provisions
herein to the contrary, the Company agrees and covenants to make and deliver as
soon as practicable upon the occurrence of such conversion, in place of this
Warrant, a new Warrant of like tenor and representing the right to purchase the
number of shares of Common Stock into which this Warrant will then be
exercisable; provided, however, that the Company shall not be required to issue
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a new Warrant if this Warrant has been exercised or expired.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Amendment to be executed by
its duly authorized officer, and each of the undersigned Warrantholders has
caused this Amendment to be executed by a duly authorized officer, partner,
trustee or agent, as the case may be, as of this day of July, 1999.
---
dsl.net, inc.
By:
------------------------------
Title:
---------------------------
ATTEST: Address: 545 Long Wharf Drive
New Haven, CT 06511
- ----------------------------------------
Name:
WARRANTHOLDERS:
VantagePoint Venture Partners 1996, L.P.
By: VantagePoint Associates, LLC,
its General Partner
By:
------------------------------------
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Communication Partners, L.P.
By: VantagePoint Communications
Associates, LLC, its General Partner
By:
------------------------------------
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
<PAGE>
Exhibit 10.03
dsl.net,inc.
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
<PAGE>
TABLE OF CONTENTS
1. Registration Rights................................................ 3
1.1 Definitions........................................................ 3
1.2 Request for Registration........................................... 5
1.3 Company Registration............................................... 6
1.4 Form S-3 Registration.............................................. 8
1.5 Obligations of the Company......................................... 9
1.6 Information from Holder............................................ 11
1.7 Expenses of Registration........................................... 11
1.8 Indemnification.................................................... 11
1.9 Reports Under Securities Exchange Act of 1934...................... 13
1.10 Assignment of Registration Rights.................................. 14
1.11 Limitations on Subsequent Registration Rights...................... 14
1.12 "Market Stand-Off" Agreement....................................... 14
1.13 Termination of Registration Rights................................. 15
2. Covenants of the Company........................................... 15
2.1 Delivery of Financial Statements................................... 16
2.2 Inspection......................................................... 17
2.3 Termination of Information and Inspection Covenants................ 17
2.4 Right of First Offer............................................... 18
2.5 Directors' and Officers' Insurance................................. 19
2.6 Proprietary Information............................................ 19
2.7 Employee Issuances................................................. 19
2.8 Right to Participate in Initial Public Offering.................... 20
2.9 Key Man Life Insurance............................................. 20
2.10 Termination of Certain Covenants................................... 20
2.11 Observer Rights - Crosspoint....................................... 20
2.12 Observer Rights - Microsoft........................................ 21
3. Miscellaneous..................................................... 21
3.1 Successors and Assigns............................................. 21
3.2 Governing Law...................................................... 21
3.3 Counterparts....................................................... 22
3.4 Titles and Subtitles............................................... 22
3.5 Notices............................................................ 22
3.6 Expenses........................................................... 22
3.7 Entire Agreement: Amendments and Waivers........................... 22
3.8 Severability....................................................... 22
3.9 Aggregation of Stock............................................... 23
3.10 Termination of Rights Agreement.................................... 23
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<PAGE>
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT is made as of the
16th day of July, 1999, by and among dsl.net, inc., a Delaware corporation (the
"Company"), the investors listed on Schedule A hereto, each of which is herein
referred to as a "Series B Investor," the investors listed on Schedule B hereto,
each of which is herein referred to as a "Series C Investor," the investors
listed on Schedule C hereto, each of which is herein referred to as a "Series D
Investor," the investors listed on Schedule D hereto, each of which is herein
referred to as a "Series E Investor" (the Series B Investors, Series C
Investors, Series D Investors and Series E Investors are sometimes referred to
herein collectively as the "Investors") and John Jaser, David Struwas, Paul Sun,
Felix Tang, the Trust U/A Paul Sun Dated 5/7/99, the Trust U/A Paul Sun Dated
10/17/97 F/B/O Katherine Sun, and the Trust U/A Paul Sun Dated 10/17/97 F/B/O
Kristen Sun (collectively, the "Founders" and each individually a "Founder").
RECITALS
--------
WHEREAS, the Company, the Founders, the Series B Investors, the Series C
Investors, the Series D Investors and certain of the Series E Investors entered
into an Amended and Restated Investors' Rights Agreement dated as of July 6,
1999 (the "Rights Agreement");
WHEREAS, the Company and Microsoft Corporation are parties to the Series E
Preferred Stock Purchase Agreement dated July 6, 1999 (the "July 6 Series E
Agreement");
WHEREAS, the Company and Staples, Inc. (the "Additional Series E Investor")
are parties to the Series E Preferred Stock Purchase Agreement of even date
herewith (the "Series E Agreement") and, together with the July 6 Series E
Agreement, the "Series E Agreements");
WHEREAS, in order to induce the Additional Series E Investor to invest
funds in the Company pursuant to the Series E Agreement, the Series B Investors,
the Series C Investors, the Series D Investors, the Series E Investor (other
than the Additional Series E Investor), the Founders and the Company hereby
agree that the Rights Agreement should be amended and restated to grant the
Series E Investor rights to cause the Company to register shares of Common Stock
issued or issuable to it; and
WHEREAS, the parties hereto wish to amend certain provisions of the Rights
Agreement hereby.
NOW, THEREFORE, THE PARTIES HEREBY AGREE TO AMEND AND RESTATE THE RIGHTS
AGREEMENT TO READ IN ITS ENTIRETY AS FOLLOWS:
1. Registration Rights. The Company covenants and agrees as follows:
-------------------
1.1 Definitions. For purposes of this Section 1:
-----------
(a) The term "Act" means the Securities Act of 1933, as amended.
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<PAGE>
(b) The term "Common Stock" refers to the shares of the Common Stock,
par value $.0005 per share, of the Company.
(c) The term "Form S-3" means such form under the Act as in effect on
the date hereof or any successor registration form under the Act subsequently
adopted by the SEC that permits inclusion or incorporation of substantial
information by reference to other documents filed by the Company with the SEC.
(d) The term "Holder" means any person owning or having the right to
acquire Registrable Securities or any assignee thereof in accordance with
Section 1.10 hereof.
(e) The term "Initial Offering" means the Company's first firm
commitment underwritten public offering of its Common Stock pursuant to a
registration statement under the Act.
(f) The term "1934 Act" means the Securities Exchange Act of 1934, as
amended.
(g) The terms "register," "registered," and "registration" refer to a
registration effected by preparing and filing a registration statement or
similar document in compliance with the Act, and the declaration or ordering of
effectiveness of such registration statement or document.
(h) The term "Registrable Securities" means (i) the Common Stock
issuable or issued upon conversion of (a) the Series B Preferred Stock held by
the Series B Investors, (b) the Series C Preferred Stock held by the Series C
Investors, (c) the Series D Preferred Stock held by the Series D Investors and
(d) the Series E Preferred Stock issued pursuant to the Series E Agreements and
(ii) any Common Stock of the Company issued as (or issuable upon the conversion
or exercise of any warrant, right or other security that is issued as) a
dividend or other distribution with respect to, or in exchange for, or in
replacement of, the shares referenced in (i) above, excluding in all cases,
however, any Registrable Securities sold by a person in a transaction in which
his rights under this Section 1 are not assigned.
(i) The number of shares of "Registrable Securities" outstanding shall
be determined by the number of shares of Common Stock outstanding that are, and
the number of shares of Common Stock issuable pursuant to then exercisable or
convertible securities that are, Registrable Securities.
(j) The term "SEC" shall mean the Securities and Exchange Commission.
(k) The term "Series B Preferred Stock" refers to the shares of Series
B Preferred Stock, par value $.001 per share, of the Company.
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<PAGE>
(l) The term "Series C Preferred Stock" refers to the shares of Series
C Preferred Stock, par value $.001 per share, of the Company.
(m) The term "Series D Preferred Stock" refers to the shares of Series
D Preferred Stock, par value $.001 per share, of the Company.
(n) The term "Series E Preferred Stock" refers to the shares of Series
E Preferred Stock, par value $.001 per share, of the Company.
1.2 Request for Registration.
------------------------
(a) Subject to the conditions of this Section 1.2, if the Company
shall receive at any time later than one hundred and eighty (180) days after
the effective date of the Initial Offering, a written request from the Holders
of forty percent (40%) or more of the Registrable Securities then outstanding
(the "Initiating Holders") that the Company file a registration statement under
the Act covering the registration of at least twenty percent (20%) of the
Registrable Securities, then the Company shall, within twenty (20) days of the
receipt thereof, give written notice of such request to all Holders, and subject
to the limitations of this Section 1.2, use best efforts to effect, as soon as
practicable, the registration under the Act of all Registrable Securities that
the Holders request to be registered in a written request received by the
Company within twenty (20) days of the mailing of the Company's notice pursuant
to this Section 1.2(a).
(b) If the Initiating Holders intend to distribute the Registrable
Securities covered by their request by means of an underwriting, they shall so
advise the Company as a part of their request made pursuant to this Section 1.2
and the Company shall include such information in the written notice referred to
in Section 1.2(a). In such event the right of any Holder to include its
Registrable Securities in such registration shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting (unless otherwise mutually agreed by
a majority in interest of the Initiating Holders and such Holder) to the extent
provided herein. All Holders proposing to distribute their securities through
such underwriting shall enter into an underwriting agreement in customary form
with the underwriter or underwriters selected for such underwriting by a
majority in interest of the Initiating Holders. Notwithstanding any other
provision of this Section 1.2, if the underwriter advises the Company that
marketing factors require a limitation of the number of securities underwritten
(including Registrable Securities), then the Company shall so advise all Holders
of Registrable Securities that would otherwise be underwritten pursuant hereto,
and the number of shares that may be included in the underwriting shall be
allocated to the Holders of such Registrable Securities on a pro rata basis
based on the number of Registrable Securities held by all such Holders
(including the Initiating Holders). Any Registrable Securities excluded or
withdrawn from such underwriting shall be withdrawn from the registration.
(c) The Company shall not be required to effect a registration
pursuant to this Section 1.2:
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<PAGE>
(i) in any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting such
registration, unless the Company is already subject to service in such
jurisdiction and except as may be required under the Act; or
(ii) after the Company has already effected two (2) registrations
pursuant to this Section 1.2, and such registrations have been declared or
ordered effective; or
(iii) during the period starting with the date sixty (60) days prior
to the Company's good faith estimate of the date of the filing of, and ending on
a date ninety (90) days following the effective date of, a Company-initiated
registration subject to Section 1.3 below, provided that the Company is actively
employing in good faith all reasonable efforts to cause such registration
statement to become effective; or
(iv) if the Initiating Holders propose to dispose of Registrable
Securities that may be registered on Form S-3 pursuant to Section 1.4 hereof; or
(v) if the Company shall furnish to Holders requesting a registration
statement pursuant to this Section 1.2, a certificate signed by the Company's
Chief Executive Officer or Chairman of the Board stating that in the good faith
judgment of the Board of Directors of the Company, it would be seriously
detrimental to the Company and its stockholders for such registration statement
to be effected at such time, in which event the Company shall have the right to
defer such filing for a period of not more than one hundred and twenty (120)
days after receipt of the request of the Initiating Holders, provided that such
right to delay a request shall be exercised by the Company not more than once in
any twelve (12) month period.
1.3 Company Registration.
--------------------
(a) If (but without any obligation to do so) the Company proposes to
register (including for this purpose a registration effected by the Company for
stockholders other than the Holders) any of its stock or other securities under
the Act in connection with the public offering of such securities (other than
the Company's Initial Offering, a registration relating solely to the sale of
securities to participants in a Company stock plan, a registration relating to a
corporate reorganization or other transaction under Rule 145 under the Act, a
registration on any form that does not include substantially the same
information as would be required to be included in a registration statement
covering the sale of the Registrable Securities, or a registration in which the
only Common Stock being registered is Common Stock issuable upon conversion of
debt securities that are also being registered), the Company shall, at such
time, promptly give each Holder and Founder written notice of such registration.
In addition, if the Company proposes to register any of its stock for a Holder
pursuant to Sections 1.2 or 1.4 hereof, the Company shall, at such time,
promptly give each Founder written notice of such registration. Upon written
request of a Holder or a Founder given within twenty (20) days after mailing of
a notice by the Company under this Section 1.3(a) in accordance with Section
3.5, the Company shall, subject to the provisions of Section 1.3(c), use all
reasonable efforts to cause to be registered under the Act (i) all of the
Registrable Securities that each such Holder has requested to be registered and
(ii) all shares of Common Stock then held by a Founder ("Founder Securities")
that each such Founder
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<PAGE>
has requested to be registered. In the event that any Founder Securities owned
by a Founder are registered pursuant to this Section 1.3(a), then, for purposes
of Sections 1.5, 1.6, 1.7 and 1.8 (as applied to such registration only), such
Founder Securities shall be included within the meaning of "Registrable
Securities" and such Founder shall be included within the meaning of "Holders."
(b) Right to Terminate Registration. The Company shall have the right
-------------------------------
to terminate or withdraw any registration initiated by it under this Section 1.3
prior to the effectiveness of such registration whether or not any Holder or
Founder has elected to include securities in such registration. The expenses of
such withdrawn registration shall be borne by the Company in accordance with
Section 1.7 hereof.
(c) Underwriting Requirements. In connection with any offering
-------------------------
involving an underwriting of shares of the Company's capital stock, the Company
shall not be required under this Section 1.3 to include any of the Holders' or
Founders' securities in such underwriting unless they accept the terms of the
underwriting as agreed upon between the Company and the underwriters selected by
it (or by other persons entitled to select the underwriters) and enter into an
underwriting agreement in customary form with such underwriter or underwriters.
If the total amount of securities, including Registrable Securities and Founder
Securities, requested by stockholders to be included in such offering exceeds
the amount of securities sold other than by the Company that the underwriters
determine in their sole discretion is compatible with the success of the
offering, then the Company shall be required to include in the offering only
that number of such securities that the underwriters determine in their sole
discretion will not jeopardize the success of the offering (the securities so
included to be apportioned (i) first, pro rata among the selling Holders
according to the total amount of securities entitled to be included therein
owned by each selling Holder or in such other proportions as shall mutually be
agreed to by such selling Holders, and (ii) second, if all of the securities
which the Holders requested to have included in the registration are so
included, pro rata among the selling Founders according to the total amount of
securities entitled to be included therein owned by each selling Founder or in
such proportions as shall mutually be agreed to by such selling Founders), but
in no event shall the amount of securities of the selling Holders included in
the offering be reduced below thirty percent (30%) of the total amount of
securities included in such offering, unless such offering is the initial public
offering of the Company's securities, in which case the selling Holders may be
excluded if the underwriters make the determination described above and no other
stockholder's securities are included. For purposes of the preceding
parenthetical concerning apportionment, for any selling stockholder that is a
Holder of Registrable Securities or a holder of Founder Securities and that is a
partnership or corporation, the partners, retired partners and stockholders of
such selling stockholder, or the estates and family members of any such partners
and retired partners and any trusts for the benefit of any of the foregoing
persons shall be deemed to be a single "selling Holder" or "selling Founder," as
the case may be and any pro rata reduction with respect to such "selling Holder"
or "selling Founder" shall be based upon the aggregate amount of Registrable
Securities or Founder Securities owned by all such related entities and
individuals.
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<PAGE>
1.4 Form S-3 Registration. In case the Company shall receive from
---------------------
the Holders of Registrable Securities a written request or requests that the
Company effect a registration on Form S-3 and any related qualification or
compliance with respect to all or a part of the Registrable Securities owned by
such Holder or Holders, the Company shall:
(a) promptly give written notice of the proposed registration, and
any related qualification or compliance, to all other Holders; and
(b) use best efforts to effect, as soon as practicable, such
registration and all such qualifications and compliances as may be so requested
and as would permit or facilitate the sale and distribution of all or such
portion of such Holders' Registrable Securities as are specified in such
request, together with all or such portion of the Registrable Securities of any
other Holders joining in such request as are specified in a written request
given within twenty (20) days after receipt of such written notice from the
Company, provided, however, that the Company shall not be obligated to effect
any such registration, qualification or compliance, pursuant to this section
1.4:
(i) if Form S-3 is not available for such offering by the
Holders;
(ii) in any particular jurisdiction in which the Company would
be required to qualify to do business or to execute a general consent to service
of process in effecting such registration, qualification or compliance;
(iii) if the Company has effected a registration pursuant to
this Section 1.4 which has been declared or ordered effective within the prior
six (6) months;
(iv) if the aggregate amount of securities to be registered is
less than one million dollars ($1,000,000); or
(v) if the Company shall furnish to Holders requesting a
registration statement pursuant to this Section 1.4, a certificate signed by the
Company's Chief Executive Officer or Chairman of the Board stating that in the
good faith judgment of the Board of Directors of the Company, it would be
seriously detrimental to the Company and its stockholders for such registration
statement to be effected at such time, in which event the Company shall have the
right to defer such filing for a period of not more than one hundred and twenty
(120) days after receipt of the request to effect the registration, provided
that such right to delay a request shall be exercised by the Company not more
than once in any twelve (12) month period.
(c) Subject to the foregoing, the Company shall file a registration
statement covering the Registrable Securities and other securities so requested
to be registered as soon as practicable after receipt of the request or requests
of the Holders. Registrations effected pursuant to this Section 1.4 shall not
be counted as requests for registration effected pursuant to Section 1.2.
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<PAGE>
1.5 Obligations of the Company. Whenever required under this Section
--------------------------
1 to effect the registration of any Registrable Securities, the Company shall,
as expeditiously as reasonably possible:
(a) prepare and file with the SEC a registration statement with
respect to such Registrable Securities and use best efforts to cause such
registration statement to become effective, and, upon the request of the Holders
of a majority of the Registrable Securities registered thereunder, keep such
registration statement effective for a period of up to one hundred eighty (180)
days or, if earlier, until the distribution contemplated in the Registration
Statement has been completed;
(b) prepare and file with the SEC such amendments and supplements to
such registration statement and the prospectus used in connection with such
registration statement as may be necessary to comply with the provisions of the
Act with respect to the disposition of all securities covered by such
registration statement;
(c) furnish to the Holders such numbers of copies of a prospectus,
including any preliminary prospectus, in conformity with the requirements of the
Act, and such other documents as they may reasonably request in order to
facilitate the disposition of Registrable Securities owned by them;
(d) use best efforts to register and qualify the securities covered
by such registration statement under such other securities or Blue Sky laws of
such jurisdictions as shall be reasonably requested by the Holders, provided
that the Company shall not be required in connection therewith or as a condition
thereto to qualify to do business or to file a general consent to service of
process in any such states or jurisdictions;
(e) in the event of any underwritten public offering, enter into and
perform its obligations under an underwriting agreement, in usual and customary
form, with the underwriters of such offering;
(f) notify each Holder of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Act of the happening of any event as a result
of which the prospectus included in such registration statement, as then in
effect, includes an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances then existing;
(g) use its reasonable best efforts (if the offering is underwritten)
to furnish, at the request of any seller, on the date that Registrable
Securities are delivered to the underwriters for sale pursuant to such
registration: (i) an opinion, dated such date, of counsel representing the
Company for the purposes of such registration, addressed to the underwriters,
stating that such registration statement has become effective under the Act and
that (A) to the best knowledge of such counsel, no stop order suspending the
effectiveness thereof has been issued and no proceedings for that purpose have
been instituted or are pending or contemplated under the Act, (B) the
registration statement, the related prospectus, and each amendment or supplement
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<PAGE>
thereof, appear on their face to comply as to form in all material respects with
the requirements of the Act and the applicable rules and regulations of the SEC
thereunder (except that such counsel need express no opinion as to financial
statements, the notes thereto, and the financial schedules and other financial
and statistical data contained therein) and (C) to such other effects as may
reasonably be requested by counsel for the underwriters, and (ii) a letter dated
such date from the independent public accountants retained by the Company,
addressed to the underwriters, stating that they are independent public
accountants within the meaning of the Act and that, in the opinion of such
accountants, the audited financial statements of the Company included in the
registration statement or the prospectus, or any amendment or supplement
thereof, comply as to form in all material respects with the applicable
accounting requirements of the Act, and such letter shall additionally cover
such other financial matters (including information as to the period ending no
more than five business days prior to the date of such letter) with respect to
the registration in respect of which such letter is being given as such
underwriters may reasonably request;
(h) for a reasonable period of time prior to the filing of the
registration statement and prior to the execution of any underwriting or similar
agreement, make available for inspection by each seller, any underwriter
participating in any distribution pursuant to such registration statement, and
any attorney or accountant retained by such seller or underwriter, all such
financial and other records, pertinent corporate documents and properties of the
Company as would customarily be necessary for the purposes of a "due diligence"
investigation of the Company's affairs, and cause the Company's officers,
directors and employees to supply all information reasonably requested by any
such seller, underwriter, attorney or accountant in connection with such
registration statement, provided that any records, information or documents that
are designated by the Company as confidential shall be kept confidential by such
persons, and that the Company may require such persons to enter into non-
disclosure agreements with respect to such records, information or documents,
and permit such seller, attorney or accountant to participate in the preparation
of such registration statement to the extent deemed reasonable by the Company;
(i) use its reasonable best efforts to cause all the Registrable
Securities included in such registration to be listed on each national
securities exchange on which the Common Stock is then listed, or quoted on each
interdealer quotation system on which the Common Stock is then quoted;
(j) use reasonable efforts to prevent the issuance of any stop order
suspending the effectiveness of such registration statement or of any order
preventing or suspending the use of any preliminary prospectus and, if any such
order is issued, to obtain the lifting thereof at the earliest reasonable time;
(k) make such representations and warranties to the selling Holders
and the underwriters as are customarily made by issuers to underwriters and
selling Holders, as the case may be, in underwritten public offerings; and
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<PAGE>
(l) provide a transfer agent and registrar for all Registrable
Securities registered pursuant hereto and a CUSIP number for all such
Registrable Securities, in each case not later than the effective date of such
registration.
1.6 Information from Holder. It shall be a condition precedent to the
-----------------------
obligations of the Company to take any action pursuant to this Section 1 with
respect to the Registrable Securities of any selling Holder that such Holder
shall furnish to the Company such information regarding itself, the Registrable
Securities held by it, and the intended method of disposition of such securities
as shall be required to effect the registration of such Holder's Registrable
Securities.
1.7 Expenses of Registration. All expenses other than underwriting
------------------------
discounts and commissions incurred in connection with registrations, filings or
qualifications pursuant to Sections 1.2, 1.3 and 1.4, including (without
limitation) all registration, filing and qualification fees, printers' and
accounting fees, fees and disbursements of counsel for the Company and the
reasonable fees and disbursements of one counsel for the selling Holders shall
be borne by the Company. Notwithstanding the foregoing, the Company shall not
be required to pay for any expenses of any registration proceeding begun
pursuant to Section 1.2 or Section 1.4 if the registration request is
subsequently withdrawn at the request of the Holders of a majority of the
Registrable Securities to be registered (in which case all participating Holders
shall bear such expenses pro rata based upon the number of Registrable
Securities that were to be requested in the withdrawn registration), provided,
however, that if at the time of such withdrawal, the Holders have learned of a
material adverse change in the condition, business, or prospects of the Company
from that known to the Holders at the time of their request and have withdrawn
the request with reasonable promptness following disclosure by the Company of
such material adverse change, then the Holders shall not be required to pay any
of such expenses and shall retain their rights pursuant to Section 1.2 or 1.4.
1.8 Indemnification. In the event any Registrable Securities are
---------------
included in a registration statement under this Section 1:
(a) To the extent permitted by law, the Company will indemnify and
hold harmless each Holder, the partners or officers, directors and stockholders
of each Holder, legal counsel and accountants for each Holder, any underwriter
(as defined in the Act) for such Holder and each person, if any, who controls
such Holder or underwriter within the meaning of the Act or the 1934 Act,
against any losses, claims, damages or liabilities (joint or several) to which
they may become subject under the Act, the 1934 Act or any state securities
laws, insofar as such losses, claims, damages, or liabilities (or actions in
respect thereof) arise out of or are based upon any of the following statements,
omissions or violations (collectively a "Violation"): (i) any untrue statement
or alleged untrue statement of a material fact contained in such registration
statement, including any preliminary prospectus or final prospectus contained
therein or any amendments or supplements thereto, (ii) 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, or (iii) any violation
or alleged violation by the Company of the Act, the 1934 Act, any state
securities laws or any rule or regulation promulgated under the Act, the 1934
Act or
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<PAGE>
any state securities laws; and the Company will reimburse each such Holder,
underwriter or controlling person for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action; provided, however, that the indemnity
agreement contained in this subsection 1.8(a) shall not apply to amounts paid in
settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Company (which consent shall
not be unreasonably withheld), nor shall the Company be liable in any such case
for any such loss, claim, damage, liability or action to the extent that it
arises out of or is based upon a Violation that occurs in reliance upon and in
conformity with written information furnished expressly for use in connection
with such registration by any such Holder, underwriter or controlling person;
provided further, however, that the foregoing indemnity agreement with respect
to any preliminary prospectus shall not inure to the benefit of any Holder or
underwriter, or any person controlling such Holder or underwriter, from whom the
person asserting any such losses, claims, damages or liabilities purchased
shares in the offering, if a copy of the prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Holder or underwriter to
such person, if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the shares to such person, and if the
prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage or liability.
(b) To the extent permitted by law, each selling Holder will
indemnify and hold harmless the Company, each of its directors, each of its
officers who has signed the registration statement, each person, if any, who
controls the Company within the meaning of the Act, legal counsel and
accountants for the Company, any underwriter, any other Holder selling
securities in such registration statement and any controlling person of any such
underwriter or other Holder, against any losses, claims, damages or liabilities
(joint or several) to which any of the foregoing persons may become subject,
under the Act, the 1934 Act or any state securities laws, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any Violation, in each case to the extent (and only to the
extent) that such Violation occurs in reliance upon and in conformity with
written information furnished by such Holder expressly for use in connection
with such registration; and each such Holder will reimburse any person intended
to be indemnified pursuant to this subsection 1.8(b), for any legal or other
expenses reasonably incurred by such person in connection with investigating or
defending any such loss, claim, damage, liability or action; provided, however,
that the indemnity agreement contained in this subsection l.8(b) shall not apply
to amounts paid in settlement of any such loss, claim, damage, liability or
action if such settlement is effected without the consent of the Holder (which
consent shall not be unreasonably withheld), provided that in no event shall any
indemnity under this subsection 1.8(b) exceed the net proceeds from the offering
received by such Holder.
(c) Promptly after receipt by an indemnified party under this Section
1.8 of notice of the commencement of any action (including any governmental
action), such indemnified party will, if a claim in respect thereof is to be
made against any indemnifying party under this Section 1.8, deliver to the
indemnifying party a written notice of the commencement thereof and the
indemnifying party shall have the right to participate in, and, to the extent
the
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<PAGE>
indemnifying party so desires, jointly with any other indemnifying party
similarly noticed, to assume the defense thereof with counsel mutually
satisfactory to the parties; provided, however, that an indemnified party
(together with all other indemnified parties that may be represented without
conflict by one counsel) shall have the right to retain one separate counsel,
with the fees and expenses to be paid by the indemnifying party, if
representation of such indemnified party by the counsel retained by the
indemnifying party would be inappropriate due to actual or potential differing
interests between such indemnified party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action, if prejudicial to its ability to defend such action, shall relieve such
indemnifying party of any liability to the indemnified party under this Section
1.8, but the omission so to deliver written notice to the indemnifying party
will not relieve it of any liability that it may have to any indemnified party
otherwise than under this Section 1.8.
(d) If the indemnification provided for in this Section 1.8 is held
by a court of competent jurisdiction to be unavailable to an indemnified party
with respect to any loss, liability, claim, damage or expense referred to
herein, then the indemnifying party, in lieu of indemnifying such indemnified
party hereunder, shall contribute to the amount paid or payable by such
indemnified party as a result of such loss, liability, claim, damage or expense
in such proportion as is appropriate to reflect the relative fault of the
indemnifying party on the one hand and of the indemnified party on the other in
connection with the statements or omissions that resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations. The relative fault of the indemnifying party and of the
indemnified party shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission; provided, however that in no event shall any contribution
under this subsection 1.8(d) exceed the net proceeds from the offering by such
Holder.
(e) The obligations of the Company and Holders under this Section 1.8
shall survive the completion of any offering of Registrable Securities in a
registration statement under this Section 1, and otherwise.
1.9 Reports Under Securities Exchange Act of 1934. With a view to
---------------------------------------------
making available to the Holders and Founders the benefits of Rule 144
promulgated under the Act and any other rule or regulation of the SEC that may
at any time permit a Holder or Founder to sell securities of the Company to the
public without registration or pursuant to a registration on Form S-3, the
Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in SEC Rule 144, at all times after the effective date of
the Initial Offering;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the Act and the 1934 Act; and
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<PAGE>
(c) furnish to any Holder or Founder, after the Initial Offering and
so long as the Holder or Founder owns any Registrable Securities or Founder
Securities, forthwith upon request (i) a written statement by the Company that
it has complied with the reporting requirements of SEC Rule 144 (at any time
after ninety (90) days after the effective date of the first registration
statement filed by the Company), the Act and the 1934 Act (at any time after it
has become subject to such reporting requirements), or that it qualifies as a
registrant whose securities may be resold pursuant to Form S-3 (at any time
after it so qualifies), (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested in
availing any Holder or Founder of any rule or regulation of the SEC that permits
the selling of any such securities without registration or pursuant to such
form.
1.10 Assignment of Registration Rights. The rights to cause the
---------------------------------
Company to register Registrable Securities or Founder Securities pursuant to
this Section 1 may be assigned (but only with all related obligations) by a
Holder or Founder to a transferee or assignee of such securities that (i) is a
subsidiary, parent, partner, limited partner, retired partner or stockholder of
a Holder or Founder, (ii) is a Holder's or Founder's spouse or member of such
Holder's or Founder's immediate family, or a custodian, trustee (including a
trustee of a voting trust), executor or other fiduciary for the account of the
Holder's or Founder's spouse or members of the Holder's or Founder's immediate
family, a trust for the Holder's or Founder's own self, a charitable remainder
trust or an entity that is controlled by one or more of the Holder's or
Founder's immediate family, or (iii) after such assignment or transfer, holds at
least 500,000 shares of Registrable Securities or Founder Securities (subject to
appropriate adjustment for stock splits, stock dividends, combinations and other
recapitalizations), provided: (a) the Company is, within a reasonable time after
such transfer, furnished with written notice of the name and address of such
transferee or assignee and the securities with respect to which such
registration rights are being assigned; (b) such transferee or assignee agrees
in writing to be bound by and subject to the terms and conditions of this
Agreement, including without limitation the provisions of Section 1.12 below;
and (c) such assignment shall be effective only if immediately following such
transfer the further disposition of such securities by the transferee or
assignee is restricted under the Act.
1.11 Limitations on Subsequent Registration Rights. From and after the
---------------------------------------------
date of this Agreement, the Company shall not, without the prior written consent
of the Holders of a majority of the Registrable Securities, enter into any
agreement with any holder or prospective holder of any securities of the Company
that would allow such holder or prospective holder (a) to include such
securities in any registration filed under Section 1.3 hereof, unless under the
terms of such agreement, such holder or prospective holder may include such
securities in any such registration only to the extent that the inclusion of
such securities will not reduce the amount of the Registrable Securities of the
Holders that are included or (b) to demand registration of their securities.
1.12 "Market Stand-Off" Agreement. Each Holder and each Founder
---------------------------
hereby agrees that he or it will not, without the prior written consent of the
lead managing underwriter, during the period commencing on the date of the final
prospectus relating to the Company's initial
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<PAGE>
public offering and ending on the date specified by the Company and the managing
underwriter (such period not to exceed one hundred eighty (180) days) (i) lend,
offer, pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase, or otherwise transfer or dispose of, directly or indirectly, any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock (whether such shares or any such securities are
then owned by the Holder or are thereafter acquired), or (ii) enter into any
swap or other arrangement that transfers to another, in whole or in part, any of
the economic consequences of ownership of the Common Stock (each such
transaction described in clause (i) or (ii), a "Transfer"), whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
provisions of this Section 1.12 shall apply only to the Company's initial public
offering of equity securities, shall not apply to the sale of any shares to an
underwriter pursuant to an underwriting agreement, and shall only be applicable
if all executive officers and directors and greater than one percent (1%)
stockholders of the Company enter into similar agreements. Notwithstanding the
foregoing, each Holder and each Founder may cause a Transfer (i) if such Holder
or Founder is an individual, pursuant to a bona fide gift to the undersigned's
immediate family members, trusts for the benefit of such immediate family
members and partnerships in which such immediate family members are the only
partners and (ii) if such Holder is a corporation, partnership, limited
liability company or other form of business entity, to a partner or member of
such entity or the estate of any such partner or member, or to an affiliate of
such Holder, in each case, only if such transferee executes and delivers to such
lead managing underwriter an agreement containing the same limitations on
transfer as set forth in this Section 1.12; and provided, further, however, that
each Holder and each Founder may cause a Transfer of shares of Common Stock that
such Holder or Founder purchased either in the initial public offering of the
Company's Common Stock or in the open market after the date of the final
prospectus without any restriction. The underwriters in connection with the
Company's initial public offering are intended third party beneficiaries of this
Section 1.12 and shall have the right, power and authority to enforce the
provisions hereof as though they were a party hereto.
In order to enforce the foregoing covenant, the Company may impose stop-
transfer instructions with respect to the Registrable Securities of each Holder
(and the shares or securities of every other person subject to the foregoing
restriction) until the end of such period.
1.13 Termination of Registration Rights. No Holder shall be entitled
----------------------------------
to exercise any right provided for in this Section 1 after the earlier of (i)
five (5) years following the consummation of the Initial Offering; and (ii) as
to any Holder, such earlier time at which all Registrable Securities held by
such Holder (and any affiliate of the Holder with whom such Holder must
aggregate its sales under Rule 144) can be sold in any three (3) month period
without registration in compliance with Rule 144 of the Act.
2. Covenants of the Company.
------------------------
2.1 Delivery of Financial Statements. The Company shall deliver to
--------------------------------
each Investor:
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<PAGE>
(a) as soon as practicable, but in any event within ninety (90) days
after the end of each fiscal year of the Company, an income statement for such
fiscal year, a balance sheet of the Company and statement of stockholder's
equity as of the end of such year, and a statement of cash flows for such year,
such year-end financial reports to be in reasonable detail, prepared in
accordance with generally accepted accounting principles ("GAAP"), and audited
and certified by independent public accountants of nationally recognized
standing selected by the Company;
(b) as soon as practicable, but in any event within forty-five (45)
days after the end of each of the first three (3) quarters of each fiscal year
of the Company, an unaudited income statement for such quarter, together with a
cumulative income statement from the first day of the then-current fiscal year
to the last day of such quarter, a statement of cash flows for such fiscal
quarter, a balance sheet as of the end of such quarter and a comparison between
the actual figures for such quarter, the comparable figures for the prior year
and the comparable figures included in the Budget (defined below) for such
quarter, with an explanation of any material differences between them, in
reasonable form and detail;
(c) within thirty (30) days of the end of each month, an unaudited
cumulative income statement from the first day of the then-current fiscal year
to the last day of such month, a statement of cash flows for such month, a
balance sheet as of the end of such month and a comparison between the actual
figures for such month, the comparable figures for the prior year and the
comparable figures included in the Budget (defined below) for such month, with
an explanation of any material differences between them, in reasonable form and
detail;
(d) as soon as practicable, but in any event at least thirty (30)
days prior to the end of each fiscal year, a budget and business plan (the
"Budget") for the next fiscal year, prepared on a monthly basis, including
balance sheets, income statements and statements of cash flows for such months,
approved by the Board of Directors, and, as soon as prepared, any other budgets
or revised budgets prepared by the Company;
(e) with respect to the financial statements called for in
subsections (b) and (c) of this Section 2.1, an instrument executed by the Chief
Financial Officer, Director of Finance or President of the Company certifying
that such financials were prepared in accordance with GAAP consistently applied
with prior practice for earlier periods (with the exception of footnotes that
may be required by GAAP) and fairly present the financial condition of the
Company and its results of operation for the period specified, subject to year-
end audit adjustment; and
(f) such other information relating to the financial condition,
business, prospects or corporate affairs of the Company as the Investor or any
assignee of the Investor may from time to time reasonably request, provided,
however, that the Company shall not be obligated under this subsection (f) or
any other subsection of Section 2.1 to provide information that it deems in good
faith to be a trade secret or similar confidential information.
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<PAGE>
2.2 Inspection.
----------
(a) The Company shall permit each Investor, at such Investor's
expense, to visit and inspect the Company's properties, to examine its books of
account and records and to discuss the Company's affairs, finances and accounts
with its officers, all at such reasonable times as may be requested by the
Investor.
(b) Each Investor shall maintain the confidentiality of any
confidential and proprietary information of the Company received by it
("Proprietary Information") using the same standard of care as it applies to its
own confidential information of a like kind and nature, except for any
Proprietary Information (a) of which such Investor had knowledge prior to its
receipt from the Company or which is in such Investor's possession and of which
it did not learn through its contact with the Company, (b) which is publicly
available or a matter of public knowledge generally through no breach by such
Investor of this Agreement, (c) which is lawfully received by such Investor
from a third party who is not known to be or to have been bound in any
confidential relationship to the Company, (d) which is independently developed
by such Investor without reference to Proprietary Information, or (e) which such
Investor is required by law (including judicial or administrative order) to
disclose. Nothing herein shall prevent any Investor from using Proprietary
Information to monitor its investment in the Company or to enforce its rights
under this Agreement or the Ancillary Agreements. In addition, nothing herein
shall prevent disclosure of summaries of Proprietary Information describing the
performance of the Company to (i) any partners of or other investors in such
Investor, in each case who have agreed in writing with the Company to maintain
the confidentiality thereof; provided, that, in connection with reports to their
--------
partners or other investors, the Investors may, without first obtaining such
written agreement, make general statements, not containing technical or other
confidential information, regarding the Company and its business; and provided
--------
further, that the Investors may provide summary information regarding the
- -------
Company's financial information in their reports to their respective partners or
other investors, but may not annex to such reports the full financial
information to be provided hereunder by the Company; (ii) the accountants,
internal and external auditors, legal counsel, financial advisors and other
fiduciaries and representatives of such partners or investors as long as such
have agreed in writing with the Company to maintain the confidentiality thereof;
or (iii) potential transferees (other than competitors of the Company) of Shares
or of such partners' or other investors' interests in an Investor, which
potential transferees agree in writing with the Company to maintain the
confidentiality thereof.
2.3 Termination of Information and Inspection Covenants. The
---------------------------------------------------
covenants set forth in Sections 2.1 and 2.2 shall terminate as to Investors and
be of no further force or effect when the sale of securities pursuant to a
registration statement filed by the Company under the Act in connection with the
firm commitment underwritten offering of its securities to the general public is
consummated or when the Company first becomes subject to the periodic reporting
requirements of Sections 12(b), 12(g) or 15(d) of the 1934 Act, whichever event
shall first occur.
2.4 Right of First Offer. Subject to the terms and conditions
--------------------
specified in this paragraph 2.4, the Company hereby grants to each Investor and
Founder a right of first offer with
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<PAGE>
respect to future sales by the Company of its Shares (as hereinafter defined).
For purposes of this Section 2.4, Investor shall mean only the Series B
Investors, Series C Investors and Series D Investors and includes any general
partners and affiliates of an Investor. An Investor shall be entitled to
apportion the right of first offer hereby granted it among itself and its
partners and affiliates in such proportions as it deems appropriate.
Each time the Company proposes to offer any shares of, or securities
convertible into or exchangeable or exercisable for any shares of, any class of
its capital stock ("Shares"), the Company shall first make an offering of such
Shares to each Investor and Founder in accordance with the following provisions.
(a) The Company shall deliver a notice in accordance with Section 4.5
("Notice") to the Investors and Founders stating (i) its bona fide intention to
offer such Shares, (ii) the number and a description of such Shares to be
offered, and (iii) the price and terms upon which it proposes to offer such
Shares.
(b) By written notification received by the Company, within twenty
(20) calendar days after receipt of the Notice, each Investor or Founder may
elect to purchase or obtain, at the price and on the terms specified in the
Notice, up to that portion of such Shares that equals the proportion that the
number of shares of Common Stock issued and held, or issuable upon conversion of
the Series B Preferred Stock, Series C Preferred Stock and Series D Preferred
Stock then held, by such Investor or Founder bears to the total number of shares
of Common Stock of the Company then outstanding (assuming full conversion of all
convertible securities), issued and held, or issuable upon conversion of the
Series B Preferred Stock, Series C Preferred Stock and Series D Preferred Stock
then held, by all the Investors and Founders. The Company shall promptly, in
writing, inform each Investor and Founder that elects to purchase all the shares
available to it (a "Fully-Exercising Party") of any other Investor's or
Founder's failure to do likewise. During the ten (10) day period commencing
after such information is given, each Fully-Exercising Party may elect to
purchase that portion of the Shares for which Investors and Founders were
entitled to subscribe but which were not subscribed for by the Investors and
Founders that is equal to the proportion that the number of shares of Common
Stock issued and held, or issuable upon conversion of Series B Preferred Stock,
Series C Preferred Stock, and Series D Preferred Stock then held, by such Fully-
Exercising Party bears to the total number of shares of Common Stock issued and
held, or issuable upon conversion of the Series B Preferred Stock, Series C
Preferred Stock, and Series D Preferred Stock then held, by all Fully-Exercising
Parties who wish to purchase some of the unsubscribed shares.
(c) If all Shares that Investors and Founders are entitled to obtain
pursuant to subsection 2.4(b) are not elected to be obtained as provided in
subsection 2.4(b) hereof, the Company may, during the ninety (90) day period
following the expiration of the period provided in subsection 2.4(b) hereof,
offer the remaining unsubscribed portion of such Shares to any person or persons
at a price not less than, and upon terms no more favorable to the offeree than
those specified in the Notice. If the Company does not enter into an agreement
for the sale of the Shares within such period, or if such agreement is not
consummated within ninety (90) days of the execution thereof, the right provided
hereunder shall be deemed to be revived and such
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<PAGE>
Shares shall not be offered unless first reoffered to the Investors and Founders
in accordance herewith.
(d) The right of first offer in this paragraph 2.4 shall not be
applicable to (i) the issuance or sale of shares of Common Stock (or options
therefor) to employees, directors and consultants for the primary purpose of
soliciting or retaining their services or for compensating them for their
services; (ii) the issuance of securities pursuant to the conversion or exercise
of convertible or exercisable securities; (iii) the issuance of securities in
connection with a bona fide business acquisition of or by the Company, whether
by merger, consolidation, sale of assets, sale or exchange of stock or
otherwise; (iv) the issuance of stock, warrants or other securities or rights to
persons or entities with which the Company has strategic business relationships
provided such issuances are for other than primarily equity financing purposes
and provided that at the time of any such issuance, the aggregate of such
issuance and similar issuances in the preceding twelve month period do not
exceed two percent 2% of the then outstanding Common Stock of the Company
(assuming full conversion and exercise of all convertible and exercisable
securities); (v) warrants or shares issued to banks, equipment lessors or other
financial institutions in connection with debt or lease financing; or (vi) the
sale of securities pursuant to a public offering as set forth in Section 2.10.
2.5 Directors' and Officers' Insurance. The Company shall within
----------------------------------
thirty (30) days of the date hereof use its best efforts to obtain from
financially sound and reputable insurers a Directors' and Officers' insurance
policy covering the Directors and Officers of the Company in the amount of at
least $1,000,000. Prior to any public offering of shares of Common Stock of
the Company, the Company shall increase the amount of its Directors' and
Officers' insurance policy to at least $5,000,000.
2.6 Proprietary Information. The Company hereby covenants that it
-----------------------
will cause each employee and officer of the Company who has had access to
confidential or proprietary information of the Company to execute a Proprietary
Information and Inventions Agreement. The Company hereby covenants that it will
cause each consultant of the Company who has had access to confidential or
proprietary information of the Company to execute a proprietary information and
inventions agreement or non-disclosure agreement. The Company shall use its
best efforts to prevent any violation of any such proprietary information and
inventions agreement or non-disclosure agreement.
2.7 Employee Issuances. Prior to the Closing, the Company will have
------------------
implemented a stock option plan for its employees, directors and consultants and
reserved up to 7,400,000 shares for issuance under such plan. The options shall
be granted at an exercise price that is not less than the fair market value of
the stock underlying the option. The options granted under the plan shall
provide for a right of first refusal on transfers for the benefit of the Company
and the vesting of such shares over a four year period; provided, however that
no shares shall vest until one (1) year from the date of grant, at which time
twenty-five percent (25%) of such shares shall vest. No shares shall be issued
or options granted to employees, directors or consultants on more favorable
terms without the approval of a committee of the Board of Directors of the
Company to be comprised of: (i) one Board member designated by the holders of
the majority of the
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<PAGE>
voting power of the Series A Preferred Stock and Series B Preferred Stock, (ii)
one Board member designated by the holders of the Common Stock of the Company
and (iii) one Board member designated by the holders of a majority of the Series
C Preferred Stock (the "Compensation Committee"), each elected to the Board
pursuant to the Amended and Restated Voting Agreement of even date herewith.
2.8 Right to Participate in Initial Public Offering. The Company
-----------------------------------------------
hereby agrees that in connection with the Company's Initial Offering, it shall
require the managing underwriter or underwriters of such Initial Offering to
offer to the Series B Investors the right to purchase up to an aggregate of
$5,000,000 of the Company's Common Stock and to the Series C Investors the right
to purchase up to an aggregate of $5,000,000 of the Company's Common Stock, on
the same terms and at the same price as the Common Stock is offered to the
public in the Initial Offering, except that in no event shall the Investors'
purchase pursuant to this Section 2.8 be subject to any underwriter's discount,
provided, however, that the aggregate amount purchasable hereunder shall not
exceed 10% of the Initial Offering and both allotments shall be reduced by one-
half of such excess, if any. The right granted under this Section 2.8 to Series
B Investors may be allocated by the Series B Investors, in their sole
discretion, among any of the Series B Investors or affiliates of the Series B
Investors. The right granted under this Section 2.8 to Series C Investors shall
be allocated among the Series C Investors pro rata in proportion to their
relative holdings of the shares of Common Stock issued or issuable upon
conversion of Series C Preferred Stock then held by such Investors. All actions
taken pursuant to this Section 2.8 shall be made in accordance with all federal
and state securities laws, including Rule 134 under the Act or any successor
provisions.
2.9 Key Man Life Insurance. The Company shall within ninety (90) days
----------------------
of the date hereof use its best efforts to obtain from financially sound and
reputable insurers key man life insurance policies, each in the amount of at
least $1,000,000, covering Paul Sun, David Struwas and any other key employee
whom a majority of the Company's Board of Directors determines should also be so
covered.
2.10 Termination of Certain Covenants. The covenants set forth in
--------------------------------
Sections 2.4, 2.5, 2.6, 2.7, 2.9, 2.11, and 2.12 shall terminate and be of no
further force or effect upon the consummation of the sale of securities pursuant
to a bona fide, firmly underwritten public offering of shares of common stock,
registered under the Act, at an offering price of at least $10.00 per share
(appropriately adjusted for any stock split, dividend, combination or other
recapitalization) and resulting in net proceeds to the Company of at least
$30,000,000.
2.11 Observer Rights - Crosspoint. The Company shall allow a
----------------------------
representative designated by Crosspoint Venture Partners 1997, L.P.
("Crosspoint") (for so long as such Crosspoint continues to own no less than 50%
of the shares of Series D Preferred Stock purchased by Crosspoint pursuant to
that certain Series D Preferred Stock Purchase Agreement, dated May 12, 1999, by
and among the Company and the Investors listed therein (or Common Stock into
which such shares may be converted, in each case such number of shares
appropriately adjusted for stock splits, stock dividends and similar
recapitalizations)), to attend and observe any meeting of the Board of Directors
of the Company, in a nonvoting capacity;
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<PAGE>
provided, however, that the Company reserves the right to exclude Crosspoint's
- -------- -------
representative from access to any material or meeting or portion thereof if the
Company believes that such exclusion is reasonably necessary to protect
confidential or proprietary information, the Board of Directors believes that
Crosspoint or its representative has a conflict of interest, the Board of
Directors is in "executive session," or for other similar reasons. The Company
shall give Crosspoint notice of each meeting of the Board of Directors,
provided, however, that a failure to comply with the requirements of this
- -------- -------
paragraph shall not affect the validity of any meeting of directors, or any
action taken at such meeting.
2.12 Observer Rights - Microsoft. The Company shall allow a
---------------------------
representative designated by Microsoft Corporation ("Microsoft") (for so long as
such Microsoft continues to own no less than 50% of the shares of Series E
Preferred Stock purchased by Microsoft pursuant to the Series E Agreements (or
Common Stock into which such shares may be converted, in each case such number
of shares appropriately adjusted for stock splits, stock dividends and similar
recapitalization)), to attend and observe any meeting of the Board of Directors
of the Company, in a nonvoting capacity; provided, however, that the Company
-------- ------
reserves the right to exclude Microsoft's representative from access to any
material or meeting or portion thereof if the Company believes that such
exclusion is reasonably necessary to protect confidential or proprietary
information, the Board of Directors believes that Microsoft or its
representative has a conflict of interest, the Board of Directors is in
"executive session," or for other similar reasons. The Company shall give
Microsoft notice of each meeting of the Board of Directors, provided, however,
-------- ------
that a failure to comply with the requirements of this paragraph shall not
affect the validity of any meeting of directors, or any action taken at such
meeting.
3. Miscellaneous.
-------------
3.1 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any shares of Registrable Securities or Founder Securities).
Nothing in this Agreement, express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations, or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
3.2 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Connecticut as applied to agreements among
Connecticut residents entered into and to be performed entirely within
Connecticut.
3.3 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
3.4 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
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<PAGE>
3.5 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
delivery by confirmed facsimile transmission, nationally recognized overnight
courier service, or upon deposit with the United States Post Office, by
registered or certified mail, postage prepaid and addressed to the party to be
notified at the address indicated for such party on the signature page hereof,
or at such other address as such party may designate by ten (10) days' advance
written notice to the other parties. In the case of Microsoft, a copy of any
notice provided hereunder shall also be delivered to General Counsel, Finance
and Operations, at the address indicated for such party on the signature page.
3.6 Expenses. If any action at law or in equity is necessary to
--------
enforce or interpret the terms of this Agreement, the prevailing party shall be
entitled to reasonable attorneys' fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
3.7 Entire Agreement: Amendments and Waivers. This Agreement
----------------------------------------
(including the Exhibits hereto, if any) constitutes the full and entire
understanding and agreement among the parties with regard to the subjects hereof
and thereof. Any term of this Agreement may be amended and the observance of
any term of this Agreement may be waived (either generally or in a particular
instance and either retroactively or prospectively), only with the written
consent of the Company and the holders of a majority of the voting power of the
Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and
Series E Preferred Stock, voting together as a class; provided, however, that in
the event that such amendment or waiver adversely affects the obligations and/or
rights of the Founders in a different manner than the other Holders, such
amendment or waiver shall also require the written consent of the holders of a
majority in interest of the Founders. Any amendment or waiver effected in
accordance with this paragraph shall be binding upon each holder of any
Registrable Securities, each future holder of all such Registrable Securities,
and the Company.
3.8 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
3.9 Aggregation of Stock. All shares of Registrable Securities held
--------------------
or acquired by affiliated entities or persons shall be aggregated together for
the purpose of determining the availability of any rights under this Agreement.
3.10 Termination of Rights Agreement. The Company, each of the
-------------------------------
Founders, the Series B Investors, the Series C Investors, the Series D Investors
and the Series E Investors (other than the Additional Series E Investor) hereby
(i) agree that this Agreement supersedes and replaces the Rights Agreement and
that the Rights Agreement is hereby terminated and of no further force or
effect, and (ii) waive their respective rights under, and enforcement of the
provisions of, Section 2.4 of the Rights Agreement with respect to the
transactions contemplated in the Series E Agreement.
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<PAGE>
[Signatures Begin on Next Page]
-23-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
DSL.NET, INC.
By:_______________________________________
Name:
Title:
Address: 545 Long Wharf Drive
New Haven, CT 06511
[Signatures Continued on Next Page]
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<PAGE>
VantagePoint Venture Partners 1996, L.P.
By: VantagePoint Associates, LLC, its
General Partner
By:_________________________________________
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Communications Partners, L.P.
By: VantagePoint Communications Associates,
LLC, its General Partner
By:_________________________________________
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Venture Partners III (Q), L.P.
By: VantagePoint Venture Associates III, LLC
its General Partner
By:_________________________________________
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
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<PAGE>
Prism Venture Partners II, L.P.
By: Prism Investment Partners II, L.P., its
general partner
By: Prism Venture Partners II, L.L.C., its
general partner
By:_________________________________________
Managing Director
Address: 100 Lowder Brook Drive, Suite 2500
Westwood, MA 02090
Oak Investment Partners VIII, LP
By: Oak Associates VIII, LLC, its
General Partner
By:_________________________________________
Ed Glassmeyer, Managing Member
Address: One Gorham Island
Westport, CT 06880
Oak VIII Affiliates Fund, L.P.
By: Oak VIII Affiliates, LLC, its
General Partner
By:_________________________________________
Ed Glassmeyer, Managing Member
Address: One Gorham Island
Westport, CT 06880
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<PAGE>
Crosspoint Venture Partners 1997, L.P.
By:_________________________________________
Name:
Title:
Address: 2925 Woodside Road
Woodside, CA 94062
Gleacher/DSL Investors LLC
By:_________________________________________
Eric Gleacher, Managing Member
[Signatures Continued on Next Page]
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<PAGE>
Charter Growth Capital Co-Investment Fund, L.P.
By: CGC Partners, L.P.,
its General Partner
By:_________________________________________
Kevin J. McQuillan, General Partner
Address: 525 University Avenue, Suite 1500
Palo Alto, CA 94301
Charter Growth Capital Co-Investment Fund, L.P.
By: CGC Partners, L.P.,
its General Partner
By:_________________________________________
Kevin J. McQuillan, General Partner
Address: 525 University Avenue, Suite 1500
Palo Alto, CA 94301
CGC Investors, L.P.
By: CGC Partners, L.P.,
its General Partner
By:_________________________________________
Kevin J. McQuillan, General Partner
Address: 525 University Avenue, Suite 1500
Palo Alto, CA 94301
[Signatures Continued on Next Page]
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<PAGE>
Microsoft Corporation
By:_________________________________________
Name:
Title:
____________________________________________
Raymond C. Allieri
Staples, Inc.
By:_________________________________________
Name:
Title:
[Signatures Continued on Next Page]
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<PAGE>
_________________________________________
John Jaser
33 Hawley Avenue
Milford, CT 06460
_________________________________________
David Struwas
22 Twin Oak Farm Road
Wallingford, CT 06492
_________________________________________
Paul Sun
350 Huntington Street
Shelton, CT 06484
_________________________________________
Felix Tang
36 Botsford Avenue
Milford, CT 06460
[Signatures Continued on Next Page]
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<PAGE>
STEPHEN K. GELLMAN AND CECILIA S. WU,
CO-TRUSTEES, TRUST U/A PAUL SUN
DATED 5/7/99
By:_______________________________________
Stephen K. Gellman, Co-Trustee
By:_______________________________________
Cecilia S. Wu, Co-Trustee
Address: c/o Shipman & Goodwin LLP
One American Row
Hartford, CT 06103-2819
STEPHEN K. GELLMAN AND CECILIA S. WU,
CO-TRUSTEES, TRUST U/A PAUL SUN
DATED 10/17/97 F/B/O KATHERINE SUN
By:_______________________________________
Stephen K. Gellman, Co-Trustee
By:_______________________________________
Cecilia S. Wu, Co-Trustee
Address: c/o Shipman & Goodwin LLP
One American Row
Hartford, CT 06103-2819
STEPHEN K. GELLMAN AND CECILIA S. WU,
CO-TRUSTEES, TRUST U/A PAUL SUN
DATED 10/17/97 F/B/O KRISTEN SUN
By:_______________________________________
Stephen K. Gellman, Co-Trustee
By:_______________________________________
Cecilia S. Wu, Co-Trustee
Address: c/o Shipman & Goodwin LLP
One American Row
Hartford, CT 06103-2819
-31-
<PAGE>
Schedule A
VantagePoint Venture Partners 1996, L.P.
VantagePoint Communications Partners, L.P.
-32-
<PAGE>
Schedule B
Prism Venture Partners II, L.P.
VantagePoint Venture Partners 1996, L.P.
VantagePoint Communications Partners, L.P.
Oak Investment Partners VIII, L.P.
Oak VIII Affiliates Fund, L.P.
-33-
<PAGE>
Schedule C
Prism Venture Partners II, L.P.
VantagePoint Venture Partners 1996, L.P.
VantagePoint Communications Partners, L.P.
VantagePoint Venture Partners III (Q), L.P.
Crosspoint Venture Partners III, L.P.
Oak Investment Partners VIII, L.P.
Oak VIII Affiliates Fund, L.P.
Crosspoint Venture Partners 1997, L.P.
Gleacher/DSL Investors LLC
Charter Growth Capital, L.P.
Charter Growth Capital Co-Investment Fund, L.P.
CGC Investors, L.P.
Raymond C. Allieri
-34-
<PAGE>
Schedule D
Microsoft Corporation
Staples, Inc.
-35-
<PAGE>
EXHIBIT 10.04
MASTER LEASE AGREEMENT
MASTER LEASE AGREEMENT (the "Master Lease") dated March 4, 1999 by and
between COMDISCO, INC. ("Lessor") and dsl.net, inc. ("Lessee").
IN CONSIDERATION of the mutual agreements described below, the parties
agree as follows (all capitalized terms are defined in Section 14.18):
1. Property Leased.
Lessor leases to Lessee all of the Equipment described on each Summary Equipment
Schedule. In the event of a conflict, the terms of the applicable Schedule
prevail over this Master Lease.
2. Term.
On the Commencement Date, Lessee will be deemed to accept the Equipment, will be
bound to its rental obligations for each item of Equipment and the term of a
Summary Equipment Schedule will begin and continue through the Initial Term and
thereafter until terminated by either party upon prior written notice received
during the Notice Period. No termination may be effective prior to the
expiration of the Initial Term.
3. Rent and Payment.
Rent is due and payable in advance on the first day of each Rent Interval at the
address specified in Lessor's invoice. Interim Rent is due and payable when
invoiced. If any payment is not made when due, Lessee will pay a Late Charge on
the overdue amount. Upon Lessee's execution of each Schedule, Lessee will pay
Lessor the Advance specified on the Schedule. The Advance will be credited
towards the final Rent payment if Lessee is not then in default. No interest
will be paid on the Advance.
4. Selection; Warranty and Disclaimer of Warranties.
4.1 Selection. Lessee acknowledges that it has selected the Equipment and
disclaims any reliance upon statements made by the Lessor, other than as set
forth in the Schedule.
4.2 Warranty and Disclaimer of Warranties. Lessor warrants to Lessee that, so
long as Lessee is not in default, Lessor will not disturb Lessee's quiet and
peaceful possession, and unrestricted use of the Equipment. To the extent
permitted by the manufacturer, Lessor assigns to Lessee during the term of the
Summary Equipment Schedule any manufacturer's warranties for the Equipment.
LESSOR MAKES NO OTHER WARRANTY, EXPRESS OR IMPLIED AS TO ANY MATTER WHATSOEVER,
INCLUDING, WITHOUT LIMITATION, THE MERCHANTABILITY OF THE EQUIPMENT OR ITS
FITNESS FOR A PARTICULAR PURPOSE. Lessor is not responsible for any liability,
claim, loss, damage or expense of any kind (including strict liability in tort)
caused by the Equipment except for any loss or damage caused by the willful
misconduct or negligent acts of Lessor. In no event is Lessor responsible for
special, incidental or consequential damages.
<PAGE>
5. Title; Relocation or Sublease; and Assignment.
5.1 Title. Lessee holds the Equipment subject and subordinate to the rights
of the Owner, Lessor, any Assignee and ant Secured Party. Lessee authorizes
Lessor, as Lessee's agent, and at Lessor's expense, to prepare, execute and file
in Lessee's name precautionary Uniform Commercial Code financing statements
showing the interest of the Owner, Lessor, and any Assignee or Secured Party in
the Equipment and to insert serial numbers in Summary Equipment Schedules as
appropriate. Lessee will, at its expense, keep the Equipment free and clear from
any liens or encumbrances of any kind (except any caused by Lessor) and will
indemnify and hold the Owner, Lessor, any Assignee and Secured Party harmless
from and against any loss caused by Lessee's failure to do so, except where such
is caused by Lessor.
5.2 Relocation or Sublease. Upon prior written notice, Lessee may relocate
Equipment to any location within the continental United States provided (i) the
Equipment will not be used by an entity exempt from federal income tax, and (ii)
all additional costs (including any administrative fees, additional taxes and
insurance coverage) are reconciled and promptly paid by Lessee.
Lessee may sublease the Equipment upon the reasonable consent of the Lessor and
the Secured Party. Such consent to sublease will be granted if: (i) Lessee
meets the relocation requirements set out above, (ii) the sublease is expressly
subject and subordinate to the terms of the Schedule, (iii) Lessee assigns its
rights in the sublease to Lessor and the Secured Party as additional collateral
and security, (iv) Lessee's obligation to maintain and insure the Equipment is
not altered, (v) all financing statements required to continue the Secured
Party's prior perfected security interest are filed, and (vi) Lessee executes
sublease documents acceptable to Lessor.
No relocation or sublease will relieve Lessee from any of its obligations under
this Master Lease and the relevant Schedule.
5.3 Assignment by Lessor. The terms and conditions of each Schedule have
been fixed by Lessor in order to permit Lessor to sell and/or assign or transfer
its interest or grant a security in each Schedule and/or the Equipment to a
Secured Party or Assignee. In that event, the term Lessor will mean the Assignee
and any Secured Party. However, any assignment, sale, or other transfer by
Lessor will not relieve Lessor of its obligations to Lessee and will not
materially change Lessee's duties or materially increase the burdens or risks
imposed on Lessee. The Lessee consents to and will acknowledge such assignments
in a written notice given to Lessee. Lessee also agrees that:
(a) The Secured Party will be entitled to exercise all of Lessor's
rights, but will not be obligated to perform any of the obligations of
Lessor. The Secured Party will not disturb Lessee's quiet and peaceful
possession and unrestricted use of the Equipment so long as Lessee is not
in default and the Secured Party continues to receive all Rent payable
under the Schedule; and
-2-
<PAGE>
(b) Lessee will pay all Rent and all other amounts payable to the
Secured Party, despite any defense or claim which it has against Lessor.
Lessee reserves its right to have recourse directly against Lessor for
any defense or claim;
(c) Subject to and without impairment of Lessee's leasehold rights in
the Equipment, Lessee holds the Equipment for the Secured Party to the
extent of the Secured Party's rights in that Equipment.
6. Net Lease, Taxes and Fees.
6.1 Net Lease. Each Summary Equipment Schedule constitutes a net lease.
Lessee's obligation to pay Rent and all other amounts due hereunder is absolute
and unconditional and is not subject to any abatement, reduction, set-off,
defense, counterclaim, interruption, deferment or recoupment for any reason
whatsoever.
6.2 Taxes and Fees. Lessee will pay when due or reimburse Lessor for all
taxes, fees or any other charges (together with any related interest or
penalties not arising from the negligence of Lessor) accrued for or arising
during the term of each Summary Equipment Schedule against Lessor, Lessee or the
Equipment by any governmental authority (except only Federal, state, local and
franchise taxes on the capital or the net income of Lessor). Lessor will file
all personal property tax returns for the Equipment and pay all such property
taxes due. Lessee will reimburse Lessor for property taxes within thirty (30)
days of receipt of an invoice.
7. Care, Use and Maintenance; Inspection by Lessor.
7.1 Care, Use and Maintenance. Lessee will maintain the Equipment in good
operating order and appearance, protect the Equipment from deterioration, other
than normal wear and tear, and will not use the Equipment for any purpose other
than that for which it was designed. If commercially available and considered
common business practice for each item of Equipment, Lessee will maintain in
force a standard maintenance contract with the manufacturer of the Equipment, or
another party acceptable to Lessor, and will provide Lessor with a complete copy
of that contract. If Lessee has the Equipment maintained by a party other than
the manufacturer or self maintains, Lessee agrees to pay any costs necessary for
the manufacturer to bring the Equipment to then current release, revision and
engineering change levels, and to re-certify the Equipment as eligible for
manufacturer's maintenance at the expiration of the lease term, provided re-
certification is available and is required by Lessor. The lease term will
continue upon the same terms and conditions until recertification has been
obtained.
7.2 Inspection by Lessor. Upon reasonable advance notice, Lessee, during
reasonable business hours and subject to Lessee's security requirements, will
make the Equipment and its related log and maintenance records available to
Lessor for inspection.
8. Representations and Warranties of Lessee. Lessee hereby represents,
warrants and covenants that with respect to the Master Lease and each Schedule
executed hereunder:
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<PAGE>
(a) The Lessee is a corporation duly organized and validly existing in
good standing under the laws of the jurisdiction of its incorporation, is
duly qualified to do business in each jurisdiction (including the
jurisdiction where the Equipment is, or is to be, located ) where its
ownership or lease of property or the conduct of its business requires
such qualification, except for where such lack of qualification would not
have a material adverse effect on the Company's business; and has full
corporate power and authority to hold property under the Master Lease and
each Schedule and to enter into and perform its obligations under the
Master Lease and each Schedule.
(b) The execution and delivery by the Lessee of the Master Lease and
each Schedule and its performance thereunder have been duly authorized by
all necessary corporate action on the part of the Lessee, and the Master
Lease and each Schedule are not inconsistent with the Lessee's Articles
of Incorporation or Bylaws, do not contravene any law or governmental
rule, regulation or order applicable to it, do not and will not
contravene any provision of, or constitute a default under, any
indenture, mortgage, contract or other instrument to which it is a party
or by which it is bound, and the Master Lease and each Schedule
constitute legal, valid and binding agreements of the Lessee, enforceable
in accordance with their terms, subject to the effect of applicable
bankruptcy and other similar laws affecting the rights of creditors
generally and rules of law concerning equitable remedies.
(c) There are no actions, suits, proceedings or patent claims pending
or, to the knowledge of the Lessee, threatened against or affecting the
Lessee in any court or before any governmental commission, board or
authority which, if adversely determined, will have a material adverse
effect on the ability of the Lessee to perform its obligations under the
Master Lease and each Schedule.
(d) The Equipment is personal property and when subjected to use by the
Lessee will not be or become fixtures under applicable law.
(e) The Lessee has no material liabilities or obligations, absolute or
contingent (individually or in the aggregate), except the liabilities and
obligations of the Lessee as set forth in the Financial Statements and
liabilities and obligations which have occurred in the ordinary course of
business, and which have not been, in any case or in the aggregate,
materially adverse to Lessee's ongoing business.
(f) To the best of the Lessee's knowledge, the Lessee owns, possesses,
has access to, or can become licensed on reasonable terms under all
patents, patent applications, trademarks, trade names, inventions,
franchises, licenses, permits, computer software and copyrights necessary
for the operations of its business as now conducted, with no known
infringement of, or conflict with , the rights of others.
(g) All material contracts, agreements and instruments to which the
Lessee is a party are in full force and effect in all material respects,
and are
-4-
<PAGE>
valid, binding and enforceable by the Lessee in accordance with their
respective terms, subject to the effect of applicable bankruptcy and
other similar laws affecting the rights of creditors generally, and rules
of law concerning equitable remedies.
9. Delivery and Return of Equipment.
Lessee hereby assumes the full expense of transportation and in-transit
insurance to Lessee's premises and installation thereat of the Equipment. Upon
termination (by expiration or otherwise) of each Summary Equipment Schedule,
Lessee shall, pursuant to Lessor's instructions and at Lessee's full expense
(including, without limitation, expenses of transportation and in-transit
insurance), return the Equipment to Lessor in the same operating order, repair,
condition and appearance as when received, less normal depreciation and wear and
tear. Lessee shall return the Equipment to Lessor at 6111 North River Road,
Rosemont, Illinois 60018 or at such other address within the continental United
States as directed by Lessor, provided, however, that Lessee's expense shall be
limited to the cost of returning the Equipment to Lessor's address as set forth
herein. During the period subsequent to receipt of a notice under Section 2,
Lessor may demonstrate the Equipment's operation in place and Lessee will supply
any of its personnel as may reasonably be required to assist in the
demonstrations.
10. Labeling.
Upon request, Lessee will mark the Equipment indicating Lessor's interest with
labels provided by Lessor. Lessor will keep all Equipment free from any other
marking or labeling which might be interpreted as a claim of ownership.
11. Indemnity.
With regard to bodily injury and property damage liability only, Lessee will
indemnify and hold Lessor, any Assignee and any Secured Party harmless from and
against any and all claims, costs, expenses, damages and liabilities, including
reasonable attorneys' fees, arising out of the ownership (for strict liability
in tort only), selection, possession, leasing, operation, control, use,
maintenance, delivery, return or other disposition of the Equipment during the
term of the Master Lease or until Lessee's obligations under the Master Lease
terminate. However, Lessee is not responsible to a party indemnified hereunder
for any claims, costs, expenses, damages and liabilities occasioned by the
negligent acts of such indemnified party. Lessee agrees to carry bodily injury
and property damage liability insurance during the term of the Master Lease in
amounts and against risks customarily insured against by the Lessee on equipment
owned by it. Any amounts received by Lessor under that insurance will be
credited against Lessee's obligations under this Section.
12. Risk of Loss.
Effective upon delivery and until the Equipment is returned, Lessee relieves
Lessor of responsibility for all risks of physical damage to or loss or
destruction of the Equipment. Lessee will carry casualty insurance for each
item of Equipment in an amount not less than the Casualty Value. All policies
for such insurance will name the Lessor and any
-5-
<PAGE>
Secured Party as additional insured and as loss payee, and will provide for at
least thirty (30) days prior written notice to the Lessor of cancellation or
expiration, and will insure Lessor's interests regardless of any breach or
violation by Lessee of any representation, warranty or condition contained in
such policies and will be primary without right of contribution from any
insurance effected by Lessor. Upon the execution of any Schedule, the Lessee
will furnish appropriate evidence of such insurance acceptable to Lessor.
Lessee will promptly repair any damaged item of Equipment unless such Equipment
has suffered a Casualty Loss. Within fifteen (15) days of a Casualty Loss,
Lessee will provide written notice of that loss to Lessor and Lessee will, at
Lessee's option, either (a) replace the item of Equipment with Like Equipment
and marketable title to the Like Equipment will automatically vest in Lessor or
(b) pay the Casualty Value and after that payment and the payment of all other
amounts due and owing with respect to that item of Equipment, Lessee's
obligation to pay further Rent for the item of Equipment will cease.
13. Default, Remedies and Mitigation.
13.1 Default. The occurrence of any one or more of the following Events of
Default constitutes a default under a Summary Equipment Schedule:
(a) Lessee's failure to pay Rent or other amounts payable by Lessee when
due if that failure continues for five (5) business days after written
notice; or
(b) Lessee's failure to perform any other term or condition of the
Schedule or the material inaccuracy of any representation or warranty
made by the Lessee in the Schedule or in any document or certificate
furnished to the Lessor hereunder if that failure or inaccuracy continues
for ten (10) business days after written notice; or
(c) An assignment by Lessee for the benefit of its creditors, the
failure by Lessee to pay its debts when due, the insolvency of Lessee,
the filing by Lessee or the filing against Lessee of any petition under
any bankruptcy or insolvency law or for the appointment of a trustee or
other officer with similar powers, the adjudication of Lessee as
insolvent, the liquidation of Lessee, or the taking of any action for the
purpose of the foregoing; or
(d) The occurrence of an Event of Default under any Schedule, Summary
Equipment Schedule or other agreement between Lessee and Lessor or its
Assignee or Secured Party.
13.2 Remedies. Upon the occurrence of any of the above Events of Default,
Lessor at its option, may:
(a) enforce Lessee's performance of the provisions of the applicable
Schedule by appropriate court action in law or in equity;
(b) recover from Lessee any damages and or expenses, including Default
Costs;
(c) with notice and demand, recover all sums due and accelerate and
recover the present value of the remaining payment stream of all Rent due
under the defaulted Schedule (discounted at the same rate of interest at
which such
-6-
<PAGE>
defaulted Schedule was discounted with a Secured Party plus any
prepayment fees charged to Lessor by the Secured Party or, if there is no
Secured Party, then discounted at 6%) together with all Rent and other
amounts currently due as liquidated damages and not as a penalty;
(d) with notice and process of law and in compliance with Lessee's
security requirements, Lessor may enter on Lessee's premises to remove
and repossess the Equipment without being liable to Lessee for damages
due to the repossession, except those resulting from Lessor's, its
assignees', agents' or representatives' negligence; and
(e) pursue any other remedy permitted by law or equity.
The above remedies, in Lessor's discretion and to the extent permitted by law,
are cumulative and may be exercised successively or concurrently.
13.3 Mitigation. Upon return of the Equipment pursuant to the terms of Section
13.2, Lessor will use its best efforts in accordance with its normal business
procedures (and with out obligation to give any priority to such Equipment) to
mitigate Lessor's damages as described below. EXCEPT AS SET FORTH IN THIS
SECTION, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE
OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY ANY OF
LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. Lessor may sell, lease or otherwise
dispose of all or any part of the Equipment at a public or private sale for case
or credit with the privilege of purchasing the Equipment. The proceeds from any
sale, lease or other disposition of the Equipment are defined as either:
(a) if sold or otherwise disposed of, the cash proceeds less the Fair
Market Value of the Equipment at the expiration of the Initial Term less
the Default Costs; or
(b) if leased, the present value (discounted at three percent (3%) over
the U.S. Treasury Notes of comparable maturity to the term of there
lease) of the rentals for a term not to exceed the Initial Term, less the
Default Costs.
Any proceeds will be applied against liquidated damages and any other sums due
to Lessor from Lessee. However, Lessee is liable to Lessor for, and Lessor may
recover, the amount by which the proceeds are less than the liquidated damages
and other sums due to Lessor from Lessee.
14. Additional Provisions
14.1 Board Attendance. Upon invitation of Lessee, one representative of Lessor
will have the right to attend Lessee's corporate Board of Directors meetings and
Lessee will give Lessor reasonable notice in advance of any special Board of
Directors meeting, which notice will provide an agenda of the subject matter to
be discussed at such board meeting. Lessee will provide Lessor with a certified
copy of the minutes of each Board of Director's meeting within thirty (30) days
following the date of such meeting held during the term of this Master Lease.
-7-
<PAGE>
14.2 Financial Statements. As soon as practicable at the end of each month
(and in any event within thirty (30) days), Lessee will provide to Lessor the
same information which Lessee provides to its Board of Directors, but which will
include not less than a monthly income statement, balance sheet and statement of
cash flows prepared in accordance with generally accepted accounting principles,
consistently applied (the "Financial Statements"). As soon as practicable at the
end of each fiscal year, Lessee will provide to Lessor audited Financial
Statements setting forth in comparative form the corresponding figures for the
fiscal year (and in any event within ninety (90) days), and accompanied by an
audit report and opinion of the independent certified public accountants
selected by Lessee. Lessee will promptly furnish to Lessor any additional
information (including, but not limited to, tax returns, income statements,
balance sheets and names of principal creditors) as Lessor reasonably believes
necessary to evaluate Lessee's continuing ability to meet financial obligations.
After the effective date of the initial registration statement covering a public
offering of Lessee's securities, the term "Financial Statements" will be deemed
to refer to only those statements required by the Securities and Exchange
Commission.
14.3 Obligation to Lease Additional Equipment. Upon notice to Lessee, Lessor
will not be obligated to lease any Equipment which would have a Commencement
Date after said notice if: (I) Lessee is in default under this Master Lease or
any Schedule; (ii) Lessee is in default under any loan agreement, the result of
which would allow the lender or any secured party to demand immediate payment of
any material indebtedness; (iii) there is a material adverse change in Lessee's
credit standing; or (iv) Lessor determines (in reasonable good faith) that
Lessee will be unable to perform its obligations under this Master Lease or any
Schedule.
14.4 Merger and Sale Provisions. Lessee will notify Lessor of any proposed
Merger at least sixty (60) days prior to the closing date. Lessor may, in its
discretion, either (i) consent to the assignment of the Master Lease and all
relevant Schedules to the successor entity, or (ii) terminate the Master Lease
and all relevant Schedules. If Lessor elects to consent to the assignment,
Lessee and its successor will sign the assignment documentation provided by
Lessor. If Lessor elects to terminate the Master Lease and all relevant
Schedules, the Lessee will pay Lessor all amounts then due and owing and a
termination fee equal to the present value (discounted at 6%) of the remaining
Rent for the balance of the initial Term(s) of all Schedules, and will return
the Equipment in accordance with Section 9. Lessor hereby consents to any Merger
in which the acquiring entity has a Moody's Bond Rating of BA3 or better or a
commercially acceptable equivalent measure of creditworthiness as reasonably
determined by Lessor.
14.5 Entire Agreement. This Master Lease and associated Schedules and Summary
Equipment Schedules supersede all other oral or written agreements or
understandings between the parties concerning the Equipment including, for
example, purchase orders. ANY AMENDMENT OF THIS MASTER LEASE OR A SCHEDULE,
-8-
<PAGE>
MAY ONLY BE ACCOMPLISHED BY A WRITING SIGNED BY THE PARTY AGAINST WHOM THE
AMENDMENT IS SOUGHT TO BE ENFORCED.
14.6 No Waiver. No action taken by Lessor or Lessee will be deemed to
constitute a waiver of compliance with any representation, warranty or covenant
contained in this Master Lease or a Schedule. The waiver by Lessor or Lessee of
a breach of any provision of this Master Lease or a Schedule will not operate or
be construed as a waiver of any subsequent breach.
14.7 Binding Nature. Each Schedule is binding upon, and inures to the benefit
of Lessor and its assigns. LESSEE MAY NOT ASSIGN ITS RIGHTS OR OBLIGATIONS.
14.8 Survival of Obligations. All agreements, obligations including, but not
limited to those arising under Section 6.2, representations and warranties
contained in this Master Lease, any Schedule, Summary Equipment Schedule or in
any document delivered in connection with those agreements and for the benefit
of Lessor and any Assignee or Secured Party and survive the execution, delivery,
expiration or termination of this Master Lease.
14.9 Notices. Any notice, request or other communication to either party by
the other will be given in writing and deemed received upon the earlier of (1)
actual receipt or (3) three day after mailing if mailed postage prepaid by
regular or airmail to Lessor (to the attention of "the Comdisco Venture Group")
or Lessee, at the address set out in the Schedule, (3) one day after it is sent
by courier or (4) on the same day that is sent via facsimile transmission,
provided that the original is sent by personal delivery or mail by the sending
party.
14.10 Applicable Law. THIS MASTER LEASE HAS BEEN, AND EACH SCHEDULE WILL HAVE
BEEN MADE, EXECUTED AND DELIVERED IN THE STATE OF ILLINOIS AND WILL BE GOVERNED
AND CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE OF
ILLINOIS WITHOUT GIVING EFFECT TO CONFLICT OF LAW PROVISIONS. NO RIGHTS OR
REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE
CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR A SCHEDULE.
14.11 Severability. If any one or more of the provisions of this Master Lease
or any Schedule is for any reason held invalid, illegal or unenforceable, the
remaining provisions of this Master Lease and any such Schedule will be
unimpaired, and the invalid, illegal or unenforceable provision replaced by a
mutually acceptable valid, legal and enforceable provision that is closest to
the original intention of the parties.
14.12 Counterparts This Master Lease and any Schedule may be executed in any
number of counterparts, each of which will be deemed an original, but all such
counterparts together constitute one and the same instrument. If Lessor grants a
security interest in all or any part of a Schedule, the Equipment or sums
payable thereunder, only that
-9-
<PAGE>
counterpart Schedule marked "Secured Party's Original" can transfer Lessor's
rights and all other counterparts will be marked "Duplicate".
14.13 Licensed Products. Lessee will obtain no title to Licensed Products which
will at all times remain the property of the owner of the Licensed Products. A
license from the owner may be required and it is Lessee's responsibility to
obtain any required license before the use of the Licensed Products. Lessee
agrees to treat the Licensed Products as confidential information of the owner,
to observe all copyright restrictions, and not to reproduce or sell the Licensed
Products.
14.14 Secretary's Certificate. Lessee will, upon execution of this Master
Lease, provide Lessor with a secretary's certificate on incumbency and
authority. Upon the execution of each Schedule with a purchase price in excess
of $1,000,000, Lessee will provide Lessor with an opinion from Lessee's counsel
in a form acceptable to Lessor regarding the representations and warranties in
Section 8.
14.15 Electronic Communications. Each of the parties may communicate with the
other by electronic means under mutually agreeable terms.
14.16 Landlord/Mortgagee Waiver. Lessee agrees to provide Lessor with a
Landlord/Mortgagee Waiver with respect to the Equipment. Such waiver shall be in
a form satisfactory to Lessor.
14.17 Equipment Procurement Charges/Progress Payments. Lessee hereby agrees
that Lessor shall not, by virtue of its entering into this Master Lease, be
required to remit any payments to any manufacturer or other third party until
Lessee accepts the Equipment subject to this Master Lease.
14.18 Definitions.
Advance--means the amount due to Lessor by Lessee upon Lessee's execution of
- -------
each Schedule.
Assignee--means an entity to whom Lessor has sold or assigned its rights as
- --------
owner and Lessor of Equipment.
Casualty Loss--means the irreparable loss or destruction of Equipment.
- -------------
Casualty Value--means the greater of the aggregate Rent remaining to be paid for
- --------------
the balance of the lease term or the Fair Market Value of the Equipment
immediately prior to the Casualty Loss. However, if a Casualty Value Table is
attached to the relevant Schedule its terms will control.
Commencement Date--is defined in each Schedule.
- -----------------
Default Costs--means reasonable attorney's fees and remarketing costs resulting
- -------------
from a Lessee default or Lessor's enforcement of its remedies.
Delivery Date--means date of delivery of Inventory Equipment to Lessee's
- -------------
address.
Equipment--means the property described on a Summary Equipment Schedule and any
- ---------
replacement for that property required or permitted by this Master Lease or a
Schedule.
-10-
<PAGE>
Event of Default--means the events described in Subsection 13.1.
- ----------------
Fair Market Value--means the aggregate amount which would be obtainable in an
- -----------------
arm's length transaction between an informed and willing buyer/user and an
informed and willing seller under no compulsion to sell.
Initial Term--means the period of time beginning on the first day of the first
- ------------
full Rent Interval following the Commencement Date for all items of Equipment
and continuing for the number of Rent Intervals indicated on a Schedule.
Interim Rent--means the pro-rata portion of Rent due for the period from the
- ------------
Commencement Date through but not including the first day of the first full rent
Interval included in the Initial Term.
Late Charge--means the lesser of five percent (5%) of the payment due or the
- -----------
maximum amount permitted by the law of the state where the Equipment is located.
Licensed Products--means any software or other licensed products attached to the
- -----------------
Equipment.
Like Equipment--means replacement Equipment which is lien free and of the same
- --------------
model, type, configuration and manufacture as Equipment.
Merger--means any consolidation or merger of the Lessee with or into any other
- ------
corporation or entity, any sale or conveyance of all or substantially all of the
assets or stock of the Lessee by or to any other person or entity in which
Lessee is not the surviving entity.
Notice Period--means not less than ninety (90) days nor more than twelve (12)
- -------------
months prior to the expiration of the lease term.
Owner--means the owner of Equipment.
- -----
Rent--means the rent Lessee will pay for each item of Equipment expressed in a
- ----
Summary Equipment Schedule either as a specific amount or an amount equal to the
amount which lessor pays for an item of equipment multiplied by a lease rate
factor plus all other amounts due to Lessor under this Master Lease or a
Schedule.
Rent Interval--means a full calendar month or quarter as indicated on a
- -------------
Schedule.
Schedule--means either an Equipment Schedule or a Licensed Products Schedule
- --------
which incorporates all of the terms and conditions of this Master Lease.
Secured Party--means an entity whom Lessor has granted a security interest for
- -------------
the purpose of securing a loan.
Summary Equipment Schedule--means a certificate provided by Lessor summarizing
- --------------------------
all of the Equipment for which Lessor has received Lessee approved vendor
invoices, purchase documents and/or evidence of delivery during a calendar
quarter which will incorporate all of the terms and conditions of the related
Schedule and this Master Lease and will constitute a separate lease for the
equipment leased thereunder.
-11-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Master Lease on or as
of the day and year first above written.
DSL.NET, INC., COMDISCO, INC.,
as Lessee as Lessor
By: /s/ David F. Struwas By: /s/ James P. Labe
--------------------- ------------------
Title: President & CEO Title: President
----------------- -----------
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<PAGE>
EXHIBIT 10.04
ADDENDUM TO THE
MASTER LEASE AGREEMENT DATED AS OF March 4, 1999
BETWEEN DSL.NET, INC., AS LESSEE
AND COMDISCO, INC., AS LESSOR
The undersigned hereby agree that the terms and conditions of the above-
referenced Master Lease are hereby modified and amended as follows:
1) Section 3., "Rent and Payment"
----------------
Line 2, after the words "when invoiced" insert, "or within five (5) days
thereafter'
In the third sentence, line 3, delete the word "when" and replace it with
"within 5 days after it is".
2) Section 4.2., "Warranty and Disclaimer of Warranties"
-------------------------------------
In the first sentence, line 2, after the word "Lessor" insert the following
"(and all assignees and secured parties)".
After the end of the second sentence, insert the following "To the extent
that such assignment is not permitted by the manufacturer, upon the request
of Lessee, Lessor will use its best efforts to enforce such warrantees for
the benefit of Lessee.
3) Section 5.1., "Title"
-----
In the third sentence, line 8, after the words "caused by Lessor" insert
the words "or other Owner".
At the end of the paragraph, insert "or other Owner".
4) Section 5.3., "Assignment by Lessor"
--------------------
At the beginning of paragraphs (a) and (b), insert the words "After such an
assignment to a Secured Party," and at the beginning of paragraph (a)
delete "The" and replace it with "the".
Paragraph (a), line 2, after the word "Lessor" delete "." and insert "and"
and delete "The" and replace with "the".
5) Section 6.2., "Taxes and Fees"
--------------
In the first sentence, line 2, after the word "charges", insert the
following "relating to the Equipment".
<PAGE>
6) Section 7.1., "Care, Use and Maintenance"
-------------------------
Line 10 and Line 11 after the word "Equipment" insert, "(except for
Licensed Products)"
7) Section 11., "Indemnity"
---------
Line 6, delete the words "this Master Lease" and replace with "the
applicable Summary Equipment Schedule" and after the word "under" insert
"such Summary Equipment Schedule or".
8) Section 12., "Risk of Loss"
------------
Paragraph 2, line 5, insert the following "(less any amounts paid to Lessor
under an insurance policy obtained pursuant to this Section 12)" after the
words "Casualty Value"
9) Section 13.1., "Default"
-------
Paragraph (c), line 2, after the word "debts", insert the following "(other
than debts which are not, in the aggregate, material to Lessee and debts
which Lessee is contesting in good faith)".
10) Section 14.1., "Board Attendance"
----------------
Delete this section in its entirety.
11) Section 14.2 "Financial Statements"
--------------------
In the first sentence, change the words "month" and "monthly" to "quarter"
and "quarterly".
Line 8, after the words "fiscal year" delete "(and in any event within
ninety (90 days)," and insert this language to Line 6 after the words
"fiscal year", except leave out the ",".
12) Section 14.5., "Entire Agreement"
----------------
Line 1, insert "addendum," after the word "associated".
13) Section 14.7., "Binding Nature"
--------------
At the end of the second sentence, insert ",except as provided herein".
14) Section 14.9. "Notices"
-------
-2-
<PAGE>
In line 6, insert "overnight or same day" after the words "sent by".
15) Section 14.10., "Applicable Law"
--------------
In line 3 and 4, delete "Illinois" and replace with "Connecticut".
16) Section 14.18., "Definitions
-----------
In the definition of "Interim Rent", delete "the pro-rata portion" and
--------------
replace with "interest only portion of".
In the definition of "Summary Equipment Schedule", in line 4, delete
----------------------------
"quarter" and replace with "period as stated on the Summary Equipment
Schedule".
DSL.NET, INC. COMDISCO, INC.
as LESSEE as LESSOR
By: /s/ David F. Struwas By: /s/ James P. Labe
---------------------- ------------------
Title: President and CEO Title: President
------------------- -----------
Date: Date:
-------------------- ----------------
-3-
<PAGE>
EXHIBIT 10.07
LEASE
-----
THIS AGREEMENT, made as of the ___ day of _________, 1999, between LONG
WHARF DRIVE, LLC, a Connecticut limited liability company with an office at 4
Hamilton Street, New Haven, Connecticut, 06511 ("Landlord") and dsl.net,
incorporated, a Delaware corporation with an office at 50 Washington Street,
Norwalk, Connecticut 06854 ("Tenant").
WITNESSETH:
1. LEASED PREMISES:
A. Premises and Building
---------------------
Landlord does hereby lease to Tenant and Tenant does hereby rent from Landlord
those certain premises which are deemed to contain approximately 12,078 rentable
square feet of space located on the fifth (5th) floor (hereinafter called the
"Premises"), as designated on the plan attached hereto as EXHIBIT A and made a
---------
part hereof, said Premises being situated in the Building known as 545 Long
Wharf Drive, New Haven, Connecticut 06511 (hereinafter called the "Building").
The legal description of the land on which the Building is situated (the "Land")
is set forth on EXHIBIT A-1 attached hereto and made a part hereof The Land, the
-----------
Building and any other improvements located on the Land are collectively
referred to herein as the "Property." Landlord hereby reserves and Tenant shall
have no right in and to (a) the use of the exterior faces of all perimeter
walls; (b) the use of the roof; and (c) the use of the land, improvements and
space below the bottom of the lower floor slabs and above the interior surface
of the ceiling of the Premises. Said letting and renting is upon and subject to
the terms, covenants, and conditions set forth herein, and Tenant covenants as a
material part of the consideration for this Lease to keep and perform each and
all of the said terms, covenants, and conditions by it to be kept and performed.
This Lease is made upon the condition of such performance.
EXHIBIT A-2 annexed hereto and made apart hereof sets forth the general layout
- -----------
of the Property and shall not be deemed to be a warranty, representation or
agreement on the part of Landlord that the Building or other improvements on the
Land will remain as indicated on said plan.
If the Commencement Date has not occurred within two (2) years of the date of
this Lease, this Lease shall automatically terminate without further action by
either Landlord or Tenant.
B. Parking
-------
Throughout the Term, Landlord shall provide 2.67 unreserved parking spaces in
the parking lot located on the Property for every 1,000 rentable square feet of
the Premises. Landlord may increase, reduce or change (in any manner
whatsoever) the dimensions or locations of the parking facility as Landlord
shall deem proper, including the increasing or decreasing the number of parking
spaces, provided however, that in the event Landlord reduces the number of
parking
<PAGE>
spaces, other than in accordance with Paragraph 18 hereof, Tenant shall continue
to receive the number of spaces provided , pursuant to the ratio set forth in
the immediately preceding sentence. Said parking spaces may not be assigned,
transferred or in any way encumbered except in conjunction with a Landlord
approved be assignment or subletting pursuant to Section 13 hereof. The parking
spaces are for the sole use and occupancy of Tenant, its employees, agents and
business invitees. Landlord shall have the right, from time to time, to change
the area, level and arrangement of the parking areas and to change parking
access routes. Tenant agrees that no such change, nor any temporary
unavailability of any of said parking spaces shall constitute an actual or
constructive eviction, in whole or in part, or entitle Tenant to any abatement
or diminution of "Rent," as defined herein, or relieve Tenant from any of its
obligations under this Lease.
2. TERM, POSSESSION AND USE:
A. Term
----
This lease is for a term of six (6) years ("Term") commencing on the
"Commencement Date", as hereinafter defined and expiring on the last day of the
seventy-second (72nd) full calendar month following the Commencement Date (the
"Expiration Date"). The Commencement Date notwithstanding, this Lease and all
of the terms and conditions hereof shall be binding upon and shall inure to the
benefit of the parties hereto as of the date Tenant takes occupancy of the
Premises and/or that certain temporary space, consisting of approximately 2,500
rentable square feet, located on the fifth (5th) floor of the Building, as more
particularly shown on EXHIBIT A-3 annexed hereto and made a part hereof (the
-----------
"Temporary Space") for Tenant's temporary use for general office purposes. The
"Commencement Date" of this Lease shall be the later to occur of (A) the date
the Premises is "Substantially Completed", as defined below, and (B) March 1,
1999. Landlord shall, in accordance with the foregoing, fix the Commencement
Date and shall notify Tenant of the date so fixed. When the Commencement Date
has been so determined, at Landlord's request, the parties hereto shall, within
fifteen (15) days after such request, execute a written agreement in the form
annexed hereto as EXHIBIT C which will delineate the following: the Commencement
---------
Date and the Expiration Date. Tenant's failure to take occupancy of the
Premises by the Commencement Date shall constitute an event of default under the
Lease.
B. The Premises shall be deemed "Substantially Completed" when Landlord has
completed the construction work which is shown on the plans (the "Construction
Plans") which are narratively described by title block in EXHIBIT B annexed
---------
hereto and made a part hereof (the "Construction Work"), as determined by
Landlord's project architect or construction manager, despite the fact that
minor or insubstantial details of construction, decoration or mechanical
adjustment remain to be performed provided said minor items can be fully
performed within sixty (60) days without material interference with Tenant's use
of the Premises.
C. Use of Premises
---------------
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Tenant covenants and agrees to occupy the Temporary Space and the Premises
exclusively for general office purposes, consistent with the first class nature
of the Building. Tenant shall use the Premises in a careful, safe, and proper
manner and agrees to pay for any damage to the Building or Premises caused by
misuse or abuse by Tenant, its agents or employees, or by any other person
entering upon the Building and/or the Premises under the express or implied
invitation of Tenant. Such payment shall be made within thirty (30) days of
such damage. Tenant shall not conduct any activity or perform any act
prohibited by the laws of the United States of America or the State of
Connecticut or the ordinances of the City of New Haven and shall not commit
waste nor suffer waste to be committed, nor permit any nuisance on or in the
Premises. Tenant understands that all "Common Areas" as defined herein, of the
Building are to be shared in common with all other tenants and that they shall
be subject to the exclusive control and management of the Landlord.
Tenant shall have the right to the nonexclusive use, in common with others, of
those driveways, walks, and other facilities on the Property as may be provided,
from time to time, by Landlord for use of the tenants of the Building
(hereinafter called "Common Areas"). Landlord may at any time and from time to
time, in its sole discretion increase, decrease or change in any manner the
Common Areas. Landlord may at any time close temporarily the Common Areas to
make repairs or changes or to effect construction, repairs or changes within the
Building. No such action of Landlord shall be deemed to be an eviction of
Tenant, or breach of this Lease, nor give rise to any claim for damages or for a
reduction of any Base Rent, "Tenants Proportionate Share of Operating and Tax
Expenses," as defined herein, or "Additional Rent," as defined herein (sometimes
collectively referred to herein as "Rent"); provided, however, no action shall
be taken by Landlord which would eliminate or substantially reduce, access to
the Premises. The Common Areas shall not be decreased, changed or closed in
such a manner or for such a time so as to adversely affect the first class
reputation and nature of the Building.
D. Option to Extent Term
---------------------
So long as (i) Tenant shall not be in default hereunder, (ii) the Lease has not
been assigned or subleased in any manner, and (iii) the Lease shall be in full
force and effect, both at the time of giving notice as required in this Section
2.D and at the time of the commencement of any Extension Period, Tenant shall
have the right, at its election, to extend the Term for two (2) additional five
(5) year period(s) (respectively, the "Extension Period") commencing upon the
expiration of the Terms or the first Extension Period, as the case may be,
provided that Tenant shall give Landlord notice of the exercise of its election
at least nine (9) months prior to the expiration of the Term or the first
Extension Period, as the case may be. Time is of the essence with respect to
the exercise by Tenant of the option(s) to extend. Prior to the exercise by
Tenant of the election to extend the Term, the expression "Term" or any
equivalent expression shall mean the Term then in effect; after the exercise by
Tenant of any such election, the expression "Term" or any equivalent expression
shall mean the Term as it may have been then extended. All terms, covenants,
agreements and conditions in this Lease contained shall apply to the Extension
Period to witch the Term shall be extended as aforesaid, including, without
limitation, the obligation to pay Additional Rent in accordance with Section 3.
below, excepting (i) such
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provisions of this Lease which by their terms are only applicable to the initial
seventy-two (72) month Term or the then existing Extension Period, including any
further right extension and, (ii) Base Rent for each Extension Period shall be
the fair market rental value for the Premises at the time, as determined by
Landlord in its commercially reasonable discretion.
E. Occupancy of Temporary Space
----------------------------
As of February 1, 1999, Tenant shall be permitted to use and occupy the
Temporary Space. Tenant acknowledges that it has inspected the Temporary Space
and accepts the same in its existing "AS IS" condition and Landlord shall have
no obligation to improve, equip or decorate the Temporary Space in any manner
whatsoever. Tenant shall make no improvements to the Temporary Space of any
nature without, in each instance, obtaining Landlord's prior written consent
which Landlord may withhold in its sole discretion. Tenant may occupy the
Temporary Space until the Commencement Date. Thereupon, Tenant shall vacate the
Temporary Space and leave the same in broom clean condition and in accordance
with Section 34(D) of this Lease.
Commencing February 1, 1999 and continuing on the first day of each calendar
month through and including the Commencement Date (the "Temporary Space Term"),
in addition to and not in lieu of Tenant's other obligations under this Lease,
Tenant shall pay to Landlord, in the manner provided in Section 3 below, for its
use and occupancy of the Temporary Space, Base Rent in the amount of Two
Thousand Nine Hundred Sixteen and 67/100 Dollars ($2,916.67). Tenant shall also
be responsible during the Temporary Space Term for payment of its Proportionate
Share of Operating and Tax Expenses as defined below, except that Tenant's
proportionate share of such costs for Tenant's use and occupancy of the
Temporary Space, shall be 0.94%. If Tenant fails to vacate the Temporary Space
by the Commencement Date, the same shall constitute an event of default under
this Lease and, in addition to the other rights afforded Landlord hereunder, the
provisions of Section 26 hereof shall apply to such holdover.
3. RENT
Tenant shall pay to Landlord as Rent, at Landlord's office, or as directed from
time to time by Landlord's notice, during each year of the Term hereof, without
prior notice, demand, recoupment or setoff whatsoever, Base Rent, Tenant's
Proportionate Share of Operating and Tax Expenses and Additional Rent as
provided in this Article 3. As used in this Lease, the following terms shall
have the following respective meanings:
Base Rent: The Base Rent payable during the initial Term shall be One Hundred
Sixty-Nine Thousand Ninety-Two and 00/100 Dollars ($169,092.00) per annum (based
on a per rentable square foot per annum rate of $14.00), which shall be payable,
in advance, in equal monthly installments of Fourteen Thousand Ninety-One and
00/100 Dollars ($14,091.00).
Additional Rent: Any required payments to Landlord from Tenant, including but
not limited to Tenant's proportionate Share of Operating and Tax Expenses.
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Electricity Charges: Landlord's payments to the electrical utility provider for
electricity usage charges and electricity demand charges in the Building.
Lease Year: "Lease Year" shall mean the period from the Commencement Date to
the expiration of the first full twelve (12) calendar month period of the Term
of this Lease and each succeeding twelve (12) month period for the Term of this
Lease and any Extended Term. If the Commencement Date is not the first day of a
calendar month, the first Lease Year shall be twelve (12) months plus the
remaining portion of the partial month of the month containing the Commencement
Date. Periods of less than a full Lease Year shall be equitably pro-rated.
Operating Year: Each calendar year in which any part of the Term of the Lease
shall fall.
Operating and Tax Expenses: The aggregate of the Operating Expenses and Taxes.
Operating Expenses: The aggregate costs or expenses reasonably incurred by
Landlord with respect to the operation, cleaning, repair, maintenance and
management of the Property and with respect to the Electricity Charges, as more
particularly enumerated hereinafter in this Section 3. For each Operating Year
during the Term, Operating Expenses shall be adjusted as necessary to reflect
the Operating Expenses which would have been incurred had the leaseable areas of
the Building been at least 95% occupied during the entire Operating Year.
Taxes: The real estate taxes and other special assessments assessed with
respect to the Property and/or any other tax, if the same replaces the current
method of assessment of real estate taxes in whole or in part or is additionally
imposed on the Property or upon Landlord relating to the Property and is
generally applicable to owners of singular properties. Notwithstanding the
foregoing, if the Tenant makes or causes improvements in the Premises, whether
installed and/or paid for by Landlord or Tenant and whether or not affixed to
the real property so as to become a part thereof, which improvements are
assessed for real property tax purposes at a valuation higher than the valuation
at which tenant improvements conforming to the Building Standard are assessed,
then the real property taxes and assessments levied against Landlord or the
Building by reason of such excess assessed valuation shall be deemed to be taxes
levied against personal property of Tenant and shall be solely the
responsibility of Tenant. If the records of the tax assessor are available and
sufficiently detailed to serve as a basis for determining whether said tenant
improvements are assessed at a higher valuation than Building Standard, such
records shall be binding on both Landlord and Tenant; otherwise the actual cost
of the construction shall be the basis for such determination.
Tenant's Proportionate Share: The quotient derived by dividing the sum of the
rentable square feet in the Premises by the total number of rentable square feet
in the Building, which quotient as of execution date of this agreement is 4.52%.
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Tenant's Proportionate Share of Operating and Tax Expenses: Tenant's
Proportionate Share of the Operating and Tax Expenses.
A. Payment
-------
Tenant shall pay the Base Rent to Landlord, or as otherwise directed by Landlord
with appropriate notice, commencing on the Commencement Date, without offset,
abatement, deduction or demand. Such Base Rent shall be payable in equal
monthly installments, in advance, on the first day of each and every calendar
month during the Term of this Lease, at Landlord's Notice Address, or at such
other place as Landlord shall from time to time designate by notice. Base Rent
shall be paid without benefit of monthly invoice. The first sentence of this
Section A. notwithstanding, provided Tenant is not in default under any of the
terms and conditions of this Lease, the Base Rent shall be abated for the period
commencing on the Commencement Date and ending on that day which is ninety (90)
calendar days after the Commencement Date (the "Abatement Period"). During the
Abatement Period, all of the other obligations, liabilities, terms and
conditions contained herein shall apply and remain in full force and effect.
Base Rent for any partial month shall be pro-rated on a daily basis, and if Base
Rent commences on a day other than the first day of a calendar month, the first
payment which Tenant shall make to Landlord shall be payable on the date Base
Rent commences and shall be equal to a proportionate part of the monthly
installment of Base Rent for the partial month in which Base Rent commences.
Commencing on the Commencement Date and continuing thereafter, during the Term,
Tenant shall pay to Landlord (without offset, abatement, deduction or demand)
Tenant's Proportionate Share of all Operating and Tax Expenses, said payments to
be made monthly on the first day of each and every calendar month during the
Term and otherwise in the manner herein provided for the payment of Base Rent,
which amount shall be apportioned for any Operating Year in which the
Commencement Date falls or the Term of this Lease expires or otherwise
terminates. Landlord shall be reasonably consistent, year to year, in its
accounting of expenses.
Except as provided above, commencing on the Commencement Date, Tenant shall pay
to Landlord (without offset, abatement deduction or demand) Tenant's
Proportionate Share of all Operating and Tax Expenses. The first sentence of
this subparagraph notwithstanding, provided Tenant is not in default under any
of the terms and conditions of this Lease, Tenant's Proportionate Share of
Operating and Tax Expenses shall be abated for the Abatement Period. Estimated
payments by Tenant on account of Tenant's Proportionate Share of Operating and
Tax Expenses shall be made monthly on the first day of each and every calendar
month during the Term of this Lease and otherwise in the manner herein provided
for the payment of Base Rent. The monthly amount so to be paid to Landlord
shall be sufficient to provide Landlord by the end of each Operating Year a sum
equal to Tenant's required payments, as reasonably estimated by Landlord from
time to time during each Operating Year, on account of Tenant's Proportionate
Share of Operating and Tax Expenses for such Operating Year. Within one hundred
twenty
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<PAGE>
(120) days after the end of each Operating Year, Landlord shall submit to
Tenant a reasonably detailed accounting of Tenant's Proportionate Share of
Operating and Tax Expenses for such Operating Year in accordance with generally
accepted accounting practices. If estimated payments theretofore made for such
Operating Year by Tenant exceed Tenant's required payment on account thereof for
such Operating Year, according to such shall within thirty (30) days thereafter
pay to Tenant the amount of the overpayment; and, if the required payments on
account thereof for such Operating Year are greater than the estimated payments
(if any) theretofore made on account thereof for such Operating Year, Tenant
shall promptly make payment to Landlord within thirty (30) days after having
received such accounting detail and an invoice from Landlord. Such invoices
shall be conclusive and binding upon Tenant unless within ninety (90) days after
the receipt of such statement Tenant shall notify Landlord that it disputes the
correctness thereof and specifying the particular respects in which the
statement is claimed to be incorrect. Tenant shall continue to pay disputed
amounts until such time as the dispute has been settled. The preceding sentence
notwithstanding, within three (3) years after receipt of Landlord's accounting
of Tenant's Proportionate Share of Operating and Tax Expenses, Tenant shall have
the right, by not less than ten (10) days prior notice to Landlord, to audit
the amount of any item in any of the previous accounting statement, but Tenant
shall continue paying Tenant's Proportionate Share of Operating and Tax
Expenses. Any such audit shall be conducted by an internal auditor of Tenant,
or a nationally recognized public accounting firm, but in either event, no such
person or entity engaged by Tenant to conduct an audit shall be hired or paid on
any contingency fee basis. Any audit conducted by Tenant shall be at Tenant's
sole cost and expense and shall be conducted during Landlord's regular business
hours and at Landlord's principal place of business. Tenant shall deliver a
copy of any such audit to Landlord and if such audit discloses an overpayment of
Operating and Tax Expenses by Tenant, and Landlord verifies same, the Tenant
shall be entitled to a credit in the amount of said overpayment against the next
monthly payment of Base Rent.
B. Operating Expenses
------------------
Operating Expenses shall mean all costs and expenses (whether or not presently
within the contemplation of the parties) paid or incurred, directly or
indirectly, by Landlord in operating, managing, equipping, repairing, replacing,
policing and/or maintaining the Building or Property, or any part thereof, witch
shall include the following costs by way of illustration, but shall not be
limited to: same, wages, hospitalization, medical, surgical, and general welfare
benefits (including group life insurance), and pension payments of agents or
employees of Landlord engaged in the operation or maintenance of the Building
(all of which shall be prorated to the extent any such agent or employee does
not work full time at the Building); payroll charges and/or taxes; workers
compensation insurance; lamps; fluorescent tubes; ballasts; steam; fuel; utility
taxes; . electricity, including the Electricity Charges; water (including sewer
charges and/or rental); casualty, business interruption or rent insurance and
liability insurance; repairs and maintenance, including, but not limited to,
repairs and maintenance to the roof, foundation, exterior and interior walls,
floors and covering of same in common areas and structural elements; building
and cleaning supplies; uniforms and dry cleaning; window cleaning; management
fees not to exceed five percent (5%) of the gross revenues of the Property;
service contracts with
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independent contractors; electricity audit costs; telephone; telegraph,
stationery, advertising; equipment necessary for the maintenance and operation
of the Building; protection and security services; replacements of plate and
window glass; tenant area and common area cleaning and janitorial services;
plant and landscape services; ground maintenance; elevator maintenance and
repair; ice, snow and trash removal; and all other expenses paid in connection
with the operation of the Building. (Operating Expenses shall not include
depreciation on the Building of which the Premises are a part or equipment
therein, loan payments, or real estate broker's commissions Operating Expenses
shall also include, but not be limited to, the capital cost of repairs and/or
replacements, including, but not limited to repairs and replacements of the
roof, foundation, exterior and interior walls, floors and coverings of same in
the Common Areas, structural elements and elements or systems in the Building
which are considered capital items pursuant to generally accepted accounting
principles, or any capital improvements made to the building by Landlord that
reduce Operating Expenses or that are required under any governmental law or
regulation not previously applicable to the Building or not in effect at the
time it was constructed.) Such capital cost shall be amortized over such
reasonable periods as Landlord shall determine consistent with generally
accepted accounting principles. Landlord agrees that all capital costs included
as Operating Expenses shall be net of any insurance proceeds received. Operating
Expenses shall not include the capital costs associated with any expansion of
the Building or the parking area (unless expanded at Tenant's request) nor shall
they include the cost of advertising costs associated with the marketing or
rental of space in the Building.
C. Tenant's Electrical Usage. In addition to the payments required of Tenant
-------------------------
hereunder, Tenant shall be responsible for all costs of electricity furnished
directly by Landlord or the public utility provider to the Premises or any
portion thereof, including, but not limited to, that portion of the Premises to
be used by Tenant as a computer network operations center (the "NOC Area") shown
as the cross-hatched area on EXHIBIT A-4 annexed hereto, and any enlargement or
-----------
relocation thereof, which electricity shall be separately submetered. The costs
initially incurred by Landlord in the purchase and installation of all
submetering equipment for the NOC Area shall be included in "Tenant's Costs" as
defined in Paragraph 5(C)(a) below. Following the completion of the
Construction Work, all costs subsequently incurred by either party in connection
with submetering the NOC Area in the event the NOC Area is enlarged or
relocated, or for submetering any other portion of the Premises, shall be the
sole obligation of Tenant. For those areas of the Premises which are not
separately submetered, the cost to Landlord for furnishing electricity to said
areas shall be deemed Electricity Charges, and the same shall be included in
Operating Expenses.
D. Late Payment
------------
If Rent or other payments due Landlord hereunder are received later than ten
(10) days after the same shall be due or if any payment due to Landlord
hereunder on demand is not received within ten (10) days after demand, a late
fee of five percent (5%) of the amount due or Twenty Five Dollars ($25.00),
whichever is the greater, shall be due and payable by Tenant as Additional Rent.
The parties agree that calculation of the exact costs which Landlord will incur
if Tenant makes late payments would be difficult to determine but would include,
without limitation,
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processing and accounting charges and late charges which may be imposed upon
Landlord by the terms of any mortgage constituting a lien upon the Building. The
parties agree that the late fee provided herein is a fair and reasonable
estimate of the costs the Landlord will incur. If any payment of Base Rent,
Tenant's Proportionate Share of Operating and Tax Expenses, Additional Rent or
any other sums payable by Tenant to Landlord hereunder shall remain unpaid for
ten (10) days after the same shall be due, then in addition to the late fee as
aforesaid interest shall, at Landlord's option, accrue on the unpaid portion
thereof at the following rate and shall be payable by Tenant on demand: at the
lesser of (i) eighteen percent (18%) per annum or (ii) the maximum rate then
permissible under Connecticut law, until paid. This provision, or payment by
Tenant hereunder, or action taken by Landlord hereunder shall not diminish or
abrogate Tenant's duty to pay Rent when due, or Landlord's rights to declare
default for late payment as provided elsewhere in this Lease.
E. Covenant to Pay Rent
--------------------
All Rent payments provided for herein shall be due at the time stipulated and
shall be due and payable in full without abatement, off-set, recoupment or
deduction of any kind. Tenant's covenant to pay Rent shall at all times exist
as an independent covenant.
4. LETTER OF CREDIT:
Tenant has deposited, and shall maintain on deposit with Landlord at all times
during the initial Term of this Lease, one or more unconditional, irrevocable
letter(s) of credit (each a "Deposit L/C") in the "Required Amount" (as
hereinafter defined), as security for the full and prompt payment, performance
and observance by Tenant of all of the covenants and obligations to be paid,
performed and/or observed on the part of Tenant under this Lease and for the
payment of any and all damages for which Tenant, shall be final by reason of any
act or omission contrary to any of the provisions of this Lease. Each Deposit
L/C shall be issued by a bank reasonably acceptable to Landlord and shall be
substantially in the form of the letter of credit attached hereto on Exhibit D
and made a part hereof. If any Deposit L/C provides that the amount drawable
thereunder shall cease to be available on a date prior to the date which is
thirty (30) days after the expiration of the fourth (4th) Lease Year, or if the
issuing bank shall give written notice to Landlord that it will not extend such
Deposit L/C for an additional twelve (12) months beyond the then current expiry
date, Tenant shall, at least thirty (30) days prior to the date specified in
such Deposit L/C as being the date on which such drawable amount will cease to
be available, or the then current expiry date, as the case may be, either
furnish to Landlord a renewal or extension of such Deposit L/C or a new Deposit
L/C. Failure to comply with the provisions of the preceding sentence prior to
the commencement of said thirty (30) day period shall be deemed to be a default
under this Lease and Landlord may, at any time during said thirty (30) day
period, draw upon such Deposit L/C and retain as a security deposit hereunder
the amount so drawn. As used herein, the term "Required Amount" shall mean (a)
$216,377.37, for the period from the Commencement Date to and including the day
immediately preceding the seventh (7th) full calendar month following the
Commencement Date, (b) $144,936.00, for the period from the first day of the
seventh full calendar month of the term to and including the day immediately
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preceding the first (1st) anniversary of the Commencement Date, (c) $120,780.00,
for the period from the first anniversary of the Commencement Date to and
including the day immediately preceding the second (2nd) anniversary of the
Commencement Date, (d) $96,624.00, for the period from the second anniversary of
the Commencement Date to and including the day immediately preceding the third
(3rd) anniversary of the Commencement Date, and (e) $72,468.00, for the period
from the third anniversary of the Commencement Date to and including the day
immediately preceding the fourth (4th) anniversary of the Commencement Date.
If Tenant defaults beyond any applicable notice and cure period in the full and
prompt payment, performance and observance of any of the covenants and
obligations to be paid, performed and/or observed on the part of Tenant under
this Lease, including the payment of Base Rent or Additional Rent, or any other
sums or damages payable under this Lease, Landlord, at Landlord's election, may
draw upon the Deposit L/C to the extent required for the payment to Landlord of
any such Base Rent or Additional Rent, or any other sums or damages in respect
of which Tenant is so in default or for any sums which Landlord may expend or
may be required to expend by reason of Tenant's default, including any damages
or deficiency in the reletting of the Premises, whether such damages or
deficiency accrue before or after summary proceedings or other re-entry by
Landlord. If Landlord shall so draw upon the Deposit L/C, Tenant shall, upon
demand, immediately deposit with Landlord, a new Deposit L/C in an amount equal
to the amount so drawn. If, at any time after the payment by Tenant to Landlord
of any amounts required to be paid by Tenant under this Lease, Landlord is
required to return or repay to Tenant, for any reason in connection with the
bankruptcy or insolvency of Tenant, any Base Rent or Additional Rent, or any
other sums paid by Tenant to Landlord under this Lease, then at Landlord's
election, the Deposit L/C may be drawn upon and the proceeds thereof applied by
Landlord to offset all or any portion of the amounts so returned or repaid. If
Tenant shall fully and faithfully pay, perform and observe all of the covenants
and obligations to be paid, performed and/or observed on the part of Tenant
under this Lease, the Deposit L/C shall be returned to Tenant within ninety (90)
days after the fourth (4th) anniversary of the Commencement Date.
In the event of any sale of Landlord's interest in the Building, or a leasing of
the Building (whether or not in connection with a sale or leasing of the Land),
Landlord shall have the right to transfer the Deposit L/C to the vendee or
lessee and Landlord shall, thereupon, be released by Tenant from all liability
for the return of the Deposit L/C and, in such event, Tenant agrees to look
solely to the new Landlord for the return of the Deposit L/C. It is agreed by
Tenant that the provisions of this Article 4 shall apply to every transfer or
assignment made of the Deposit L/C to a new Landlord.
Tenant further covenants that it will not assign or encumber, or attempt to
assign or encumber, its interest in the Deposit L/C and that neither Landlord
nor its successors or assigns shall be bound by any such assignment or
encumbrance, or attempted assignment or attempted encumbrance.
5. IMPROVEMENTS AND SERVICES:
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A. Construction Work
-----------------
Landlord will Substantially Complete the Construction Work.
B. Change Orders
-------------
Tenant may make minor changes to the Construction Plans subject to Landlord's
prior written approval, which approval shall not be unreasonably withheld.
C. Tenant's Costs and Improvement Allowance.
----------------------------------------
(a) Tenant's Costs. Tenant's costs ("Tenant's Costs") for the
Construction Work shall be the contract price paid by Landlord, as the
same may have been revised by any change orders, plus the following:
(i) permit fees; (ii) space planning and other design costs; (iii)
fees of a third party construction manager; (iv) fees of architects
and engineers in connection with the design of the Construction Work;
(v) general contractor profit and overhead; (vi) administrative fees
of Landlord in connection with overseeing the design and construction
of the Construction Work; (vii) the cost of installing submeter(s) in
the Premises for measuring Tenant's electrical consumption; and (viii)
all other costs and expenses in connection with the design and
construction of the Construction Work.
(b) Improvement Allowance. Landlord shall provide Tenant an allowance of
---------------------
up to Twelve and 00/100 Dollars ($12.00) per rentable square foot of
the Premises (the "Improvement Allowance"), to be applied against
Tenant's Costs. Within sixty (60) days of Substantial Completion of
the Construction Work, Landlord shall furnish to Tenant a final
accounting of Tenant's Costs.
(c) If Tenant's Costs exceed the Improvement Allowance, then Tenant shall
pay Landlord such excess within ten (10) days after receipt of such
final accounting, as Additional Rent.
(d) If Tenant's Costs exceed Ten and 00/100 ($10.00) per rentable square
foot of the Premises but are less than or equal to $12.00 per rentable
square foot of the Premises (the "Excess Tenant's Costs"), annual Base
Rent shall be increased as follows: The Excess Tenant's Costs shall be
fully amortized on a straight-line basis over the remaining initial
Term, using an annual interest factor of 10%, so as to arrive at a
monthly amortization amount (the "Monthly Amortized Allowance
Amount"). The Monthly Amortized Allowance Amount shall be added to
the monthly installment of Base Rent and shall be treated as Base Rent
for all purposes of this Lease. Upon determination of the Monthly
Amortized Allowance Amount, the parties shall enter into an amendment
to this Lease to establish the increased Base Rent.
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(e) If Tenant's Costs are less than the Improvement Allowance, then the
unused portion of the improvement Allowance shall be retained by
Landlord.
D. Subsequent Improvements
-----------------------
Tenant covenants and agrees that Tenant shall not make or erect any
improvements, alterations, replacements, additions or accessions or any other
tenant improvements (individually and collectively referred to herein as "Tenant
Improvements") in any manner whatsoever to the Building or to the Premises
without the prior written consent of Landlord, which consent shall not be
unreasonably withheld or delayed. For the purposes of this Lease, "Tenant's
Improvements" shall include and be defined to mean all work required to be done
in preparing the Premises so that it may be operated for business (other than
the Construction Work), as well as all alterations, decorations, installations,
additions or improvements to the Premises occurring thereafter. Tenant
covenants and agrees that all Tenant's Improvements shall be done at Tenant's
full cost and expense, shall comply with all applicable governmental
regulations, shall be done only by contractors, subcontractors and mechanics
with respect to whom Landlord has consented, which consent shall not be
unreasonably withheld, shall be done in a manner which will assure labor harmony
at the site and shall be done in a manner which will not unreasonably interfere
with the construction work or other tenants of Landlord's Building. Tenant
agrees to provide Landlord copies of all plans and specifications for such
improvements, alterations, replacements or accessions and with the name of the
general contractor and, if known, names of any subcontractors and mechanics who
are to perform such work at least fifteen (15) days in advance of the
commencement of any such work. Landlord shall, within three (3) business days.
of receipt of such copies from Tenant, notify Tenant as to whether Landlord
consents to such plans, specifications, contractors, subcontractors, etc., which
consent shall not be unreasonably withheld, or whether such consent is withheld,
in which case Tenant's contemplated construction shall not commence. All
electrical and/or mechanical contractors must be specifically approved by
Landlord which approval may be withheld in Landlord's sole discretion.
Notwithstanding the aforesaid, Landlord's consent to Tenant's plans,
specifications, contractors, subcontractors, etc. shall not be construed as
Landlord's consent to Tenant causing work to be done in the Premises in a manner
or under conditions which entitle the person doing the work or furnishing the
materials to a mechanic's or materialmen's lien. As a condition precedent to
Landlord's consent to the making by Tenant of such Tenant's Improvements to the
Premises, Tenant agrees to obtain and deliver to Landlord written and
unconditional waivers of mechanic's liens upon the real property in which the
Premises are located, for all work, labor and services to be performed and
materials to be furnished in connection with such work, signed by all
contractors, subcontractors, materialmen and laborers who contract for or intend
to perform such work. Notwithstanding the foregoing, if any mechanic's lien or
other lien is filed against the Premises or the Landlord's Building for work
claimed to have been done for, or materials claimed to have been furnished to
Tenant, it shall be discharged by Tenant within thirty (30) days thereafter, at
Tenant's expense, by filing the bond required by law, or by payment or
otherwise. If any such mechanics' or other liens be filed against the Land, the
Building or the Premises and Tenant fails to discharge same within thirty (30)
days after such filing, then in addition to any other right or remedy of
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Landlord, Landlord may, but without obligation to do so, discharge the same by
bonding or by paying the amount claimed to be due. Any amount paid by Landlord
for the satisfaction of any such lien and all reasonable legal and other costs
incurred by Landlord in procuring such discharge shall be payable by Tenant to
Landlord as Additional Rent on demand. Tenant covenants and agrees to indemnify
Landlord and hold Landlord harmless of and from any and all claims, costs,
suits, damages and liability whatsoever arising out of or as a result of any
such work done by Tenant or Tenant's contractors, subcontractors, agents or
employees, including reasonable attorney's fees for the defense thereof.
Landlord shall not be liable for any failure of any building facilities or
services caused by alterations, installations and/or additions by Tenant, and
Tenant shall promptly correct any such failure. In the event Tenant shall not
promptly correct same, Landlord may make such correction and charge Tenant for
the cost thereof. Such sum due Landlord shall be deemed Additional Rent and
shall be paid by Tenant promptly upon being billed therefor.
Prior to commencing any work pursuant to the provisions of this Lease, Tenant
shall additionally furnish to Landlord: (i) copies of all governmental permits
and authorizations which may be required in connection with such work; (ii) a
certificate evidencing that Tenant (or Tenant's agents or contractors) has
procured worker's compensation insurance covering all persons employed in
connection with the work who might assert claims for death or bodily injury
against Landlord, Tenant or Landlord's Building; and (iii) such additional
personal injury and property damage insurance as Landlord may reasonably require
because of the nature of the work to be done by Tenant.
All Improvements upon the Premises and any replacements therefor, including all
paneling, decorations, partitions, railings, affixed to the realty, except
furniture, movable trade fixtures and movable equipment installed at the expense
of Tenant shall become the property of Landlord and shall remain upon, and be
surrendered with the Premises as a part thereof at the termination of this
Lease, without compensation to Tenant; unless, however, Landlord by notice given
to Tenant no later than thirty (30) days prior to the end of the Term shall
elect to have Tenant remove any or all such Tenant Improvements. Thereupon
Tenant shall accomplish such removal at its sole cost and repair any damage
caused by such removal.
E. Customary Services
------------------
Landlord shall provide the following services, all of which shall be considered
Operating Expenses:
(a) Heating and cooling to the Premises to provide reasonably comfortable
levels of temperature and ventilation consistent with applicable
building codes and regulations for the occupants of the Premises under
normal business operation. Business hours for the Premises shall be
between the hours of 7:00 a.m. and 7:00 p.m. Monday through Friday and
8:00 a.m. to 12:00 p.m. on Saturdays but there shall be excluded from
business days Connecticut and federal holidays that are normally
observed by general business offices.
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(b) Water service for lavatory purposes and for drinking, lavatory and
toilet purposes at a central service area on each floor.
(c), Cleaning and janitorial services including rubbish removal, to the
Premises in accordance with Cleaning Specifications, annexed hereto as
EXHIBIT E, provided the same are kept in reasonable order by Tenant.
---------
(d) Free and unobstructed access to the Premises on business days and
access at all other times subject to reasonable security restrictions
from time to time in effect, and subject always to restrictions based
on emergency conditions. Landlord shall provide keys or other
security devices which will permit such access outside of the hours
and days above specified.
(e) Cleaning and janitorial services to the Common Areas, the other public
areas of the Building and Property and the exterior walls of the
Buildings (including the exterior glass), and removal of snow and ice
from the parking areas, sidewalks and walkways included in the
Property, also as to maintain such areas in a clean and neat condition
commensurate with similar office buildings in the New Haven,
Connecticut area.
(f) Electricity for Tenant's general office uses (i.e. lighting, office
equipment and personal computers) and replacement of light fixtures,
tubes, lamps, ballasts, bulbs, lenses, globes and switches.
(g) One lobby directory sign, the size and location of which shall be
designated by Landlord in its sole and absolute discretion.
Tenant shall pay Landlord a charge of Twenty-Five and 00/100 Dollars ($25.00)
per hour for any utilities and services, including without limitation, air
conditioning, electric current and water, provided by Landlord by reason of any
use of the Premises at any time other than the times described above or any use
beyond that which Landlord agrees to furnish as described above, or special
electrical, cooling and ventilating needs created in certain areas by telephone
equipment, computers and other similar equipment or uses.
F. Additional Services
-------------------
Should Tenant require any additional work or service, including but not limited
to service of the nature described above, including service furnished outside
the stipulated hours, Landlord may on terms to be agreed, upon reasonable
advance notice by Tenant, furnish such service at charges as may be agreed on,
but in no event at a charge less than Landlord's actual cost plus overhead for
the additional services provided. It is understood that Landlord does not
warrant that any of the services referred to above, or any other services which
Landlord may supply, will be free from reasonable interruption. Tenant
acknowledges that any one or more such services may be
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suspended by reason of accident or of repairs, alterations or improvements
necessary to be made (in which event Landlord will use its reasonable efforts to
cure or correct any deficiency in same), or by strikes or lockouts or reason of
operation of law, or causes beyond the reasonable control of Landlord. Any such
interruption or discontinuance of service shall never be deemed an eviction or
disturbance of Tenant's use, and possession of the Premises, or any part
thereof, or render Landlord liable to Tenant for damages by abatement of Rent or
otherwise, or relieve Tenant from performance of Tenant's obligations under this
Lease. Notwithstanding the foregoing, in the event the cessation of any service
renders the Premises untenantable, Rent shall abate but only for the period of
time and in the amount for which Rent reimbursement insurance proceeds are
actually received by Landlord.
6. QUIET ENJOYMENT:
So long as Tenant shall observe and perform the covenants and agreements binding
on it hereunder, Tenant shall at all times during the Term herein granted,
peacefully and quietly have and enjoy possession of the Premises without any
encumbrance or hindrance by, from, or through Landlord.
7. LEASE SUBJECT TO SUPERIOR RIGHTS:
This Lease, including the covenant of quiet enjoyment, and all of Tenant's
rights and options hereunder, is subject and subordinate to all present
mortgages affecting the Property or the Building, and to any mortgage which may
hereafter be executed affecting the Property or the Building, and to all
renewals, modifications, consolidations, replacements and extensions thereof.
Tenant hereby agrees to execute, if the same is required or requested, any and
all instruments in writing to subordinate Tenant's rights acquired by this Lease
to the lien of any such mortgage. Tenant agrees that foreclosure of any
mortgage encumbering the Property or the Building shall not be a constructive
eviction of Tenant and Tenant shall not have the right to appear in any such
foreclosure action. Tenant hereby agrees to execute, acknowledge, and deliver
any such instrument or instruments as Landlord may determine necessary to carry
out the intent of this Article within ten (10) days of notice from Landlord.
Notwithstanding the foregoing, Tenant agrees to attorn to any purchaser at
foreclosure sale, to any grantee or transferee designated in any deed given in
lieu of foreclosure, or any mortgagee in possession and this Lease shall
thereafter continue in full force and effect, or at the request of such
purchaser, grantee or transferee or mortgagee in possession to enter into a new
lease on the same terms and conditions as this Lease. Landlord shall use
reasonable efforts to provide Tenant with such subordination, non-disturbance
and/or attornment agreements, provided such agreements do not materially alter
any terms hereof or expand Tenant's financial liability hereunder.
Landlord shall have the right to mortgage, transfer, assign or convey the
Building, Property or any of its rights under this Lease, in whole or in part,
and nothing in this Lease shall be construed as a restriction of Landlord's
ability to do so.
8. ESTOPPEL CERTIFICATE BY TENANT:
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Tenant shall at any time and from time to time, within ten (10) days after
written notice from Landlord, execute, acknowledge, and deliver to Landlord a
statement in writing certifying that this Lease is unmodified and in full force
and effect (or, if modified, stating the nature of such modification and
certifying that this Lease, as so modified, is in full force and effect) and the
dates to which the rental, the security deposit, if any, and other charges are
paid in advance, if any, and acknowledging that, to the best of Tenant's
knowledge, there are no offsets, defenses or counterclaims with respect to the
payment of Rent and that there are no uncured defaults on the part of Landlord
hereunder and no events or conditions then in existence which, with the passage
of time or notice or both, would constitute a default on the part of Landlord
hereunder or specifying such defaults, events, or conditions if any are claimed.
Tenant shall also execute and acknowledge such certificates and agreements as
may be required by Landlord's mortgagee, provided such certificates or
agreements do not materially alter any of the Terms hereof or expand Tenant's
financial liability hereunder. Without limiting the generality of the
foregoing, Tenant shall agree that if Landlord's mortgagee succeeds to
Landlord's interest in the Building or assumes possession or control of the
Building, such mortgagee shall not be liable for any act or omission of any
prior Landlord but Tenant shall not be prohibited from seeking any recovery for
such acts from the prior Landlord. It is expressly understood and agreed that
any such statement may be relied upon by Landlord or any prospective purchaser
or encumbrancer of all or any portion of the Building or the Property. Tenant's
failure to deliver such statement within such time shall constitute a breach and
default under this Lease, and shall be conclusive upon Tenant that this Lease is
in full force and effect without modification except as maybe represented by
Landlord, and that there are no uncured defaults in the Landlord's performance.
Tenant, upon request of Landlord, will, from time to time, execute and deliver
to Landlord an instrument in form reasonably satisfactory to Landlord stating
whether or not Tenant has exercised any option to extend the Term of this Lease.
9. RIGHTS RESERVED TO LANDLORD:
In addition to any other rights of Landlord under this Lease and/or at law or in
equity, Landlord reserves the following rights:
(a) After thirty (30) days notice to Tenant, to change the name, number,
or designation of the Building during the Term of this Lease or any
extensions hereof without liability to Tenant.
(b) To install and maintain a sign or signs on the exterior or interior of
the Building.
(c) To designate all sources furnishing sign painting and lettering, ice,
drinking water, towels, toilet supplies, shoe shining, vending
machines, mobile vending service, catering, and like services used on
the Premises or in the Building.
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(d) Constantly to have pass keys to the Premises. Said keys shall only be
for use in the event of emergency or for cleaning and maintenance.
(e) On reasonable prior notice to Tenant, to exhibit the Premises to
prospective tenants during the last twelve (12) months of the Term,
and to exhibit the Premises at any time during the Term to any
prospective purchaser, mortgagee, or assignee of any mortgage on the
Property and to others having a legitimate interest.
(f) At any time upon reasonable notice and in a manner which does not
unreasonably interfere with Tenant's business, to enter the Premises
to examine and inspect the same or make such repairs, additions, or
alterations as Landlord may deem necessary or proper for the safety,
improvement, or preservation thereof. Landlord shall at all times
have the right at its reasonable election to make such alterations or
changes in other portions of the Building as it may from time to time
deem necessary or desirable. All such work performed within the
Premises shall, except in the case of emergency, be performed so as
not to unreasonably interfere with Tenants use of the Premises.
Landlord shall not be liable to Tenant for any damage or inconvenience
thereby suffered by Tenant.
10. TENANT'S ADDITIONAL COVENANTS:
Tenant covenants at all times during the Term and such further times as Tenant
occupies the Premises or any part thereof
(a) To perform promptly all of the obligations of the Tenant set forth in
this Lease; and to pay when due items of Base Rent, Tenant's
Proportionate Share of Operating and Tax Expenses, Additional Rent and
all charges, rates and other sums which by the terms of this Lease are
to be paid by the Tenant.
(b) To conduct its business at all times in a high grade and reputable
manner so as to help establish and maintain a high reputation for the
Building.
(c) To store all trash and refuse within the Premises and to attend to the
daily disposal thereof in the manner designated by Landlord; to keep
all drains inside the Premises clean; to receive and deliver goods and
merchandise only in the manner and areas designated by Landlord.
(d) To comply with "Building Rules and Regulations" ("Rules") which are
attached hereto as EXHIBIT F and incorporated herein by reference.
---------
Landlord may from time to time hereafter make Rules or reasonable
modifications to the Rules and establish reasonable additional Rules
for the safety, comfort and welfare of the occupants of the Building
as Landlord deems necessary. Such Rules, modifications or additions
shall be binding upon Tenant when a copy is delivered
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to Tenant or Tenant's agents or employees in the Premises. Landlord
shall have no duty or obligation to enforce any Rules, or any term,
covenant or condition of any other lease, against any other tenant or
occupant of the Building, and Landlord's failure or refusal to enforce
any Rule or any term, covenant or condition of any other lease against
any other tenant or occupant of the Building shall not constitute an
actual or constructive eviction, in whole or in part, or entitle
Tenant to any abatement or diminution of Rent, or relieve Tenant from
any of its obligations under this Lease, or impose any liability upon
Landlord or its agents by reason of inconvenience or annoyance to
Tenant, or injury to or interruption of Tenant's business, or
otherwise.
(e) To make all repairs, alterations, additions or replacements to the
Premises required by any law or ordinance or any order or regulation
of any public authority because of Tenant's use of the Premises; to
keep the Premises equipped with all safety appliances so required
because of such use; to procure any licenses and permits required for
any such use; and to comply with the orders and regulations of all
governmental authorities, except that Tenant may defer compliance so
long as the validity of any such law, ordinance, order or regulation
shall be contested by Tenant in good faith and by appropriate legal
proceedings, if Tenant first gives Landlord appropriate assurance
against any loss, cost or expense on account thereof and if such
deferral shall not adversely affect the operation of any other areas
within the Building.
(f) Not to place signs of any nature or kind whatsoever in or upon the
windows of the Premises. Tenant signage, at Tenant's sole expense,
will be installed by means of a Building Standard nameplate located at
the entrance to Tenant's Premises. Any other signs shall be subject
to Landlord's approval which may be unreasonably withheld. Tenant
shall not use any picture or drawing of the Building in any
advertisement or promotional material without Landlord's prior written
consent. Landlord reserves the right to promulgate standards for all
window coverings for the Premises and the Building.
(g) Not to make any use of the Premises other than the permitted use set
forth in Section 2.B.
(h) Not to injure, overload, deface or otherwise harm the Premises; nor
commit any nuisance; nor permit the emission of any objectionable
noise or odor; nor burn any trash or refuse within the Building; nor
make any use of the Premises which is improper, offensive or contrary
to any law or ordinance; nor use any advertising medium that may
constitute a nuisance, such as loudspeakers, sound amplifiers,
phonographs or radio or television broadcasts in a manner to be heard
outside the Premises; nor do any act tending to injure the reputation
of the Building; nor park trucks or delivery vehicles outside the
Premises so as to interfere unreasonably with the use, of any
driveways, walks, or parking areas.
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(i) Not permit or suffer to be done any act, matter, thing or failure to
act in respect of the Premises or use or occupy the Premises or
conduct or operate Tenant's business in any manner objectionable to
any insurance company or companies whereby the fire insurance or any
other insurance then in effect in respect of the Premises or the
Building or any part thereof shall become void or suspended or whereby
any premiums in respect of insurance maintained by Landlord shall be
higher than those which would normally have been in effect for the
occupancy contemplated within the Building. In case of a breach of
this covenant, in addition to all other rights and remedies of
Landlord hereunder, Tenant shall (a) indemnify Landlord and the
lessor(s) of any ground or underlying lease(s) and hold Landlord and
such lessor(s) of any ground or underlying lease(s) harmless from and
against any loss which would have been covered by insurance which
shall have become void or suspended because of such breach by Tenant
and (b) pay to Landlord, as Additional Rent, any and all increases or
premiums on any insurance, including, without limitation, fire
insurance and rent insurance, resulting from any such breach.
11. WAIVER OF PROPERTY AND LIABILITY CLAIMS:
A. Damage from Water and Similar Sources
-------------------------------------
Landlord shall not be liable for any damage to any property, or person, at any
time in the Premises, or the Building of which they are a part, from steam,
gases, electricity, or from water, rain, or snow, whether they may leak into,
issue, or flow from any part of said Building, or from the pipes or heating or
air conditioning apparatus of the same, or from any other place. Tenant shall
give Landlord prompt notice of any accident to or defect in the pipes, heating,
or air conditioning apparatus or electric wires or system.
B. Damage from Other Causes
------------------------
Tenant waives all claims it may have against Landlord, and against Landlord's
agents and employees for injury or damage to person or property sustained by
Tenant or by any occupant of the Premises, or by any other person, resulting
from any part of the Building or any equipment or appurtenances becoming out of
air, or resulting from any accident in or about the Building or resulting
directly or indirectly from any act or neglect of any tenant or occupant of any
part of the Building or of any other person. If any damage results from any act
of neglect or negligence of Tenant, Landlord may, at Landlord's option repair
such damage and Tenant shall thereupon pay to Landlord upon demand the total
cost of such repair as Additional Rent. All personal property belonging to
Tenant or any occupant of the Premises that is in or on any part of the Building
shall be there at the risk of Tenant or of such other person only, and Landlord,
its agents and employees shall not be liable for any damage thereto or for the
theft or misappropriation thereof.
C. Loss of Business, Etc.
----------------------
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Landlord shall not in any event be liable for loss of business of Tenant nor
salaries paid to Tenant's employees, agents, or contractors, nor for any latent
defect in the Premises or in the Building. Tenant shall give prompt written
notice to Landlord in case of theft, fire, or accidents in the Premises or in
the Building or of defects therein or in the fixtures or equipment.
D. Indemnification
---------------
Tenant covenants and agrees that Tenant will have sole liability for any claims,
demands, penalties, or liabilities that may arise out of or be connected with
Tenant's occupation, use or enjoyment of the Premises, or the Building and will
release, discharge, indemnify Landlord, and hold Landlord and Landlord's
mortgagee harmless from and against all claims, demands, penalties and
liabilities for any damage or injury to persons, firms, corporations or property
suffered, sustained, or incurred as a result of or in connection with or arising
out of any act or omission of Tenant or its agents, employees, contractors,
licensees and business invitees, in connection with the occupation, use, or
enjoyment of the Premises or the Building by Tenant, including the cost of
defending against such claims or demands. Tenant shall indemnify and save
harmless Landlord and Landlord's mortgagee from and against any and all
liability and damages, and from and against any and all suits, claims, and
demands of every kind and nature, including reasonable counsel fees, by or on
behalf of any person, firm, association or corporation arising out of or based
upon any accident, injury or damage, however occurring, which shall or may
happen during the Term hereof, on or about the Premises, and from and against
any matter or thing growing out of the condition, maintenance, repair,
alteration, use, occupation or operation of the Premises. In case of any action
or proceeding on any such claim or demand being brought against Landlord or
Landlord's mortgagee, Tenant, upon notice from Landlord, covenants to resist and
defend such action or proceeding. Landlord may also resist and defend such
action in the event Tenant fails or refuses to do so, and in such event, Tenant
shall reimburse Landlord on demand for all reasonable costs which Landlord may
incur in so doing, as Additional Rent. Subject to the provisions of Sections
11.A., 11.B., 11.C. and 12.F. hereof, Landlord shall indemnify and hold Tenant
harmless for any and all damage or injury to person or property arising out of
the gross negligence of Landlord, its agents, servants and employees.
12. INSURANCE BY TENANT:
During the Term of this Lease, Tenant, at its sole cost and expense, shall carry
and maintain the following types of insurance, in insurance companies which are
authorized to do business in the State of Connecticut, which have a Best's
Rating of A-X or better and are satisfactory to Landlord in its sole discretion.
A. Property Insurance
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All-risk property insurance, on a Special Causes of Loss, Replacement Cost
basis, on all of Tenant's, personal property located within the Premises and on
all Tenant Improvements which may have been made by Tenant or by Landlord on
behalf of the Tenant to the Premises.
B. Liability Insurance
-------------------
Comprehensive general liability insurance and personal injury liability
insurance, insuring Tenant and Landlord, against liability for injury to persons
(including death) or damage to property occurring in or about the Premises or
arising out of the ownership, maintenance, use, or occupancy thereof, insuring
against any claim up to $2,000,000.00, in the case of death or bodily injury to
one person and up to $2,000,000.00 in the case of any one accident involving
death or bodily injury to more than one person, and shall insure against any
claim for property damage up to $1,000,000.00 with a contractual obligation
endorsement.
At the reasonable request of Landlord, Tenant shall adjust annually the amount
of the coverage established in this Section 12.B to such amount as, in
Landlord's reasonable opinion, adequately protects Landlord's interest.
C. Worker's Compensation
---------------------
Worker's compensation insurance insuring Tenant from all claims for personal
injury, disease, and/or death under the worker's compensation law of the State
of Connecticut, plus at least $500,000.00 of employers' liability coverage.
D. Other Insurance
---------------
Such other insurance as Landlord may reasonably require.
E. Tenant To Furnish Copies
------------------------
Tenant shall furnish Landlord certificates of insurance evidencing said policies
within ten (10) days after the execution of this Lease and thereafter at least
fifteen (15) days prior to each policy renewal date. Such policies shall name
Landlord and any mortgagee or property manager of Landlord as additional
insureds and shall provide that coverage may not be canceled or reduced without
at least thirty (30) days' written notice first given to Landlord. Tenant shall
have the privilege of procuring and obtaining all such insurance through its own
sources; provided, however, that if Tenant fails to produce and maintain said
insurance, Landlord may, but shall not be obligated to, purchase the same at
Tenant's cost, and the cost thereof shall be Additional Rent which shall be due
and payable to Landlord on the date of the next monthly rental installment.
Landlord, however, may elect not to purchase such insurance for Tenant's behalf
and, in lieu thereof, declare Tenant's default hereunder.
F. Waiver of Subrogation
---------------------
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Notwithstanding anything in this Lease to the contrary, Landlord and Tenant each
hereby waives any and all rights of recovery, claim, action, or cause of action
against the other, its agents, employees, licensees, or invitees for any loss or
damage to or at the Premises or the Property or any personal property of such
party therein or thereon by reason of fire, the elements, or any other cause
which would be insured against under the terms of the insurance policies
referred to hereinabove, regardless of cause or origin, including omission of
the other party hereto, its agents, employees, licensees, or invitees. Landlord
and Tenant covenant that no insurer shall hold any right of subrogation against
either of such parties and Landlord and Tenant shall obtain waivers of such
subrogation rights from its insurers. The parties hereto agree that any and all
such insurance policies required to be carried by either shall be endorsed with
a subrogation clause, substantially as follows: "This insurance shall not be
invalidated should the insured waive, in writing prior to a loss, any and all
right of recovery against any party for loss occurring to the property described
therein," and shall provide that such party's insurer waives any right of
recovery against the other party in connection with any such loss or damage.
13. ASSIGNMENT AND SUBLETTING:
A. Consent.
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Tenant will not sublet the Premises or any part thereof or transfer possession
or occupancy thereof to any person, firm or corporation, or transfer or assign
this Lease, except pursuant to the provisions of this Article 13. No subletting
or assignment hereof shall be effected by operation of law or in any other
manner unless with prior written consent of Landlord. Tenant shall not assign
this Lease or sublet the Premises without Landlord's prior consent which shall
not be unreasonably withheld. The parties explicitly agree that Landlord shall
be deemed to be acting in good faith in withholding its consent if, among other
reasons, (i) evidence of satisfactory financial capacity of such sublessee or
assignee is not submitted to Landlord or if Landlord determines such financial
capacity of any proposed assignee or sublessee is insufficient to cover Tenant's
obligations under this Lease, (ii) Landlord believes such sublessee's or
assignee's business would be disruptive or objectionable to other Tenants of the
Building, (iii) the nature of such sublessee's or assignee's business would
cause a material increase in Operating Expenses or require a use of the Premises
from that set forth in Article 2.C. or (iv) Tenant's mortgagee(s) does (do) not
grant its (their) consent.
B. Excess Rent
-----------
From and after the effective date of an assignment or subletting, Tenant shall
pay to Landlord monthly as Additional Rent fifty percent (50%) of any "Net
Rent," as defined herein which is in excess of (i) the pro-rata share of Rent
then being paid by Tenant for the portion of the Premises being sublet or
assigned, and (ii) in the case of a subletting, all reasonable subleasing
expenses, including, but not limited to attorney's fees, brokerage commissions,
improvements to the Premises and free rent. For the purposes of this paragraph
"Net Rent" shall mean the Rent accruing to Tenant as the result of such sublease
or assignment.
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If Tenant or any subtenant or other person claiming through or under Tenant,
shall assign or have assigned its interest as Tenant under this Lease or its
interest as subtenant under any sublease, as the case may be, Tenant shall pay
to Landlord a sum equal to fifty percent (50%) of any consideration paid to
Tenant or any subtenant or other person claiming through or under Tenant for
such assignment. All sums payable hereunder by Tenant shall be paid to Landlord
as Additional Rent immediately upon receipt thereof by Tenant or by any
subtenant or other person claiming through or under Tenant.
C. Tenant Not Released
-------------------
In the event of any subletting of all or any portion of the Premises or
assignment of this Lease by Tenant, Tenant shall remain jointly and severally
liable to Landlord for payment of all Rent stipulated herein and for payment and
performance of all other covenants and conditions contained herein. Rent due
from Tenant shall not be diminished or abated during any remodeling or
redecoration period. Landlord may collect Rent from any sublessee or assignee
and apply the net amounts collected to the Base Rent, Tenant's Proportionate
Share of Operating and Tax Expenses, and Additional Rent but no such collection
shall be deemed to be a waiver of the provisions of this Section. Further,
notwithstanding anything contained herein to the contrary, any and all
unexercised options to extend or renew the Term of this Lease or to expand the
Premises and any and all rights of first offer and similar rights are intended
by both Landlord and Tenant to be personal to dsl.net, incorporated and are not
intended to, and shall not benefit any assignee or sublessee hereunder. Upon
any assignment or subletting of the Premises or any portion thereof any such
options or rights shall automatically and without any further action by Landlord
terminate and be of no further force and effect.
D. Transfer to Affiliate
---------------------
Notwithstanding anything to the contrary contained in this provision of this
Article 13, Tenant shall have the right to assign this Lease, or sublet all or a
portion of the Premises, without Landlord's consent, to Tenant's parent or to
any entity of which Tenant has a majority ownership and voting control interest,
provided that Tenant shall remain liable under this Lease, notwithstanding such
assignment or sublease, and further provided that any Tenant Improvements in
connection with such subletting are performed in accordance with the terms and
conditions of this Lease and the use of the Premises is consistent with the use
set forth in Article 2.C. hereof.
14. CONDITION OF PREMISES:
Tenant's taking possession of the Premises shall be conclusive evidence that the
Premises were in good order and satisfactory condition, when Tenant took
possession. No promise to alter, remodel, repair, or improve the Premises or
the Building has been made by Landlord to Tenant, other than as may be contained
herein. At the termination of this Lease, Tenant shall return the
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Premises with all of Tenant's personal property removed therefrom, broom clean
and in as good condition as when Tenant took possession, ordinary wear and tear
excepted, failing which Landlord may restore the premises to such condition and
Tenant shall pay the cost thereof immediately on demand.
15. OBLIGATION TO REPAIR:
A. Tenant's Obligation
-------------------
Tenant agrees and covenants to keep the Premises in as good order, condition,
and repair as when the same were entered upon, ordinary wear and tear excepted.
All damage or injury to the Building or to the Premises, fixtures,
appurtenances, and/or equipment caused by Tenant, its agents, servants,
employees or invitees, shall be repaired, restored, or replaced promptly by
Tenant at its sole cost and expense. All repairs, restorations, and
replacements shall be in quality and class equal to the original work or
installations and shall be done to Landlord's satisfaction. If Tenant fails to
keep the Premises in such good order, condition, and repair as required
hereunder, Landlord may restore the Premises to such good order and condition
and make such repairs without liability to Tenant for loss or damage that may
accrue to Tenant's property or business by reason thereof, and upon completion
thereof Tenant shall pay to Landlord upon demand the cost of restoring the
Premises to such good order and condition, as Additional Rent.
B. Landlord's Obligation
---------------------
Landlord shall maintain the structural portions of the Building, including the
roof, the basic plumbing, air conditioning, heating, and electrical systems
installed by Landlord, unless the condition requiring such maintenance is caused
in part or in whole by the act, neglect, fault, or omission of any duty by
Tenant, its agents, servants, employees, or invitees, in which case Tenant shall
pay Landlord the reasonable cost of such maintenance or repairs. There shall be
no abatement of Rent and no liability of Landlord by reason of any injury or
interference with Tenant's business arising from the making of any repairs,
alterations, or improvements in or to any portion of the Building or the
Premises or in or to fixtures, appurtenances, and equipment therein. Tenant
waives the right to make repairs at Landlord's expense under any law, statute,
or ordinance now or hereafter in effect.
16. LIABILITY:
Landlord assumes no liability or responsibility whatever with respect to the
conduct and operation of the business to be conducted in the Premises by Tenant
nor for any loss or damage of whatsoever kind or by whomsoever caused, to
personal property, documents, records, monies, or goods of Tenant or to anyone
in or about the Building. Tenant agrees to hold Landlord harmless against all
such claims.
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17. DAMAGE TO LEASED PREMISES:
A. Untenantable - Permanent
------------------------
If the Premises, the Building, or any portion thereof shall be damaged by fire
or other cause so as to render the Premises wholly untenantable, and if such
damage shall be so great that a licensed architect as selected by Landlord shall
certify within thirty (30) days after date of such occurrence in writing to
Landlord and Tenant that the Premises, with the exercise of reasonable
diligence, cannot be made fit for occupancy within one hundred and eighty (180)
days from the happening thereof, then this Lease shall cease and terminate from
the date of the occurrence of such damage, and Tenant thereupon shall surrender
to Landlord said Premises and all interest therein as granted hereunder, and
Landlord may reenter and take possession of the Premises and remove Tenant
therefrom. There shall be no liability on the part of Landlord for such
termination. In the event of such termination, Tenant shall pay Rent duly
apportioned up to the time of the event causing such damage and all Rent
accruing subsequent to such event shall be abated, Landlord being entitled to
receive the proceeds of any insurance maintained by Landlord covering the
Premises.
B. Untenantable - Temporary
------------------------
(1) If the Premises are partially damaged by fire or other causes during
the Term hereof, the Premises, exclusive of Tenant's Improvements,
shall be repaired by Landlord with reasonable dispatch, and no
abatement shall be made to Tenant from the Rent corresponding with the
time during which the Premises cannot be used by Tenant after damage
occurring as aforesaid. Landlord shall be entitled to receive the
proceeds of all insurance maintained by Landlord covering the
Premises. For the purposes of this subdivision, "partially damaged"
shall mean damage which renders forty percent (40%) or less of the
Premises untenantable. Notwithstanding the foregoing, in the event
the Premises are rendered partially untenantable, Rent shall abate
during the period of untenantability but only for the period of time
and in the amount for which Rent reimbursement insurance proceeds are
actually received by Landlord.
(2) If the Premises are damaged by fire or other causes and more than
forty percent (40%) thereof is rendered untenantable, or the means of
ingress or egress are rendered unusable, Tenant shall notify Landlord
of such damage within two (2) days after such damage and Landlord
shall have the option whether such damage shall be repaired or
rebuilt. In the event that Landlord shall decide not to repair or
rebuild, this Lease shall then and thereupon cease and come to an end,
Landlord shall be entitled to the proceeds of all insurance maintained
by Landlord covering the Premises and to the proceeds of the Tenant's
insurance covering the Tenant Improvements to the extent of the
Landlord's undepreciated value of said Tenant Improvements. Tenant
shall be liable for Rent only up to the time of such damage, and
thereafter there shall be no further liability on the part of the
parties
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hereto by reason of such termination. Tenant shall promptly surrender
possession of the Premises.
If Landlord shall decide that the Premises shall be repaired and
rebuilt following a fire or other cause, Landlord shall give Tenant
notice thereof within thirty (30) days after receiving notice of such
damage, and the Premises, exclusive of Tenant's Improvements, shall be
repaired by Landlord with due diligence taking into account the nature
of such damage. Landlord shall use commercially reasonable efforts to
complete such repair within one hundred and eighty (180) days from the
date Landlord gave notice to Tenant of such intent to repair,
excepting delays outside the reasonable control of Landlord, or Tenant
may cancel this Lease and be under no further obligation to Landlord.
Tenant shall subrogate, to the extent of the value of the loss
resulting from such damage, to Landlord's right of recovery from any
insurance carrier with respect to such loss. If loss to the Premises
or any portion thereof which is to be repaired or rebuilt by Landlord
hereunder is covered by Tenant's insurance policy or policies,
Landlord shall receive, by assignment or otherwise, all proceeds of
such insurance other than proceeds for loss or damage to Tenant's
personal property or trade fixtures. Tenant shall receive an
abatement in the Rent payments otherwise due, which abatement shall
correspond with the period during which and the extent to which the
Premises cannot be used by Tenant for the ones and purposes
contemplated by this Lease. Tenant recognizes that there may be from
time to time a mortgage or mortgages covering the Property and that
the foregoing options with respect to repairing and rebuilding are all
subject to any mortgagee on any current or future mortgage agreeing to
allow the Premises to be repaired and/or rebuilt under the terms of
any such mortgage.
(3) The Rent hereunder shall in no case be withheld or diminished on
account of any defect in the Premises or in the Building, any change
in the condition thereof, any damage occurring thereto, or the
existence with respect thereto of any violations of the laws or
regulations of any governmental authority except as otherwise
specifically provided herein.
C. Negligence of Tenant
--------------------
If the fire or other casualty causing damage to the Premises or other parts of
the Building shall have been caused by the negligence or misconduct of Tenant,
its agents, servants, or employees, or of any other person entering the Premises
under express or implied invitation of Tenant, such damage shall be repaired by
Landlord at the expense of Tenant and, in such event, there shall be no
abatement of Rent. Tenant's liability shall only be to the extent of any
uninsured losses.
D. Thirty Percent (30%) Damage
---------------------------
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In the event the Building is damaged to the extent of thirty percent (30%) or
more of the replacement cost thereof Landlord may elect to terminate this Lease,
whether the Premises were damaged or not, by giving Tenant notice at any time
within thirty (30) days after such damage occurred that this Lease will
terminate as of the date specified in the notice, but the termination date shall
be no less than thirty (30) and no more than (60) days after the giving of such
notice. In the event of the giving of such notice, this Lease shall expire and
all interest of Tenant in the Premises shall terminate on the date specified in
such notice and Rent shall be paid to the date of termination. Thereafter, both
Landlord and Tenant shall be free and discharged of all further obligations
hereunder.
E. Other Terminations
------------------
If the Building shall be damaged by fire or other casualty and any of the
following applies: (a) any mortgagee under a mortgage now or hereafter
encumbering the Property requires that the insurance proceeds payable as a
result of said fire or other casualty be used to reduce or retire the mortgage
debt, (b) the Building is damaged as a result of a risk that is not covered by
Landlord's insurance or the amount of insurance recovered by Landlord is
insufficient to cover the cost of repairing the Building, or (c) the Premises
are materially damaged during the last twelve (12) months of the Term, then, in
any such event, Landlord may, at its option, terminate this Lease by notifying
Tenant in writing of such termination within thirty (30) days after the date of
such damage or casualty, in which event the Rent hereunder shall be abated as of
the date of such notice, and Tenant shall vacate the Premises in accordance with
the requirements of this Lease, including without limitation, Section 32.D.
18. CONDEMNATION:
Tenant agrees that if the Building, or the Property, or any part thereof, shall
be taken or condemned for public or quasi-public use or purpose by any competent
authority during the Term of this Lease, (or transferred under threat of such
action,) then and in such event all sums that may be awarded for compensation
for such taking shall be the sole property of Landlord. Tenant shall have no
claim against Landlord and shall not have any claim or rights to any portion of
the amount that may be awarded as damages or paid as a result of any such
condemnation; and all rights of Tenant to damages therefor, if any, are hereby
assigned by Tenant to Landlord. Upon such condemnation or taking of a material
portion of the parking lot located on the property and/or the Building, the Term
of this Lease, at Landlord's sole option, shall cease and terminate from date of
such taking or condemnation, and Tenant shall have no claim against Landlord for
the value of any unexpired term of this Lease.
19. NOTICES:
All notices, which may or are required to be given by either party to the other
shall be in writing and mailed by express mail carrier or by United States
Postal Service Certified or Registered
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mail and shall be deemed effective upon receipt or the failure to accept
receipt. Notice shall be sent to the following addresses (or such other
addresses as the parties shall so advise by notice):
If to Landlord:
Long Wharf Drive, LLC
4 Hamilton Street
New Haven, CT 06511
Attention:
--------------------------
With a copy to:
Joseph K. Fortier, Esq.
Reid and Riege, P.C.
One State Street
Hartford, CT 06103
If to Tenant:
dsl.net, incorporated
50 Washington Street
Norwalk, CT 06854
20. DEFAULT AND REMEDIEES:
A. Default
-------
The occurrence of any one or more of the following events shall constitute a
default and breach of this Lease by Tenant:
(1) The vacating or abandonment of the Premises by Tenant.
(2) The failure by Tenant to make any payment of Rent, Tenant's
Proportionate Share of Operating and Tax Expenses, or Additional Rent
or other monetary payment required to be made by Tenant hereunder, as
and when due, where such failure shall continue for a period of ten
(10) days after such payment becomes due.
(3) The failure by Tenant to observe or perform any of the covenants,
conditions, or provisions of this Lease to be observed or performed by
Tenant, other than to make payments as required by this Lease, where
such failure shall continue for a period of thirty (30) days after
written notice thereof by Landlord to Tenant; provided, however, that
if the nature of Tenant's default is such that more than thirty (30)
days are reasonably required for its cure, then Tenant shall not be in
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default if Tenant commences such cure within said thirty (30) day
period and thereafter diligently prosecutes such cure to completion.
(4) The making by Tenant of any general assignment or general arrangement
for the benefit of creditors; or the filing by or against Tenant of a
petition to have Tenant adjudged a bankrupt, or a petition of
reorganization or arrangement under any law relating to bankruptcy
unless, in the case of a petition filed against Tenant, the same is
dismissed within sixty (60) days; or the appointment of a trustee or a
receiver to take possession of substantially all of Tenant's assets
located at the Premises or of Tenant's interest in this Lease where
possession is not restored to Tenant within thirty (30) days; or the
attachment, execution, or other judicial seizure of substantially all
of Tenant's assets located at the Premises or of Tenant's interest in
this Lease, where such seizure is not discharged within thirty (30)
days after the levy thereof.
B. Remedies
--------
In the event of any default or breach of Tenant, Landlord may at any time
thereafter, with or without notice or demand and without limiting Landlord in
the exercise of any right which Landlord may have by reason of such default or
breach terminate this Lease pursuant to this express stipulation in which event
this Lease shall expire and terminate and Landlord shall be entitled to recover
possession of the Premises in the manner prescribed by the statute relating to
summary process; and Landlord shall have the right to proceed as follows:
(1) Re-enter and take possession of the Premises or any part thereof and
repossess the same as of Landlord's former estate and expel Tenant and those
claiming through or under Tenant, and remove the effects of both or either with
force, if necessary, without being deemed guilty in trespass or of a forcible
entry or detainer and without prejudice to any remedies for arrears of Rent or
preceding breach of covenants. In such event Landlord shall be entitled to
recover from Tenant all damages incurred by Landlord by reason of Tenant's
default, including but not limited to the cost of recovering possession of the
Premises, expenses of reletting, including necessary renovation and alteration
of the Premises, reasonable attorneys fees and any real estate commission
actually paid. Such damages shall bear interest from the date due at the lesser
of (i) eighteen percent (18%) per annum or (ii) the maximum rate then
permissible under Connecticut law, until paid.
(2) Should Landlord elect to reenter as above provided, or should Landlord take
possession pursuant to legal proceedings or pursuant to any notice provided by
law or otherwise, Landlord may from time to time, without terminating Tenant's
obligations to pay Rent hereunder, relet the Premises or any part thereof for
such terms, at such rentals, and upon such other terms and conditions as
Landlord in its sole discretion may deem advisable. Landlord shall use
reasonable efforts, but shall not be obligated, to relet the Premises, and
nothing herein contained shall under
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<PAGE>
any circumstances be construed so as to require Landlord to lease the Premises
below the then-current market rental rates being obtained for similar office
buildings in the relevant market area or to lease the same to any tenant not
creditworthy or otherwise unacceptable, to Landlord and shall in no way be
responsible or liable for any failure to relet the Premises, or any part
thereof, or for any failure to collect any rent due upon such reletting. In the
event Landlord shall elect to so relet, then any rent received by Landlord from
such reletting shall be applied first, to the payment of any indebtedness other
than Rent due hereunder from Tenant to Landlord; second, to payment of any
reasonable cost of such reletting, including, without limitation, all
repossession costs, legal expenses, attorneys' fees, concessions, moving and/or
storage costs, alteration, remodeling and repair costs, leasing commissions, and
other expenses of preparation for such reletting (collectively, "Reletting
Costs"); third, to the unamortized portion of the Improvement Allowance
amortized on a straight-line basis over the initial term of this Lease, using an
annual interest rate equal to the prime rate announced as such in the Wall
Street Journal, plus two percent (2%), and fourth, to the payment of Rent due
and unpaid hereunder. Tenant shall satisfy and pay any deficiency between the
rents so collected from the total of the amounts for the items listed above as
"first," "second," "third," and "fourth" above. In no event shall Tenant be
entitled to any excess of any rent obtained by reletting over and above the
items listed above as "first," "second," "third," and "fourth" above.
(3) Tenant, until the end of the Term or what would have been such Term in the
absence of any such event, shall be liable to Landlord as damages for Tenant's
default, for the equivalent of the amount of the Rent, Tenant's Proportionate
Share of Operating and Tax Expenses, the Additional Rent and other charges which
would be payable under this Lease by Tenant if this Lease were still in effect,
plus all Reletting Costs, less the net proceeds of any reletting. Tenant shall
pay such current damages (herein called "deficiency") to Landlord monthly on the
days on which the Rent would have been payable under this Lease if this Lease
were still in effect, and Landlord shall be entitled to recover from Tenant each
monthly deficiency as the same shall arise.
The foregoing remedies may be pursued severally or jointly. No exercise by
Landlord of the foregoing remedies, and no expiration or termination of this
Lease or summary proceedings, abandonment or vacancy effected pursuant to this
Article 20, shall relieve Tenant of its liability and obligation under this
Lease, whether or not the Premises shall be relet. In any such event Tenant
shall pay Landlord the Base Rent, Tenant's Proportionate Share of Operating and
Tax Expenses, Additional Rent and other charges required Tenant's to be paid by
Tenant up to the time of such event.
(4) At Landlord's election, Landlord shall be entitled to recover as damages
caused by such breach of the provisions of this Lease in lieu of sums becoming
due under Section 20(B)(3): either (a) an amount equal to the difference, if
any, between (i) the Rent reserved hereunder for the unexpired portion of the
Term, together with all Reletting Costs and (ii) the fair rental value of the
Premises for the balance of the Term which Tenant proves can be realized from
reletting, both discounted at the rate of six percent (6%) per annum to their
then present worth. Said damages shall be due and payable to Landlord
immediately upon breach of this Lease as
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provided in this Article. Such sum shall be payable in addition to and not in
lieu of amounts due under Section 20(B)(1) above and any amounts owed pursuant
to the terms of this Lease for any period prior to termination. In determining
the fair rental value of the Premises, the rental realized by any reletting
shall be deemed prima facie evidence thereof, or (b) an amount equal to twelve
(12) months of Base Rent.
21. BANKRUPTCY:
If at any time during the Term of this Lease, a petition shall be filed, either
by or against Tenant, in any court or pursuant to any Federal, State or
municipal statute whether in bankruptcy, insolvency, for the appointment of a
receiver, involving Tenant's business or property or because of any general
assignment made by Tenant of Tenant's property for the benefit of Tenant's
creditors, then immediately upon the happening of any such event, in addition to
any other remedy available to Landlord hereunder and without any entry or other
act by Landlord, this Lease, subject to the time limitations set forth in
Section 20.(A)(4) at Landlord's option, shall cease and come to an end with the
same force add effect as if the date of the happening of any such event were the
date herein fixed for the expiration of the Term. It is further stipulated and
agreed that in the event of termination of the Term by the happening of any such
event, Landlord shall forthwith, upon such termination, any other provisions of
this Lease to the contrary notwithstanding, become entitled to recover as and
for liquidated damages caused by such breach of the provisions of this Lease, an
amount equal to the difference between (a) the then present cash value of the
future Rent reserved hereunder for the unexpired portion of the Term, and (b)
the then cash rental value of the Premises for the balance of the Term, unless
the statute which governs shall limit the amount of such claim capable of being
so proved, in which case Landlord shall be entitled to prove as and for
liquidated damages an amount equal to that allowed by or under any such statute.
Said damages shall be due and payable to Landlord immediately upon breach of
this Lease as provided in this Article. In making any such computation, the
then cash rental value of Premises shall be deemed prima facie to be the rental
realized upon any reletting, if such reletting can be accomplished by Landlord
within a reasonable time after such termination of this Lease, and the then
present cash value of the future rents reserved hereunder to Landlord for the
unexpired portion of the Term shall be deemed to be such sum, if invested at six
percent (6%) simple interest, as will produce the future rent over the period of
time in question. The provisions of this Article of this Lease shall be without
prejudice to Landlord's right to prove in full damages for Rent accrued prior to
termination of this Lease, but not paid. This provision of this Lease shall be
without prejudice to any rights given Landlord by any pertinent statute to prove
further any amounts allowed thereby.
22. LANDLORD DEFINED:
A. Definition
----------
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The term "Landlord" as used in this Lease insofar as covenants or obligations on
the part of Landlord are concerned, shall be limited to mean and include only
the owner or owners at the time in question of the fee of the Premises.
Landlord may assign, transfer, or sell this Lease in its sole and absolute
discretion. In the event of any transfer of title to such fee, Landlord herein
named (and in the case of any subsequent transfers or conveyances, the then
grantor) shall automatically be freed and relieved from and after the date of
such transfer or conveyance of all liability as respects the performance of any
covenants or obligations on the part of Landlord contained in this Lease
thereafter to be performed, provided that any funds in the hands of such
Landlord, or the then grantor, at the time of such transfer in which Tenant has
an interest, shall be turned over to the grantee, and any amount then due and
payable to Tenant by Landlord, or the then grantor under any provisions of this
Lease, shall be paid to Tenant.
B. Limitations of Assets Liable for Collection of Judgment
-------------------------------------------------------
If Landlord or any successor in interest be an individual, corporation, limited
liability company, limited liability partnership, joint venture, tenancy in
common, limited or general partnership, or other unincorporated aggregate of
individuals or a mortgagee (all of which are herein referred to individually and
collectively as "Landlord"), then anything elsewhere in this Lease to the
contrary notwithstanding, Tenant shall look solely to the estate and property of
such Landlord in the Building of which the Premises are a part for the
satisfaction of Tenant's remedies for the collection of a judgment (or other
judicial process) requiring the payment of money by Landlord in the event of any
default or breach by Landlord with respect to any of the terms, covenants, and
conditions of the Lease to be observed and/or performed by Landlord, and no
other property or assets of such Landlord, or of any shareholder, officer,
director, managing agent, member or partner of Landlord, shall be subject to
levy, execution, or other enforcement procedure for the satisfaction of Tenant's
remedies.
23. RECORDING PROHIBITED:
Tenant shall not record this Lease, or a memorandum or notice hereof, in any
form.
24. PREVAILING PARTY IN LEGAL PROCEEDINGS:
In the event any action is commenced for any breach of any covenant, condition,
or agreement herein contained, the prevailing party in such action shall be
entitled to receive all costs incurred in such action, including without
limitation, all reasonable attorneys' fees.
25. SEVERABILITY:
If any clause or provision of this Lease is or becomes illegal, invalid, or
unenforceable because of present or future laws or any rule or regulation or any
governmental body or entity, effective
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during its Term, the intention of the parties hereto is that the remaining parts
of this Lease shall not be affected thereby unless such invalidity is, in the
sole determination of Landlord, essential to the rights of both parties in which
event Landlord has the right to terminate this Lease on written notice to
Tenant.
26. HOLDING OVER:
If after the expiration of this Lease, Tenant shall remain in possession of the
Premises and continue to pay rent, without any written agreement as to such
holding, then such holding shall be deemed and taken to be a holding upon a
tenancy from month to month, subject to all the terms and conditions hereof on
the part of Tenant to be observed and performed and at a monthly rental
equivalent to one hundred fifty percent (150%) of the monthly installments of
Base Rent, and Tenant's Proportionate Share of Operating and Tax Expenses
hereinabove provided for during the year immediately preceding, all of which
shall be payable in advance on the first day of each calendar month. In the
event Tenant holds over for any reason, and Landlord or Tenant's successor in
occupancy suffers any cost, expense, or damage by reason of such holding over,
Tenant agrees to indemnify Landlord and the said successor in occupancy for all
such costs, expenses, or damages including reasonable attorney's fees. Such
indemnification payment shall be in addition to the Rent obligation assumed by
Tenant hereunder.
27. RE-ENTRY BY LANDLORD:
Tenant hereby expressly waives, so far as permitted by law, the service of any
notice of intention to re-enter provided for in any statute, and except as is
herein otherwise provided, Tenant, for and on behalf of itself and all persons
claiming through or under Tenant (including any leasehold mortgagee or other
creditor), also waives any and all right of redemption of re-entry or
repossession in case Tenant shall be dispossessed by a judgment or by warrant of
any court or judge or in case of re-entry or repossession by Landlord or in case
of any expiration or termination of this Lease. The terms "enter", "re-enter,"
"entry" or "re-entry" as used in this Lease are not restricted to their
technical legal meanings.
28. NO WAIVER:
No failure by Landlord to insist upon the strict performance of any agreement,
term, covenant or condition hereof or to exercise any right or remedy consequent
upon a breach thereof, and no acceptance of full or partial Rent during the
continuance, of any such breach, shall constitute a waiver of any such breach or
of such agreement, term, covenant or condition. No agreement, term, covenant or
condition hereof to be performed or complied with by Tenant, and no breach
thereof, shall be waived, altered or modified except by a written instrument
executed by Landlord. No waiver of any breach shall affect or alter this Lease,
but each and every agreement,
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term, covenant and condition shall continue in full force and effect with
respect to any other then existing or subsequent breach thereof.
29. OTHER REMEDIIES:
In the event of any breach or threatened breach by Tenant of any of the
agreements, terms, covenants or conditions contained in this Lease, Landlord
shall be entitled to enjoin such breach or threatened breach and shall have the
right to invoke any right and remedy allowed at law or in equity or by statute
or otherwise as though re-entry, summary proceedings, and other remedies were
not provided for in this Lease.
Landlord may, but shall not be obligated to, cure, at any time upon ten (10)
days' notice or without notice in case of emergencies, any default(s) by Tenant
under this Lease, and Tenant shall pay to Landlord on demand all costs and
expenses incurred by Landlord in curing such default(s), including, without
limitation, court costs and attorneys' fees and disbursements in connection
therewith, together with interest on the amount of costs and expenses so
incurred at the lesser of (i) eighteen percent (18%) per annum or (ii) the
maximum rate then permissible under Connecticut law, until paid.
Each right and remedy provided for in this Lease shall be cumulative and shall
be in addition to every other right or remedy provided for in this Lease or now
or hereafter existing at law or in equity or by statute or otherwise, and the
exercise or beginning of the exercise by Landlord or Tenant of any one or more
of the rights or remedies provided for in this Lease or now or hereafter
existing at law or in equity or by statute or otherwise shall not preclude the
simultaneous or later exercise by the party in question of any or all other
rights or remedies provided for in this Lease or now or hereafter existing at
law or in equity or by statute or otherwise.
30. NOTICE TO MORTGAGEES:
Tenant agrees that in the event Tenant shall claim any event of default or non-
performance hereunder on the part of Landlord or shall claim that there exist
any circumstances whatsoever which give rise (or with the passage of time would
give rise) to a right of termination on the part of Tenant hereunder, Tenant
shall give immediate written notice of such event or such circumstances to all
mortgagees of Landlord of which Tenant has been notified, in addition to and
separate from any notice required to be given to Landlord hereunder. Tenant
further agrees that if Landlord shall have failed to cure such default within
the time provided for in this Lease, then the holders of mortgages shall have an
additional thirty (30) days within which to cure such default or if such default
cannot be cured within that time, then such additional time as may be necessary
if within such thirty (30) days, any holder of a mortgage or deed of trust has
commenced and is diligently pursuing the remedies necessary to cure such default
(which may include the commencement of foreclosure proceedings, if necessary, to
effect such cure), in
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which event this Lease shall not be terminated while such remedies are being so
diligently pursued.
31. ENVIRONMENTAL LAWS:
A. Compliance:
----------
With respect to Tenant's use of the Premises, the Building and the Property,
Tenant shall at all times, at its own cost and expense, comply with all federal,
state, and local laws, ordinances, regulations, and standards relating to the
use, analysis, production, storage, sale, disposal, or transportation of any
"hazardous materials," "hazardous waste", or "hazardous substances,"
(collectively referred to herein as "Hazardous Substances") as such terms are
defined in any of the following: the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601, et
--
seq. ("CERCLA"); The Clear Air Act, as amended, 42 U.S.C. (S)7401, et seq.; The
- --- -- ---
Federal Water Pollution Control Act (Clean Water Act), 33 U.S.C. (S)1251, et
--
seq.; The Occupational Safety and Health Act, 29 U.S.C. (S)51, et seq.; The
- --- -- ---
Resource Conservation and Recovery Act, 42 U.S.C. (S)6901, et seq.; The
-- ---
Hazardous Materials Transportation Act, 49 U.S.C. Section 1802; The Toxic
Substances Control Act, 15 U.S.C. Section 2601, et seq.; and/or any other
-- ---
federal, state or local environmental law, ordinance, rule or regulation and the
regulations adopted and publications promulgated pursuant to any of said Acts
(collectively the "Hazardous Substance Laws"), including oil or petroleum
products or their derivatives, solvents, PCB's, explosive substances, asbestos,
radioactive materials or waste, and any other toxic, ignitable, reactive,
corrosive, contaminating, or pollution materials which are now or in the future
subject to any governmental regulations.
Tenant shall not generate, store, or dispose of any Hazardous Substances in or
on the Premises, the Building or the Property. Tenant shall not take any
remedial action in response to the presence or release of any Hazardous
Substances on or about the Premises, the Building or the Property without first
giving written notice of the same to Landlord. Tenant shall not enter into any
settlement agreement, consent decree, or other compromise with respect to any
claims relating to any Hazardous Substances in any way connected with the
Property without Landlord's prior written consent, which consent may be withheld
or conditioned in Landlord's sole and absolute discretion, and without affording
Landlord the opportunity to participate in any such proceedings.
All costs and expenses incurred by Landlord in connection with any environmental
audit shall be paid by Landlord (and may be included in Operating Expenses),
except that if any such environmental audit shows that Tenant has failed to
comply with the provisions of this Article, or that the Property (including
surrounding soil and any underlying or adjacent groundwater) have become
contaminated due to the operations or activities in any way attributable to
Tenant, then all of the costs and expenses of such audit shall be paid by Tenant
on demand, as Additional Rent.
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<PAGE>
Tenant shall immediately notify Landlord upon the receipt by Tenant of any
"Notice," as hereinafter defined, of any violation of the Hazardous Substance
Laws. "Notice" shall mean any summons, citation, directive, order, claim,
litigation, investigation, proceeding, judgment, letter or other communication,
written or oral, actual or threatened, from the United States Environmental
Protection Agency ("US EPA") or other federal, state or local agency or
authority or any other entity or any individual, concerning any intentional or
unintentional act or omission which has resulted or which may result in the
releasing of Hazardous Substances into the waters or onto the land of the State
or commonwealth in which the Property is located or into the "environment" as
such term is defined in CERCLA or into waters outside of the jurisdiction of the
State or commonwealth in which the Property is located, from or on the Premises,
the Building, or the Property or any portion thereof, and shall include the
imposition of any lien on the Premises, the Building, or the Property or any
portion thereof, pursuant to Hazardous Substance Laws or any violation of
federal, state or local environmental laws, ordinances, rules, regulations,
government actions, orders or permits, or any knowledge, after due inquiry and
investigation, or of any facts which could give rise to any of the above.
In the event Tenant fails to comply with the requirements of any of the
Hazardous Substance Laws, it shall be deemed an event of default of this Lease
and Landlord may, at its election, but without the obligation so to do, give
such notices or cause such work to be performed at the Premises, the Building,
or the Property, or take any and all other actions as Landlord deems necessary,
as shall cure said failure of compliance, and any amounts paid as a result
thereof, together with interest thereon at lesser of (i) eighteen percent (18%)
per annum or (ii) the maximum rate permissible under Connecticut Law for any
period during which there is such an event of default, from the date of payment
by Landlord, shall be immediately due and payable by Tenant to Landlord, as
Additional Rent, or Landlord, by the payment of any assessment, claim, or
charge, may, if it sees fit, be thereby subrogated to the rights of the
governmental agencies having jurisdiction over such matters.
B. Indemnity:
---------
In the event of any breach of this Article 31, Tenant agrees to defend,
indemnify, and hold harmless Landlord, its successors and assigns from and
against any and all liabilities, losses, damages, costs, expenses (including,
without limitation reasonable attorneys' fees and expenses), civil and/or
criminal penalties, causes of action, suits, claims, demand, or judgments of any
nature arising out of or in connection with (i) the presence of any Hazardous
Substances on or in the Premises, or the release of any Hazardous Substances
therefrom or from any property of Tenant located on or in the Building or the
Property; (ii) any failure by Tenant to comply with the terms of any order
issued by the US EPA, or any other federal, state, or municipal department or
agency having regulatory authority over environmental matters, with regard to
the Premises; and (iii) any lien or claim imposed under any Hazardous Substance
Laws. The provisions of this Section 3l.B. shall survive the expiration or
earlier termination of this Lease.
32. COMPLIANCE WITH LAW:
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<PAGE>
A. Tenant, at Tenant's expense, shall comply promptly with the laws,
ordinances, rules, regulations and orders of all governmental authorities in
effect from time to time during the Term that shall impose any duty on Tenant
with respect to Tenant's use of the Premises, including, without limitation, the
Americans with Disabilities Act ("ADA") and the Federal Occupational Safety and
Health Act of 1970, and will obtain any and all licenses and permits necessary
for any such use. Following completion of the Construction Work, Tenant shall
not be required to make any alterations in or to the Premises in order to comply
with the foregoing, unless such alterations shall be necessitated or occasioned,
in whole or in part (i) by Tenant's obligations under the ADA as set forth in
subsection (B), (ii) by the use or manner of use of the Premises by Tenant, (i)
by reason of a breach of any of Tenant's covenants, warranties or agreements
hereunder, or (iv) by the willful misconduct or negligence of Tenant, or any
person claiming through or under Tenant, or any of their servants, employees,
contractors, agents, visitors or licensees.
B. Tenant represents, warrants and agrees that: (i) the placement of Tenant's
furniture, fixtures and equipment within the Premises, and (ii) all of Tenant's
Leasehold Improvements or alterations to the Premises undertaken by Tenant will
comply, to the extent necessary, with the ADA. Tenant agrees to indemnify and
hold Landlord harmless from any claims, losses, costs, damages or other expenses
(including, without limitation, reasonable attorneys' fees) arising from any
breach of the foregoing warranty and covenants.
33. RIGHT OF FIRST OFFER:
If at any time during the first two (2) Lease Years of this Lease, Landlord
decides to seek offers to lease (i) all or any part of the space remaining on
the fifth (5th) floor of the Building following the leasing of space remaining
on said fifth floor to any other tenant after the execution of this Lease, or in
the alternative at Landlord's discretion, (ii) a block of space equal to or
greater than 5,000 rentable square feet elsewhere in the Building, Landlord
shall provide Tenant with written notice of the terms under which Landlord will
seek such offers ("Landlord's Offer"). Within fourteen (14) days following its
receipt of Landlord's Offer, Tenant shall have the right to accept the same by
written notice to Landlord. Within thirty (30) days following Tenant's written
notice of acceptance, Landlord and Tenant shall enter into an amendment of this
Lease incorporating the terms of Landlord's Offer. In the event Tenant either
rejects Landlord's Offer or fails to notify Landlord of its acceptance of the
same within said fourteen (14) day period, the right of first offer shall
terminate.
34. MISCELLANEOUS:
A. Taxes
-----
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<PAGE>
Tenant, at all times, shall be responsible for and shall pay, before
delinquency, all municipal, county, state, or federal taxes which may be levied,
imposed or assessed against Tenant's personal property, its leasehold interest,
its right to occupy the Premises, or the Rent. If any governmental authority
requires that a tax, other than the ad valorem taxes above mentioned, be paid by
Tenant, but collected by Landlord, for and on behalf of said governmental
authority, and from time to time forwarded by the Landlord to said governmental
authority, the same shall be paid by Tenant to Landlord and be collectable by
Landlord and for the purpose of enforcing payment thereof shall be deemed
Additional Rent hereunder, payable monthly.
B. Accord and Satisfaction:
-----------------------
No payment by Tenant or receipt by Landlord of any lesser amount than the amount
stipulated to be paid hereunder shall be deemed other than on account of the
earliest stipulated Rent; nor shall any endorsement or statement on any check or
letter be deemed an accord and satisfaction, and Landlord may accept any check
or payment without prejudice to Landlord's right to recover the balance due or
to pursue any other remedy available to Landlord.
C. No Representations by Landlord:
-------------------------------
Neither Landlord nor any agent or employee of Landlord has made any warranties,
representations or promises with respect to the Building or the Premises except
as herein expressly set forth herein.
D. End of Term:
-----------
At the expiration or sooner termination of the Term, Tenant shall quit and
surrender to Landlord the Premises, broom clean and in good order and condition,
ordinary wear and tear and damage by fire and any other casualty excepted. At
such expiration or sooner termination Tenant shall remove all personal property
of Tenant except as provided in Section 5 hereof, and Tenant shall repair all
damage to the Premises or Building caused by such removal and restore the
Premises to the condition in which they were prior to the installation of the
items so removed. Any personal property of the Tenant which shall remain in or
upon the Premises after the expiration of the Term or sooner termination thereof
and the removal of Tenant from the Premises may, at the option of Landlord, be
deemed to have been abandoned, and either may be retained by Landlord as its
property or may be disposed of in such manner as Landlord may see fit. If the
Premises are not surrendered as and when aforesaid, Tenant shall indemnify
Landlord against loss or liability resulting from the delay by Tenant in so
surrendering the Premises including, without limitation, any claims made by any
succeeding occupant founded on such delay. Tenant's obligations under this
Section 32.D. shall survive the expiration or sooner termination of the Term.
E. Waiver of Jury Trial and Right to Counterclaim/Prejudgment Remedy Waiver
------------------------------------------------------------------------
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<PAGE>
(a) Landlord and Tenant shall and they hereby do waive trial by jury in
any action, proceeding or counterclaim brought by either of the
parties hereto against the other on any matters arising out of or in
any way connected with this Lease, the relationship of Landlord and
Tenant, Tenant's use or occupancy of the Premises, and any emergency
or other statutory remedy. Tenant further agrees that it shall not
interpose any counterclaim(s) in a summary proceeding or in any action
based on holdover or non-payment of Rent.
(b) TENANT, FOR ITSELF AND FOR ALL PERSONS CLAMING THROUGH OR UNDER IT,
HEREBY ACKNOWLEDGES THAT THIS LEASE CONSTITUTES A COMMERCIAL
TRANSACTION AS SUCH TERM IS USED AND DEFINED IN SECTION 52-278(A) OF
THE CONNECTICUT GENERAL STATUTES, OR ITS SUCCESSOR PROVISIONS IF
AMENDED, AND HEREBY EXPRESSLY WAIVES ANY AND ALL RIGHTS WHICH ARE OR
MAY BE CONFERRED UPON TENANT BY SAID ACT TO ANY NOTICE OR HEARING
PRIOR TO A PREJUDGMENT REMEDY UNDER SECTIONS 52-278(A) TO 52-278(G),
OR THEIR SUCCESSOR PROVISIONS IF AMENDED, INCLUSIVE OF SAID STATUTES.
SUCH WAIVER IS INTENDED AS A WAIVER IN ACCORDANCE WITH SECTION 52-
278(F) OR ITS SUCCESSOR PROVISIONS IF AMENDED, OF SAID STATUTES.
F. Intentionally Omitted.
---------------------
G. Unavoidable Delays:
-------------------
It is understood and agreed that with respect to any service to be furnished or
obligations to be performed by Landlord for Tenant that in no event shall
Landlord be liable for failure to furnish or perform the same when prevented
from doing so by strike, lockout, breakdown, accident, supply, or inability by
the exercise of reasonable diligence to obtain supplies, parts, or employees
necessary to furnish such service or meet such obligation; or because of war or
other emergency; or for any cause beyond Landlord's reasonable control; or for
any cause due to any act or omission of Tenant or its agents, employees,
licensees, invitees, or any persons claiming by, through, or under Tenant
(individually and collectively referred to herein as "force majeure").
H. Brokerage:
----------
Each party represents to the other that (i) it has not dealt with any broker,
agent or other intermediary who is or may be entitled to be paid a broker
commission or finder's fee in connection with this Lease, except for
Insignia/ESG ("Landlord's Broker") and Sentry Commercial Real Estate Services,
Inc. ("Tenant's Broker"); and (ii) there are no claims for brokerage commissions
or finder's fees in connection with this Lease, except as to Landlord's Broker
and Tenant's Broker. Landlord and Tenant acknowledge that Landlord shall pay a
commission or finder's fee only to Landlord's Broker pursuant to a separate
agreement between
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<PAGE>
Landlord and Landlord's Broker. Landlord shall have no obligation or liability
of any nature whatsoever to pay any commission, broker's fee or otherwise to
Tenant's Broker. Tenant's Broker shall be paid by Landlord's Broker. Each party
agrees to indemnify the other and hold it harmless from all liabilities arising
from breach of the representations stated above. The representations and
obligations contained in this subparagraph 34(H) shall survive the termination
of this Lease.
I. Successors and Assigns:
----------------------
The provisions of this Lease, except as herein otherwise specifically provided
shall extend to, bind and inure to the benefit of the parties hereto and their
respective personal representatives, heirs, successors and permitted assigns.
J. Consents and Approvals:
----------------------
In the event that Tenant shall seek the approval by or consent of Landlord and
Landlord shall fail or refuse to give such consent or approval, Tenant shall not
be entitled to any damages for any withholding or delay of such approval or
consent by Landlord, it being intended that Tenant's sole remedy shall be an
action for injunction or specific performance and that said remedy of any action
for injunction or specific performance shall be available only in those cases
where Landlord shall have expressly agreed in writing not to unreasonably
withhold or delay its consent.
K. Interpretation:
---------------
Irrespective of the place of execution or performance, this Lease shall be
governed by and construed in accordance with the laws of the State of
Connecticut. If any provision of this Lease or the application thereof to any
person or circumstances shall, for any reason and to any extent, be invalid or
unenforceable, the remainder of this Lease and the application of that provision
to other persons or circumstances shall not be affected but rather shall be
enforced to the extent permitted by law. The table of contents, captions,
headings and titles in this Lease are solely for convenience of reference and
shall not affect its interpretation. This Lease shall be construed without
regard to any presumption or other rule requiring construction against the party
causing this Lease to be drafted. If any words or phrases in this Lease shall
have been stricken out or otherwise eliminated, whether or not any other words
or phrases have been added, this Lease shall be construed as if the words or
phrases so stricken out or otherwise eliminated were never included in this
Lease and no implication or inference shall be drawn from the fact that said
words or phrases were so stricken out or otherwise eliminated. Each covenant,
agreement, obligation or other provision of this Lease shall be deemed and
construed as a separate and independent covenant of the party bound by,
undertaking or making same, not dependent on any other provision of this Lease
unless otherwise expressly provided. All terms and words used in this Lease,
regardless of the number or gender in which they are used, shall be deemed to
include any other number and any other gender as the context may require.
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<PAGE>
L. Authority:
---------
Each person executing this Lease warrants to the other party that it has full
right and authority to enter into this Lease and that each person signing on
behalf of such party is authorized to do so.
M. Complete Agreement:
------------------
There are no representations, agreements, arrangements or understandings, oral
or written, between the parties relating to the subject matter of this Lease
which are not fully expressed in this Lease. This Lease cannot be changed or
terminated orally or in any manner other than by a written agreement executed by
both parties.
LANDLORD:
Witnessed by: LONG WHARF DRIVE, LLC
By:
- ---------------------------- ----------------------------
Its:
------------------------
- ----------------------------
STATE OF CONNECTICUT )
) ss.:
COUNTY OF )
----------
On this the day of , 1999 before me , the
-- ------------ ---------
undersigned officer, personally appeared Barbara E. Hampton, who acknowledged
herself to be the of Long Wharf Drive, LLC and that she, as such
----------
and being authorized to do so, executed the foregoing instrument for
- ---------
the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
-----------------------------------
Notary Public
My Commission Expires:
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<PAGE>
Witnessed by: TENANT:
dsl.net, incorporated
By:
- -------------------------- --------------------------
Name:
------------------------
Title:
-----------------------
- --------------------------
STATE OF CONNECTICUT )
) ss.:
COUNTY OF )
----------
On this the day of , 1999 before me , the
-- ------------ ---------
undersigned officer, personally appeared , who acknowledged
---------
himself/herself to be the of and that he/she, as such
---------- -----------
, being authorized to do so, executed the foregoing instrument for the
- --------
purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
-------------------------------------
Notary Public
My Commission Expires:
---------------
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<PAGE>
AMENDMENT NO. 1 TO LEASE
THIS AMENDMENT NO. 1 TO LEASE is made and entered into as of the 9th day
of June, 1999 between Landlord and Tenant named below.
LANDLORD: LONG WHARF DRIVE, LLC
310 Orange Street
New Haven, CT 06511
TENANT: dsl.net, incorporated
545 Long Wharf Drive
New Haven, CT 06511
BUILDING: 545 Long Wharf Drive
New Haven, CT 06511
WHEREAS, Landlord and Tenant executed a lease dated as of February 5, 1999
(the "Lease"), by which Tenant leased 12,078 rentable square feet on the fifth
(5th) floor of the Building (the "Premises"); and
WHEREAS, Tenant also leases and occupies certain "Temporary Space," as that
term is defined in the Lease; and
WHEREAS, Tenant wishes to lease an additional 19,422 rentable square feet
of space located on the fifth (5th) floor in the Building (the "Additional
Space"), thereby increasing the size of the Premises to 31,500 rentable square
feet; and
WHEREAS, Tenant wishes to continue its occupancy of the Temporary Space
until the "Additional Space Commencement Date," as that term is defined below;
and
WHEREAS, Landlord and Tenant wish to execute an amendment of the Lease
stating, among other things, the new area of the Premises, the annual Base Rent,
the monthly rent installment, and Tenant's Proportionate Share,
NOW, THEREFORE, the parties to this Amendment No. 1 to Lease, in
consideration of the covenants hereinafter contained and the sum of One Dollar
($1.00) to each party paid by the other, the receipt of which is hereby
acknowledged, I do covenant and agree as follows:
1. Unless otherwise stated herein, this Amendment is effective on the day
and year written above.
<PAGE>
-2-
2.
(a) Tenant shall acquire and lease from Landlord the Additional
Space, said Additional Space being shown and designated on the plan attached
hereto as Exhibit A , on the later to occur of (i) June 15, 1999, and (ii) the
date the Additional Space is "Substantially Completed," the later to occur of
said dates being referred to as the "Additional Space Commencement Date." The
Additional Space shall be deemed "Substantially Completed" when Landlord has
completed certain improvements (the "Improvements") as shown on the plans which,
when approved by Landlord, shall be narratively described by title block in
Exhibit B attached hereto and made a part hereof (the "Additional Space
- ---------
Construction Plans"), as shall be determined by Landlord's project architect or
construction manager, despite the fact that minor or insubstantial details of
construction, decoration or mechanical adjustments remain to be performed,
provided said minor terms can be fully performed within sixty (60) days without
(material) interference with Tenants use of the Additional Space. The
Improvements shall be performed by Landlord, at Tenant's sole cost and expense
as more particularly described in Subparagraph 2(c) below. Tenant's occupancy of
the Additional Space shall be for a term as shall be co-terminous with the
expiration date of the Lease.
(b) Landlord will use commercially reasonable efforts to
Substantially Complete the Improvements by June 15, 1999, provided Tenant has
submitted the Additional Space Construction Plans on a timely basis as required
by Landlord and Tenant does not otherwise interfere with Landlord's construction
of the Improvements. Landlord shall have no liability for Landlord's failure to
Substantially Complete the Improvements by June 15, 1999.
(c) Tenant's costs ("Tenant's Additional Space Costs") for the
Improvements shall be the contract price paid by Landlord for the construction
of the Improvements and all materials associated therewith, as the same may have
been revised by any change orders, plus the following: (i) permit fees; (ii)
space planning and other design costs; (iii) fees of a third party construction
manager; (iv) fees of architects and engineers in connection with the design of
the Improvements; (v) general contractor profit and overhead; (vi)
administrative fees of Landlord in connection with overseeing the design and
construction of the Improvements; (vii) the cost of installing submeter(s) in
the Additional Space for measuring Tenant's electrical consumption; and (viii)
all other costs and expenses in connection with the design and construction of
the Improvements.
(d) Landlord shall provide Tenant an allowance of up to Twelve and
00/100 Dollars ($12.00) per rentable square foot of the Additional Space (the
"Additional Space Improvement Allowance"), to be applied against Tenant's
Additional Space Costs. Within sixty (60) days of Substantial Completion of the
Additional Space, Landlord shall furnish to Tenant a final accounting of
Tenant's Additional Space Costs. To the extent that Tenant's Additional Costs
exceed Ten and 00/100 Dollars ($10.00) per rentable square foot of the
Additional Space but are less than or equal to Twelve and 00/100 Dollars
($12.00) per rentable square foot of the Additional Space (the "Additional Space
Excess Tenant's Costs"), annual Base Rent shall be increased as follows: the
Additional Space Excess Tenant's Costs shall be fully amortized on a straight-
line basis over the remaining initial Term, using an annual interest factor of
ten percent (10%), so as to arrive at a monthly amortization amount (the
"Additional Space Monthly Amortized Allowance Amount"). The preceding sentence
notwithstanding, Tenant shall also remain fully liable and obligated to pay for
all Tenant's Additional Space Costs in excess of Twelve and 00/100 Dollars
($12.00) per rentable square foot of the Additional Space as provided in
subparagraph 2(e) below. The Additional Space Monthly Amortized Allowance Amount
shall be added to the monthly installment of Base Rent and shall be treated as
Base Rent for all purposes of the Lease. Upon determination of the Additional
Space Monthly Amortized Allowance Amount, the parties shall enter into an
amendment to this Lease to establish the increased Base Rent. Any Additional
Space Excess Tenant's Costs arising hereunder and the corresponding increase to
Base Rent shall be in addition to, and not in lieu of, any increase in Base Rent
arising as a result of any "Excess Tenant's Costs" as set forth in subparagraph
5(C)(d) of the Lease.
<PAGE>
-3-
Space Monthly Amortized Allowance Amount, the parties shall enter into an
amendment to this lease to establish the increased Base Rent. Any Additional
Space Excess Tenant's Cost arising hereunder and the corresponding increase to
Base Rent shall be in addition to, and not in lieu of, any insrease in base Rent
arising as a result of any "Excess Tenant's Cost" as set forth in subparagraph
5 (c) (d) of the Lease.
(e) If Tenant's Additional Space Costs exceed the Additional Space
Improvement Allowance, then Tenant shall pay Landlord such excess within ten
(10) days after receipt of such final accounting, as Additional Rent.
(f) If Tenant's Additional Space Costs are less than the Additional
Space Improvement Allowance and "Tenant's Costs," as that term is defined in
subparagraph 5(C)(a) of the Lease (for the construction of the original Premises
as contemplated in paragraph 5 of the Lease) are greater than the "Improvement
Allowance," as that term is defined in subparagraph 5(C)(b) of the Lease, then
any unused portion of the Additional Space Improvement Allowance shall be
applied by Landlord toward the difference between Tenant's Costs and the
Improvement Allowance. For example, if Tenant's Costs equal $14.00 per rentable
square foot of the original Premises (with the Improvement Allowance being
capped at $12.00 per rentable square foot of the original Premises) and Tenant's
Additional Space Costs equal $10.00 per rentable square foot of the Additional
Space (with the Additional Space Improvement Allowance being capped at $12.00
per rentable square foot of the Additional Space), then Landlord shall apply the
balance of the Additional Space Improvement Allowance (said balance being $2.00
per rentable square foot of the Additional Space) toward Tenant's Costs. Tenant
shall remain solely liable for any deficiency remaining for Tenant's Costs. If
any surplus exists from the Improvement Allowance and/or the Additional Space
Improvement Allowance after each has been applied toward Tenant's Costs and
Tenant's Additional Space Costs, as the case may be, the same shall be retained
by Landlord. If the cross-funding contemplated by this subparagraph 2(f) is
utilized, then the corresponding increase to Base Rent set forth in subparagraph
5(C)(d) of the Lease and in subparagraph 2(d) shall be calculated pursuant to
subparagraph 2(g) below.
(g) Pursuant to subparagraph 2(f) above, if the quotient obtained by
dividing the sum of Tenant's Costs and Tenant's Additional Space Costs by the
size of the entire Premises (i.e. the entire Premises consisting of 31,500
rentable square feet) is less than Ten and 00/100 Dollars ($10.00) per rentable
square foot of the entire Premises, then the increase(s) to Base Rent set forth
in subparagraph 5(C)(d) of the Lease and subparagraph 2(d) of this Amendment
shall be inapplicable. For example, although the Improvement Allowance actually
disbursed toward Tenant's Costs may be in excess of $10.00 per rentable square
foot of the original Premises (which would otherwise trigger the increase to
Base Rent), if Tenant's Additional Space Costs, and therefore the Additional
Space Improvement Allowance, is a number which, when calculated on a per
rentable square foot of the Additional Space basis, is such that the total
amount of the sum of Tenant's Costs and Tenant's Additional Space Costs result
in an average cost of $10.00 per rentable square foot of the entire Premises or
less, then there shall be no such increase to Base Rent. Similarly, if,
following any cross-funding contemplated by the provisions of subparagraph 2(f)
above, the average of Tenant's Costs and Tenant's Additional Space Costs are
<PAGE>
-4-
in excess of $10.00 per rentable square foot of the entire Premises, then Base
Rent shall increase per the provisions of subparagraph 5(C)(d) of the Lease and
2(d) herein.
(h) Tenant acknowledges and agrees that the Improvement Allowance
contemplated in paragraph 5(C)(b) of the Lease shall apply only to the rentable
square footage of the original Premises, which consist of 12,078 rentable square
feet. The purpose of this subparagraph 2(h) is to prevent the duplication of
the payment of any improvement allowance for the same area of space.
(i) Tenant agrees that it shall continue making all payments of
Base Rent and Additional Rent on the original Premises as provided in the Lease
until the increased rental provisions contained in Section 4 below become
effective.
3. Effective on the Additional Space Commencement Date:
(a) Subparagraph 1(A) of the Lease is hereby modified by deleting
the term "12,078 rentable square feet" in the second line of said subparagraph,
and inserting the term "31,500 rentable square feet" in lieu thereof.
(b) Tenant shall be required to pay Tenant's share of all
Electricity Charges serving the Building. For purposes of this subparagraph
3(b), Tenant agrees that its share shall be 11.80% with respect to its
obligation for the payment of said Electricity Charges. The intent of the
preceding sentence is to provide that although "Tenant's Proportionate Share"
shall not be increased for a period of ninety (90) days after the Additional
Space Commencement Date as provided in Section 4 below, with respect to Tenant's
payments of "Tenant's Proportionate Share of Operating and Tax Expenses," as
that term is defined in the Lease, Tenant's Proportionate Share shall
nevertheless be increased immediately on the Additional Space Commencement Date
with respect to all Electricity Charges for the Building, regardless of whether
the same are ordinarily included in Operating Expenses.
(c) The number of parking spaces allocated to Tenant shall be
proportionately increased in accordance with the parking ratio requirements set
forth in Paragraph l(B).
4. Effective as of that date which is ninety (90) days following the
Additional Space Commencement Date:
(a) The paragraph entitled "Base Rent" in Paragraph 3 of the Lease
is hereby deleted in its entirety and replaced with the following:
"Base Rent: The Base Rent payable during the initial Term shall
be Four Hundred Forty-One Thousand and 00/100 Dollars ($441,000.00) per
annum (based on a per rentable square foot per annum rate of $14.00), which
shall be payable in advance, in equal monthly installments of Thirty-Six
Thousand Seven Hundred Fifty and 00/100 Dollars ($36,750.00)."
<PAGE>
-5-
(b) The paragraph entitled "Tenant's Proportionate Share" in
Paragraph 3 is hereby modified by deleting the term "4.52%" and inserting the
term "11.80%" in lieu thereof.
5. Commencing as of March 1, 1999, the "Temporary Space" as defined in
Paragraph 2(A) of the Lease, is hereby modified to include an additional 1,500
rentable square feet, such that the Temporary Space shall consist of a total of
4,000 rentable square feet, as shown on "Exhibit" A-3 annexed hereto and made a
---
part hereof. Further, as of March 1, 1999, the second paragraph of Paragraph
2(E) of the Lease is hereby deleted in its entirety and replaced with the
following:
"Commencing March 1, 1999 and continuing on the first day of each
calendar month through and including the Additional Space Commencement Date
(the "Temporary Space Term"), in addition to and not in lieu of Tenant's
other obligations under this Lease, Tenant shall pay to Landlord, in the
manner provided in Section 3 below, for its use and occupancy of the
Temporary Space, Base Rent in the amount of Four Thousand Six Hundred
Sixty-Six and 67/100 Dollars ($4,666.67). Tenant shall also be responsible
during the Temporary Space Term for payment of its Proportionate Share of
Operating and Tax Expenses as defined below, except that Tenant's
proportionate share of such costs for Tenant's use and occupancy of the
Temporary Space, shall be 1.50%. If Tenant fails to vacate the Temporary
Space by the Additional Space Commencement Date, the same shall constitute
an event of default under this Lease and, in addition to the other rights
afforded Landlord hereunder, the provisions of Section 26 hereof shall
apply to such holdover."
6. Effective as of the date of this Amendment, Paragraph 4 of the Lease
entitled "Letter of Credit" is hereby modified by deleting the fifth (5th)
sentence in its entirety, which sentence defines the term "Required Amount," and
inserting the following sentence in lieu thereof:
"As used herein, the term "Required Amount" shall mean (a)
$517,418.37, for the period from the Commencement Date to and including the
day immediately preceding the first (lst) anniversary of the Commencement
Date, (b) $413,934.70, for the period from the first anniversary of the
Commencement Date to and including the day immediately preceding the second
2nd anniversary of the Commencement Date, (c) $310,451.03, for the period
from the second anniversary of the Commencement Date to and including the
day immediately preceding the third (3rd) Anniversary of the Commencement
Date, (d) $206,967.36, for the period from the third anniversary of the
Commencement ]Date to and including the day immediately preceding the
fourth (4th) Anniversary of the Commencement Date, and (c) $103,483.60,
for the period from the fourth (4th) anniversary of the Commencement Date
to and including the day immediately preceding the fifth (5th) anniversary
of the Commencement Date.
7. Effective as of February 5, 1999, Paragraph 5(C)(d) of the Lease is
hereby modified by deleting the word "If" from the first line of said section
and inserting in lieu thereof the phrase "To the extent that". Further, the
following is hereby added after the first sentence of said section: "The
preceding sentence notwithstanding, Tenant shall also remain fully liable and
<PAGE>
-6-
obligated to pay for all Tenant's Costs in excess of Twelve and 00/100 Dollars
($12.00) per rentable square foot of the Premises as provided in subparagraph
5(C)(c) above."
8. Subitem "(i)" of Paragraph 33 of the Lease is hereby deleted in its
entirety.
9. Each party represents to the other that (i) it has not dealt with any
broker, agent or other intermediary who is or may be entitled to be paid a
broker commission or finder's fee in connection with this Amendment No. 1 to
Lease, except for Insignia/ESG ("Landlord's Broker") and Sentry Commercial Real
Estate Services, Inc. ("Tenant's Broker"); and (ii) there are no claims for
brokerage commissions or finder's fees in connection with this Amendment, except
as to Landlord's Broker and Tenant's Broker. Landlord acknowledges that any
commission or finder's fee due to the Broker(s) in connection with this Lease
shall be the sole obligation of Landlord. Each party agrees to indemnify the
other and hold it harmless from all liabilities arising from breach of the
representations stated above. The representations and obligations contained in
this Section 9 shall survive the termination of this Amendment.
10. Except as set forth above, the Additional Space shall be added to the
Premises for the remainder of the Term on the Additional Space Commencement Date
and shall be subject to all of the terms and conditions of the Lease.
11. Tenant hereby represents and warrants to Landlord that "dsl.net,
incorporated," "DSL.net, Inc." and "DSL.NET, INC." are one and the same entity.
12. As of March 1, 1999, Exhibit A-3 attached hereto and made a part
-----------
hereof is hereby substituted for and shall replace, for all purposes, Exhibit A-
---------
3 originally attached to and made a part of the Lease.
- -
13. Except as modified by this Amendment No. I to Lease, the terms and
provisions of the Lease are hereby confirmed and ratified, and that instrument
shall remain in full force and effect as modified herein.
<PAGE>
-7-
IN WITNESS WHEREOF, Landlord and Tenant have signed this Amendment No. 1 to
Lease as of the day and year first above written.
SIGNED, SEALED, AND DELIVERED
IN THE PRESENCE OF: LANDLORD
LONG WHARF DRIVE, LLC
______________________________ By:_______________________________
______________________________ Its
TENANT
dsl.net, incorporated
______________________________ By:_______________________________
______________________________ Its Authorized Signatory
<PAGE>
Exhibit 10.08
AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
THIS AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT (this "Agreement") is
made and entered into as of this 20th day of April, 1999, by and among dsl.net,
inc., a Delaware corporation (the "Company"), and the Shareholders listed on
Schedule I hereto (each a "Shareholder" and, collectively, the "Shareholders").
WITNESSETH:
-----------
WHEREAS, the Company intends to sell shares of its preferred stock to
certain investors (the "Investors") pursuant to that certain Series C Preferred
Stock Purchase Agreement, dated as of March 31, 1999, by and among the Company
and the Investors listed therein (the "Series C Preferred Stock Purchase
Agreement"); and
WHEREAS, the Company and the Shareholders are parties to a Shareholders'
Agreement dated as of January 7, 1999 (the "Shareholders' Agreement") and agree
that such agreement be amended and restated as set forth herein; and
WHEREAS, the Shareholders' Agreement included terms and provisions related
to the treatment of 3,000,000 shares of Common Stock owned by the Shareholders
and subject to certain repurchase provisions thereof and described therein as
the "Milestone Shares" (the "Milestone Shares"), which shares shall not be
subject to this Agreement or to any other repurchase or similar provisions; and
WHEREAS, pursuant to transactions separate from this Agreement, but of date
even herewith, certain of the Shareholders are surrendering certain of their
Milestone Shares to the Company; and
WHEREAS, in order to induce the Investors to enter into and carry out the
transactions contemplated by the Series C Preferred Stock Purchase Agreement,
the Company and the Shareholders are willing to enter into this Agreement, which
shall supersede in full the Shareholders' Agreement.
NOW, THEREFORE, in consideration of the premises and of the mutual
covenants and agreements hereinafter set forth, it is hereby covenanted and
agreed as follows:
SECTION 1
Definitions
As used herein, the following terms shall have the respective meanings
following such terms:
<PAGE>
Cease Employment shall mean the cessation of employment with the Company.
----------------
Certificate of Incorporation shall mean the Company's Restated Certificate
----------------------------
of Incorporation, as amended from time to time.
Common Stock shall mean the Company's Common Stock, par value $.001 per
------------
share.
Escrow Agent see Section 2.3.
------------
Purchase Option see Section 2.1.
---------------
Purchase Option Shares see Section 2.1.
----------------------
Purchase Price shall mean $.005 per share, subject to equitable adjustment
--------------
by the Company's Board of Directors for stock splits, stock dividends, stock
combinations, recapitalizations and similar events.
Securities Act shall mean the Securities Act of 1933, as amended, and any
--------------
successor statute thereto.
Shareholders shall mean the persons listed on Schedule I hereto and shall
------------
include any other party who agrees in writing with the parties hereto to be
bound by and to comply with all applicable provisions of this Agreement.
SECTION 2
Purchase Option Shares
Section 2.1 Purchase Option. If a Shareholder shall Cease Employment at
----------- ---------------
any time, the Company shall have the right to exercise the "Purchase Option,"
which consists of the right to purchase from such Shareholder or his or its
personal representatives, as the case may be, at the Purchase Price, all or any
part of the Purchase Option Shares, as described below.
(a) With respect to Mr. Jaser, "Purchase Option Shares" shall mean 450,000
shares of Common Stock less an amount equal to 1/36th of such shares for each
and every full month which has elapsed from March 15, 1999 until the date Mr.
Jaser Ceases Employment or all such shares are no longer subject to the Purchase
Option.
(b) With respect to Mr. Tang, "Purchase Option Shares" shall mean 375,000
shares of Common Stock less an amount equal to 1/36th of such shares for each
and every full month which has elapsed from March 15, 1999 until the date Mr.
Tang Ceases Employment or all such shares are no longer subject to the Purchase
Option.
(c) With respect to Mr. Struwas, "Purchase Option Shares" shall mean
525,000 shares of Common Stock less an amount equal to 1/36th of such shares for
each and every full month which has elapsed from March 15, 1999 until the date
Mr. Struwas Ceases Employment or all such shares are no longer subject to the
Purchase Option.
-2-
<PAGE>
(d) With respect to Mr. Sun, "Purchase Option Shares" shall mean 1,087,500
shares of Common Stock less an amount equal to 1/36th of such shares for each
and every full month which has elapsed from March 15, 1999 until the date Mr.
Sun Ceases Employment or all such shares are no longer subject to the Purchase
Option.
Section 2.2 Procedures.
----------- ----------
(a) The Purchase Option shall be exercised by written notice signed by an
officer of the Company, on behalf of the Company, and delivered to the
Shareholder who has Ceased Employment within thirty (30) days after the date
such Shareholder has Ceased Employment. The Purchase Price shall be payable, at
the option of the Company, in cancellation of all or a portion of any
outstanding indebtedness of such Shareholder to the Company or in cash (by
check) or both.
(b) A Shareholder shall not sell or transfer any shares of Common Stock
subject to the Purchase Option without the prior written consent of the Company.
(c) Subject to the other provisions of this Agreement, each Shareholder
shall, during the term of this Agreement, exercise all rights and privileges of
a Shareholder of the Company with respect to the Shares subject to the Purchase
Option.
(d) The Company may assign its rights under this Section 2. The Company
covenants that to the extent it has the right to exercise the Purchase Option
and it chooses not to exercise such right, it will assign such right to the
Shareholders, exclusive of any Shareholder that has Ceased Employment, on a pro
rata basis according to the number of shares of Common Stock held by each such
person. The Company covenants further that it will either exercise such right or
make such assignment no later than ten (10) days before its right to repurchase
such securities terminates.
Section 2.3 The Escrow Agent. As security for the faithful performance of
----------- ----------------
the terms of this Agreement by each Shareholder, and to insure that such
Shareholders' securities will be available for delivery upon exercise of the
Purchase Option as herein provided, each Shareholder agrees to deliver to and
deposit with Day, Berry & Howard LLP, counsel to the Company, as Escrow Agent
("Escrow Agent"), two (2) Stock Assignments duly endorsed (with date and number
of Shares blank) in the form attached hereto as Exhibit A, together with the
certificate or certificates evidencing such Shareholder's shares of Common Stock
which are subject to the Purchase Option; said documents are to be held by the
Escrow Agent and delivered by said Escrow Agent pursuant to the Amended and
Restated Joint Escrow Instructions of the Company and such Shareholder as set
forth in Exhibit B attached hereto.
SECTION 3
Shares Not Subject to the Purchase Option
A total of (i) 370,000 of the shares of Common Stock currently held by Mr.
Jaser, (ii) 305,000 of the shares of Common Stock currently held by Mr. Tang,
(iii) 975,000 of the shares
-3-
<PAGE>
of Common Stock currently held by Mr. Struwas, and (iv) 1,212,500 of the shares
of Common Stock currently held by Mr. Sun, shall be not subject to the Purchase
Option.
SECTION 4
Transfer of Shares; Covenants of the Company
Section 4.1. Transfer by Shareholders. No Shareholder shall sell, assign,
----------- ------------------------
transfer, pledge, encumber or otherwise dispose of, whether by operation of law
or otherwise, any shares of Common Stock which are then subject to the Purchase
Option unless (i) the Shareholder has obtained the consent of the Company
pursuant to Section 2.2(b) and (ii) any such transfer is made to a transferee
who concurrently with or prior to such transfer becomes a party to this
Agreement.
Section 4.2. Registration of Transfer. The Company shall permit
------------ ------------------------
registration of transfer of shares of Common Stock which are subject to the
Purchase Option only in accordance with the terms of this Agreement. Any
transfer of such securities which is made in any manner contrary to the
provisions of this Agreement shall be void and shall not be effective to
constitute the transferee as a shareholder of the Company entitled to any
rights, benefits, and privileges as such.
Section 4.3. Legend. Each certificate representing shares of Common Stock
------------ ------
which are subject to the Purchase Option shall be stamped or otherwise have
endorsed or imprinted thereon a legend in substantially the following form:
"The transfer of the shares represented by this certificate, and the rights
of the holder hereof, are subject to the terms and conditions of an Amended and
Restated Shareholders' Agreement, dated as of April ___, 1999 (a copy of which
is on file with the Company), as the same may be amended from time to time, and
no transfer of the shares represented hereby or of shares issued in exchange
therefor shall be valid or effective unless the terms and conditions of such
Agreement have been fulfilled."
SECTION 5
Miscellaneous Provisions
Section 5.1. Termination of Employment. Nothing contained in this
------------ -------------------------
Agreement shall in any manner whatsoever affect the right or power of the
Company to terminate a Shareholder's employment, for any reason, with or without
cause.
Section 5.2. Termination of Irrevocable Proxies. The Company and each of
------------ ----------------------------------
the Shareholders hereby agree that this Agreement supersedes and replaces the
Shareholders' Agreement and that the Shareholders' Agreement is hereby
terminated for all purposes, including for purposes of the Irrevocable Proxies
executed by each of the Shareholders pursuant to the Shareholders' Agreement,
and is of no further force or effect.
Section 5.3. Assignment of Rights. The provisions of this Agreement shall
------------ --------------------
be binding upon and inure to the benefit of any successor or assign of any party
hereto.
-4-
<PAGE>
Section 5.4. Duration of Agreement. Unless sooner terminated in
------------ ---------------------
accordance with the provisions of this Agreement, the rights and obligations of
each Shareholder under this Agreement shall terminate as to such Shareholder
when none of such Shareholder's shares of Common Stock are subject to the
Purchase Option.
Section 5.5. Enforcement. The parties hereto agree that the remedy at law
------------ -----------
for any breach of this Agreement is inadequate and that should any dispute arise
concerning any matter hereunder, this Agreement shall be enforceable in a court
of equity by an injunction or a decree of specific performance. Such remedies
shall, however, be cumulative and not exclusive, and shall be in addition to any
other remedies which the parties hereto may have.
Section 5.6. Severability of Provisions. If any one or more provisions of
------------ --------------------------
this Agreement shall be declared invalid or unenforceable, the same shall not
affect the validity or enforceability of any other provisions of this Agreement.
Section 5.7. Amendments. Neither this Agreement nor any term hereof may
------------ ----------
be amended, waived, discharged, or terminated, except by written instrument
signed by the Company and Shareholders holding greater than sixty-six and two-
thirds percent (66 2/3%) of the Common Stock held by the Shareholders; provided,
--------
however, that (i) this Section may not be amended without the consent of all of
- -------
the Shareholders, and (ii) the obligations of any Shareholder may not be
increased, and the rights of any Shareholder may not be decreased, without the
written consent of such Shareholder.
Section 5.8. Notices.
------------ -------
(a) All notices and other communications required or permitted hereunder
shall be in writing and (unless otherwise expressly provided on Schedule I
attached hereto) shall be mailed by registered or certified mail, postage
prepaid, or delivered either by hand or by messenger, or sent via telex,
telecopier, computer mail or other electronic means, addressed (i) if to a
Shareholder, as indicated on Schedule I, or at such other address as such
Shareholder shall have furnished in writing to the party initiating the notice
or communication, or (ii) if to the Company, to the Company at 545 Long Wharf
Drive, New Haven, Connecticut 06511, or at such other address as the Company
shall have furnished in writing to the party initiating the notice or
communication.
(b) Any notice or other communications so addressed and mailed, postage
prepaid, by registered or certified mail (in each case, with return receipt
requested) shall be deemed to be delivered and given when so mailed. Any notice
so addressed and otherwise delivered shall be deemed to be given when actually
received by the addressee.
Section 5.9. Governing Law. This Agreement shall be construed in
------------ -------------
accordance with, and the rights of the parties shall be governed by, the law of
the State of Connecticut.
Section 5.10. Entire Agreement. All prior understandings and agreements
------------- ----------------
between the parties hereto with respect to the transactions contemplated hereby
are merged in this Agreement, and this Agreement reflects all the understandings
with respect to such transactions. Nothing
-5-
<PAGE>
herein contained shall be construed to obligate the Shareholders to make any
additional investment in the Company or to constitute the Shareholders as
partners.
Section 5.11. Counterparts. This Agreement may be executed in multiple
------------- ------------
counterparts, each of which when so executed and delivered shall constitute an
original instrument but all of which together shall constitute one and the same
agreement, and it shall not be necessary when making proof of this Agreement or
any counterpart hereof to account for any other counterpart.
IN WITNESS WHEREOF, each party hereto has executed this Agreement as of the
date and year first above written.
DSL.NET, INC.
By: ________________________________
Name:
Title:
SHAREHOLDERS
____________________________________
John Jaser
____________________________________
Felix Tang
____________________________________
David Struwas
____________________________________
Paul Sun
-6-
<PAGE>
SCHEDULE I
Schedule of Shareholders
Name and Address
- ----------------
John Jaser
33 Hawley Avenue
Milford, Connecticut 06460
Felix Tang
36 Botsford Avenue
Milford, Connecticut 06460
David Struwas
22 Twin Oak Faryn Road
Wallingford, Connecticut 06492
Paul Sun
350 Huntington Street
Shelton, Connecticut 06484
-7-
<PAGE>
EXHIBIT A
STOCK ASSIGNMENT SEPARATE FROM CERTIFICATE
FOR VALUE RECEIVED, ___________________ hereby sells, assigns and transfers
unto ______________________________________________________________ (________)
shares of Common Stock of dsl.net, inc., a Delaware corporation, standing in the
undersigned's name on the books of said corporation and represented by
Certificate Nos. __________________ and do hereby irrevocably constitute and
appoint ___________________________________ attorney to transfer the said stock
on the books of the said corporation with full power of substitution in the
premises.
Dated: ______________________________
Signature: __________________________
-8-
<PAGE>
EXHIBIT B
AMENDED AND RESTATED JOINT ESCROW INSTRUCTIONS
____________________,1999
Day, Berry & Howard LLP
CityPlace I
Hartford, CT 06103-3499
ATTN: Frank J. Marco, Esq.
Dear Sirs:
As Escrow Agent for both dsl.net, inc., a Delaware corporation (the
"Company"), and ___________________________________ ("Holder"), you were
authorized and directed to hold the documents delivered to you pursuant to the
terms of that certain Shareholders' Agreement (the "Shareholders' Agreement"),
dated as of January 7, 1999, in accordance with the instructions contained in
the Joint Escrow Instructions (the "Prior Instructions") of date even therewith.
The Company and Holder now desire to amend and restate those Prior Instructions
pursuant to the terms of that certain Amended and Restated Shareholders'
Agreement (the "Agreement"), dated as of _____________, 1999, to which a copy of
these Amended and Restated Joint Escrow Instructions (these "Instructions") is
attached as Exhibit B. In addition, the Irrevocable Proxy executed in connection
with the Shareholders' Agreement, and referred to in the Prior Instructions,
shall be terminated upon the execution of the Agreement and shall be of no
further force or effect with respect to these Instructions. Therefore, you are
hereby authorized and directed to hold the documents delivered to you pursuant
to the Agreement in accordance with these Instructions, which Instructions
supersede the Prior Instructions, and which instructions are as follows:
1. In the event the Company and/or any assignee of the Company and/or any
other shareholder of the Company entitled to exercise rights under the Agreement
(referred to collectively herein as the "Purchaser") shall exercise the Purchase
Option set forth in the Agreement, the Purchaser shall give to Holder and you a
written notice specifying the number of shares of stock to be purchased, the
purchase price, and the time for a closing thereunder at the principal office of
the Purchaser. Holder and the Company hereby irrevocably authorize and direct
you to close the transaction contemplated by such notice in accordance with the
terms of said notice.
2. At the closing, you are directed (a) to date the stock assignments
necessary for the transfer in question, (b) to fill in the number of shares
being transferred, the numbers of the certificates representing such shares and
the name of the Purchaser, as transferee of such shares, and (c) to deliver
same, together with the certificates evidencing the shares of stock to be
transferred, to the Company against the simultaneous delivery to you of the
purchase price for the number of shares of stock being purchased pursuant to the
exercise of the Purchase Option.
-9-
<PAGE>
3. Holder irrevocably authorizes the Company to deposit with you any
certificates evidencing shares of stock to be held by you hereunder and any
additions and substitutions to said shares as referred to in the Agreement.
Holder does hereby irrevocably constitute and appoint you as his attorney-in-
fact and agent for the term of this escrow to execute with respect to such
securities all documents necessary or appropriate to make such securities
negotiable and complete any transaction herein contemplated, including but not
limited to any appropriate filing with federal or state securities officials.
Subject to the provisions of this paragraph 3, Holder shall exercise all rights
and privileges of a shareholder of the Company while the stock is held by you.
4. Upon the request of Holder, the Company shall certify to you the
number of shares of Common Stock of the Company owned by Holder and then subject
to the Purchase Option, whereupon, upon the request of Holder, you shall deliver
to Holder certificates representing the number of shares of Common Stock of the
Company owned by Holder and held by you which exceed the number of such shares
then subject to the Purchase Option as certified by the Company. The Company
shall, and shall cause any transfer agent or registrar to, take all reasonable
steps necessary to enable you to effect such delivery.
5. This escrow shall terminate upon the earlier to occur of (a)
termination of the Agreement in accordance with the provisions thereof and (b)
such time as all of the securities held by you hereunder are no longer subject
to the Purchase Option.
6. If at the time of termination of this escrow you should have in your
possession any documents, securities, or other property belonging to Holder, you
shall deliver all of same to Holder and shall be discharged of all further
obligations hereunder.
7. Your duties hereunder may be altered, amended, modified or revoked
only by a writing signed by all of the parties hereto.
8. You shall be obligated only for the performance of such duties as are
specifically set forth herein and may rely and shall be protected in relying or
refraining from acting on any instrument reasonably believed by you to be
genuine and to have been signed or presented by the proper party or parties. You
shall not be liable to any party by reason of any error of judgment or for any
act done or step taken or omitted by you or for any mistake of fact or law, or
for anything which you may do or refrain from doing in connection herewith,
unless caused by or arising from your own gross negligence or willful
misconduct.
9. You are hereby expressly authorized to disregard any and all warnings
given by either of the parties hereto or by any other person or corporation,
excepting only orders or process of courts of law, and are hereby expressly
authorized to comply with and obey orders, judgments or decrees of any court;
you shall not be liable to either of the parties hereto or to any other person,
firm or corporation by reason of such compliance, notwithstanding any such
order, judgment or decree being subsequently reversed, modified, annulled, set
aside, vacated or found to have been entered without jurisdiction.
-10-
<PAGE>
10. You shall not be liable in any respect on account of the identity,
authorities or rights of the parties executing or delivering or purporting to
execute or deliver the Agreement or any documents or papers deposited or called
for hereunder.
11. You shall not be liable for the outlawing of any rights under the
Statute of Limitations with respect to these Instructions on any documents
deposited with you.
12. Your responsibilities as Escrow Agent hereunder shall terminate if you
shall cease to be counsel to the Company or if you shall resign by written
notice to each party. In the event of any such termination, the Company shall
appoint your successor as counsel to the Company as successor Escrow Agent.
13. If you reasonably require other or further instruments in connection
with these Instructions or obligations in respect hereto, the necessary parties
hereto shall join in furnishing such instruments.
14. It is understood and agreed that should any dispute arise with respect
to the delivery and/or ownership or right of possession of the securities held
by you hereunder, you are authorized and directed to retain in your possession
without liability to anyone all or any part of said securities until such
dispute shall have been settled either by mutual written agreement of the
parties concerned or by a final order, decree or judgment of a court of
competent jurisdiction after the time for appeal has expired and no appeal has
been perfected, but you shall be under no duty whatsoever to institute or defend
any such proceedings. At your option, you shall have the right in the event of
any claim against you arising out of this Agreement to deposit all of the
securities, funds and other documents held by you pursuant hereto in any court
and to institute an interpleader proceeding, whereupon you shall be relieved of
all liabilities and obligations hereunder.
15. Any notice required or permitted hereunder shall be given in writing
and shall be deemed effectively given upon personal delivery or upon deposit in
the United States Post Office, by registered or certified mail with postage and
fees prepaid, addressed to each of the other parties thereunto entitled at the
following addresses, or at such other addresses as a party may designate by ten
(10) days' advance written notice to each of the other parties hereto.
COMPANY: dsl.net, inc.
545 Long Wharf Drive
New Haven, Connecticut 06511
HOLDER: To the address set forth in Schedule I to the
Agreement or any other address for notices
pursuant thereto
-11-
<PAGE>
ESCROW AGENT: Day, Berry & Howard LLP
CityPlace I
Hartford, CT 06103-3499
ATTN: Frank J. Marco, Esq.
(860) 275-0255
16. By signing these Instructions, you become a party hereto only for the
purpose of said Instructions; you do not become a party to the Agreement.
17. You shall be entitled to employ such legal counsel and other experts
as you may deem necessary properly to advise you in connection with your
obligations hereunder; you may rely upon the advice of such counsel, and you may
pay such counsel reasonable compensation therefor. The Company will pay all fees
(at your standard hourly rates) and reasonable out-of-pocket expenses under
these Instructions.
18. This instrument shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns.
[Signature Page Follows]
-12-
<PAGE>
Very truly yours,
DSL.NET, INC.
By: ________________________________
Name:
Title:
HOLDER:
____________________________________
ESCROW AGENT
Day, Berry & Howard LLP
By: ________________________________
-13-
<PAGE>
AMENDMENT NUMBER ONE
TO THE
AMENDED AND RESTATED SHAREHOLDERS' AGREEMENT
THIS AMENDMENT NUMBER ONE TO THE AMENDED AND RESTATED SHAREHOLDERS'
AGREEMENT (this "Amendment Number One") is entered into as of June 1, 1999, by
and among dsl.net, inc., a Delaware corporation (the "Company"), and John Jaser,
David Struwas, Paul K. Sun and Felix Tang (collectively, the "Shareholders").
W I T N E S S E T H:
WHEREAS, the Company and the Shareholders desire to amend the Amended and
Restated Shareholders' Agreement, dated as of April 20, 1999 (the "Shareholders'
Agreement") in the manner and on the terms and conditions set forth herein to
provide for the termination of the Company's Purchase Option in the event of a
Change in Control (as defined herein):
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and each of the Shareholders hereby agree as follows:
1. That a new Section 2.4 is added to the Shareholders' Agreement to read
in its entirety as follows:
2.4 Change in Control. Notwithstanding anything to the contrary
-----------------
herein, upon a Change in Control (as defined in the following sentence) the
Purchase Option shall terminate as to all Purchase Option Shares held by
each of the Shareholders and such shares shall no longer be subject to the
Purchase Option. For purposes of the preceding, the term "Change-in-
Control" shall mean: (i) any sale, lease, exchange or other transfer (in
one transaction or series of transactions) of all or substantially all of
the assets of the Company; (ii) individuals who, as of the date hereof,
constitute the entire Board of Directors of the Company (the "Incumbent
Directors") cease for any reason to constitute at least a majority of the
Board of Directors, provided that any individual becoming a director
subsequent to the date hereof whose election or nomination for election was
approved by a vote of at least a majority of the then Incumbent Directors
shall be, for the purposes of this provision, considered as though such
individual were an Incumbent Director; (iii) any consolidation or merger of
the Company with any other entity (including, without limitation, a
triangular merger) where the stockholders of the Company, immediately prior
to the consolidation or merger, would not, immediately after the
consolidation or merger, beneficially own, directly or indirectly, shares
representing fifty percent (50%) of the combined voting power of all of the
outstanding securities of the entity issuing cash or securities in the
consolidation or merger (or its ultimate parent corporation, if any); (iv)
a person, including a "person" as defined in Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), other
than the Company or an employee benefit plan sponsored by the Company,
becomes the
<PAGE>
beneficial owner (as defined in Rule 13d-3 under the Exchange Act),
directly or indirectly, of securities of the Company representing forty
percent (40%) or more of the total voting power represented by the
Company's then outstanding voting securities, except for a person who is a
beneficial owner of forty percent (40%) or more of the total voting power
of the Company's outstanding voting securities as of the date hereof; or
(v) the Board of Directors of the Company, by a vote of a majority of all
the Directors, adopts a resolution to the effect that a "Change-in-Control"
has occurred for purposes of this Agreement.
2. All capitalized terms not defined herein shall have the meanings
ascribed to them in the Shareholders' Agreement.
3. The Shareholders' Agreement, as amended hereby, shall remain in full
force and effect.
4. This Amendment Number One shall be construed in accordance with, and
the rights of the parties shall be governed by, the law of the State of
Connecticut, without regard to its conflict of laws principles.
5. This Amendment Number One may be executed in counterparts, each of
which when so executed and delivered shall constitute a complete and original
instrument but all of which together shall constitute one and the same
agreement, and it shall not be necessary when making proof of this Amendment
Number One or any counterpart thereof to account for any other counterpart.
[Signature Page Follows]
-2-
<PAGE>
(d) With respect to Mr. Sun, "Purchase Option Shares" shall mean 1,087,500
shares of Common Stock less an amount equal to 1/36th of such shares for each
and every full month which has elapsed from March 15, 1999 until the date Mr.
Sun Ceases Employment or all such shares are no longer subject to the Purchase
Option.
Section 2.2 Procedures.
----------- ----------
(a) The Purchase Option shall be exercised by written notice signed by an
officer of the Company, on behalf of the Company, and delivered to the
Shareholder who has Ceased Employment within thirty (30) days after the date
such Shareholder has Ceased Employment. The Purchase Price shall be payable, at
the option of the Company, in cancellation of all or a portion of any
outstanding indebtedness of such Shareholder to the Company or in cash (by
check) or both.
(b) A Shareholder shall not sell or transfer any shares of Common Stock
subject to the Purchase Option without the prior written consent of the Company.
(c) Subject to the other provisions of this Agreement, each Shareholder
shall, during the term of this Agreement, exercise all rights and privileges of
a Shareholder of the Company with respect to the Shares subject to the Purchase
Option.
(d) The Company may assign its rights under this Section 2. The Company
covenants that to the extent it has the right to exercise the Purchase Option
and it chooses not to exercise such right, it will assign such right to the
Shareholders, exclusive of any Shareholder that has Ceased Employment, on a pro
rata basis according to the number of shares of Common Stock held by each such
person. The Company covenants further that it will either exercise such right or
make such assignment no later than ten (10) days before its right to repurchase
such securities terminates.
Section 2.3 The Escrow Agent. As security for the faithful performance of
----------- ----------------
the terms of this Agreement by each Shareholder, and to insure that such
Shareholders' securities will be available for delivery upon exercise of the
Purchase Option as herein provided, each Shareholder agrees to deliver to and
deposit with Day, Berry & Howard LLP, counsel to the Company, as Escrow Agent
("Escrow Agent"), two (2) Stock Assignments duly endorsed (with date and number
of Shares blank) in the form attached hereto as Exhibit A, together with the
certificate or certificates evidencing such Shareholder's shares of Common Stock
which are subject to the Purchase Option; said documents are to be held by the
Escrow Agent and delivered by said Escrow Agent pursuant to the Amended and
Restated Joint Escrow Instructions of the Company and such Shareholder as set
forth in Exhibit B attached hereto.
SECTION 3
Shares Not Subject to the Purchase Option
A total of (i) 370,000 of the shares of Common Stock currently held by Mr.
Jaser, (ii) 305,000 of the shares of Common Stock currently held by Mr. Tang,
(iii) 975,000 of the shares
-3-
<PAGE>
Exhibit 10.09
NOTE AND WARRANT PURCHASE AGREEMENT
THIS NOTE AND WARRANT PURCHASE AGREEMENT ("Agreement") is made as of
November 18, 1998, by and among dsl.net, inc., a Delaware corporation (the
"Company"), and VantagePoint Venture Partners (the "Purchaser").
WHEREAS, the Purchaser desires to purchase, and the Company desires to
issue a secured convertible promissory note (the "Note") with a principal amount
of One Hundred Twenty-Five Thousand Dollars ($125,000) convertible into shares
(the "Note Shares") of the equity securities issued by the Company (the "New
Securities") at the closing of the Company's next transaction or series of
related transactions in which the Company sells equity securities and in which
the gross proceeds equal or exceed One Million Dollars ($1,000,000) (excluding
the conversion of the Note and any other notes outstanding as of the date
hereof) (the "Financing");
WHEREAS, in consideration of the purchase by the Purchaser of the Note, the
Company desires to sell and issue a warrant (the "Warrant") to purchase that
number of shares of the Company's New Securities as determined in this Agreement
and in the Warrant;
WHEREAS, the parties also wish to set forth certain representations,
warranties and agreements relating to the purchase of the Note and Warrant
provided for herein.
NOW, THEREFORE, THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Note and Warrant.
----------------
1.1 Sale and Issuance of Note. Subject to the terms and conditions
-------------------------
hereof, the Company agrees to sell and issue to the Purchaser, and the Purchaser
agrees to purchase from the Company, a Note in the form attached as Exhibit A
---------
hereto, with a principal amount of One Hundred Twenty-Five Thousand Dollars
($125,000).
1.2 Issuance of Warrant. Subject to the terms and conditions hereof,
-------------------
in consideration of the Purchaser's purchase of the Note, the Company agrees to
issue to the Purchaser, a Warrant in the form attached hereto as Exhibit B
---------
originally exercisable, at an exercise price per share equal to the price per
share of the New Securities sold to investors in the Financing (the "Next Round
Price"), for that number of shares of New Securities (the "Warrant Shares")
equal to the quotient obtained by dividing (a) Thirty-One Thousand Two Hundred
And Fifty Dollars ($31,250) by (b) the Next Round Price, which Warrant and
Warrant Shares shall be subject to adjustment, as described in the Warrant.
2. Closing. The closing of the issuance of the Note under this Agreement
-------
(the "Closing") shall take place on the date of this Agreement (the "Closing
Date"), in accordance with arrangements mutually satisfactory to the Purchaser
and the Company.
<PAGE>
-2-
3. Representations and Warranties of the Company.
---------------------------------------------
3.1 Authorization. Except for the approval, execution and adoption
-------------
of the Restated Certificate of Incorporation, authorizing the New Securities and
filing of the Restated Certificate of Incorporation with the Secretary of state
of the State of Delaware, all corporate action on the part of the Company, its
officers, directors, and stockholders necessary for the authorization,
execution, and delivery of this Agreement, the performance of all the Company's
obligations hereunder and for the authorization, issuance, sale, and delivery of
the Note, the Warrant, the Warrant Shares and the Note Shares has been taken or
will be taken prior to the Closing. This Agreement, the Note and the Warrant
when executed and delivered, shall constitute the valid and legally binding
obligations of the Company enforceable in accordance with their respective
terms, subject to the laws of general application relating to bankruptcy,
insolvency, and the relief of debtors.
3.2 Validity of Note, Warrant, Warrant Shares and Note Shares. The
---------------------------------------------------------
Note and Warrant, when issued in accordance with the terms of this Agreement,
shall be duly and validly issued. The issuance of the Warrant and any
subsequent issuance of the Warrant Shares and Note Shares are not and will not
be subject to any rights of first refusal or preemptive rights and, when issued,
sold, and delivered in compliance with the provisions of this Agreement, the
terms of the Warrant and Note and in accordance with the Restated Certificate of
Incorporation, and the Warrant Shares and Note Shares will be validly issued,
fully paid, and nonassessable, and will be free of any liens or encumbrances;
provided, however, that the Warrant, the Warrant Shares and Note Shares may be
subject to restrictions on transfer under state and/or federal securities laws
as set forth herein or as otherwise required by such laws at the time a transfer
is proposed or under the Financing purchase documents.
3.3 Governmental Consents. All consents, approvals, orders, or
---------------------
authorizations of, or registrations, qualifications, designations, declarations,
or filings with, any governmental authority, required on the part of the Company
in connection with the valid execution and delivery of this Agreement, the
offer, sale, or issuance of the Note, the Warrant, the Warrant Shares and the
Note Shares, or the consummation of any other transaction contemplated hereby
shall have been obtained and will be effective at the Closing, except for
notices required or permitted to be filed with certain state and federal
securities commissions, which notices will be filed on a timely basis, and the
approvals or and filing of the Restated Certificate of Incorporation with the
Secretary of State of the State of Delaware.
4. Representations and Warranties of the Purchaser. The Purchaser hereby
-----------------------------------------------
represents and warrant to the Company as follows:
4.1 Legal Authority. It has the requisite legal power to enter into
---------------
this Agreement, to purchase the Note and Warrant hereunder and to carry out and
perform its obligations under the terms of this Agreement.
4.2 Due Execution. This Agreement has been duly authorized,
-------------
executed, and delivered by it, and, upon execution and delivery by the Company,
this Agreement will be a valid and binding agreement of it.
<PAGE>
-3-
4.3 Pledge Agreement. The Purchaser hereby acknowledges its receipt
----------------
of that certain Pledge Agreement by and between the Company and Fleet National
Bank, dated as of ___________________, 1998.
4.4 Investment Representations.
--------------------------
(a) It is acquiring the Note and Warrant for its own account, not
as nominee or agent, for investment and not with a view to, or for resale in
connection with, any distribution or public offering of the Note, Warrant,
Warrant Shares or Note Shares within the meaning of the Securities Act of 1933,
as amended (the "1933 Act").
(b) It understands that (i) the Note, Warrant, Warrant Shares and
Note Shares have not been registered under the 1933 Act by reason of a specific
exemption therefrom, that they must be held by it indefinitely, and that
Purchaser must, therefore, bear the economic risk of such investment
indefinitely, unless a subsequent disposition thereof is registered under the
1933 Act or is exempt from such registration; and (ii) the Note, Warrant, and
each certificate representing the Warrant Shares and Note Shares will be
endorsed with the following legend:
"THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. THEY MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO
AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT OR PURSUANT TO
AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY THAT SUCH
REGISTRATION IS NOT REQUIRED, OR UNLESS SOLD PURSUANT TO RULE 144
UNDER SUCH ACT."
(c) It is an "accredited investor" as provided under the 1933 Act
and regulations adopted thereunder.
5. Miscellaneous.
-------------
5.1 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Delaware as applied to agreements among Delaware
residents, made and to be performed entirely within the State of Delaware.
5.2 Successors and Assigns. Except as otherwise expressly provided
----------------------
herein, the terms and conditions of this Agreement shall inure to the benefit
of, and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto.
5.3 Entire Agreement. This Agreement, the Exhibits hereto, the
----------------
representations of the Purchaser contained in the Investor Questionnaire and the
other documents delivered pursuant hereto constitute the full and entire
understanding and agreement among the parties with regard to the subjects hereof
and no party shall be liable or bound to any other party
<PAGE>
-4-
in any manner by any representations, warranties, covenants, or agreements
except as specifically set forth herein or therein.
5.4 Separability. Any invalidity, illegality, or limitation of the
------------
enforceability with respect to the Purchaser of any one or more of the
provisions of this Agreement, or any part thereof, whether arising by reason of
the law of any such Purchaser's domicile or otherwise, shall in no way affect or
impair the validity, legality, or enforceability of this Agreement with respect
to other Purchaser. In case any provision of this Agreement shall be invalid,
illegal, or unenforceable, the validity, legality, and enforceability of the
remaining provisions shall not in any way be affected or impaired thereby.
5.5 Titles and Subtitles. The titles of the paragraphs and
--------------------
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
5.6 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one instrument.
IN WITNESS WHEREOF, the Company has caused this Note and Warrant Purchase
Agreement to be signed by its duly authorized officer.
COMPANY
dsl.net, inc.
By:______________________________________________
Title:___________________________________________
PURCHASER:
VANTAGEPOINT VENTURE PARTNERS
By:______________________________________________
Title:___________________________________________
<PAGE>
Exhibit 10.10
-------------
SUBSCRIPTION AGREEMENT
----------------------
dsl.net, inc.
50 Washington Street, 7th Floor East
Norwalk, Connecticut 06854
Attention: David Struwas
Ladies and Gentlemen:
1. SUBSCRIPTION
------------
The undersigned hereby subscribes for a convertible demand note in the
principal amount set forth on the attached signature page and in the form set
forth as Exhibit A hereto (the "Note"). The Note shall be convertible, on the
conditions stated herein, into Equity Securities (as hereinafter defined) of
dsl.net, inc., a Delaware corporation, or any successor thereof, whether by
merger, exchange of stock or otherwise (the "Company"). In addition, the
undersigned will receive the right to a warrant to purchase one (1) share of
Equity Securities for every four (4) shares of Equity Securities issuable upon
conversion of the Note (the "Warrant"), on the conditions stated herein,
expiring five (5) years from the date of issuance.
2. DEFINITIONS
-----------
Capitalized terms used herein shall have the meanings set forth herein or
as set forth below:
"Common Shares" shall mean shares of the Company's Common Stock, as now or
hereafter constituted.
"Conversion Shares" shall mean the Equity Securities issuable upon
conversion of the Note.
"Equity Securities" shall include common stock and preferred stock of the
Company, any equity or debt security that is exercisable for or convertible into
such common stock or preferred stock, and any equity or debt security that is
issued in combination with such common stock or preferred stock.
"Qualified Financing Date" shall mean September 30, 2000.
"Qualified Financing" shall mean the sale by the Company, in one or more
transactions, of Equity Securities having an aggregate purchase price of
$1,000,000 or more, not including conversion of the Note, exercise of the
Warrant or the conversion or exercise of similar notes or warrants issued by the
Company.
"Qualified Financing Purchase Price" shall mean the price per share at
which Equity Securities are sold in a Qualified Financing; in the event that
such equity securities are convertible securities, it shall mean the conversion
price.
<PAGE>
-2-
"Securities" shall mean the Note, the Conversion Shares, the Warrant, the
Warrant Shares and any Common Shares issued by the Company upon conversion of or
in exchange for any Conversion Shares or Warrant Shares, if such shares are
convertible into or exchangeable for Common Shares.
"Warrant Shares" shall mean the Equity Securities issuable upon exercise of
the Warrant.
3. REPRESENTATIONS AND WARRANTIES OF THE POTENTIAL INVESTOR
--------------------------------------------------------
The undersigned hereby acknowledges that the undersigned has received and
read (a) the Company's Business Plan and the other documents attached to or
included by reference therein, (b) this Subscription Agreement, and (c) the
Investor Questionnaire (collectively, the "Disclosure Documents").
The undersigned understands that the Company is in the early stages of
development and that the information contained in the Disclosure Documents is
constantly subject to change. The undersigned acknowledges that the undersigned
has had an opportunity to ask questions of and request additional information
concerning the Company from representatives of the Company. The undersigned has
not received any written information concerning this offering other than the
Disclosure Documents and is not relying on any other information provided to the
undersigned or any representations made to the undersigned by anyone other than
the representatives of the Company referred to above.
The undersigned understands that the Company is relying on Section 4(2) of
the Securities Act of 1933, as amended (the "Act"), and the regulations
thereunder, which provides an exemption from registration under the Securities
Act which does not require that any specific information about the Company be
disclosed.
The undersigned acknowledges that the transfer of the Securities shall be
subject to the securities law restrictions set forth in this paragraph 3, the
right of first refusal of the Company set forth in paragraph 4 hereof and the
transfer restrictions set forth in paragraphs 5 and 6 hereof.
The undersigned understands that the Securities have not been registered
and will not be registered under the Act or any applicable state securities laws
and that the Securities will be sold in transactions exempt from registration
under the Act and such state securities laws. The undersigned understands that
the availability of these exemptions are predicated in part on the Company's
reliance on the undersigned's representations and warranties herein.
The undersigned hereby represents and warrants to you that: (a) the
undersigned is acquiring the Securities for the undersigned's own account for
investment purposes only, and not with a view to the resale or other
distribution thereof, and the undersigned will not transfer, sell or otherwise
dispose of the Securities without registering them under the applicable federal
or state securities laws or seeking an exemption therefrom; (b) the undersigned
has such knowledge and experience in financial and business matters and
particularly this type of investment to evaluate the merits and risks of an
investment in the Company; (c) the undersigned can bear the economic risk of an
investment in the Company, including the risk of a complete loss of the
undersigned's investment; and (d) the undersigned is not committed to illiquid
investments, including the investment in the Company, that are
disproportionately high in comparison with the undersigned's net worth.
The undersigned understands that the undersigned must bear the economic
risk of this investment for an indefinite period of time inasmuch as it has not
been and will not be registered under the Act or any applicable state securities
laws and, therefore, that the Securities cannot be sold, pledged or transferred
unless they are subsequently registered under the Act and qualified under
applicable state securities laws or an exemption from such registration and
qualification is available. The undersigned understands that the Company has no
obligation and does not presently intend to register or qualify any
<PAGE>
-3-
of its securities or to take any action or provide any information necessary to
the availability of any such exemption.
The undersigned further understands that these restrictions on
transferability will be noted in the Company's records as a stop transfer
instruction, and that the Securities will be subject to the other terms and
conditions of this Subscription Agreement, and will bear a legend substantially
in the following form, as well as any legend required by appropriate Blue Sky
officials:
"The securities represented by this certificate (i) are subject to the
restrictions on transfer and other terms contained in a Subscription
Agreement dated [date of Subscription Agreement] between the Company and
the holder of this certificate (a copy of which is available without charge
from the Company), and (ii) have not been registered under the Securities
Act of 1933 or applicable state securities laws and may not be transferred,
sold or otherwise disposed of in the absence of an effective registration
statement with respect to the securities evidenced by this certificate,
filed and made effective under the Securities Act of 1933 and such
applicable state securities laws, or unless the Company receives an opinion
of counsel satisfactory to the Company to the effect that registration
under such Act and such applicable state securities laws is not required."
The undersigned understands that the Company will require that the
undersigned meet certain investor suitability standards and that the undersigned
be an "accredited investor" as that term is defined in the federal securities
laws. A document entitled "Investor Questionnaire" is attached to elicit
certain information about the undersigned for investment in the, Securities.
The information provided to the Company herein and in the Investor
Questionnaire is true and correct in all respects as of the date hereof. The
undersigned agrees to notify the Company in writing immediately if any of the
statements made herein or in the Investor Questionnaire shall become untrue.
4. RIGHT OF FIRST REFUSAL
----------------------
The undersigned (referred to in this Section as the "Holder") agrees that
it shall not sell any of the Securities except in accordance with the following
procedures:
(a) The Holder shall first deliver to the Company a written Notice of
Intention to Sell, which shall be irrevocable for a period of thirty (30) days
after delivery thereof, offering to the Company such Securities owned by the
Holder at the purchase price and on the other material terms specified therein
at which it proposes to sell such Securities. The Company shall have the right
of first refusal and option for a period of thirty (30) days after delivery to
the Company of the Notice of Intention to Sell, to purchase all or (subject to
the provisions of Section 4(d) hereof) any part of the Securities so offered at
the purchase price and on the other terms stated therein. Such acceptance shall
be made by delivering a written Notice of Acceptance to the Holder within the
aforesaid thirty (30) day period.
(b) The closing of any sales of the Securities under the terms of Section
4(a) shall be made at the offices of the Company on a mutually satisfactory
business day within forty-five (45) days after the expiration of the aforesaid
period. Delivery of certificates or other instruments evidencing such
Securities duly endorsed for transfer to the Company shall be made on such date
against payment of the purchase price therefor.
<PAGE>
-4-
(c) If effective acceptance shall not be received pursuant to Section 4(a)
above with respect to all Securities offered for sale pursuant to a Notice of
Intention to Sell, then, subject to compliance with applicable securities laws
and any other applicable restrictions on the transfer of such Securities
(including the restrictions set forth herein), the Holder may sell all or any
part of the remaining Securities so offered for sale at a price not less than
the price, and on terms not more favorable to the purchaser thereof than the
terms stated in the Notice of Intention to Sell, at any time within sixty (60)
days after the expiration of such offer. In the event the remaining Securities
are not sold by the Holder during such sixty (60) day period, the right of the
Holder to sell such remaining Securities shall expire and the obligations of
this Section 4 shall be reinstated; provided, however, that in the event the
-------- -------
Holder determines, at any time during such sixty (60) day period, that the sale
of all or any part of the remaining Securities on the terms set forth in the
Notice of Intention to Sell is impractical, the Holder can terminate the offer
and reinstate the procedure provided in this Section 4 without waiting for the
expiration of such sixty (60) day period.
(d) The Holder may specify in the Notice of Intention to Sell contemplated
by Section 4(a) hereof that all Securities offered thereby must be sold, in
which case the Notice of Acceptance must relate to all Securities covered by
such Notice of Intention to Sell in order to be effective.
5. TRANSFER OF SECURITIES
----------------------
(a) The undersigned agrees that it may not transfer, sell, pledge,
hypothecate or otherwise dispose of any Securities except (i) pursuant to an
effective registration statement under the Act and any applicable state
securities laws, or (ii) upon delivery to the Company of an opinion of counsel
satisfactory to the Company to the effect that registration under the Act and
such state securities laws is not required.
(b) The undersigned agrees that it may not transfer, sell, pledge,
hypothecate or otherwise dispose of any Securities in any way, either voluntary
or involuntary, except (i) by will or the laws of descent and distribution or
(ii) with the prior consent of the Company.
(c) Anything contained herein to the contrary notwithstanding, any
purchaser or other transferee of Securities, other than the Company, shall agree
in writing in advance with the Company to be bound by and comply with all
applicable provisions of this Agreement.
6. TERMS AND CONDITIONS OF NOTE AND WARRANT
----------------------------------------
(a) The Note will be substantially in the form and to the effect of the
Note set forth as Exhibit A hereto. The Warrant will be substantially in the
form and to the effect of the Warrant set forth as Exhibit B hereto.
(b) If the Company completes a Qualified Financing by the Qualified
Financing Date, (i) the Note shall be automatically converted into the Equity
Securities issued by the Company in the Qualified Financing, at the Qualified
Financing Purchase Price, and on the other terms and conditions of such
Qualified Financing, and (ii) the Company shall issue the Warrant, which shall
be exercisable for the type of Equity Securities issued by the Company in the
Qualified Financing at the Qualified Financing Purchase Price in the amount of
one (1) share of Equity Securities for four (4) shares of Equity Securities into
which the Note is so converted, on the other terms and conditions of such
Qualified Financing. The Company shall notify the Subscriber in writing
immediately upon the closing of a Qualified Financing.
<PAGE>
-5-
(c) In the event that the Company fails to complete a Qualified Financing
an or before the Qualified Financing Date, the Note shall become payable upon
demand by the holder of the Note and, upon such payment, the Note shall be
cancelled and the right to the Warrant shall become null and void.
7. ACCEPTANCE
----------
(a) Subscription. A complete subscription must include (i) two copies of
------------
the signature page of the Subscription Agreement signed by me, (ii) two copies
of the Investor Questionnaire signed by me, and (iii) a check in the principal
amount of the Note, payable to the Company, all of which must be delivered to
the Company.
(b) Rejection. The Company may at its option refuse to accept my
---------
subscription in its discretion for any reason. Should this subscription be
rejected or should the offering of the Securities not be consummated for any
reason, the Company promptly shall return the amount enclosed herewith.
<PAGE>
Exhibit 10.11
dsl.net, inc.
SERIES A PREFERRED STOCK
AND WARRANT PURCHASE AGREEMENT
January 8, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
1. PURCHASE AND SALE OF STOCK AND WARRANTS................................. 1
1.1 Sale and Issuance of Series A Preferred Stock and Warrants........... 1
1.2 Closing.............................................................. 2
2. COMPANY RIGHT TO REPURCHASE WARRANT SHARES.............................. 2
2.1 Scope of Repurchase Right............................................ 2
2.2 Repurchase Cost...................................................... 2
2.3 Exercise of Repurchase Right......................................... 2
2.4 Termination of Rights as Stockholder................................. 4
2.5 Definition........................................................... 4
2.6 Transfer Restrictions................................................ 4
2.7 Legend............................................................... 4
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................... 5
3.1 Organization, Good Standing and Qualification........................ 5
3.2 Capitalization and Voting Rights..................................... 5
3.3 Subsidiaries......................................................... 6
3.4 Authorization........................................................ 6
3.5 Valid Issuance of Preferred and Common Stock and Warrants............ 6
3.6 Governmental Consents................................................ 7
3.7 Offering............................................................. 7
3.8 Litigation........................................................... 7
3.9 Proprietary Information and Shareholders' Agreements................. 7
3.10 Patents and Trademarks............................................... 7
3.11 Compliance with Other Instruments.................................... 8
3.12 Agreements; Action................................................... 8
3.13 Related-Party Transactions........................................... 9
3.14 Permits.............................................................. 10
3.15 Environmental and Safety Laws........................................ 10
3.16 Manufacturing and Marketing Rights................................... 10
3.17 Disclosure........................................................... 10
3.18 Business Plan........................................................ 10
3.19 Registration Rights.................................................. 10
3.20 Corporate Documents.................................................. 10
3.21 Title to Property and Assets......................................... 10
3.22 Financial Statements................................................. 11
3.23 Changes.............................................................. 11
3.24 Employee Benefit Plans............................................... 11
3.25 Tax Returns, Payments and Elections.................................. 11
3.26 Insurance............................................................ 12
3.27 Minutes.............................................................. 12
3.28 Labor Agreements and Actions; Employee Compensation.................. 12
3.29 Section 83(b) Elections.............................................. 12
3.30 Real Property Holding Company........................................ 12
3.31 Net Operating Loss Carryforward...................................... 13
3.32 Brokers.............................................................. 13
3.33 Significant Customers and Suppliers.................................. 13
3.34 Qualified Small Business Stock....................................... 13
3.35 Year 2000............................................................ 13
3.36 No Outstanding Preferred Stock....................................... 13
4. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS......................... 13
</TABLE>
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<PAGE>
<TABLE>
<S> <C>
4.1 Authorization........................................................ 13
4.2 Purchase Entirely for Own Account.................................... 14
4.3 Disclosure of Information............................................ 14
4.4 Investment Experience................................................ 14
4.5 Accredited Investor.................................................. 14
4.6 Restricted Securities................................................ 14
4.7 Further Limitations on Disposition................................... 14
4.8 Legends.............................................................. 15
4.9 Investors' State of Residence........................................ 15
5. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING......................... 16
5.1 Representations and Warranties....................................... 16
5.2 Performance.......................................................... 16
5.3 Compliance Certificate............................................... 16
5.4 Qualifications....................................................... 16
5.5 Proceedings and Documents............................................ 16
5.6 Proprietary Information and Shareholders' Agreement.................. 16
5.7 Bylaws............................................................... 16
5.8 Voting Agreement..................................................... 16
5.9 Board of Directors................................................... 17
5.10 Opinion of Company Counsel........................................... 17
5.11 Investors' Rights Agreement.......................................... 17
5.12 Co-Sale Agreement.................................................... 17
6. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING...................... 17
6.1 Representations and Warranties....................................... 17
6.2 Qualifications....................................................... 17
7. MISCELLANEOUS........................................................... 17
7.1 Survival or Warrants................................................. 17
7.2 Successors and Assigns............................................... 17
7.3 Governing Law........................................................ 17
7.4 Counterparts......................................................... 18
7.5 Titles and Subtitles................................................. 18
7.6 Notices.............................................................. 18
7.7 Finder's Fee......................................................... 18
7.8 Expenses............................................................. 18
7.9 Amendments and Waivers............................................... 18
7.10 Severability......................................................... 18
7.11 Corporate Securities Law............................................. 19
7.12 Aggregation of Stock................................................. 19
7.13 Entire Agreement..................................................... 19
</TABLE>
-ii-
<PAGE>
SCHEDULE A Schedule of Investors
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B Warrant to Purchase Series A Preferred Stock
EXHIBIT C List of Stockholders
EXHIBIT D Voting Agreement
EXHIBIT E Opinion of Counsel for the Company
EXHIBIT F Investors' Rights Agreement
EXHIBIT G Co-Sale Agreement
EXHIBIT H Shareholders' Agreement
-iii-
<PAGE>
dsl.net, inc.
SERIES A PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT
THIS SERIES A PREFERRED STOCK AND WARRANT PURCHASE AGREEMENT is made as of
the 8th day of January, 1999, by and among dsl.net, inc., a Delaware corporation
(the "Company"), and the investors listed on Schedule A hereto, each of which is
herein referred to as an "Investor" and together as the "Investors."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock and Warrants.
---------------------------------------
1.1 Sale and Issuance of Series A Preferred Stock and Warrants.
----------------------------------------------------------
(a) The Company shall adopt and file with the Secretary of State of
Delaware on or before the Closing (as defined below) the Restated Certificate of
Incorporation in the form attached hereto as Exhibit A (the "Restated
---------
Certificate").
(b) On or prior to the Closing (as defined below), the Company shall
have authorized (i) the sale and issuance to the Investors of 3,500,000 shares
of Series A Preferred Stock (as defined below), (ii) the issuance of the shares
of Common Stock (as defined below) to be issued upon conversion of the Series A
Preferred Stock (the "Common Shares"), (iii) the sale and issuance to the
Investors of warrants in substantially the form attached hereto as Exhibit B
---------
(each individually a "Warrant" and collectively the "Warrants") exercisable for
up the number shares of Series B Preferred Stock (as defined below) set forth
opposite each respective Investor's name on Schedule A hereto and (iv) the
issuance of the Series B Preferred Stock upon exercise of the Warrants (the
"Warrant Shares") and the issuance of the Common Stock issuable upon conversion
of the Warrant Shares. The Common Shares and shares of Common Stock issuable
upon conversion of the Warrant Shares are collectively referred to herein as the
"Conversion Shares." The Series A Preferred Stock and the Conversion Shares
shall have the rights, preferences, privileges and restrictions set forth
herein, in the Investors' Rights Agreement of even date herewith, and in the
Restated Certificate.
(c) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally and not jointly, to purchase at the Closing and the
Company agrees to sell and issue to each Investor at the Closing that number of
shares of the Company's Series A Preferred Stock set forth opposite such
Investor's name on Schedule A hereto for the purchase price set forth thereon.
----------
In addition, the Company agrees to issue the Warrants to the Investors, in
consideration of the Investors' participation in the transaction contemplated by
this Agreement. The Warrants received by each Investor shall be exercisable for
the number of shares of the Company's Series B Preferred Stock set forth
opposite such Investor's name on Schedule A hereto at the initial per share
exercise price specified in Section 2 of the Warrant (subject to adjustment as
set forth in the Warrants), in accordance with the terms of the Warrants.
<PAGE>
-2-
1.2 Closing. The purchase and sale of the Series A Preferred Stock and
-------
Warrants shall take place at the offices of Day, Berry and Howard LLP, CityPlace
I, Hartford, Connecticut, at 9:30 A.M., on January 8, 1999, or at such other
time and place as the Company and Investors acquiring in the aggregate more than
fifty percent (50%) the shares of Series A Preferred Stock sold pursuant hereto
mutually agree upon orally or in writing (which time and place are designated as
the "Closing"). At the Closing the Company shall deliver to each Investor a
certificate representing the Series A Preferred Stock purchased thereby against
payment of the purchase price therefor by wire transfer, cancellation of
indebtedness, or any combination thereof. The Company shall also deliver the
Warrants to the Investors. In the event that payment by an Investor is made, in
whole or in part, by cancellation of indebtedness, then such Investor shall
surrender to the Company for cancellation at the Closing any evidence of such
indebtedness or shall execute an instrument of cancellation in form and
substance acceptable to the Company.
2. Company Right to Repurchase Warrant Shares.
------------------------------------------
2.1 Scope of Repurchase Right. Each time an Investor or any transferee of
-------------------------
all or a part of its Warrant ("Holder") chooses to exercise such Warrant
pursuant to Section 4 or Section 5 of the Warrant (a "Warrant Exercise") all
Warrant Shares purchased thereby, and all shares of Common Stock issued or
issuable upon conversion of such Warrant Shares, initially shall be Restricted
Shares (as defined in Section 2.5 below) and shall be subject to a right (but
not an obligation) of repurchase by the Company (the "Repurchase Right") until
five business days after the closing of a Public Offering (as defined in Section
2.3 below) or Acquisition Transaction (as defined in Section 2.3 below) as
provided below.
2.2 Repurchase Cost. If the Company exercises the Repurchase Right with
---------------
respect to outstanding Warrant Shares, it shall pay the Holder thereof an amount
in cash or cash equivalents equal to the Exercise Price (as defined in the
Warrant) paid with respect to each of the Restricted Shares being repurchased
(as adjusted for stock splits, stock dividends, reverse stock splits,
recapitalizations and the like after the date of exercise), plus interest on the
Exercise Price from the date the applicable Warrant was exercised for such
Shares to the date of repurchase at the rate of eight percent (8%) per annum,
less any dividends which have been paid (or for which the record date has
passed) on such Restricted Shares since the date they were issued.
2.3 Exercise of Repurchase Right. The Repurchase Right shall be
----------------------------
exercisable, in whole or in part, as follows:
(a) The Repurchase Right shall be exercisable by the Company (or its
successor) as to all Warrant Shares commencing immediately prior to, but subject
in all events to the completion of, the occurrence of one of the following
events, if such event occurs on or prior to January 8, 2000:
(i) the closing of a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended (a "Public Offering"), at a price to the public of not
less than $5.00 for each share of Series B Preferred Stock, or the Common
Stock issuable upon conversion of one share of Series B Preferred Stock (as
adjusted for stock splits, reverse stock splits and the like effected after
the date of this Agreement); or
<PAGE>
-3-
(ii) the closing of the Company's sale of all or substantially
all of its assets or the acquisition of the Company by another entity by
means of merger, consolidation or other transaction or series of related
transactions resulting in the exchange of the outstanding shares of the
Company's capital stock such that the stockholders of the Company prior to
such transaction own, directly or indirectly, less than 50% of the voting
power of the surviving entity (an "Acquisition Transaction"), if the Fair
Market Value (as defined below) of the consideration to be received for one
share of Series B Preferred Stock upon such event is greater than or equal
to five (5) times the Exercise Price.
(b) Commencing immediately prior to, and subject in all events to the
completion of, the closing of a Public Offering or the closing of an Acquisition
Transaction after January 8, 2000, the Repurchase Right shall be exercisable for
the number of Warrant Shares determined as follows:
(i) if the fair market value of one share of Series B Preferred
Stock upon such Public Offering or Acquisition Transaction (as determined
in good faith by the Board of Directors of the Company, or in the event of
a Public Offering, by the initial "Price to Public" of one share of such
Series B Preferred Stock, or Common Stock issuable upon conversion of such
Series B Preferred Stock, specified in the final prospectus with respect to
such offering) (the "Fair Market Value") is more than ten (10) times
greater than the Exercise Price (as defined in the Warrants), the
Repurchase Right may be exercised to repurchase that number of Warrant
Shares issued pursuant to each Warrant computed by the following formula,
with all Warrant Shares issued pursuant to such Warrant in excess of such
amount no longer subject to the Repurchase Right:
A = (BxD)((C/D) - 10)
Where: A = the number of Warrant Shares subject to exercise of the
Repurchase Right
B = ten percent (10%) of the Originally Purchasable Number of Shares
(as defined in the Warrant), as adjusted pursuant to Section
8 of the Warrant
C = the Fair Market Value
D = the Exercise Price (as defined in the Warrant)
(ii) if A is equal to or greater than the number of Warrant
Shares issued pursuant to a Warrant, then all Warrant Shares issued
pursuant to such Warrant shall be subject to the Repurchase Right, and the
amount by which A exceeds such number of shares shall be known as the
"Excess Repurchasable Shares" with respect to such Warrant (or, if such
Warrant is later transferred in part, with respect to all parts of such
Warrant).
<PAGE>
-4-
(iii) if the Fair Market Value is less than or equal to ten (10)
times greater than the Exercise Price, no Warrant Shares shall be subject
to the Repurchase Right.
(c) The Repurchase Right shall be exercisable only by written notice
delivered to the Holder at least three (3) business days prior to the closing of
a Public Offering or Acquisition Transaction. The notice shall set forth the
date on which the repurchase is to be effected and shall specify that the
repurchase shall be conditioned upon the closing of such transaction. Such date
shall not be more than five (5) business days after the date of such closing.
If such transaction does not occur for any reason, all Warrant Shares which were
Restricted Shares shall continue to be Restricted Shares. The certificate(s)
representing the Restricted Shares to be repurchased shall, prior to the close
of business on the date specified for the repurchase, be delivered to the
Company properly endorsed for transfer. The Company shall, concurrently with
the receipt of such certificate(s), pay to the Investors or their transferees
the purchase price determined according to Subsection 2.2 above. Payment shall
be made in cash or cash equivalents.
(d) The Repurchase Right shall expire, and all Restricted Shares
shall cease to be subject to the Repurchase Right, on the sixth business day
following the closing of a Public Offering or Acquisition Transaction.
2.4 Termination of Rights as Stockholder. If the Company makes available,
------------------------------------
at the time and place and in the amount and form provided in this Agreement, the
consideration for the Restricted Shares to be repurchased in accordance with
this Section 2, then after such time the person from whom such Restricted Shares
are to be repurchased shall no longer have any rights as a holder of such
Restricted Shares (other than the right to receive payment of such consideration
in accordance with this Agreement). Such Restricted Shares shall be deemed to
have been repurchased in accordance with the applicable provisions hereof,
whether or not the certificate(s) therefor have been delivered as required by
this Agreement.
2.5 Definition. "Restricted Share" shall mean a Warrant Share that is
----------
subject to a Repurchase Right.
2.6 Transfer Restrictions. The Restricted Shares may not be transferred,
---------------------
assigned, encumbered, or otherwise disposed of prior to the expiration of the
Repurchase Right, except to a transferee who agrees in writing to be bound by
the provisions of this Section 2 and the Voting Agreement. Any attempted
transfer of such shares, unless in accordance with this Section 2.6, shall be
void and have no effect. The Restricted Shares held by a Holder and all of its
transferees of Restricted Shares shall be aggregated for purposes of determining
the number of Warrant Shares subject to the Repurchase Right, and the Company's
Repurchase Right shall apply to each Holder and its transferees of Warrant
Shares on a pro rata basis, based upon the number of Restricted Shares held by
each (without regard to any unexercised shares issuable pursuant to the
Warrant).
2.7 Legend. Each certificate representing Restricted Shares shall bear
------
the following legend upon its face until such time as the Repurchase Right has
expired:
<PAGE>
-5-
"THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
REPURCHASE RIGHT UNDER THAT CERTAIN SERIES A STOCK AND WARRANT
PURCHASE AGREEMENT DATED JANUARY 7,1999 ("THE AGREEMENT', A COPY
OF WHICH MAY BE OBTAINED FROM THE SECRETARY OF THE COMPANY), AND
MAY NOT BE TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT IN
ACCORDANCE WITH THE AGREEMENT."
3. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Investor that, except as set forth on a Schedule
of Exceptions (the "Schedule of Exceptions") furnished each Investor and special
counsel for the Investors, specifically identifying the relevant subparagraph
hereof, which exceptions shall be deemed to be representations and warranties as
if made hereunder:
3.1 Organization, Good Standing and Qualification. The Company 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
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
3.2 Capitalization and Voting Rights.
--------------------------------
(a) The authorized capital of the Company consists, or will consist
immediately prior to the Closing, of: (i) 7,500,000 shares of Preferred Stock,
par value $.001 per share (the "Preferred Stock"), 4,000,000 of which have been
designated Series A Preferred Stock (the "Series A Preferred Stock"), up to
3,812,500 of which will be issued or issuable pursuant to this Agreement, and
the convertible notes (the "Bridge Notes") and warrants (the "Bridge Warrants")
described on the Schedule of Exceptions, and 3,500,000 of which have been
designated Series B Preferred Stock (the "Series B Preferred Stock"); and (ii)
20,000,000 shares of common stock, par value $.001 per share ("Common Stock"),
of which 6,300,000 shares are issued and outstanding. The rights, privileges
and preferences of the Common Stock, Series A Preferred Stock and Series B
Preferred Stock will be as stated in the Restated Certificate.
(b) The outstanding shares of Common Stock are owned by the
stockholders, in the numbers specified and subject to the restrictions set forth
in Exhibit C hereto.
---------
(c) The outstanding shares of Common Stock are all duly and validly
authorized and issued, fully paid and nonassessable, and were issued in
accordance with the registration or qualification provisions of the Securities
Act of 1933, as amended (the "Act"), and any relevant state securities laws, or
pursuant to valid exemptions therefrom.
(d) Except for (A) the conversion privileges of the Series A
Preferred Stock to be issued under this Agreement and under the Bridge Notes,
(B) the rights provided in Section 2.4 of the Investors' Rights Agreement, (C)
the Warrants, and (D) the Bridge Warrants, there are not outstanding any
options, warrants, rights (including conversion or preemptive rights) or
<PAGE>
-6-
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. In addition to the aforementioned options, the Company intends to
reserve 3,700,000 shares of its Common Stock for purchase upon exercise of
options to be granted in the future to directors, officers, employees,
consultants and advisors under a stock plan to be adopted by the Company (the
"Option Plan"). Except for the Shareholders' Agreement in the form attached
hereto as Exhibit H and the Voting Agreement, the Company is not a party or
---------
subject to any agreement or understanding, and, to the best of the Company's
knowledge, there is no agreement or understanding between any persons and/or
entities, which affects or relates to the voting or giving of written consents
with respect to any security or by a director of the Company.
3.3 Subsidiaries. The Company does not presently own or control, directly
------------
or indirectly, any interest in any other corporation, association, or other
business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
3.4 Authorization. All corporate action on the part of the Company, its
-------------
officers, directors and stockholders necessary for the authorization, execution
and delivery of this Agreement and the Investors' Rights Agreement, the Co-Sale
Agreement, the Voting Agreement, and the Warrants, all of even date herewith
(collectively, the "Ancillary Agreements"), the performance of all obligations
of the Company hereunder and thereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Series A Preferred Stock
being sold hereunder, the Series B Preferred Stock issuable upon exercise of the
Warrants, and the Common Stock issuable upon conversion of the Series A
Preferred Stock being sold hereunder and the Warrant Shares has been taken or
will be taken prior to the Closing, and this Agreement and the Ancillary
Agreements constitute valid and legally binding obligations of the Company,
enforceable in accordance with their respective terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws and principles relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in the Investors' Rights
Agreement may be limited by applicable federal or state securities laws.
3.5 Valid Issuance of Preferred and Common Stock and Warrants. The Series
---------------------------------------------------------
A Preferred Stock that is being purchased by the Investors hereunder, when
issued, sold and delivered in accordance with the terms of this Agreement for
the consideration expressed herein, will be duly and validly issued, fully paid,
and nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement, the Voting Agreement and the
Investors' Rights Agreement and under applicable state and federal securities
laws. The Warrants purchased pursuant to this Agreement and the Warrant Shares
issuable upon exercise of the Warrants will be free of restrictions on transfer
other than restrictions on transfer under the Warrants, the Investors' Rights
Agreement, the Voting Agreement and this Agreement, and under applicable state
and federal securities laws. The Conversion Shares have been duly and validly
reserved for issuance and, upon issuance in accordance with the terms of the
Restated Certificate and, if applicable, the Warrants, will be duly and validly
issued, fully paid, and nonassessable and will be free of restrictions on
transfer other than restrictions on transfer under this Agreement, the Voting
Agreement, and the Investors' Rights Agreement and under applicable state and
federal securities laws.
<PAGE>
-7-
3.6 Governmental Consents. No consent, approval, order or authorization
---------------------
of, or registration, qualification, designation, declaration or filing with, any
federal, state or local governmental authority on the part of the Company is
required in connection with the consummation of the transactions contemplated by
this Agreement, except (i) the filing of the Restated Certificate with the
Secretary of State of Delaware; and (ii) the filings pursuant to Regulation D
under the Act and Section 25102(f) of the California Corporate Securities Law of
1968, as amended, and the rules thereunder, which filings will be effected
within 15 days of the sale of the Series A Preferred Stock hereunder, and such
other post-closing filings as may be required.
3.7 Offering. Subject in part to the truth and accuracy of each
--------
Investor's representations set forth in Section 4 of this Agreement, the offer,
sale and issuance of the Series A Preferred Stock and Warrants as contemplated
by this Agreement are exempt from the registration requirements of any
applicable state and federal securities laws, and neither the Company nor any
authorized agent acting on its behalf will take any action hereafter that would
cause the loss of such exemption.
3.8 Litigation. There is no action, suit, proceeding or known
----------
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of this Agreement or the
Investors' Rights Agreement or any Ancillary Agreements, or the right of the
Company to enter into such agreements, or to consummate the transactions
contemplated hereby or thereby, or that might result, either individually or in
the aggregate, in any material adverse changes in the assets, condition, affairs
or prospects of the Company, financially or otherwise, or any change in the
current equity ownership of the Company, nor is the Company aware that there is
any basis for the foregoing. The foregoing includes, without limitation,
actions, suits, proceedings or investigations pending or threatened (or any
basis therefor known to the Company) involving the prior employment of any of
the Company's employees, their use in connection with the Company's business of
any information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
3.9 Proprietary Information and Shareholders' Agreements. Each employee
----------------------------------------------------
and officer of the Company, and each consultant who has had access to
confidential or proprietary information of the Company, has executed a
Proprietary Information and Inventions Agreement. Each Founder has executed or
will execute prior to the Closing a Shareholders' Agreement in a form provided
to special counsel to the Investors, which agreement supersedes all prior
agreements between the Company and the Founders related to the capital stock of
the Company held by the Founders. The Company is not aware that any of its
employees, officers or consultants are in violation thereof, and the Company
will use its best efforts to prevent any such violation.
3.10 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of or licenses to all patents, trademarks, service marks, trade names,
copyrights, trade secrets,
<PAGE>
-8-
information, proprietary rights and processes necessary for its business as now
conducted and as proposed to be conducted without any violation or infringement
of the rights of others, except for such items as have yet to be conceived or
developed or that are expected to be available for licensing on reasonable terms
from third parties. The Company has no patents or pending patent applications.
There are no outstanding options, licenses, or agreements of any kind relating
to the foregoing, nor is the Company bound by or a party to any options,
licenses or agreements of any kind with respect to the patents, trademarks,
service marks, trade names, copyrights, trade secrets, licenses, information,
proprietary rights and processes of any other person or entity. The Company has
not received any communications alleging that the Company has violated or, by
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement or the
Investors' Rights Agreement or the Ancillary Agreements, nor the carrying on of
the Company's business by the employees of the Company, nor the conduct of the
Company's business as proposed, will, to the best of the Company's knowledge,
conflict with or result in a breach of the terms, conditions or provisions of,
or constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated. The Company does not believe it is
necessary to utilize any inventions of any of its employees (or people it
currently intends to hire) made prior to or outside the scope of their
employment by the Company.
3.11 Compliance with Other Instruments. The Company is not in violation or
---------------------------------
default of any provision of its Restated Certificate or Bylaws, or of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound, or, to the best of its knowledge, of any provision of any
federal or state statute, rule or regulation applicable to the Company. The
execution, delivery and performance of this Agreement and the Investors' Rights
Agreement and the Ancillary Agreements, and the consummation of the transactions
contemplated hereby and thereby will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument judgment, order,
writ, decree or contract or an event that results in the creation of any lien,
charge or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations or any of its assets or properties.
3.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby and by the
Investors' Rights Agreement and the Ancillary Agreements, there are no
agreements, understandings or proposed transactions between the Company and any
of its officers, directors, affiliates, or any affiliate thereof.
<PAGE>
-9-
(b) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound that may involve (i) obligations (contingent
or otherwise) of, or payments to the Company in excess of, $10,000, or (ii) the
license of any patent, copyright, trade secret or other proprietary right to or
from the Company (other than the license of the Company's or generally available
shrink-wrap software and products in the ordinary course of business), or (iii)
provisions restricting or affecting the development, manufacture or distribution
of the Company's products or services, or (iv) indemnification by the Company
with respect to infringements of proprietary rights.
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $10,000 or, in the case of
indebtedness and/or liabilities individually less than $10,000, in excess of
$25,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to and is not bound by any contract,
agreement or instrument, or subject to any restriction under its Restated
Certificate or Bylaws that adversely affects its business as now conducted or as
proposed to be conducted, its properties or its financial condition.
(f) The Company has not engaged in the past three (3) months in any
discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
3.13 Related-Party Transactions. No employee, officer, or director of the
--------------------------
Company or member of his or her immediate family is indebted to the Company, nor
is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers, or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the
<PAGE>
-10-
immediate family of any officer or director of the Company is directly or
indirectly interested in any material contract with the Company.
3.14 Permits. The Company has all franchises, permits, licenses, and any
-------
similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
3.15 Environmental and Safety Laws. To the best of its knowledge, the
-----------------------------
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to the best
of its knowledge, no material expenditures are or will be required in order to
comply with any such existing statute, law or regulation.
3.16 Manufacturing and Marketing Rights. The Company has not granted
----------------------------------
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market or sell
its products.
3.17 Disclosure. The Company has fully provided each Investor with all
----------
the information that such Investor has requested for deciding whether to
purchase the Series A Preferred Stock and all information that the Company
believes is reasonably necessary to enable such Investor to make such decision.
Neither this Agreement, the Investors' Rights Agreement, nor any other
statements or certificates made or delivered in connection herewith or therewith
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading.
3.18 Business Plan. The 1998-1999 Business Plan dated November, 1998,
-------------
previously delivered to each Investor, has been prepared in good faith by the
Company and does not contain any untrue statement of a material fact nor does it
omit to state a material fact necessary to make the statements made therein not
misleading, except that with respect to projections contained in the Business
Plan, the Company represents only that such projections were prepared in good
faith and that the Company reasonably believes there is a reasonable basis for
such projections.
3.19 Registration Rights. Except as provided in the Investors' Rights
-------------------
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
3.20 Corporate Documents. Except for amendments necessary to satisfy
-------------------
representations and warranties or conditions contained herein (the form of which
amendments has been approved by the Investors), the Restated Certificate and
Bylaws of the Company are in the form previously provided to special counsel for
the Investors.
3.21 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that
<PAGE>
-11-
arise in the ordinary course of business and do not materially impair the
Company's ownership or use of such property or assets. With respect to the
property and assets it leases, the Company is in compliance with such leases
and, to the best of its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances.
3.22 Financial Statements. The Company has delivered to Investor its
--------------------
unaudited financial statements (balance sheet and statement of operations) as at
and for the eleven (11) month period ended November 30, 1998 (the "Financial
Statements"). The Financial Statements fairly present the financial condition
and operating results of the Company as of the date, and for the periods,
indicated therein, subject to normal year-end audit adjustments. Except as set
forth in the Financial Statements, the Company has no material liabilities,
contingent or otherwise, other than (i) liabilities incurred in the ordinary
course of business subsequent to November 30, 1998 and (ii) obligations under
contracts and commitments incurred in the ordinary course of business and not
required under generally accepted accounting principles to be reflected in the
Financial Statements, which, in both cases, individually or in the aggregate,
are not material to the financial condition or operating results of the Company.
Except as disclosed in the Financial Statements, the Company is not a guarantor
or indemnitor of any indebtedness of any other person, firm or corporation. The
Company maintains and will continue to maintain a standard system of accounting
established and administered in accordance with generally accepted accounting
principles.
3.23 Changes. Since November 30, 1998, there has not been any adverse
-------
change in the assets, liabilities, financial condition or operating results of
the Company from that reflected in the Financial Statements, except changes in
the ordinary course of business that have not been, in the aggregate, materially
adverse.
3.24 Employee Benefit Plans. The Company does not have any Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
3.25 Tax Returns, Payments and Elections. The Company has filed all tax
-----------------------------------
returns and reports (including information returns and reports) as required by
law. These returns and reports are true and correct in all material respects.
The Company has paid all taxes and other assessments due, except those contested
by it in good faith that are listed in the Schedule of Exceptions. The
provision for taxes of the Company as shown in the Financial Statements is
adequate for taxes due or accrued as of the date thereof. The Company has not
elected pursuant to the Internal Revenue Code of 1986, as amended (the "Code"),
to be treated as a Subchapter S corporation pursuant to Section 1362(a) of the
Code, nor has it made an election pursuant to Section 341(f) of the Code, nor
has it made any other elections pursuant to the Code (other than elections that
relate solely to methods of accounting, depreciation or amortization) that would
have a material effect on the Company, its financial condition, its business as
presently conducted or proposed to be conducted or any of its properties or
material assets. The Company has never had any tax deficiency proposed or
assessed against it and has not executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge.
None of the Company's federal income tax returns and none of its state income or
franchise tax or sales or use tax returns has ever been audited by governmental
authorities. Since the date of the Financial Statements, the Company has not
incurred any taxes, assessments or governmental
<PAGE>
-12-
charges other than in the ordinary course of business and the Company has made
adequate provisions on its books of account for all taxes, assessments and
governmental charges with respect to its business, properties and operations for
such period. The Company has withheld or collected from each payment made to
each of its employees, the amount of all taxes (including, but not limited to,
federal income taxes, Federal Insurance Contribution Act taxes and Federal
Unemployment Tax Act taxes) required to be withheld or collected therefrom, and
has paid the same to the proper tax receiving officers or authorized
depositories.
3.26 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed. The Company has in full force and effect
products liability and errors and omissions insurance in amounts customary for
companies similarly situated.
3.27 Minutes. The minutes of the Company provided to the Investors
-------
contain a complete summary of all meetings of directors and stockholders since
the time of incorporation and reflect all transactions referred to in such
minutes accurately in all material respects.
3.28 Labor Agreements and Actions, Employee Compensation. The Company is
---------------------------------------------------
not bound by or subject to (and none of its assets or properties is bound by or
subject to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
best of the Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the best of the Company's
knowledge, threatened, that could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the Company
(as such business is presently conducted and as it is proposed to be conducted),
nor is the Company aware of any labor organization activity involving its
employees. The Company is not aware that any officer or key employee, or that
any group of key employees, intends to terminate their employment with the
Company, nor does the Company have a present intention to terminate the
employment of any of the foregoing. The employment of each officer and employee
of the Company is terminable at the will of the Company. To the best of its
knowledge, the Company has complied in all material respects with all applicable
state and federal equal employment opportunity and other laws related to
employment. The Company is not a party to or bound by any currently effective
employment contract, deferred compensation agreement, bonus plan, incentive
plan, profit sharing plan, retirement agreement, or other employee compensation
agreement.
3.29 Section 83(b) Elections. To the best of the Company's knowledge, all
-----------------------
individuals who have purchased unvested shares of the Company's Common Stock
have timely filed or will timely file elections under Section 83(b) of the Code
and any analogous provisions of applicable state tax laws.
3.30 Real Property Holding Company. The Company is not currently, and has
-----------------------------
not been during the prior five years, a United States real property holding
corporation within the meaning of Section 897 of the Code and the Company has
filed with the Internal Revenue
<PAGE>
-13-
Service all statements, if any, with its United States income tax returns which
are required under Section 1.897-2(H) of the Treasury Regulations.
3.31 Net Operating Loss Carryforward. The information contained in the
-------------------------------
Schedule of Exceptions or otherwise provided to counsel for the Investors
regarding the application of Section 382 of the Code to the Company's federal
net operating loss carryforward is true and correct to the best of the Company's
knowledge.
3.32 Brokers. The Company has no contract, arrangement or understanding
-------
with any broker, finder or similar agent with respect to the transactions
contemplated by this Agreement.
3.33 Significant Customers and Suppliers. No customer or supplier that
-----------------------------------
was or is significant to the Company has terminated, materially reduced or
threatened to terminate or materially reduce its purchases from or provision of
products or services to the Company, as the case may be.
3.34 Qualified Small Business Stock. As of the Closing: (i) the Company
------------------------------
will be an eligible corporation as defined in Section 1202(e)(4) of the Internal
Revenue Code of 1986, as amended (the "Code"), (ii) the Company will not have
made any purchases of its own stock during the one-year period proceeding the
Closing having an aggregate value exceeding 5% of the aggregate value of all its
stock as of the beginning of such period and (iii) the Company's aggregate gross
assets, as defined by Code Section 1202(d)(2), at no time through the Closing
have exceeded or will exceed $50 million, taking into account the assets of any
corporations required to be aggregated with the Company in accordance with Code
Section 1202(d)(3).
3.35 Year 2000. The Company's proprietary software is capable of
---------
recording, storing, processing, calculating and displaying calendar dates
falling before, on and after January 1, 2000, without loss of functionality or
data integrity, except where the failure to do so could not reasonably be
expected to have a material adverse affect on the assets, properties, financial
condition, operating results or business of the Company. The foregoing does not
constitute a warranty or representation that the Company's software will be
capable of recording, storing, processing, calculating and displaying correct
calendar dates based on software supplied by or licensed from any party other
than the Company, or that the Company's software will properly interact with
such third party software.
3.36 No Outstanding Preferred Stock. Immediately prior to the Closing,
------------------------------
there shall be no preferred stock of the Company outstanding.
4. Representations and Warranties of the Investors. Each Investor
-----------------------------------------------
hereby represents and warrants that:
4.1 Authorization. Such Investor has full power and authority to enter
-------------
into this Agreement, the Investors' Rights Agreement and the Ancillary
Agreements, and each such Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief, or other
<PAGE>
-14-
equitable remedies, and (iii) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
4.2 Purchase Entirely for Own Account. This Agreement is made with such
---------------------------------
Investor in reliance upon such Investor's representation to the Company, which
by such Investor's execution of this Agreement such Investor hereby confirms,
that the Series A Preferred Stock and the Warrant to be received by such
Investor, the Warrant Shares and the Common Stock issuable upon conversion of
the Series A Preferred Stock and the Warrant Shares (collectively, the
"Securities") will be acquired for investment for such Investor's own account,
not as a nominee or agent, and not with a view to the resale or distribution of
any part thereof, and that such Investor has no present intention of selling,
granting any participation in, or otherwise distributing the same. By executing
this Agreement, such Investor further represents that such Investor does not
have any contract, undertaking, agreement or arrangement with any person to
sell, transfer or grant participations to such person or to any third person,
with respect to any of the Securities.
4.3 Disclosure of Information. Such Investor represents that it has had
-------------------------
an opportunity to ask questions and receive answers from the Company regarding
the terms and conditions of the offering of the Series A Preferred Stock and
Warrant, and the business, properties, prospects and financial condition of the
Company. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 3 of this Agreement or the right of the
Investors to rely thereon.
4.4 Investment Experience. Such Investor is an investor in securities of
---------------------
companies in the development stage and acknowledges that it is able to fend for
itself, can bear the economic risk of its investment, and has such knowledge and
experience in financial or business matters that it is capable of evaluating the
merits and risks of the investment in the Series A Preferred Stock and Warrant.
If other than an individual, such Investor also represents it has not been
organized for the purpose of acquiring the Series A Preferred Stock or Warrant.
4.5 Accredited Investor. Such Investor is an "accredited investor"
-------------------
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
4.6 Restricted Securities. Such Investor understands that the Securities
---------------------
it is purchasing are characterized as "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, such
Investor represents that it is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the Act.
4.7 Further Limitations on Disposition. Without in any way limiting the
----------------------------------
representations set forth above, such Investor further agrees not to make any
disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 4 and the Investors' Rights Agreement provided and to the extent
this Section and such agreement are then applicable, and:
<PAGE>
-15-
(a) There is then in effect a Registration Statement under the Act
covering such proposed disposition and such disposition is made in accordance
with such Registration Statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of Paragraphs (a) and (b) above,
no such registration statement or opinion of counsel shall be necessary for a
transfer by an Investor that is a partnership to a partner of such partnership
or a retired partner of such partnership who retires after the date hereof, or
to the estate of any such partner or retired partner or the transfer by gift,
will or intestate succession of any partner to his or her spouse or to the
siblings, lineal descendants or ancestors of such partner or his or her spouse,
if the transferee agrees in writing to be subject to the terms hereof to the
same extent as if he or she were an original Investor hereunder.
4.8 Legends.
-------
(a) It is understood that the certificates evidencing the Securities
may bear the following legend:
"These securities have not been registered under the
Securities Act of 1933, as amended, or any state securities
laws. They may not be sold, offered for sale, pledged or
hypothecated in the absence of a registration statement in
effect with respect to the securities under such Act and
any applicable state securities laws or pursuant to an
opinion of counsel satisfactory to the Company that such
registration is not required or unless sold pursuant to
Rule 144 of such Act."
(b) It is understood that the Warrants shall bear the following
additional legend:
"Shares issuable pursuant to this Warrant are subject to a
repurchase right and certain transfer restrictions under
that certain Series A Preferred Stock and Warrant Purchase
Agreement dated January 8, 1999. Copies of such agreement
may be obtained upon written request to the Secretary of
the Company."
4.9 Investors' State of Residence. Each Investor represents that, as of
-----------------------------
the Closing, it is a resident of the State of California.
<PAGE>
-16-
5. Conditions of Investors' Obligations at Closing. The obligations of
-----------------------------------------------
each Investor under subsection I. I (b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions, the
waiver of which shall not be effective against any Investor who does not consent
thereto:
5.1 Representations and Warranties. The representations and warranties of
------------------------------
the Company contained in Section 3 shall be true on and as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the date of such Closing.
5.2 Performance. The Company shall have performed and complied with all
-----------
agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Closing.
5.3 Compliance Certificate. The President of the Company shall deliver to
----------------------
each Investor at the Closing a certificate stating that the conditions specified
in Sections 5.1 and 5.2 have been fulfilled and stating that there shall have
been no adverse change in the business, affairs, prospects, operations,
properties, assets or condition of the Company since the date of its Financial
Statements.
5.4 Qualifications. All authorizations, approvals, or permits, if any, of
--------------
any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Securities pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
5.5 Proceedings and Documents. All corporate and other proceedings in
-------------------------
connection with the transactions contemplated at the Closing and all documents
incident thereto shall be reasonably satisfactory in form and substance to
Investors' special counsel, and they shall have received all such counterpart
original and certified or other copies of such documents as they may reasonably
request. This may include, without limitation, good standing certificates and
certification by the Company's Secretary regarding the Restated Certificate and
Bylaws and Board of Director and stockholder resolutions relating to this
transaction.
5.6 Proprietary Information and Shareholders' Agreement. Each employee of
---------------------------------------------------
the Company, and each consultant to the Company who has had access to
confidential or proprietary information of the Company, shall have entered into
a Proprietary Information and Inventions Agreement in the form previously
provided to special counsel for the Investors. The Company shall cause each
holder of Common Stock of the Company to enter into a Shareholders' Agreement
(including an irrevocable proxy) in a form reasonably acceptable to special
counsel for the Investors.
5.7 Bylaws. The Bylaws of the Company shall provide that the Board of
------
Directors of the Company shall consist of five (5) persons.
5.8 Voting Agreement. The Company, each Founder (as defined therein) and
----------------
each Investor shall have entered into the Voting Agreement in the form attached
hereto as Exhibit D.
---------
<PAGE>
-17-
5.9 Board of Directors. The Board of Directors of the Company,
------------------
immediately following the Closing, shall be comprised of the following members:
David Struwas and Paul Sun as designees of the holders of shares of the Common
Stock of the Company; Robert Gilbertson and Jeff Marshall, as designees of the
holders of shares of Series A Preferred Stock of the Company; and one vacancy.
5.10 Opinion of Company Counsel. Each Investor shall have received from
--------------------------
Day, Berry & Howard LLP, counsel for the Company, an opinion, dated as of the
Closing, in the form attached hereto as Exhibit E.
---------
5.11 Investors' Rights Agreement. The Company, the Founders and each
---------------------------
Investor shall have entered into the Investors' Rights Agreement in the form
attached as Exhibit F.
---------
5.12 Co-Sale Agreement. The Investors, the Founders and the Company shall
-----------------
each have entered into a Co-Sale Agreement in the form attached hereto as
Exhibit G.
- ---------
6. Conditions of the Company's Obligations at Closing. The obligations
--------------------------------------------------
of the Company to each Investor under this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions by that
Investor:
6.1 Representations and Warranties. The representations and warranties of
------------------------------
the Investors contained in Section 4 shall be true on and as of the Closing with
the same effect as though such representations and warranties had been made on
and as of the Closing.
6.2 Qualifications. All authorizations, approvals, or permits, if any, of
--------------
any governmental authority or regulatory body of the United States or of any
state that are required in connection with the lawful issuance and sale of the
Securities pursuant to this Agreement shall be duly obtained and effective as of
the Closing.
7. Miscellaneous.
-------------
7.1 Survival of Warranties. The warranties, representations and covenants
----------------------
of the Company and Investors contained in or made pursuant to this Agreement
shall survive the execution and delivery of this Agreement and the Closing and
shall in no way be affected by any investigation of the subject matter thereof
made by or on behalf of the Investors or the Company.
7.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Connecticut as applied to agreements among
Connecticut residents entered into and to be performed entirely within
Connecticut.
<PAGE>
-18-
7.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this Agreement
--------------------
are used for convenience only and are not to be considered in construing or
interpreting this Agreement.
7.6 Notices. Unless otherwise provided, any notice required or permitted
-------
under this Agreement shall be given in writing and shall be deemed effectively
given upon personal delivery to the party to be notified or upon deposit with
the United States Post Office, by registered or certified mail, postage prepaid
and addressed to the party to be notified at the address indicated for such
party on the signature page hereof, or at such other address as such party may
designate by ten (10) days' advance written notice to the other parties.
7.7 Finder's Fee. Each party represents that it neither is nor will be
------------
obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from
any liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
7.8 Expenses. Irrespective of whether the Closing is effected, the
--------
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Closing is effected, the Company shall, at the Closing, reimburse the reasonable
fees of special counsel for the Investors and shall, upon receipt of a bill
therefor, reimburse the reasonable out-of-pocket expenses of such counsel. If
any action at law or in equity is necessary to enforce or interpret the terms of
this Agreement, the Investors' Rights Agreement or the Restated Certificate, the
prevailing party shall be entitled to reasonable attorney's fees, costs and
necessary disbursements in addition to any other relief to which such party may
be entitled.
7.9 Amendments and Waivers. Any term of this Agreement may be amended and
----------------------
the observance of any term of this Agreement may be waived (either generally or
in a particular instance and either retroactively or prospectively), only with
the written consent of the Company and the holders of a majority of the Common
Stock issuable or issued upon conversion of the Series A Preferred Stock. Any
amendment or waiver effected in accordance with this paragraph shall be binding
upon each holder of any securities purchased under this Agreement at the time
outstanding (including securities into which such securities are convertible),
each future holder of all such securities, and the Company.
7.10 Severability. If one or more provisions of this Agreement are held to
------------
be unenforceable under applicable law, such provision shall be excluded from
this Agreement and
<PAGE>
-19-
the balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
7.11 Corporate Securities Law. THE SALE OF THE SECURITIES THAT ARE THE
------------------------
SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
7.12 Aggregation of Stock. All shares of the Preferred Stock held or
--------------------
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
7.13 Entire Agreement. This Agreement and the documents referred to herein
----------------
constitute the entire agreement among the parties with respect to the subject
matter hereof and no party shall be liable or bound to any other party in any
manner by any warranties, representations, or covenants with respect to such
subject matter except as specifically set forth herein or therein.
[Remainder of page intentionally left blank.]
<PAGE>
-20-
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY
dsl.net, inc.
By: ______________________________________
Title: ___________________________________
Address: 50 Washington Street
7th Floor East
East Norwalk, CT 06854
PURCHASERS
VantagePoint Venture Partners 1996, L.P.
1001 Bayhill Drive
Suite 140
San Bruno, CA 94066
By: ______________________________________
Title: ___________________________________
VantagePoint Communications Partners, L.P.
1001 Bayhill Drive
Suite 140
San Bruno, CA 94066
By: ______________________________________
Title: ___________________________________
<PAGE>
-21-
Schedule A
----------
Schedule of Investors
---------------------
<TABLE>
<CAPTION>
Series A Number of Warrant Total Purchase Price of
Shares Shares Issuable Upon Series A Shares and
Name and Address Purchased Exercise of Warrant Warrants
<S> <C> <C> <C>
VantagePoint Venture 1,166,667 1,166,667 $1,166,667
Partners 1996, L.P.
1001 Bayhill Drive
Suite 140
San Bruno, CA 94066
VantagePoint 2,333,333 2,333,333 $2,333,333
Communications Partners, L.P.
1001 Bayhill Drive
Suite 140
San Bruno, CA 94066
TOTAL 3,500,000 3,500,000 $3,500,000
</TABLE>
<PAGE>
EXHIBIT 10.12
dsl.net, inc.
SECURITIES EXCHANGE AND SUBSCRIPTION AGREEMENT
THIS AGREEMENT is entered into as of April 15, 1999 by and between dsl.net,
inc., a Delaware corporation (the "Company"), and VantagePoint Venture Partners
1996, L.P. and VantagePoint Communications Partners L.P. (each a "Shareholder"
and, collectively, the "Shareholders").
WITNESSETH:
WHEREAS, the Shareholders own the number of shares of Series A Preferred
Stock, par value $.001 per share, of the Company ("Series A Preferred Stock")
and warrants (the "Warrants") for the purchase of Series B Preferred Stock, par
value $.001 per share, of the Company ("Old Series B Preferred Stock") set forth
on Schedule I attached hereto (such shares and warrants collectively referred to
as the "Exchange Securities"), as authorized in the Restated Certificate of
Incorporation of the Company filed with the Secretary of State of the State of
Delaware on January 7, 1999 (the "Old Restated Certificate"); and
WHEREAS, the Company intends to file a new Restated Certificate of
Incorporation (the "New Restated Certificate") with the Secretary of State of
the State of Delaware pursuant to that certain Series C Preferred Stock Purchase
Agreement, dated as of March 31, 1999 (the "Series C Agreement"), by and among
the Company and the Investors listed therein (the "Series C Investors"), which
New Restated Certificate will, among other things, alter the rights and other
terms of the Company's Series B Preferred Stock, par value $.001 per share (as
so altered, the "New Series B Preferred Stock"); and
WHEREAS, the Company and each of the Shareholders desire to exchange the
Exchange Securities for newly-issued shares of New Series B Preferred Stock.
NOW, THEREFORE, in consideration of the premises and certain other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereby agree as follows:
<PAGE>
-2-
1. Exchange and Issuance of Shares.
-------------------------------
(a) Effective concurrently with, and in no event prior to, the
delivery by the Company to the Series C Investors of an aggregate of 2,785,516
shares of its Series C Preferred Stock, par value $.001 per share, pursuant to
the Series C Agreement, the Exchange Securities owned by the Shareholders shall
be canceled and, upon the surrender to the Company of the stock and warrant
certificates representing such securities, the Company shall issue to the
Shareholders, in exchange for such securities, certificates for the number of
shares of New Series B Preferred Stock as set forth on Schedule II attached
hereto.
(b) Upon the filing of the New Restated Certificate with the
Secretary of State of the State of Delaware, the Warrants shall be of no further
force or effect and shall only represent the right to exchange such Warrants in
conjunction with shares of Series A Preferred Stock for shares of New Series B
Preferred Stock as provided in (a) above.
(c) If the transactions contemplated in the Series C Agreement are
not consummated by or before April 30, 1999, the Company shall promptly take
such steps as are necessary (i) if the Company has filed the New Restated
Certificate with the Secretary of State of the State of Delaware, to amend its
certificate of incorporation so that the rights and other terms of the Company's
Series B Preferred Stock, par value $.001 per share, are returned to those in
effect under the Old Restated Certificate and (ii) to then revive the
Shareholders' rights under the Warrants to those in effect immediately prior to
entering into this Agreement.
2. Conformity with Securities Laws. The exchange and issuance of shares
-------------------------------
hereunder is subject to compliance with all applicable federal and state
securities laws. Each Shareholder hereby represents to the Company that it is
acquiring the shares of New Series B Preferred Stock for investment and not with
a view to the distribution thereof, and that it has had full and complete access
to the financial statements of the Company and such other information relating
to the Company and the New Series B Preferred Stock as it has deemed
appropriate. Each Shareholder acknowledges that the shares of New Series B
Preferred Stock have not been registered under the Securities Act of 1933, as
amended (the "Act"), or any state securities laws.
<PAGE>
-3-
Each Shareholder represents that it is an "accredited investor" as defined in
Regulation D under the Act. The certificates representing the shares of New
Series B Preferred Stock issued by the Company pursuant to this Agreement may
bear a legend describing the restrictions on re-sale thereof under applicable
securities laws and agreements of the Company, and stop transfer orders with
respect to such certificates may be entered in the share transfer books of the
Company.
3. Miscellaneous. (a) Applicable Law. This Agreement and the
------------- --------------
interpretation of the provisions hereof shall be governed by laws of the State
of Connecticut.
(b) Headings. The headings contained 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.
(c) Counterparts. This Agreement may be executed in multiple
------------
counterparts, each of which when so executed and delivered shall constitute a
complete and original instrument but all of which together shall constitute one
and the same agreement, and it shall not be necessary when making proof of this
Agreement or any counterpart hereof to account for any other counterpart.
<PAGE>
-4-
IN WITNESS WHEREOF, the undersigned have executed and delivered this
Agreement as of the date first written above.
DSL.NET, INC.
By: ______________________________________
VantagePoint Venture Partners 1996, L.P.
By: VantagePoint Associates, LLC, its
General Partner
By: ______________________________________
Name:
Title:
VantagePoint Communications Partners, L.P.
By: VantagePoint Communications Associates,
LLC, its General Partner
By: ______________________________________
Name:
Title:
<PAGE>
-5-
SCHEDULE I
<TABLE>
<CAPTION>
Shares of Old Series B
Shares of Series A Preferred Stock Issuable
Name and Address Preferred Stock on Exercise of Warrant
- ---------------- --------------- ----------------------
<S> <C> <C>
VantagePoint Venture Partners 1,166,667 1,166,667
1996, L.P. (Evidenced by Certificate #P-1) (Evidenced by Warrant #PS-1)
1001 Bayhill Drive
Suite 140
San Bruno, CA 94066
VantagePoint Communications 2,333,333 2,333,333
Partners, L.P. (Evidenced by Certificate #P-2) (Evidenced by Warrant #PS-2)
1001 Bayhill Drive
Suite 140
San Bruno, CA 94066
TOTAL 3,500,000 3,500,000
</TABLE>
<PAGE>
-6-
SCHEDULE II
<TABLE>
<CAPTION>
Shares of New Series B
Name and Address Preferred Stock to be issued
- ---------------- ----------------------------
<S> <C>
VantagePoint Venture Partners 1996, L.P. 2,166,667
1001 Bayhill Drive
Suite 140
San Bruno, CA 94066
VantagePoint Communications Partners, L.P. 4,333,333
1001 Bayhill Drive
Suite 140
San Bruno, CA 94066
TOTAL 6,500,000
</TABLE>
<PAGE>
Exhibit 10.13
dsl.net, inc.
SERIES C PREFERRED STOCK
PURCHASE AGREEMENT
March 31, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<S> <C>
1. Purchase and Sale of Stock................................................ 7
1.1 Sale and Issuance of Series C Preferred Stock....................... 7
1.2 Funding............................................................. 7
2. Representations and Warranties of the Company............................. 8
2.1 Organization, Good Standing and Qualification....................... 8
2.2 Capitalization and Voting Rights.................................... 8
2.3 Subsidiaries........................................................ 9
2.4 Authorization....................................................... 9
2.5 Valid Issuance of Preferred and Common Stock........................ 9
2.6 Governmental Consents............................................... 10
2.7 Offering............................................................ 10
2.8 Litigation.......................................................... 10
2.9 Proprietary Information and Shareholders' Agreements................ 11
2.10 Patents and Trademarks.............................................. 11
2.11 Compliance with Other Instruments................................... 11
2.12 Agreements; Action.................................................. 12
2.13 Related Party Transactions.......................................... 13
2.14 Permits............................................................. 13
2.15 Environmental and Safety Laws....................................... 14
2.16 Manufacturing and Marketing Rights.................................. 14
2.17 Disclosure.......................................................... 14
2.18 Business Plan....................................................... 14
2.19 Registration Rights................................................. 14
2.20 Corporate Documents................................................. 14
2.21 Title to Property and Assets........................................ 14
2.22 Financial Statements................................................ 15
2.23 Changes............................................................. 15
2.24 Employee Benefit Plans.............................................. 15
2.25 Tax Returns, Payments and Elections................................. 15
2.26 Insurance........................................................... 16
2.27 Minutes............................................................. 16
2.28 Labor Agreements and Actions; Employee Compensation................. 16
2.29 Section 83(b) Elections............................................. 17
2.30 Real Property Holding Company....................................... 17
2.31 Net Operating Loss Carryforward..................................... 17
2.32 Brokers............................................................. 17
2.33 Significant Customers and Suppliers................................. 17
2.34 Qualified Small Business Stock...................................... 17
2.35 Year 2000........................................................... 17
</TABLE>
<PAGE>
<TABLE>
<S> <C>
2.36 Offerees............................................................ 18
3. Representations and Warranties of the Investors........................... 18
3.1 Authorization....................................................... 18
3.2 Purchase Entirely for Own Account................................... 18
3.3 Disclosure of Information........................................... 19
3.4 Investment Experience............................................... 19
3.5 Accredited Investor................................................. 19
3.6 Restricted Securities............................................... 19
3.7 Further Limitations on Disposition.................................. 19
3.8 Legends............................................................. 20
3.9 Investors' State of Residence....................................... 20
4. Conditions of Investors' Obligations at Funding........................... 20
4.1 Representations and Warranties...................................... 20
4.2 Performance......................................................... 20
4.3 Compliance Certificate.............................................. 20
4.4 Qualifications...................................................... 21
4.5 Proceedings and Documents........................................... 21
4.6 Proprietary Information and Shareholders' Agreement................. 21
4.7 Bylaws.............................................................. 21
4.8 Amended and Restated Voting Agreement............................... 21
4.9 Board of Directors.................................................. 21
4.10 Opinion of Company Counsel.......................................... 21
4.11 Amended and Restated Investors' Rights Agreement.................... 21
4.12 Amended and Restated Right of First Refusal and Co-Sale Agreement... 22
4.13 Due Diligence and No Material Adverse Change........................ 22
5. Conditions of the Company's Obligations at Funding....................... 22
5.1 Representations and Warranties...................................... 22
5.2 Qualifications...................................................... 22
6. Miscellaneous............................................................ 22
6.1 Survival of Warranties.............................................. 22
6.2 Successors and Assigns.............................................. 22
6.3 Governing Law....................................................... 22
6.4 Counterparts........................................................ 22
6.5 Titles and Subtitles................................................ 23
6.6 Notices............................................................. 23
6.7 Finder's Fee........................................................ 23
6.8 Expenses............................................................ 23
6.9 Amendments and Waivers.............................................. 23
</TABLE>
<PAGE>
<TABLE>
<S> <C>
6.10 Severability........................................................ 24
6.11 Corporate Securities Law............................................ 24
6.12 Aggregation of Stock................................................ 24
6.13 Entire Agreement.................................................... 24
</TABLE>
<PAGE>
SCHEDULE A Schedule of Investors
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B List of Stockholders
EXHIBIT C Amended and Restated Voting Agreement
EXHIBIT D Amended and Restated Investors' Rights Agreement
EXHIBIT E Amended and Restated Right of First Refusal and Co-Sale Agreement
<PAGE>
dsl.net, inc.
SERIES C PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT is made as of the 31st day
of March, 1999, by and among dsl.net, inc., a Delaware corporation (the
"Company"), and the investors listed on Schedule A hereto, each of which is
herein referred to as an "Investor" and together as the "Investors."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series C Preferred Stock.
(a) The Company shall adopt and file with the Secretary of State of
Delaware on or before the Funding (as defined below) the Restated Certificate of
Incorporation in the form attached hereto as Exhibit A (the "Restated
---------
Certificate").
(b) On or prior to the Funding (as defined below), the Company shall
have authorized (i) the sale and issuance to the Investors of 2,785,516 shares
of Series C Preferred Stock (as defined below), (ii) the issuance of the shares
of Common Stock (as defined below) to be issued upon conversion of the Series C
Preferred Stock (the "Common Shares"). The Series C Preferred Stock shall have
the rights, preferences, privileges and restrictions set forth herein, in the
Amended and Restated Investors' Rights Agreement in the form attached hereto as
Exhibit E and in the Restated Certificate.
(c) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally and not jointly, to purchase at the Funding and the
Company agrees to sell and issue to each Investor at the Funding that number of
shares of the Company's Series C Preferred Stock set forth opposite such
Investor's name on Schedule A hereto for the purchase price set forth thereon.
----------
1.2 Funding. The funding and delivery of the Series C Preferred
-------
Stock shall take place at the offices of Day, Berry & Howard LLP, CityPlace I,
Hartford, Connecticut, at 9:30 A.M., on April 21, 1999, or at such other time
and place as the Company and Investors acquiring in the aggregate more than
fifty percent (50%) the shares of Series C Preferred Stock sold pursuant hereto
mutually agree upon orally or in writing (which time and place are designated as
the "Funding"). At the Funding the Company shall deliver to each Investor a
certificate representing the Series C Preferred Stock purchased thereby against
payment of the purchase price therefor by wire transfer, cancellation of
indebtedness, or any combination thereof. In the event that payment by an
Investor is made, in whole or in part, by cancellation of indebtedness, then
such Investor shall surrender to the Company for cancellation at the Funding any
evidence of such indebtedness or shall execute an
<PAGE>
instrument of cancellation in form and substance acceptable to the Company.
2. Representations and Warranties of the Company. The Company
---------------------------------------------
hereby represents and warrants to each Investor that, except as set forth on a
Schedule of Exceptions (the "Schedule of Exceptions") furnished each Investor
and special counsel for the Investors, specifically identifying the relevant
subparagraph hereof, which exceptions shall be deemed to be representations and
warranties as if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company 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 carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on its business or properties.
2.2 Capitalization and Voting Rights.
--------------------------------
(a) The authorized capital of the Company consists, or will
consist at the time of the Funding, of: (i)10,362,500 shares of Preferred Stock,
par value $.001 per share (the "Preferred Stock"), 362,500 of which will be
designated Series A Preferred Stock (the "Series A Preferred Stock"), 225,000 of
which will be issued and outstanding at the time of the Funding, 6,500,000 of
which will be designated Series B Preferred Stock (the "Series B Preferred
Stock"), of which 6,500,000 will be issued and outstanding at the time of to the
Funding, and 3,500,000 of which will be designated Series C Preferred Stock (the
"Series C Preferred Stock"), up to 2,785,516 of which will be issuable pursuant
to this Agreement; and (ii) 19,362,500 shares of common stock, par value $.001
per share ("Common Stock"), of which 5,300,000 shares will be issued and
outstanding at the time of the Funding. The rights, privileges and preferences
of the Common Stock, Series A Preferred Stock, Series B Preferred Stock and
Series C Preferred Stock will be as stated in the Restated Certificate.
(b) The outstanding shares of Common Stock and Preferred Stock
will be owned by the stockholders, in the numbers specified and subject to the
restrictions set forth in Exhibit B hereto, at the time of the Funding.
---------
(c) At the time of the Funding, the outstanding shares of Common
Stock and Preferred Stock will all be duly and validly authorized and issued,
fully paid and nonassessable and issued in accordance with the registration or
qualification provisions of the Securities Act of 1933, as amended (the "Act"),
and any relevant state securities laws, or pursuant to valid exemptions
therefrom.
(d) Except for (A) the conversion privileges of the Preferred
Stock, (B) the rights provided in Section 2.4 of the Amended and Restated
Investors' Rights Agreement,
2
<PAGE>
and the options and warrants listed in Exhibit B, there are not outstanding any
---------
options, warrants, rights (including conversion or preemptive rights) or
agreements for the purchase or acquisition from the Company of any shares of its
capital stock. In addition to the aforementioned warrants, the Company has
reserved 3,700,000 shares of its Common Stock for purchase upon exercise of
options granted and to be granted in the future to directors, officers,
employees, consultants and advisors under the Company's 1999 Stock Plan (the
"Option Plan"). Except for the Amended and Restated Voting Agreement in the
form attached hereto as Exhibit C, the Company is not a party or subject to any
agreement or understanding, and, to the best of the Company's knowledge, there
is no agreement or understanding between any persons and/or entities, which
affects or relates to the voting or giving of written consents with respect to
any security or by a director of the Company. Following the transactions
contemplated hereby, except as set forth in the Schedule of Exceptions and
except as set forth in the Amended and Restated Investors' Rights Agreement
described in Section 4.11, there will be no preemptive or similar rights to
purchase or otherwise acquire shares of capital stock of the Company pursuant to
any provision of law, the Restated Certificate or the By-Laws of the Company or
any agreement to which the Company is a party, or otherwise.
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the Amended and Restated Investors'
Rights Agreement described in Section 4.11, the Amended and Restated Right of
First Refusal and Co-Sale Agreement described in Section 4.12, and the Amended
and Restated Voting Agreement described in Section 4.8 (collectively, the
"Ancillary Agreements"), the performance of all obligations of the Company
hereunder and thereunder, and the authorization, issuance (or reservation for
issuance), sale and delivery of the Series C Preferred Stock being sold
hereunder and the Common Stock issuable upon conversion of the Series C
Preferred Stock being sold hereunder, has been taken or will be taken prior to
the Funding, and this Agreement and the Ancillary Agreements constitute, or
will, upon execution thereof by the parties thereto, constitute, valid and
legally binding obligations of the Company, enforceable in accordance with their
respective terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws and
principles relating to the availability of specific performance, injunctive
relief, or other equitable remedies, and (iii) to the extent the indemnification
provisions contained in the Amended and Restated Investors' Rights Agreement may
be limited by applicable federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series C
--------------------------------------------
Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
3
<PAGE>
restrictions on transfer under this Agreement, the Amended and Restated Voting
Agreement and the Amended and Restated Investors' Rights Agreement and under
applicable state and federal securities laws. The Common Shares have been or
will, prior to the Funding, be duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Restated Certificate will be duly
and validly issued, fully paid, and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement, the Amended and Restated Voting Agreement, and the Amended and
Restated Investors' Rights Agreement and under applicable state and federal
securities laws.
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except (i) the filing of the Restated
Certificate with the Secretary of State of Delaware; and (ii) the filings
pursuant to Regulation D under the Act, Section 25102(f) of the California
Corporate Securities Law of 1968, as amended, and the rules thereunder, and
other applicable state securities laws, which filings will be effected within 15
days of the sale of the Series C Preferred Stock hereunder, and such other post-
Funding filings as may be required.
2.7 Offering. Subject in part to the truth and accuracy of each
--------
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Series C Preferred Stock as contemplated by this
Agreement are exempt from the registration requirements of any applicable state
and federal securities laws, and neither the Company nor any authorized agent
acting on its behalf will take any action hereafter that would cause the loss of
such exemption.
2.8 Litigation. There is no action, suit, proceeding or known
----------
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of this Agreement or any
Ancillary Agreements, or the right of the Company to enter into such agreements,
or to consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse changes
in the assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. The foregoing
includes, without limitation, actions, suits, proceedings or investigations
pending or threatened (or any basis therefor known to the Company) involving the
prior employment of any of the Company's employees, their use in connection with
the Company's business of any information or techniques allegedly proprietary to
any of their former employers, or their obligations under any agreements with
prior employers. The Company is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information and Shareholders' Agreements. Each
----------------------------------------------------
employee and
4
<PAGE>
officer of the Company, and each consultant who has had access to confidential
or proprietary information of the Company, has executed a Proprietary
Information and Inventions Agreement. Each Founder has executed or will execute
prior to the Funding an Amended and Restated Shareholders' Agreement in a form
provided to special counsel to the Investors, which agreement supersedes all
prior agreements between the Company and the Founders related to the capital
stock of the Company held by the Founders. The Company is not aware that any of
its employees, officers or consultants are in violation thereof, and the Company
will use its best efforts to prevent any such violation.
2.10 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of or licenses to all patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
necessary for its business as now conducted and as proposed to be conducted
without any violation or infringement of the rights of others, except for such
items as have yet to be conceived or developed or that are expected to be
available for licensing on reasonable terms from third parties. The Company has
no patents or pending patent applications. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights or trade secrets or other proprietary rights of any other
person or entity. The Company is not aware that any of its employees is
obligated under any contract (including licenses, covenants or commitments of
any nature) or other agreement, or subject to any judgment, decree or order of
any court or administrative agency, that would interfere with the use of his or
her best efforts to promote the interests of the Company or that would conflict
with the Company's business as proposed to be conducted. Neither the execution
nor delivery of this Agreement or the Ancillary Agreements, nor the carrying on
of the Company's business by the employees of the Company, nor the conduct of
the Company's business as proposed, will, to the best of the Company's
knowledge, conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such employees is now obligated. The Company does
not believe it is necessary to utilize any inventions of any of its employees
(or people it currently intends to hire) made prior to or outside the scope of
their employment by the Company. To the best knowledge of the Company, all
data, information, ideas, concepts, know-how and materials that the Company
treats as trade secrets, and all other confidential information and intellectual
property rights of the Company, are not part of the public domain or knowledge,
nor, to the best knowledge of the Company, have they been used, divulged or
appropriated for the benefit of any person other than the Company or otherwise
to the detriment of the Company.
2.11 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provision of its Restated Certificate or Bylaws, or
of any instrument, judgment, order, writ, decree or contract to which it is a
party or by which it is bound. The Company has complied
5
<PAGE>
in all material respects with all federal, state, local or foreign statutes,
rules and regulations and orders applicable to the Company, except where the
failure to comply would not have a material adverse effect on the business,
properties or financial condition of the Company. The execution, delivery and
performance of this Agreement and the Ancillary Agreements, and the consummation
of the transactions contemplated hereby and thereby will not result in any such
violation or be in conflict with or constitute, with or without the passage of
time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event that results
in the creation of any lien, charge or encumbrance upon any assets of the
Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of
any material permit, license, authorization, or approval applicable to the
Company, its business or operations or any of its assets or properties.
2.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby and the
Ancillary Agreements, there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates,
or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or by which it is bound that may involve (i) obligations
(contingent or otherwise) of, or payments to the Company in excess of, $50,000,
or (ii) the license of any patent, copyright, trade secret or other proprietary
right to or from the Company (other than the license of the Company's or
generally available shrinkwrap software and products in the ordinary course of
business), or (iii) provisions restricting or affecting the development,
manufacture or distribution of the Company's products or services, or (iv)
indemnification by the Company with respect to infringements of proprietary
rights. The Company is not a party to any written or oral (a) contract with any
labor union; (b) contract for the future purchase of fixed assets or for the
future purchase of materials, supplies or equipment in excess of normal
operating requirements, in excess of $25,000 per annum for all such contracts;
(c) contract for the employment of any officer, employee or other person or any
contract with any person on a consulting basis; (d) agreement or indenture
relating to the borrowing of money; (e) lease or agreement under which the
Company is lessee of or holds or operates any property, real or personal, owned
by any other party, in excess of $25,000 per annum for all such contracts; (f)
lease or agreement under which the Company is lessor of or permits any third
party to hold or operate any property, real or personal, owned or controlled by
the Company, in excess of $25,000 per annum for all such contracts; (g)
contract, agreement or commitment under which the Corporation is obligated to
pay any broker's fees, finder's fees or any such similar fees, to any third
party other than for the hiring of employees; or (h) other contract, agreement,
arrangement or understanding which is material to the business of the Company.
The Company is not a party to any term sheet, memorandum or letter of
understanding which could lead to any such contract, agreement, arrangement,
understanding or commitment.
6
<PAGE>
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $50,000 or, in the case of
indebtedness and/or liabilities individually less than $50,000, in excess of
$100,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Restated Certificate of Incorporation or Bylaws that adversely affects its
business as now conducted or as proposed to be conducted, its properties or its
financial condition.
(f) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
2.13 Related Party Transactions. No employee, officer, or director of
--------------------------
the Company or member of his or her immediate family is indebted to the Company,
nor is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers, or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the immediate family of any officer or director
of the Company is directly or indirectly interested in any material contract
with the Company.
2.14 Permits. The Company has all franchises, permits, licenses, and
-------
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of
7
<PAGE>
the Company, and the Company believes it can obtain, without undue burden or
expense, any similar authority for the conduct of its business as planned to be
conducted. The Company is not in default in any material respect under any of
such franchises, permits, licenses, or other similar authority.
2.15 Environmental and Safety Laws. To the best of its knowledge, the
-----------------------------
Company has complied with all applicable statutes, laws and regulations relating
to the environment or occupational health and safety, and to the best of its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.16 Manufacturing and Marketing Rights. The Company has not granted
----------------------------------
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market or sell
its products.
2.17 Disclosure. The Company has fully provided each Investor with
----------
all the information that such Investor has requested for deciding whether to
purchase the Series C Preferred Stock and all information that the Company
believes is reasonably necessary to enable such Investor to make such decision.
Neither this Agreement, the Investors' Rights Agreement, nor any other
statements or certificates made or delivered in connection herewith or therewith
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading.
2.18 Business Plan. The 1999 Information Memorandum dated March,
-------------
1999, previously delivered to each Investor, has been prepared in good faith by
the Company and does not contain any untrue statement of a material fact nor
does it omit to state a material fact necessary to make the statements made
therein not misleading, except that with respect to projections contained in the
Business Plan, the Company represents only that such projections were prepared
in good faith and that the Company reasonably believes there is a reasonable
basis for such projections.
2.19 Registration Rights. Except as provided in the Investors' Rights
-------------------
Agreement, the Company has not granted or agreed to grant any registration
rights, including piggyback rights, to any person or entity.
2.20 Corporate Documents. Except for amendments necessary to satisfy
-------------------
representations and warranties or conditions contained herein (the form of which
amendments has been approved by the Investors), the Restated Certificate and
Bylaws of the Company are in the form previously provided to special counsel for
the Investors.
2.21 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in
8
<PAGE>
compliance with such leases and, to the best of its knowledge, holds a valid
leasehold interest free of any liens, claims or encumbrances.
2.22 Financial Statements. The Company has delivered to the
--------------------
Investors its unaudited financial statements (balance sheet and statement of
operations) as at and for the year ended December 31, 1998 and the two-month
period ended February 28, 1999 (the "Financial Statements"). The Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods covered thereby,
except for the absence of footnotes. The Financial Statements fairly present
the financial condition and operating results of the Company as of the dates,
and for the periods, indicated therein, subject to normal year-end audit
adjustments. Except as set forth in the Financial Statements, the Company has
no material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to February 28, 1999 and
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in the Financial Statements, which, in both cases, individually or
in the aggregate, are not material to the financial condition or operating
results of the Company. Except as disclosed in the Financial Statements, the
Company is not a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation. The Company maintains and will continue to
maintain a standard system of accounting established and administered in
accordance with generally accepted accounting principles.
2.23 Changes. Since February 28, 1999, there has not been any
-------
adverse change in the assets, liabilities, financial condition or operating
results of the Company from that reflected in the Financial Statements, except
changes in the ordinary course of business that have not been, in the aggregate,
materially adverse.
2.24 Employee Benefit Plans. The Company does not have any Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
2.25 Tax Returns, Payments and Elections. The Company has filed all
-----------------------------------
tax returns and reports (including information returns and reports) as required
by law. These returns and reports are true and correct in all material respects.
The Company has paid all taxes and other assessments due, except those contested
by it in good faith that are listed in the Schedule of Exceptions. The provision
for taxes of the Company as shown in the Financial Statements is adequate for
taxes due or accrued as of the date thereof. The Company has not elected
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
treated as a Subchapter S corporation pursuant to Section 1362(a) of the Code,
nor has it made an election pursuant to Section 341(f) of the Code, nor has it
made any other elections pursuant to the Code (other than elections that relate
solely to methods of accounting, depreciation or amortization) that would have a
material effect on the Company, its financial condition, its business as
presently conducted or proposed to be conducted or any of its properties or
material assets. The Company has never had any tax deficiency proposed or
assessed against it and has not executed any waiver of any statute of
limitations on the assessment
9
<PAGE>
or collection of any tax or governmental charge. None of the Company's federal
income tax returns and none of its state income or franchise tax or sales or use
tax returns has ever been audited by governmental authorities. Since the date of
the Financial Statements, the Company has not incurred any taxes, assessments or
governmental charges other than in the ordinary course of business and the
Company has made adequate provisions on its books of account for all taxes,
assessments and governmental charges with respect to its business, properties
and operations for such period. The Company has withheld or collected from each
payment made to each of its employees, the amount of all taxes (including, but
not limited to, federal income taxes, Federal Insurance Contribution Act taxes
and Federal Unemployment Tax Act taxes) required to be withheld or collected
therefrom, and has paid the same to the proper tax receiving officers or
authorized depositories. The Company is not party to any contract, arrangement
or understanding that could obligate the Company to make a payment to an
individual that would be a "parachute payment" to a "disqualified individual,"
as those terms are defined in Section 280G of the Code, without regard to
whether such payment might constitute reasonable compensation for personal
services performed or to be performed in the future.
2.26 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed. The Company has in full force and effect
products liability and errors and omissions insurance in amounts customary for
companies similarly situated.
2.27 Minutes. The minutes of the Company provided to the Investors
-------
contain a complete summary of all meetings of directors and stockholders since
the time of incorporation and reflect all transactions referred to in such
minutes accurately in all material respects.
2.28 Labor Agreements and Actions; Employee Compensation. The
---------------------------------------------------
Company is not bound by or subject to (and none of its assets or properties is
bound by or subject to) any written or oral, express or implied, contract,
commitment or arrangement with any labor union, and no labor union has requested
or, to the best of the Company's knowledge, has sought to represent any of the
employees, representatives or agents of the Company. There is no strike or
other labor dispute involving the Company pending, or to the best of the
Company's knowledge, threatened, that could have a material adverse effect on
the assets, properties, financial condition, operating results, or business of
the Company (as such business is presently conducted and as it is proposed to be
conducted), nor is the Company aware of any labor organization activity
involving its employees. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each
officer and employee of the Company is terminable at the will of the Company.
To the best of its knowledge, the Company has complied in all material respects
with all applicable state and federal equal employment opportunity and other
laws related to employment. The Company is not a party to or bound by any
currently effective employment contract, deferred compensation agreement, bonus
plan, incentive plan, profit sharing plan, retirement agreement, or other
employee compensation
10
<PAGE>
agreement.
2.29 Section 83(b) Elections. To the best of the Company's
-----------------------
knowledge, all individuals who have purchased unvested shares of the Company's
Common Stock have timely filed or will timely file elections under Section 83(b)
of the Code and any analogous provisions of applicable state tax laws.
2.30 Real Property Holding Company. The Company is not currently,
-----------------------------
and has not been during the prior five years, a United States real property
holding corporation within the meaning of Section 897 of the Code and the
Company has filed with the Internal Revenue Service all statements, if any, with
its United States income tax returns which are required under Section 1.897-2(h)
of the Treasury Regulations.
2.31 Net Operating Loss Carryforward. The information contained in
-------------------------------
the Schedule of Exceptions or otherwise provided to counsel for the Investors
regarding the application of Section 382 of the Code to the Company's federal
net operating loss carryforward is true and correct to the best of the Company's
knowledge.
2.32 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
2.33 Significant Customers and Suppliers. No customer or supplier
-----------------------------------
that was or is significant to the Company has terminated, materially reduced or
threatened to terminate or materially reduce its purchases from or provision of
products or services to the Company, as the case may be.
2.34 Qualified Small Business Stock. As of the Funding: (i) the
------------------------------
Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Internal Revenue Code of 1986, as amended (the "Code"), (ii) the Company will
not have made any purchases of its own stock during the one-year period
proceeding the Funding having an aggregate value exceeding 5% of the aggregate
value of all its stock as of the beginning of such period and (iii) the
Company's aggregate gross assets, as defined by Code Section 1202(d)(2), at no
time through the Funding have exceeded or will exceed $50 million, taking into
account the assets of any corporations required to be aggregated with the
Company in accordance with Code Section 1202(d)(3).
2.35 Year 2000. The Company's proprietary software is capable of
---------
recording, storing, processing, calculating and displaying calendar dates
falling before, on and after January 1, 2000, without loss of functionality or
data integrity, except where the failure to do so could not reasonably be
expected to have a material adverse affect on the assets, properties, financial
condition, operating results or business of the Company. The foregoing does not
constitute a warranty or representation that the Company's software will be
capable of recording, storing, processing, calculating and displaying correct
calendar dates based on software supplied by or
11
<PAGE>
licensed from any party other than the Company, or that the Company's software
will properly interact with such third party software.
2.36 Offerees. The Company has not, either directly or through any
--------
agent, broker or finder, offered any securities exercisable for or convertible
into Common Stock or Preferred Stock or any security or securities similar to
any thereof, for sale to, or solicited any offers to buy any securities
exercisable for or convertible into Common Stock or Preferred Stock, or any such
similar security or securities from, or otherwise approached or negotiated in
respect thereof with, any person or entity other than the Investors, other
"accredited investors" (as that term is defined in Regulation D promulgated
under the Securities Act) who have not invested under this Agreement and
employees, directors and consultants of the Company, except for offers,
solicitations or other actions that would not, under applicable law, be
integrated with the sale of the Series C Preferred Stock hereunder.
3. Representations and Warranties of the Investors. Each Investor
-----------------------------------------------
hereby represents and warrants to the Company that:
3.1 Authorization. Such Investor has full power and authority to
-------------
enter into this Agreement and the Ancillary Agreements, and each such Agreement
constitutes its valid and legally binding obligation, enforceable in accordance
with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Amended and Restated Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series C Preferred Stock to be received by such Investor and
the Common Stock issuable upon conversion of the Series C Preferred Stock
(collectively, the "Securities") will be acquired for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, such Investor further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Securities.
12
<PAGE>
3.3 Disclosure of Information. Such Investor represents that it has
-------------------------
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series C Preferred
Stock, and the business, properties, prospects and financial condition of the
Company. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Investors to rely thereon.
3.4 Investment Experience. Such Investor is an investor in
---------------------
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment, and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Series C
Preferred Stock. If other than an individual, such Investor also represents it
has not been organized for the purpose of acquiring the Series C Preferred
Stock.
3.5 Accredited Investor. Such Investor is an "accredited investor"
-------------------
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 Restricted Securities. Such Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, such
Investor represents that it is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the Act.
3.7 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 3 and the Amended and Restated Investors' Rights Agreement provided
and to the extent this Section and such agreement are then applicable, and:
(a) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule
13
<PAGE>
144 except in unusual circumstances.
(c) Notwithstanding the provisions of Paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were an original Investor hereunder.
3.8 Legends. It is understood that the certificates evidencing the
-------
Series C Preferred Stock and the Common Shares may bear the following legend:
"These securities have not been registered under the Securities Act of
1933, as amended, or any state securities laws. They may not be sold,
offered for sale, pledged or hypothecated in the absence of a registration
statement in effect with respect to the securities under such Act and any
applicable state securities laws or pursuant to an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
3.9 Investors' State of Residence. Each Investor represents that,
-----------------------------
as of the Funding, it is a resident of the state listed as its address on
Schedule A hereto.
- ----------
4. Conditions of Investors' Obligations at Funding. The
-----------------------------------------------
obligations of each Investor under subsection 1.1(c) of this Agreement are
subject to the fulfillment on or before the Funding of each of the following
conditions, the waiver of which shall not be effective against any Investor who
does not consent thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Funding with the same effect as though such representations and warranties had
been made on and as of the date of such Funding, provided, that the Company may
supplement the Schedule of Exceptions to reflect developments occurring after
the date hereof.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Funding.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to each Investor at the Funding a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there shall have been no adverse change in the business, affairs,
prospects, operations, properties, assets or condition of the Company since
February 28, 1999 ("No
14
<PAGE>
Material Adverse Change").
4.4 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
4.5 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Funding and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request. This may include, without limitation, good standing
certificates and certification by the Company's Secretary regarding the Restated
Certificate and Bylaws and Board of Director and stockholder resolutions
relating to this transaction.
4.6 Proprietary Information and Shareholders' Agreement. Each
---------------------------------------------------
employee of the Company, and each consultant to the Company who has had access
to confidential or proprietary information of the Company, shall have entered
into a Proprietary Information and Inventions Agreement in the form previously
provided to special counsel for the Investors.
4.7 Bylaws. The Bylaws of the Company shall provide that the Board
------
of Directors of the Company shall consist of five (5) persons.
4.8 Amended and Restated Voting Agreement. The Company, each
-------------------------------------
Founder (as defined therein) and each Investor shall have entered into the
Amended and Restated Voting Agreement in the form attached hereto as Exhibit C.
---------
4.9 Board of Directors. The Board of Directors of the Company,
------------------
immediately following the Funding, shall be comprised of the following members:
David Struwas and Paul Sun as designees of the holders of shares of the Common
Stock of the Company; Robert Gilbertson and Jeff Marshall, as designees of the
holders of shares of Series A Preferred Stock and Series B Preferred Stock of
the Company; and William Seifert, as designee of the holders of shares of Series
C Preferred Stock of the Company.
4.10 Opinion of Company Counsel. Each Investor shall have received
--------------------------
from Day, Berry & Howard LLP, counsel for the Company, an opinion, dated as of
the Funding, in form and substance reasonably acceptable to the Investors.
4.11 Amended and Restated Investors' Rights Agreement. The Company,
------------------------------------------------
the Founders and each Investor shall have entered into the Amended and Restated
Investors' Rights Agreement in the form attached as Exhibit D.
---------
15
<PAGE>
4.12 Amended and Restated Right of First Refusal and Co-Sale
-------------------------------------------------------
Agreement. The Investors, the Founders and the Company shall each have entered
- ---------
into the Amended and Restated Co-Sale Agreement in the form attached hereto as
Exhibit E.
- ---------
4.13 Due Diligence and No Material Adverse Change. The Company
--------------------------------------------
shall have provided the Investors access to such information as the Investors
have reasonably requested in connection with their due diligence review and the
Investors shall have concluded their due diligence review of the Company to
their complete satisfaction and shall be reasonably satisfied that there has
been No Material Adverse Change.
5. Conditions of the Company's Obligations at Funding. The
--------------------------------------------------
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Funding of each of the following conditions by
that Investor:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investors contained in Section 3 shall be true on and as of
the Funding with the same effect as though such representations and warranties
had been made on and as of the Funding.
5.2 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
6. Miscellaneous.
-------------
6.1 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Funding and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of Connecticut as applied to agreements
among Connecticut residents entered into and to be performed entirely within
Connecticut.
6.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts,
16
<PAGE>
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
6.7 Finder's Fee. Each party represents that it neither is nor
------------
will be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
6.8 Expenses. Irrespective of whether the Funding is effected, the
--------
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Funding is effected, the Company shall, at the Funding, reimburse the reasonable
fees of one special counsel for the Investors and shall, upon receipt of a bill
therefor, reimburse the reasonable out-of-pocket expenses of such counsel,
provided, however, that in no event shall the Company be required to reimburse
fees and expenses in excess of $25,000 in the aggregate. If any action at law
or in equity is necessary to enforce or interpret the terms of this Agreement,
the Ancillary Agreements or the Restated Certificate, the prevailing party shall
be entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.9 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock issuable or issued upon conversion of the Series
C Preferred Stock. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any securities purchased under
this Agreement at the time outstanding
17
<PAGE>
(including securities into which such securities are convertible), each future
holder of all such securities, and the Company.
6.10 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
6.11 Corporate Securities Law. THE SALE OF THE SECURITIES THAT ARE
------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT ARE EXPRESSLY
CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO
EXEMPT.
6.12 Aggregation of Stock. All shares of the Preferred Stock held or
--------------------
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
6.13 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties with respect to the
subject matter hereof and no party shall be liable or bound to any other party
in any manner by any warranties, representations, or covenants with respect to
such subject matter except as specifically set forth herein or therein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY
dsl.net, inc.
By: _____________________________________
Title: __________________________________
Address: 545 Long Wharf Drive
New Haven, CT 06511
18
<PAGE>
INVESTORS:
VantagePoint Venture Partners 1996, L.P.
By: VantagePoint Associates, LLC, its
General Partner
By: _____________________________________
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Communications Partners, L.P.
By: VantagePoint Communication Associates, LLC,
its General Partner
By: _____________________________________
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
Prism Venture Partners II, L.P.
By: Prism Investment Partners II, L.P.,
its general partner
By: Prism Venture Partners II, L.L.C.,
its general partner
By:_______________________________________
Managing Partner
19
<PAGE>
Address: 100 Lowder Brook Drive,
Suite 2500
Westwood, MA 02090
Oak Investment Partners VIII, LP
By: Oak Associates VIII, LLC,
its General Partner
By: ______________________________________
Ed Glassmeyer, Managing Member
Address: One Gorham Island
Westport, CT 06830
Oak VIII Affiliates Fund, L.P.
By: Oak VIII Affiliates, LLC,
its General Partner
By: ______________________________________
Ed Glassmeyer, Managing Member
Address: One Gorham Island
Westport, CT 06830
20
<PAGE>
SCHEDULE OF EXCEPTIONS
----------------------
21
<PAGE>
Schedule A
----------
Schedule of Investors
---------------------
<TABLE>
<CAPTION>
Total Purchase Price of
Name and Address Series C Shares Purchased Series C Shares
- ---------------- ------------------------- -----------------------
<S> <C> <C>
Prism Venture Partners II, L.P. 1,392,758 $ 5,000,001.22
100 Lowder Brook Drive
Suite 2500
Westwood, Ma 02090
VantagePoint Venture Partners 185,701 $ 666,666.59
1996, L.P.
1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Communications 371,402 $ 1,333,333.18
Partners L.P.
1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
Oak Investment Partners VIII, 819,778 $ 2,943,003.02
L.P.
One Gorham Island
Westport, CT 06830
Oak VIII Affiliates Fund, L.P. 15,877 $ 56,998.43
One Gorham Island
Westport, CT 06830
TOTAL 2,785,516 $10,000,002.44
</TABLE>
22
<PAGE>
Exhibit 10.14
dsl.net, inc.
SERIES D PREFERRED STOCK
PURCHASE AGREEMENT
May 12, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Purchase and Sale of Stock.......................................... 4
--------------------------
1.1 Sale and Issuance of Series D Preferred Stock....................... 4
---------------------------------------------
1.2 Funding............................................................. 4
-------
2. Representations and Warranties of the Company....................... 5
---------------------------------------------
2.1 Organization, Good Standing and Qualification....................... 5
---------------------------------------------
2.2 Capitalization and Voting Rights.................................... 5
--------------------------------
2.3 Subsidiaries........................................................ 6
------------
2.4 Authorization....................................................... 6
-------------
2.5 Valid Issuance of Preferred and Common Stock........................ 6
--------------------------------------------
2.6 Governmental Consents............................................... 7
---------------------
2.7 Offering............................................................ 7
--------
2.8 Litigation.......................................................... 7
----------
2.9 Proprietary Information and Inventions Agreements................... 7
-------------------------------------------------
2.10 Patents and Trademarks.............................................. 8
----------------------
2.11 Compliance with Other Instruments................................... 8
---------------------------------
2.12 Agreements; Action.................................................. 9
------------------
2.13 Related Party Transactions.......................................... 10
--------------------------
2.14 Permits............................................................. 10
-------
2.15 Environmental and Safety Laws....................................... 10
-----------------------------
2.16 Manufacturing and Marketing Rights.................................. 10
----------------------------------
2.17 Disclosure.......................................................... 11
----------
2.18 Business Plan....................................................... 11
-------------
2.19 Registration Rights................................................. 11
-------------------
2.20 Corporate Documents................................................. 11
-------------------
2.21 Title to Property and Assets........................................ 11
----------------------------
2.22 Financial Statements................................................ 11
--------------------
2.23 Changes............................................................. 12
-------
2.24 Employee Benefit Plans.............................................. 12
----------------------
2.25 Tax Returns, Payments and Elections................................. 12
-----------------------------------
2.26 Insurance........................................................... 13
---------
2.27 Minutes............................................................. 13
-------
2.28 Labor Agreements and Actions; Employee Compensation................. 13
---------------------------------------------------
2.29 Section 83(b) Elections............................................. 13
-----------------------
2.30 Real Property Holding Company....................................... 13
-----------------------------
2.31 Net Operating Loss Carryforward..................................... 14
-------------------------------
2.32 Brokers............................................................. 14
-------
2.33 Significant Customers and Suppliers................................. 14
-----------------------------------
2.34 Qualified Small Business Stock...................................... 14
------------------------------
2.35 Year 2000........................................................... 14
---------
2.36 Offerees............................................................ 14
--------
3. Representations and Warranties of the Investors..................... 15
-----------------------------------------------
3.1 Authorization....................................................... 15
-------------
3.2 Purchase Entirely for Own Account................................... 15
---------------------------------
</TABLE>
-2-
<PAGE>
<TABLE>
<S> <C>
3.3 Disclosure of Information............................................ 15
-------------------------
3.4 Investment Experience................................................ 15
---------------------
3.5 Accredited Investor.................................................. 15
-------------------
3.6 Restricted Securities................................................ 16
---------------------
3.7 Further Limitations on Disposition................................... 16
----------------------------------
3.8 Legends.............................................................. 16
-------
3.9 Investors' State of Residence........................................ 17
-----------------------------
4. Conditions of Investors' Obligations at Funding...................... 17
-----------------------------------------------
4.1 Representations and Warranties....................................... 17
------------------------------
4.2 Performance.......................................................... 17
-----------
4.3 Compliance Certificate............................................... 17
----------------------
4.4 Qualifications....................................................... 17
--------------
4.5 Proceedings and Documents............................................ 17
-------------------------
4.6 Proprietary Information and Inventions Agreement..................... 17
------------------------------------------------
4.7 Bylaws............................................................... 17
------
4.8 Amended and Restated Voting Agreement................................ 18
-------------------------------------
4.9 Board of Directors................................................... 18
------------------
4.10 Opinion of Company Counsel........................................... 18
--------------------------
4.11 Amended and Restated Investors' Rights Agreement..................... 18
------------------------------------------------
4.12 Amended and Restated Right of First Refusal and Co-Sale Agreement.... 18
-----------------------------------------------------------------
4.13 Due Diligence and No Material Adverse Change......................... 18
--------------------------------------------
5. Conditions of the Company's Obligations at Funding................... 18
--------------------------------------------------
5.1 Representations and Warranties....................................... 18
------------------------------
5.2 Qualifications....................................................... 19
--------------
6. Miscellaneous........................................................ 19
-------------
6.1 Survival of Warranties............................................... 19
----------------------
6.2 Successors and Assigns............................................... 19
----------------------
6.3 Governing Law........................................................ 19
-------------
6.4 Counterparts......................................................... 19
------------
6.5 Titles and Subtitles................................................. 19
--------------------
6.6 Notices.............................................................. 19
-------
6.7 Finder's Fee......................................................... 19
------------
6.8 Expenses............................................................. 20
--------
6.9 Amendments and Waivers............................................... 20
----------------------
6.10 Severability......................................................... 20
------------
6.11 Corporate Securities Law............................................. 20
------------------------
6.12 Aggregation of Stock................................................. 20
--------------------
6.13 Entire Agreement..................................................... 21
----------------
</TABLE>
SCHEDULE A Schedule of Investors
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B List of Stockholders
EXHIBIT C Amended and Restated Voting Agreement
EXHIBIT D Amended and Restated Investors' Rights Agreement
EXHIBIT E Amended and Restated Right of First Refusal and Co-Sale Agreement
-3-
<PAGE>
dsl.net, inc.
SERIES D PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES D PREFERRED STOCK PURCHASE AGREEMENT is made as of the 12th day
of May, 1999, by and among dsl.net, inc., a Delaware corporation (the
"Company"), and the investors listed on Schedule A hereto, each of which is
herein referred to as an "Investor" and together as the "Investors."
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series D Preferred Stock.
(a) The Company shall adopt and file with the Secretary of State of
Delaware on or before the Funding (as defined below) the Restated Certificate of
Incorporation in the form attached hereto as Exhibit A (the "Restated
---------
Certificate").
(b) On or prior to the Funding (as defined below), the Company shall
have authorized (i) the sale and issuance to the Investors of 2,868,069 shares
of Series D Preferred Stock (as defined below), (ii) the issuance of the shares
of Common Stock (as defined below) to be issued upon conversion of the Series D
Preferred Stock (the "Common Shares"). The Series D Preferred Stock shall have
the rights, preferences, privileges and restrictions set forth herein, in the
Amended and Restated Investors' Rights Agreement in the form attached hereto as
Exhibit E and in the Restated Certificate.
(c) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally and not jointly, to purchase at the Funding and the
Company agrees to sell and issue to each Investor at the Funding that number of
shares of the Company's Series D Preferred Stock set forth opposite such
Investor's name on Schedule A hereto for the purchase price set forth thereon.
----------
1.2 Funding. The funding and delivery of the Series D Preferred Stock
-------
shall take place at the offices of Day, Berry & Howard LLP, CityPlace I,
Hartford, Connecticut, at 9:30 A.M., on May 12, 1999, or at such other time and
place as the Company and Investors acquiring in the aggregate more than fifty
percent (50%) the shares of Series D Preferred Stock sold pursuant hereto
mutually agree upon orally or in writing (which time and place are designated as
the "Funding"). At the Funding the Company shall deliver to each Investor a
certificate representing the Series D Preferred Stock purchased thereby against
payment of the purchase price therefor by wire transfer, cancellation of
indebtedness, or any combination thereof. In the event that payment by an
Investor is made, in whole or in part, by cancellation of indebtedness, then
such Investor shall surrender to the Company for cancellation at the Funding any
evidence of such indebtedness or shall execute an instrument of cancellation in
form and substance acceptable to the Company.
-4-
<PAGE>
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to each Investor that, except as set forth on a Schedule
of Exceptions (the "Schedule of Exceptions") furnished each Investor and special
counsel for the Investors, specifically identifying the relevant subparagraph
hereof, which exceptions shall be deemed to be representations and warranties as
if made hereunder:
2.1 Organization, Good Standing and Qualification. The Company 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
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
2.2 Capitalization and Voting Rights.
--------------------------------
(a) The authorized capital of the Company consists, or will
consist at the time of the Funding, of: (i) 16,862,500 shares of Preferred
Stock, par value $.001 per share (the "Preferred Stock"), 3,862,500 of which
will be designated Series A Preferred Stock (the "Series A Preferred Stock"),
225,000 of which will be issued and outstanding at the time of the Funding,
6,500,000 of which will be designated Series B Preferred Stock (the "Series B
Preferred Stock"), of which 6,500,000 will be issued and outstanding at the time
of to the Funding, 3,500,000 of which will be designated Series C Preferred
Stock (the "Series C Preferred Stock"), 2,785,516 of which will be issued and
outstanding at the time of to the Funding, and 3,000,000 of which will be
designated Series D Preferred Stock (the "Series D Preferred Stock"), up to
2,868,069 of which will be issuable pursuant to this Agreement; and (ii)
22,862,500 shares of common stock, par value $.001 per share ("Common Stock"),
of which 5,300,000 shares will be issued and outstanding at the time of the
Funding. The rights, privileges and preferences of the Common Stock, Series A
Preferred Stock, Series B Preferred Stock, Series C Preferred Stock and Series D
Preferred Stock will be as stated in the Restated Certificate.
(b) The outstanding shares of Common Stock and Preferred Stock
will be owned by the stockholders, in the numbers specified and subject to the
restrictions set forth in Exhibit B hereto, at the time of the Funding.
---------
(c) At the time of the Funding, the outstanding shares of Common
Stock and Preferred Stock will all be duly and validly authorized and issued,
fully paid and nonassessable and issued in accordance with the registration or
qualification provisions of the Securities Act of 1933, as amended (the "Act"),
and any relevant state securities laws, or pursuant to valid exemptions
therefrom.
(d) Except for (A) the conversion privileges of the Preferred
Stock, (B) the rights provided in Section 2.4 of the Amended and Restated
Investors' Rights Agreement, and the options and warrants listed in Exhibit B,
---------
there are not outstanding any options, warrants, rights (including conversion or
preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. In addition to the aforementioned
warrants,
-5-
<PAGE>
the Company has reserved 3,700,000 shares of its Common Stock for purchase upon
exercise of options granted and to be granted in the future to directors,
officers, employees, consultants and advisors under the Company's 1999 Stock
Plan (the "Option Plan"). Except for the Amended and Restated Voting Agreement
in the form attached hereto as Exhibit C, the Company is not a party or subject
to any agreement or understanding, and, to the best of the Company's knowledge,
there is no agreement or understanding between any persons and/or entities,
which affects or relates to the voting or giving of written consents with
respect to any security or by a director of the Company. Following the
transactions contemplated hereby, except as set forth in the Schedule of
Exceptions and except as set forth in the Amended and Restated Investors' Rights
Agreement described in Section 4.11, there will be no preemptive or similar
rights to purchase or otherwise acquire shares of capital stock of the Company
pursuant to any provision of law, the Restated Certificate or the By-Laws of the
Company or any agreement to which the Company is a party, or otherwise.
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the Amended and Restated Investors'
Rights Agreement described in Section 4.11, the Amended and Restated Right of
First Refusal and Co-Sale Agreement described in Section 4.12, and the Amended
and Restated Voting Agreement described in Section 4.8 (collectively, the
"Ancillary Agreements"), the performance of all obligations of the Company
hereunder and thereunder, and the authorization, issuance (or reservation for
issuance), sale and delivery of the Series D Preferred Stock being sold
hereunder and the Common Stock issuable upon conversion of the Series D
Preferred Stock being sold hereunder, has been taken or will be taken prior to
the Funding, and this Agreement and the Ancillary Agreements constitute, or
will, upon execution thereof by the parties thereto, constitute, valid and
legally binding obligations of the Company, enforceable in accordance with their
respective terms, except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws and
principles relating to the availability of specific performance, injunctive
relief, or other equitable remedies, and (iii) to the extent the indemnification
provisions contained in the Amended and Restated Investors' Rights Agreement may
be limited by applicable federal or state securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series D
--------------------------------------------
Preferred Stock that is being purchased by the Investors hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement, the Amended and Restated Voting
Agreement and the Amended and Restated Investors' Rights Agreement and under
applicable state and federal securities laws. The Common Shares have been or
will, prior to the Funding, be duly and validly reserved for issuance and, upon
issuance in accordance with the terms of the Restated Certificate will be duly
and validly issued, fully paid, and nonassessable and will be free of
restrictions on transfer other than restrictions on transfer under this
Agreement, the Amended and
-6-
<PAGE>
Restated Voting Agreement, and the Amended and Restated Investors' Rights
Agreement and under applicable state and federal securities laws.
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except (i) the filing of the Restated
Certificate with the Secretary of State of Delaware; and (ii) the filings
pursuant to Regulation D under the Act, Section 25102(f) of the California
Corporate Securities Law of 1968, as amended, and the rules thereunder, and
other applicable state securities laws, which filings will be effected within 15
days of the sale of the Series D Preferred Stock hereunder, and such other post-
Funding filings as may be required.
2.7 Offering. Subject in part to the truth and accuracy of each
--------
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Series D Preferred Stock as contemplated by this
Agreement are exempt from the registration requirements of any applicable state
and federal securities laws, and neither the Company nor any authorized agent
acting on its behalf will take any action hereafter that would cause the loss of
such exemption.
2.8 Litigation. There is no action, suit, proceeding or known
----------
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of this Agreement or any
Ancillary Agreements, or the right of the Company to enter into such agreements,
or to consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse changes
in the assets, condition, affairs or prospects of the Company, financially or
otherwise, or any change in the current equity ownership of the Company, nor is
the Company aware that there is any basis for the foregoing. The foregoing
includes, without limitation, actions, suits, proceedings or investigations
pending or threatened (or any basis therefor known to the Company) involving the
prior employment of any of the Company's employees, their use in connection with
the Company's business of any information or techniques allegedly proprietary to
any of their former employers, or their obligations under any agreements with
prior employers. The Company is not a party or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information and Inventions Agreements. Each employee
-------------------------------------------------
and officer of the Company, and each consultant who has had access to
confidential or proprietary information of the Company, has executed a
Proprietary Information and Inventions Agreement. The Company is not aware that
any of its employees, officers or consultants are in violation thereof, and the
Company will use its best efforts to prevent any such violation.
2.10 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of or licenses to all patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
necessary for its business as now conducted and as proposed to be conducted
without any violation or infringement of the rights of others, except for
-7-
<PAGE>
such items as have yet to be conceived or developed or that are expected to be
available for licensing on reasonable terms from third parties. The Company has
no patents or pending patent applications. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. The Company has not received any communications alleging
that the Company has violated or, by conducting its business as proposed, would
violate any of the patents, trademarks, service marks, trade names, copyrights
or trade secrets or other proprietary rights of any other person or entity. The
Company is not aware that any of its employees is obligated under any contract
(including licenses, covenants or commitments of any nature) or other agreement,
or subject to any judgment, decree or order of any court or administrative
agency, that would interfere with the use of his or her best efforts to promote
the interests of the Company or that would conflict with the Company's business
as proposed to be conducted. Neither the execution nor delivery of this
Agreement or the Ancillary Agreements, nor the carrying on of the Company's
business by the employees of the Company, nor the conduct of the Company's
business as proposed, will, to the best of the Company's knowledge, conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which any
of such employees is now obligated. The Company does not believe it is necessary
to utilize any inventions of any of its employees (or people it currently
intends to hire) made prior to or outside the scope of their employment by the
Company. To the best knowledge of the Company, all data, information, ideas,
concepts, know-how and materials that the Company treats as trade secrets, and
all other confidential information and intellectual property rights of the
Company, are not part of the public domain or knowledge, nor, to the best
knowledge of the Company, have they been used, divulged or appropriated for the
benefit of any person other than the Company or otherwise to the detriment of
the Company.
2.11 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provision of its Restated Certificate or Bylaws, or
of any instrument, judgment, order, writ, decree or contract to which it is a
party or by which it is bound. The Company has complied in all material respects
with all federal, state, local or foreign statutes, rules and regulations and
orders applicable to the Company, except where the failure to comply would not
have a material adverse effect on the business, properties or financial
condition of the Company. The execution, delivery and performance of this
Agreement and the Ancillary Agreements, and the consummation of the transactions
contemplated hereby and thereby will not result in any such violation or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a default under any such provision, instrument, judgment, order,
writ, decree or contract or an event that results in the creation of any lien,
charge or encumbrance upon any assets of the Company or the suspension,
revocation, impairment, forfeiture, or nonrenewal of any material permit,
license, authorization, or approval applicable to the Company, its business or
operations or any of its assets or properties.
2.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby and the
Ancillary Agreements, there are no agreements, understandings or proposed
transactions between the Company and any of its officers, directors, affiliates,
or any affiliate thereof.
-8-
<PAGE>
(b) There are no agreements, understandings, instruments, contracts,
proposed transactions, judgments, orders, writs or decrees to which the Company
is a party or by which it is bound that may involve (i) obligations (contingent
or otherwise) of, or payments to the Company in excess of, $100,000, or (ii) the
license of any patent, copyright, trade secret or other proprietary right to or
from the Company (other than the license of the Company's or generally available
shrinkwrap software and products in the ordinary course of business), or (iii)
provisions restricting or affecting the development, manufacture or distribution
of the Company's products or services, or (iv) indemnification by the Company
with respect to infringements of proprietary rights. The Company is not a party
to any written or oral (a) contract with any labor union; (b) contract for the
future purchase of fixed assets or for the future purchase of materials,
supplies or equipment in excess of normal operating requirements, in excess of
$50,000 per annum for all such contracts; (c) contract for the employment of any
officer, employee or other person or any contract with any person on a
consulting basis; (d) agreement or indenture relating to the borrowing of money;
(e) lease or agreement under which the Company is lessee of or holds or operates
any property, real or personal, owned by any other party, in excess of $50,000
per annum for all such contracts; (f) lease or agreement under which the Company
is lessor of or permits any third party to hold or operate any property, real or
personal, owned or controlled by the Company, in excess of $50,000 per annum for
all such contracts; (g) contract, agreement or commitment under which the
Corporation is obligated to pay any broker's fees, finder's fees or any such
similar fees, to any third party other than for the hiring of employees; or (h)
other contract, agreement, arrangement or understanding which is material to the
business of the Company. The Company is not a party to any term sheet,
memorandum or letter of understanding which could lead to any such contract,
agreement, arrangement, understanding or commitment.
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $100,000 or, in the case of
indebtedness and/or liabilities individually less than $100,000, in excess of
$200,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to and is not bound by any contract,
agreement or instrument, or subject to any restriction under its Restated
Certificate of Incorporation or Bylaws that adversely affects its business as
now conducted or as proposed to be conducted, its properties or its financial
condition.
-9-
<PAGE>
(f) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting power of the Company is disposed of, or (iii) regarding any
other form of acquisition, liquidation, dissolution or winding up of the
Company.
2.13 Related Party Transactions. No employee, officer, or director of
--------------------------
the Company or member of his or her immediate family is indebted to the Company,
nor is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers, or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the immediate family of any officer or director
of the Company is directly or indirectly interested in any material contract
with the Company.
2.14 Permits. The Company has all franchises, permits, licenses, and
-------
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
2.15 Environmental and Safety Laws. To the best of its knowledge, the
-----------------------------
Company has complied with all applicable statutes, laws and regulations relating
to the environment or occupational health and safety, and to the best of its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.16 Manufacturing and Marketing Rights. The Company has not granted
----------------------------------
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market or sell
its products.
2.17 Disclosure. The Company has fully provided each Investor with
----------
all the information that such Investor has requested for deciding whether to
purchase the Series D Preferred Stock and all information that the Company
believes is reasonably necessary to enable such Investor to make such decision.
Neither this Agreement, the Amended and Restated Investors' Rights Agreement,
nor any other statements or certificates made or delivered in connection
herewith or therewith contains any untrue statement of a material fact or omits
to state a material fact necessary to make the statements herein or therein not
misleading.
-10-
<PAGE>
2.18 Business Plan. The 1999 Information Memorandum previously
-------------
delivered to each Investor in connection with the sale and issuance of Series D
Preferred Stock, has been prepared in good faith by the Company and does not
contain any untrue statement of a material fact nor does it omit to state a
material fact necessary to make the statements made therein not misleading,
except that with respect to projections contained in the Business Plan, the
Company represents only that such projections were prepared in good faith and
that the Company reasonably believes there is a reasonable basis for such
projections.
2.19 Registration Rights. Except as provided in the Amended and
-------------------
Restated Investors' Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity.
2.20 Corporate Documents. Except for amendments necessary to satisfy
-------------------
representations and warranties or conditions contained herein (the form of which
amendments has been approved by the Investors), the Restated Certificate and
Bylaws of the Company are in the form previously provided to special counsel for
the Investors.
2.21 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases and, to the best of its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2.22 Financial Statements. The Company has delivered to the
--------------------
Investors its unaudited financial statements (balance sheet and statement of
operations) as at and for the year ended December 31, 1998 and the two-month
period ended February 28, 1999 (the "Financial Statements"). The Financial
Statements have been prepared in accordance with generally accepted accounting
principles applied on a consistent basis throughout the periods covered thereby,
except for the absence of footnotes. The Financial Statements fairly present the
financial condition and operating results of the Company as of the dates, and
for the periods, indicated therein, subject to normal year-end audit
adjustments. Except as set forth in the Financial Statements, the Company has no
material liabilities, contingent or otherwise, other than (i) liabilities
incurred in the ordinary course of business subsequent to February 28, 1999 and
(ii) obligations under contracts and commitments incurred in the ordinary course
of business and not required under generally accepted accounting principles to
be reflected in the Financial Statements, which, in both cases, individually or
in the aggregate, are not material to the financial condition or operating
results of the Company. Except as disclosed in the Financial Statements, the
Company is not a guarantor or indemnitor of any indebtedness of any other
person, firm or corporation. The Company maintains and will continue to maintain
a standard system of accounting established and administered in accordance with
generally accepted accounting principles.
2.23 Changes. Since February 28, 1999, there has not been any adverse
-------
change in the assets, liabilities, financial condition or operating results of
the Company from that reflected in the Financial Statements, except changes in
the ordinary course of business that have not been, in the aggregate, materially
adverse.
-11-
<PAGE>
2.24 Employee Benefit Plans. The Company does not have any Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
2.25 Tax Returns, Payments and Elections. The Company has filed all
-----------------------------------
tax returns and reports (including information returns and reports) as required
by law. These returns and reports are true and correct in all material respects.
The Company has paid all taxes and other assessments due, except those contested
by it in good faith that are listed in the Schedule of Exceptions. The provision
for taxes of the Company as shown in the Financial Statements is adequate for
taxes due or accrued as of the date thereof. The Company has not elected
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
treated as a Subchapter S corporation pursuant to Section 1362(a) of the Code,
nor has it made an election pursuant to Section 341(f) of the Code, nor has it
made any other elections pursuant to the Code (other than elections that relate
solely to methods of accounting, depreciation or amortization) that would have a
material effect on the Company, its financial condition, its business as
presently conducted or proposed to be conducted or any of its properties or
material assets. The Company has never had any tax deficiency proposed or
assessed against it and has not executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge.
None of the Company's federal income tax returns and none of its state income or
franchise tax or sales or use tax returns has ever been audited by governmental
authorities. Since the date of the Financial Statements, the Company has not
incurred any taxes, assessments or governmental charges other than in the
ordinary course of business and the Company has made adequate provisions on its
books of account for all taxes, assessments and governmental charges with
respect to its business, properties and operations for such period. The Company
has withheld or collected from each payment made to each of its employees, the
amount of all taxes (including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes)
required to be withheld or collected therefrom, and has paid the same to the
proper tax receiving officers or authorized depositories. The Company is not
party to any contract, arrangement or understanding that could obligate the
Company to make a payment to an individual that would be a "parachute payment"
to a "disqualified individual," as those terms are defined in Section 280G of
the Code, without regard to whether such payment might constitute reasonable
compensation for personal services performed or to be performed in the future.
2.26 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed. The Company has in full force and effect
products liability and errors and omissions insurance in amounts customary for
companies similarly situated.
2.27 Minutes. The minutes of the Company provided to the Investors
-------
contain a complete summary of all meetings of directors and stockholders since
the time of incorporation and reflect all transactions referred to in such
minutes accurately in all material respects.
2.28 Labor Agreements and Actions; Employee Compensation. The
---------------------------------------------------
Company is not bound by or subject to (and none of its assets or properties is
bound by or subject to) any written or oral, express or implied, contract,
commitment or arrangement with any labor union, and no labor union has requested
or, to the best of the Company's knowledge, has sought to
-12-
<PAGE>
represent any of the employees, representatives or agents of the Company. There
is no strike or other labor dispute involving the Company pending, or to the
best of the Company's knowledge, threatened, that could have a material adverse
effect on the assets, properties, financial condition, operating results, or
business of the Company (as such business is presently conducted and as it is
proposed to be conducted), nor is the Company aware of any labor organization
activity involving its employees. The Company is not aware that any officer or
key employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each officer
and employee of the Company is terminable at the will of the Company. To the
best of its knowledge, the Company has complied in all material respects with
all applicable state and federal equal employment opportunity and other laws
related to employment. The Company is not a party to or bound by any currently
effective employment contract, deferred compensation agreement, bonus plan,
incentive plan, profit sharing plan, retirement agreement, or other employee
compensation agreement.
2.29 Section 83(b) Elections. To the best of the Company's
-----------------------
knowledge, all individuals who have purchased unvested shares of the Company's
Common Stock have timely filed or will timely file elections under Section 83(b)
of the Code and any analogous provisions of applicable state tax laws.
2.30 Real Property Holding Company. The Company is not currently, and
-----------------------------
has not been during the prior five years, a United States real property holding
corporation within the meaning of Section 897 of the Code and the Company has
filed with the Internal Revenue Service all statements, if any, with its United
States income tax returns which are required under Section 1.897-2(h) of the
Treasury Regulations.
2.31 Net Operating Loss Carryforward. The information contained in
-------------------------------
the Schedule of Exceptions or otherwise provided to counsel for the Investors
regarding the application of Section 382 of the Code to the Company's federal
net operating loss carryforward is true and correct to the best of the Company's
knowledge.
2.32 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
2.33 Significant Customers and Suppliers. No customer or supplier
-----------------------------------
that was or is significant to the Company has terminated, materially reduced or
threatened to terminate or materially reduce its purchases from or provision of
products or services to the Company, as the case may be.
2.34 Qualified Small Business Stock. As of the Funding: (i) the
------------------------------
Company will be an eligible corporation as defined in Section 1202(e)(4) of the
Internal Revenue Code of 1986, as amended (the "Code"), (ii) the Company will
not have made any purchases of its own stock during the one-year period
proceeding the Funding having an aggregate value exceeding 5% of the aggregate
value of all its stock as of the beginning of such period and (iii) the
Company's aggregate gross assets, as defined by Code Section 1202(d)(2), at no
time through the Funding have exceeded or will exceed $50 million, taking into
account the assets of any corporations required to be aggregated with the
Company in accordance with Code Section 1202(d)(3).
-13-
<PAGE>
2.35 Year 2000. The Company's proprietary software is capable of
---------
recording, storing, processing, calculating and displaying calendar dates
falling before, on and after January 1, 2000, without loss of functionality or
data integrity, except where the failure to do so could not reasonably be
expected to have a material adverse affect on the assets, properties, financial
condition, operating results or business of the Company. The foregoing does not
constitute a warranty or representation that the Company's software will be
capable of recording, storing, processing, calculating and displaying correct
calendar dates based on software supplied by or licensed from any party other
than the Company, or that the Company's software will properly interact with
such third party software.
2.36 Offerees. The Company has not, either directly or through any
--------
agent, broker or finder, offered any securities exercisable for or convertible
into Common Stock or Preferred Stock or any security or securities similar to
any thereof, for sale to, or solicited any offers to buy any securities
exercisable for or convertible into Common Stock or Preferred Stock, or any such
similar security or securities from, or otherwise approached or negotiated in
respect thereof with, any person or entity other than the Investors, other
"accredited investors" (as that term is defined in Regulation D promulgated
under the Securities Act) who have not invested under this Agreement and
employees, directors and consultants of the Company, except for offers,
solicitations or other actions that would not, under applicable law, be
integrated with the sale of the Series D Preferred Stock hereunder.
3. Representations and Warranties of the Investors. Each Investor
-----------------------------------------------
hereby represents and warrants to the Company, for each Investor itself and only
for itself, that:
3.1 Authorization. Such Investor has full power and authority to
-------------
enter into this Agreement and the Ancillary Agreements, and each such Agreement
constitutes its valid and legally binding obligation, enforceable in accordance
with its terms except (i) as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, and other laws of general application affecting
enforcement of creditors' rights generally, (ii) as limited by laws relating to
the availability of specific performance, injunctive relief, or other equitable
remedies, and (iii) to the extent the indemnification provisions contained in
the Amended and Restated Investors' Rights Agreement may be limited by
applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
such Investor in reliance upon such Investor's representation to the Company,
which by such Investor's execution of this Agreement such Investor hereby
confirms, that the Series D Preferred Stock to be received by such Investor and
the Common Stock issuable upon conversion of the Series D Preferred Stock
(collectively, the "Securities") will be acquired for investment for such
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that such Investor has no
present intention of selling, granting any participation in, or otherwise
distributing the same. By executing this Agreement, such Investor further
represents that such Investor does not have any contract, undertaking, agreement
or arrangement with any person to sell, transfer or grant participations to such
person or to any third person, with respect to any of the Securities.
3.3 Disclosure of Information. Such Investor represents that it has
-------------------------
had an opportunity to ask questions and receive answers from the Company
regarding the terms and
-14-
<PAGE>
conditions of the offering of the Series D Preferred Stock, and the business,
properties, prospects and financial condition of the Company. The foregoing,
however, does not limit or modify the representations and warranties of the
Company in Section 2 of this Agreement or the right of the Investors to rely
thereon.
3.4 Investment Experience. Such Investor is an investor in
---------------------
securities of companies in the development stage and acknowledges that it is
able to fend for itself, can bear the economic risk of its investment, and has
such knowledge and experience in financial or business matters that it is
capable of evaluating the merits and risks of the investment in the Series D
Preferred Stock. If other than an individual, such Investor also represents it
has not been organized for the purpose of acquiring the Series D Preferred
Stock.
3.5 Accredited Investor. Such Investor is an "accredited investor"
-------------------
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 Restricted Securities. Such Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, such
Investor represents that it is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the Act.
3.7 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, such Investor further agrees not to make
any disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 3 and the Amended and Restated Investors' Rights Agreement provided
and to the extent this Section and such agreement are then applicable, and:
(a) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) Such Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, such Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of Paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal
-15-
<PAGE>
descendants or ancestors of such partner or his or her spouse, if the transferee
agrees in writing to be subject to the terms hereof to the same extent as if he
or she were an original Investor hereunder.
3.8 Legends. It is understood that the certificates evidencing the
-------
Series D Preferred Stock and the Common Shares may bear the following legend:
"These securities have not been registered under the Securities Act of
1933, as amended, or any state securities laws. They may not be sold,
offered for sale, pledged or hypothecated in the absence of a registration
statement in effect with respect to the securities under such Act and any
applicable state securities laws or pursuant to an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
3.9 Investors' State of Residence. Each Investor represents that,
-----------------------------
as of the Funding, it is a resident of the state listed as its address on
Schedule A hereto.
- ----------
4. Conditions of Investors' Obligations at Funding. The
-----------------------------------------------
obligations of each Investor under subsection 1.1(c) of this Agreement are
subject to the fulfillment on or before the Funding of each of the following
conditions, the waiver of which shall not be effective against any Investor who
does not consent thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Funding with the same effect as though such representations and warranties had
been made on and as of the date of such Funding.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Funding.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to each Investor at the Funding a certificate stating that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there shall have been no adverse change in the business, affairs,
prospects, operations, properties, assets or condition of the Company since
February 28, 1999 ("No Material Adverse Change").
4.4 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
4.5 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Funding and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' special counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request. This may include, without limitation, good standing
certificates
-16-
<PAGE>
and certification by the Company's Secretary regarding the Restated Certificate
and Bylaws and Board of Director and stockholder resolutions relating to this
transaction.
4.6 Proprietary Information and Inventions Agreement. Each employee
------------------------------------------------
of the Company, and each consultant to the Company who has had access to
confidential or proprietary information of the Company, shall have entered into
a Proprietary Information and Inventions Agreement in the form previously
provided to special counsel for the Investors.
4.7 Bylaws. The Bylaws of the Company shall provide that the Board
------
of Directors of the Company shall consist of seven (7) persons.
4.8 Amended and Restated Voting Agreement. The Company, each Founder
-------------------------------------
(as defined therein) and each Investor shall have entered into the Amended and
Restated Voting Agreement in the form attached hereto as Exhibit C.
---------
4.9 Board of Directors. The Board of Directors of the Company,
------------------
immediately following the Funding, shall be comprised of the following members:
David Struwas and Paul Sun as designees of the holders of shares of the Common
Stock of the Company; James Marver and Jeff Marshall, as designees of the
holders of shares of Series A Preferred Stock and Series B Preferred Stock of
the Company; William Seifert, as designee of the holders of shares of Series C
Preferred Stock of the Company; and Robert Gilbertson as a designee of the
holders of the Common Stock, Series A Preferred Stock, Series B Preferred Stock,
Series C Preferred Stock and Series D Preferred Stock of the Company.
4.10 Opinion of Company Counsel. Each Investor shall have received
--------------------------
from Day, Berry & Howard LLP, counsel for the Company, an opinion, dated as of
the Funding, in form and substance reasonably acceptable to the Investors.
4.11 Amended and Restated Investors' Rights Agreement. The Company,
------------------------------------------------
the Founders and each Investor shall have entered into the Amended and Restated
Investors' Rights Agreement in the form attached as Exhibit D .
---------
4.12 Amended and Restated Right of First Refusal and Co-Sale
-------------------------------------------------------
Agreement. The Investors, the Founders and the Company shall each have entered
- ---------
into the Amended and Restated Co-Sale Agreement in the form attached hereto as
Exhibit E.
- ---------
4.13 Due Diligence and No Material Adverse Change. The Company shall
--------------------------------------------
have provided the Investors access to such information as the Investors have
reasonably requested in connection with their due diligence review and the
Investors shall have concluded their due diligence review of the Company to
their complete satisfaction and shall be reasonably satisfied that there has
been No Material Adverse Change.
5. Conditions of the Company's Obligations at Funding. The
--------------------------------------------------
obligations of the Company to each Investor under this Agreement are subject to
the fulfillment on or before the Funding of each of the following conditions by
that Investor:
-17-
<PAGE>
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investors contained in Section 3 shall be true on and as of
the Funding with the same effect as though such representations and warranties
had been made on and as of the Funding.
5.2 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
6. Miscellaneous.
-------------
6.1 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company and Investors contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Funding and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investors or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of Connecticut as applied to agreements among
Connecticut residents entered into and to be performed entirely within
Connecticut.
6.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
6.7 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which such Investor or any of its officers, partners,
employees, or representatives is responsible.
-18-
<PAGE>
The Company agrees to indemnify and hold harmless each Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
6.8 Expenses. Irrespective of whether the Funding is effected, the
--------
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Funding is effected, the Company shall, at the Funding, reimburse the reasonable
fees of one special counsel for the Investors and shall, upon receipt of a bill
therefor, reimburse the reasonable out-of-pocket expenses of such counsel,
provided, however, that in no event shall the Company be required to reimburse
fees and expenses in excess of $15,000 in the aggregate. If any action at law or
in equity is necessary to enforce or interpret the terms of this Agreement, the
Ancillary Agreements or the Restated Certificate, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.9 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock issuable or issued upon conversion of the Series
D Preferred Stock. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any securities purchased under
this Agreement at the time outstanding (including securities into which such
securities are convertible), each future holder of all such securities, and the
Company.
6.10 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
6.11 Corporate Securities Law. THE SALE OF THE SECURITIES THAT ARE
------------------------
THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED WITH THE COMMISSIONER OF
CORPORATIONS OF THE STATE OF CALIFORNIA AND THE ISSUANCE OF SUCH SECURITIES OR
THE PAYMENT OR RECEIPT OF ANY PART OF THE CONSIDERATION FOR SUCH SECURITIES
PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS THE SALE OF SECURITIES IS EXEMPT
FROM QUALIFICATION BY SECTION 25100, 25102 OR 25105 OF THE CALIFORNIA
CORPORATIONS CODE. THE RIGHTS OF ALL PARTIES TO THIS AGREEMENT AFFECTED BY THE
FOREGOING ARE EXPRESSLY CONDITIONED UPON SUCH QUALIFICATION BEING OBTAINED,
UNLESS THE SALE IS SO EXEMPT.
6.12 Aggregation of Stock. All shares of the Preferred Stock held or
--------------------
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
6.13 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties with respect to the
subject matter hereof and no
-19-
<PAGE>
party shall be liable or bound to any other party in any manner by any
warranties, representations, or covenants with respect to such subject matter
except as specifically set forth herein or therein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY
dsl.net, inc.
By: _____________________________________
Title: __________________________________
Address: 545 Long Wharf Drive
New Haven, CT 06511
INVESTORS:
VantagePoint Venture Partners 1996, L.P.
By: VantagePoint Associates, LLC, its
General Partner
By: _____________________________________
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Communications Partners, L.P.
By: VantagePoint Communication Associates, LLC,
its General Partner
By: _____________________________________
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Venture Partners III, L.P.
By: VantagePoint Venture Associates III, LLC
-20-
<PAGE>
its General Partner
By: _____________________________________
Managing Member
Address: 1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
Prism Venture Partners II, L.P.
By: Prism Investment Partners II, L.P.,
its general partner
By: Prism Venture Partners II, L.L.C.,
its general partner
By:______________________________________
Managing Director
Address: 100 Lowder Brook Drive,
Suite 2500
Westwood, MA 02090
Oak Investment Partners VIII, LP
By: Oak Associates VIII, LLC,
its General Partner
By: _____________________________________
Ed Glassmeyer, Managing Member
Address: One Gorham Island
Westport, CT 06830
Oak VIII Affiliates Fund, L.P.
By: Oak VIII Affiliates, LLC,
its General Partner
By: _____________________________________
Ed Glassmeyer, Managing Member
Address: One Gorham Island
Westport, CT 06830
-21-
<PAGE>
Crosspoint Venture Partners 1997, L.P.
By: _____________________________________
Name:
Title:
Address: 2925 Woodside Road
Woodside, CA 94062
Gleacher/DSL Investors LLC
By: _____________________________________
Name:
Title:
Eric Gleacher, Managing Member
Address: 660 Madison Avenue
New York, NY 10021
[Signatures Continue on Next Page]
-22-
<PAGE>
Charter Growth Capital, L.P.
By: CGC Partners, L.P.,
its General Partner
By: _____________________________________
Name: Kevin J. McQuillan
Title: General Partner
Address: 525 University Avenue, Suite 1500
Palo Alto, CA 94301
Charter Growth Capital Co-Investment Fund, L.P.
By: CGC Partners, L.P.,
its General Partner
By: _____________________________________
Kevin J. McQuillan, General Partner
Address: 525 University Avenue, Suite 1500
Palo Alto, CA 94301
CGC Investors, L.P.
By: CGC Partners, L.P.,
its General Partner
By: _____________________________________
Kevin J. McQuillan, General Partner
Address: 525 University Avenue, Suite 1500
Palo Alto, CA 94301
-23-
<PAGE>
SCHEDULE OF EXCEPTIONS
-24-
<PAGE>
Schedule A
Schedule of Investors
Total Purchase Price
<TABLE>
<CAPTION>
Name and Address Series D Shares Purchased of Series D Shares
- ---------------- ------------------------- ------------------
<S> <C> <C>
Prism Venture Partners II, L.P. 95,602 $ 999,996.92
100 Lowder Brook Drive
Suite 2500
Westwood, MA 02090
VantagePoint Venture Partners 1996 L.P. 191,204 $ 1,999,993.84
1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Communications Partners, L.P. 382,410 $ 4,000,008.60
1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
VantagePoint Venture Partners III, L.P. 573,614 $ 6,000,002.44*
1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
Oak Investment Partners VIII, L.P. 515,823 $ 5,395,508.58
One Gorham Island
Westport, CT 06830
Oak VIII Affiliates Fund, L.P. 9,990 $ 104,495.40
One Gorham Island
Westport, CT 06830
Crosspoint Venture Partners 1997, L.P. 764,818 $ 7,999,996.28
2925 Woodside Road
Woodside, CA 94062
</TABLE>
-25-
<PAGE>
<TABLE>
<S> <C> <C>
Charter Growth Capital, L.P. 14,722 $ 1,199,992.12
525 University Avenue, Suite 1500
Palo Alto, CA 94301
Charter Growth Capital Co-Investment 21,511 $ 225,005.06
Fund, L.P.
525 University Avenue, Suite 1500
Palo Alto, CA 94301
CGC Investors, L.P. 7,170 $ 4,998.20
525 University Avenue, Suite 1500
Palo Alto, CA 94301
Gleacher/DSL Investors LLC 191,205 $ 2,000,004.30
660 Madison Avenue
New York, NY 10021
TOTAL 2,868,069 $30,000,001.74
</TABLE>
*Payment to be made with $573.62 in
cash and a Secured Full-Recourse
Promissory Note (due May 26,1999) in
favor of dsl.net, inc. for the balance.
<PAGE>
Exhibit 10.15
dsl.net, inc.
PREFERRED STOCK
PURCHASE AGREEMENT
June 2, 1999
<PAGE>
dsl.net, inc.
PREFERRED STOCK PURCHASE AGREEMENT
THIS PREFERRED STOCK PURCHASE AGREEMENT is made as of the 2nd day of June,
1999, by and among dsl.net, inc., a Delaware corporation (the "Company"), and
Raymond C. Allieri, an individual residing at 8113 River Falls Drive, Potomac,
Maryland 20854 (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
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1.1 Sale and Issuance of Series D Preferred Stock (as defined
below).
(a) On or prior to the Funding (as defined below), the Company
shall have authorized (i) the sale and issuance to the Investor of 95,603 shares
of its Series D Preferred Stock, par value $.001 per share (the "Series D
Preferred Stock") and (ii) the issuance of the shares of Common Stock, par value
$.0005 per share, to be issued upon conversion of the Series D Preferred Stock
(the "Common Shares"). The Series D Preferred Stock shall have the rights,
preferences, privileges and restrictions set forth herein, and in the Restated
Certificate of Incorporation of the Company (the "Restated Certificate").
(b) Subject to the terms and conditions of this Agreement, the
Investor agrees to purchase at the Funding and the Company agrees to sell and
issue to the Investor at the Funding 95,603 shares of Series D Preferred Stock
for an aggregate purchase price of $1,000,007.38.
1.2 Funding. The funding and delivery of the Series D Preferred
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Stock shall take place at the offices of Day, Berry & Howard LLP, CityPlace I,
Hartford, Connecticut, at 9:30 A.M., on June 2, 1999, or at such other time and
place as the Company and the Investor mutually agree upon orally or in writing
(which time and place are designated as the "Funding"). At the Funding the
Company shall deliver to the Investor a certificate representing the Series D
Preferred Stock purchased thereby against payment of the purchase price therefor
by wire transfer or bank check for immediately available funds; provided,
however, that up to $999,911.77 of such payment may be made by means of a
secured full-recourse promissory note in form and substance acceptable to the
Company (the "Note").
2. Representations and Warranties of the Company. The Company
---------------------------------------------
hereby represents and warrants to the Investor that:
2.1 Organization, Good Standing and Qualification. The Company 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
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
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<PAGE>
2.2 Authorization. All corporate action on the part of the Company,
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its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the performance of all obligations of
the Company hereunder, and the authorization, issuance (or reservation for
issuance), sale and delivery of the Series D Preferred Stock being sold
hereunder and the Common Shares, has been taken or will be taken prior to the
Funding, and this Agreement constitutes, or will, upon execution thereof by the
parties thereto, constitute, the valid and legally binding obligation of the
Company, enforceable in accordance with its terms, except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally and
(ii) as limited by laws and principles relating to the availability of specific
performance, injunctive relief, or other equitable remedies.
2.3 Valid Issuance of Series D Preferred Stock and Common Shares.
------------------------------------------------------------
The Series D Preferred Stock that is being purchased by the Investor hereunder,
when issued, sold and delivered in accordance with the terms of this Agreement
for the consideration expressed herein, will be duly and validly issued, fully
paid, and nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under, or as contemplated by, this Agreement, the
Pledge Agreement (defined below) and under applicable state and federal
securities laws. The Common Shares have been or will, prior to the Funding, be
duly and validly reserved for issuance and, upon issuance in accordance with the
terms of the Restated Certificate will be duly and validly issued, fully paid,
and nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement, the Pledge Agreement and under
applicable state and federal securities laws.
2.4 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except the filings pursuant to Regulation D
under the Securities Act of 1933, as amended (the "Act"), which filings will be
effected within 15 days of the sale of the Series D Preferred Stock hereunder,
and such other post-Funding filings as may be required.
3. Certain Representations, Warranties and Covenants of the
--------------------------------------------------------
Investor. The Investor hereby represents, warrants and covenants to the
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Company that:
3.1 Authorization. The Investor has full power and authority to
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enter into this Agreement, the Note, the Pledge Agreement of even date herewith
securing the investor's obligations under the Note (the "Pledge Agreement"), the
stock power in respect of the Series D Preferred Stock, and all other documents,
instruments and agreements executed and/or delivered by the Investor in
connection with the foregoing (collectively, the "Transaction Documents"), and
each of such Transaction Documents constitutes his valid and legally binding
obligation, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, and
(ii) as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies.
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<PAGE>
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Series D Preferred Stock to be purchased by the Investor and
the Common Shares (collectively, the "Securities") will be acquired for
investment for the Investor's own account, not as a nominee or agent, and not
with a view to the resale or distribution of any part thereof, and that the
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the same. By executing this Agreement, the Investor
further represents that the Investor does not have any contract, undertaking,
agreement or arrangement with any person to sell, transfer or grant
participations to such person or to any third person, with respect to any of the
Securities.
3.3 Disclosure of Information. The Investor represents that he has
-------------------------
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series D Preferred
Stock, and the business, properties, prospects and financial condition of the
Company. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Investor to rely thereon.
3.4 Investment Experience. The Investor is an investor in securities
---------------------
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Series D Preferred Stock.
3.5 Accredited Investor. The Investor is an "accredited investor"
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within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect, and all representations made by the
Investor in that certain Investor Questionnaire of even date herewith by the
Investor in favor of the Company are true, correct and complete.
3.6 Restricted Securities. The Investor understands that the
---------------------
Securities he is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Act, only in certain limited circumstances. In this connection, the Investor
represents that he is familiar with SEC Rule 144, as presently in effect, and
understands the resale limitations imposed thereby and by the Act.
3.7 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above or the Right of First Refusal set forth in
Section 6.3 below, the Investor further agrees not to make any disposition of
all or any portion of the Securities unless and until the transferee has agreed
in writing for the benefit of the Company to be bound by this Section 3
provided, and to the extent, this Section is then applicable, and:
(a) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
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<PAGE>
(b) (i) The Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, the Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
3.8 Legends. It is understood that the certificates evidencing the
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Series D Preferred Stock and the Common Shares may bear the following legend:
"These securities have not been registered under the Securities Act of
1933, as amended, or any state securities laws. They may not be sold,
offered for sale, pledged or hypothecated in the absence of a registration
statement in effect with respect to the securities under such Act and any
applicable state securities laws or pursuant to an opinion of counsel
satisfactory to the Company that such registration is not required or
unless sold pursuant to Rule 144 of such Act."
3.9 Investors' State of Residence. The Investor represents that, as
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of the Funding, he is a resident of the state of Maryland.
4. Conditions of Investor's Obligations at Funding. The obligations
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of the Investor under subsection 1.1(b) of this Agreement are subject to the
fulfillment on or before the Funding of each of the following conditions:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Funding with the same effect as though such representations and warranties had
been made on and as of the date of such Funding.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Funding.
4.3 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
4.4 Due Diligence and No Material Adverse Change. The Company shall
--------------------------------------------
have provided the Investor access to such information as the Investor has
reasonably requested in connection with his due diligence review and the
Investor shall have concluded his due diligence review of the Company to his
complete satisfaction and shall be reasonably satisfied that there has been no
material adverse change in the business, affairs, prospects, operations,
properties, assets or condition of the Company.
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<PAGE>
5. Conditions of the Company's Obligations at Funding. The
--------------------------------------------------
obligations of the Company to the Investor under this Agreement are subject to
the fulfillment on or before the Funding of each of the following conditions:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 3 shall be true on and as of the
Funding with the same effect as though such representations and warranties had
been made on and as of the Funding.
5.2 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
5.3 Preemptive Rights Waiver. The parties to that certain Amended
------------------------
and Restated Investors Rights Agreement, dated as of May 12, 1999, shall have
executed a waiver with respect to the provisions of Section 2.4 of such
agreement.
6. Affirmative Covenants.
---------------------
6.1 Lock-Up Agreements. The Investor agrees, for himself and his
------------------
heirs, legal representatives and assigns that he will enter into any "lock-up"
or similar agreements requested by the Company or managing underwriter in
connection with any public offering of shares of the Company's stock.
6.2 Ancillary Agreements. The Company and certain other persons and
--------------------
entities are parties to an Amended and Restated Investors' Rights Agreement, an
Amended and Restated Right of First Refusal and Co-Sale Agreement, and an
Amended and Restated Voting Agreement, each dated as of May 12, 1999. Each of
the Investor and the Company agrees to use its reasonable best efforts to have
the Investor added as a party to such agreements at such time as the parties
currently thereto agree to amend and/or restate such agreements.
6.3 Right of First Refusal. The Investor agrees that he shall not
----------------------
sell any of the Securities, except in accordance with the following procedures:
(a) The Investor shall first deliver to the Company a written
Notice of Intention to Sell, which shall be irrevocable for a period of
thirty (30) days after delivery thereof, offering to the Company such
Securities owned by the Investor at the purchase price and on the other
material terms specified therein at which it proposes to sell such
Securities. The Company shall have the right of first refusal and option
for a period of thirty (30) days after delivery to the Company of the
Notice of Intention to Sell, to purchase all or (subject to the provisions
of Section 6.3(d) hereof) any part of the Securities so offered at the
purchase price (or, if such price is not payable in cash, at the Company's
option, the cash equivalent thereof) and on the other terms stated therein.
Such acceptance shall be made by delivering a written Notice of Acceptance
to the Investor within the aforesaid thirty (30) day period.
(b) The closing of any sales of the Securities under the terms
of Section 6.3(a) shall be made at the offices of the Company on a mutually
satisfactory business day within forty-five (45) days after the expiration
of the aforesaid period. Delivery of
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<PAGE>
certificates or other instruments evidencing such Securities duly endorsed
for transfer to the Company shall be made on such date against payment of
the purchase price therefor.
(c) If effective acceptance shall not be received pursuant to
Section 6.3(a) above with respect to all Securities offered for sale
pursuant to a Notice of Intention to Sell, then, subject to compliance with
applicable securities laws and any other applicable restrictions on the
transfer of such Securities (including the restrictions set forth herein),
the Investor may sell all or any part of the remaining Securities so
offered for sale at a price not less than the price, and on terms not more
favorable to the purchaser thereof than the terms stated in the Notice of
Intention to Sell, at any time within sixty (60) days after the expiration
of such offer. In the event the remaining Securities are not sold by the
Investor during such sixty (60) day period, the right of the Investor to
sell such remaining Securities shall expire and the obligations of this
Section 6.3 shall be reinstated; provided, however, that in the event the
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Investor determines, at any time during such sixty (60) day period, that
the sale of all or any part of the remaining Securities on the terms set
forth in the Notice of Intention to Sell is impractical, the Investor can
terminate the offer and reinstate the procedure provided in this Section
6.3 without waiting for the expiration of such sixty (60) day period.
(d) The Investor may specify in the Notice of Intention to Sell
contemplated by Section 6.3(a) hereof that all Securities offered thereby
must be sold, in which case the Notice of Acceptance must relate to all
Securities covered by such Notice of Intention to Sell in order to be
effective.
(e) The provisions of this Section 6.3 shall survive the
closing hereunder and shall remain in effect until the earlier occur of (x) the
public offering of the Company's common stock pursuant to a registration
statement under the Act, and (y) such time as the Investor shall become a party
to the an Amended and Restated Right of First Refusal and Co-Sale Agreement
referenced in Section 6.2 above.
7. Miscellaneous.
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7.1 Survival. The warranties, representations and covenants of the
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Company and Investor contained in or made pursuant to this Agreement shall
survive the execution and delivery of this Agreement and the Funding and shall
in no way be affected by any investigation of the subject matter thereof made by
or on behalf of the Investor or the Company.
7.2 Successors and Assigns. Except as otherwise provided herein, the
----------------------
terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
7.3 Governing Law. This Agreement shall be governed by and construed
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under the laws of the State of Connecticut as applied to agreements among
Connecticut residents entered into and to be performed entirely within
Connecticut.
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<PAGE>
7.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
7.6 Notices. Unless otherwise provided, any notice required or
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permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties.
7.7 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finders' fee or commission in connection with this
transaction. The Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of his representatives is
responsible.
The Company agrees to indemnify and hold harmless the Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
7.8 Expenses. Irrespective of whether the Funding is effected, the
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Company and the Investor shall pay all costs and expenses that they incur with
respect to the negotiation, execution, delivery and performance of this
Agreement. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the prevailing party shall be entitled to
reasonable attorney's fees, costs and necessary disbursements in addition to any
other relief to which such party may be entitled.
7.9 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the Investor.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at the
time outstanding (including securities into which such securities are
convertible), each future holder of all such securities, and the Company.
7.10 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
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<PAGE>
7.11 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties with respect to the
subject matter hereof and no party shall be liable or bound to any other party
in any manner by any warranties, representations, or covenants with respect to
such subject matter except as specifically set forth herein or therein.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
dsl.net, inc.
By: _____________________________________
Name:
Title:
Address: 545 Long Wharf Drive
New Haven, CT 06511
INVESTOR:
_________________________________________
Raymond C. Allieri
Address: 8113 River Falls Drive
Potomac, MD 20854
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<PAGE>
Exhibit 10.16
dsl.net, inc.
SERIES E PREFERRED STOCK
PURCHASE AGREEMENT
July 6, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Purchase and Sale of Stock.............................................. 1
1.1 Sale and Issuance of Series E Preferred Stock........................... 1
1.2 Funding................................................................. 1
2. Representations and Warranties of the Company........................... 1
2.1 Organization, Good Standing and Qualification........................... 2
2.2 Capitalization and Voting Rights........................................ 2
2.3 Subsidiaries............................................................ 3
2.4 Authorization........................................................... 3
2.5 Valid Issuance of Preferred and Common Stock............................ 3
2.6 Governmental Consents................................................... 4
2.7 Offering................................................................ 4
2.8 Litigation.............................................................. 4
2.9 Proprietary Information and Inventions Agreements....................... 4
2.10 Patents and Trademarks.................................................. 5
2.11 Compliance with Other Instruments....................................... 5
2.12 Agreements; Action...................................................... 6
2.13 Related Party Transactions.............................................. 7
2.14 Permits................................................................. 7
2.15 Environmental and Safety Laws........................................... 7
2.16 Manufacturing and Marketing Rights...................................... 7
2.17 Disclosure.............................................................. 8
2.18 Offerees................................................................ 8
2.19 Registration Rights..................................................... 8
2.20 Corporate Documents..................................................... 8
2.21 Title to Property and Assets............................................ 8
2.22 Financial Statements.................................................... 8
2.23 Changes................................................................. 9
2.24 Employee Benefit Plans.................................................. 9
2.25 Tax Returns, Payments and Elections..................................... 9
2.26 Insurance............................................................... 10
2.27 Minutes................................................................. 10
2.28 Labor Agreements and Actions; Employee Compensation..................... 10
2.29 Section 83(b) Elections................................................. 10
2.30 Real Property Holding Company........................................... 10
2.31 Net Operating Loss Carryforward......................................... 11
2.32 Brokers................................................................. 11
2.33 Significant Customers and Suppliers..................................... 11
2.34 Year 2000............................................................... 11
2.35 Reliance................................................................ 11
3. Representations and Warranties of the Investor.......................... 11
3.1 Authorization........................................................... 11
3.2 Purchase Entirely for Own Account....................................... 11
</TABLE>
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<PAGE>
<TABLE>
<S>........................................................................... <C>
3.3 Disclosure of Information............................................... 12
3.4 Investment Experience................................................... 12
3.5 Accredited Investor..................................................... 12
3.6 Restricted Securities................................................... 12
3.7 Qualified Institutional Buyer........................................... 12
3.8 Qualified Passive Investor.............................................. 12
3.9 Further Limitations on Disposition...................................... 13
3.10 Legends................................................................. 13
3.11 Investor's State of Residence........................................... 13
4. Conditions of Investor's Obligations at Funding......................... 13
4.1 Representations and Warranties.......................................... 14
4.2 Performance............................................................. 14
4.3 Compliance Certificate.................................................. 14
4.4 Qualifications.......................................................... 14
4.5 Proceedings and Documents............................................... 14
4.6 Proprietary Information and Inventions Agreement........................ 14
4.7 Opinion of Company Counsel.............................................. 14
4.8 Amended and Restated Investors' Rights Agreement........................ 14
4.9 Commercial Agreement.................................................... 15
4.10 Due Diligence and No Material Adverse Change............................ 15
5. Conditions of the Company's Obligations at Funding...................... 15
5.1 Representations and Warranties.......................................... 15
5.2 Qualifications.......................................................... 15
5.3 Commercial Agreement.................................................... 15
6. Miscellaneous........................................................... 15
6.1 Survival of Warranties.................................................. 15
6.2 Successors and Assigns.................................................. 15
6.3 Governing Law........................................................... 16
6.4 Counterparts............................................................ 16
6.5 Titles and Subtitles.................................................... 16
6.6 Notices................................................................. 16
6.7 Finder's Fee............................................................ 16
6.8 Expenses................................................................ 16
6.9 Amendments and Waivers.................................................. 16
6.10 Severability............................................................ 17
6.11 Public Announcements.................................................... 17
6.12 Aggregation of Stock.................................................... 17
6.13 Entire Agreement........................................................ 17
</TABLE>
SCHEDULE OF EXCEPTIONS
SCHEDULE A Investor Schedule
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B List of Stockholders
EXHIBIT C Amended and Restated Investors' Rights Agreement
EXHIBIT D Portal Co-Marketing Agreement
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<PAGE>
dsl.net, inc.
SERIES E PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES E PREFERRED STOCK PURCHASE AGREEMENT is made as of the 6th day
of July, 1999, by and between dsl.net, inc., a Delaware corporation (the
"Company"), and Microsoft Corporation, a Washington corporation (the
"Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series E Preferred Stock.
(a) The Company shall adopt and file with the Secretary of State of
Delaware on or before the Funding (as defined below) the Restated Certificate of
Incorporation in the form attached hereto as Exhibit A (the "Restated
---------
Certificate").
(b) On or prior to the Funding (as defined below), the Company shall
have authorized (i) the sale and issuance to the Investor of 761,421 shares of
Series E Preferred Stock (as defined below), (ii) the issuance of the shares of
Common Stock (as defined below) to be issued upon conversion of the Series E
Preferred Stock (the "Common Shares"). The Series E Preferred Stock shall have
the rights, preferences, privileges and restrictions set forth herein, in the
Amended and Restated Investors' Rights Agreement in the form attached hereto as
Exhibit C and in the Restated Certificate.
(c) Subject to the terms and conditions of this Agreement, the
Investor agrees to purchase at the Funding and the Company agrees to sell and
issue to the Investor at the Funding that number of shares of the Company's
Series E Preferred Stock set forth opposite the Investor's name on Schedule A
----------
hereto for the purchase price set forth thereon.
1.2 Funding. The funding and delivery of the Series E Preferred
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Stock shall take place at the offices of Day, Berry & Howard LLP, CityPlace I,
Hartford, Connecticut, at 9:30 A.M., on July 6, 1999, or at such other time and
place as the Company and Investors mutually agree upon orally or in writing
(which time and place are designated as the "Funding"). At the Funding the
Company shall deliver to the Investor a certificate representing the Series E
Preferred Stock purchased thereby against payment of the purchase price therefor
by wire transfer, cancellation of indebtedness, or any combination thereof. In
the event that payment by an Investor is made, in whole or in part, by
cancellation of indebtedness, then the Investor shall surrender to the Company
for cancellation at the Funding any evidence of such indebtedness or shall
execute an instrument of cancellation in form and substance acceptable to the
Company.
2. Representations and Warranties of the Company. The Company hereby
---------------------------------------------
represents and warrants to the Investor that, except as set forth on a Schedule
of Exceptions (the "Schedule of Exceptions") furnished to the Investor and
counsel for the Investor, specifically identifying the relevant subparagraph
hereof, which exceptions shall be deemed to be representations and warranties as
if made hereunder:
<PAGE>
2.1 Organization, Good Standing and Qualification. The Company 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
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
2.2 Capitalization and Voting Rights.
--------------------------------
(a) The authorized capital of the Company consists, or will
consist at the time of the Funding, of: (i) 18,962,500 shares of Preferred
Stock, par value $.001 per share (the "Preferred Stock"), 3,862,500 of which
will be designated Series A Preferred Stock (the "Series A Preferred Stock"),
225,000 of which will be issued and outstanding at the time of the Funding,
6,500,000 of which will be designated Series B Preferred Stock (the "Series B
Preferred Stock"), of which 6,500,000 will be issued and outstanding at the time
of the Funding, 3,500,000 of which will be designated Series C Preferred Stock
(the "Series C Preferred Stock"), 2,785,516 of which will be issued and
outstanding at the time of the Funding, 3,000,000 of which will be designated
Series D Preferred Stock (the "Series D Preferred Stock"), 2,963,672 of which
will be issued and outstanding at the time of the Funding, and 2,100,000 of
which will be designated Series E Preferred Stock (the "Series E Preferred
Stock"), up to 761,421 of which will be issuable pursuant to this Agreement; and
(ii) 55,925,000 shares of common stock, par value $.0005 per share ("Common
Stock"), of which 10,600,000 shares will be issued and outstanding at the time
of the Funding. The rights, privileges and preferences of the Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock will be as stated in the
Restated Certificate.
(b) The outstanding shares of Common Stock and Preferred Stock
will be owned by the stockholders, in the numbers specified and subject to the
restrictions set forth in Exhibit B hereto, at the time of the Funding.
---------
(c) At the time of the Funding, the outstanding shares of Common
Stock and Preferred Stock will all be duly and validly authorized and issued,
fully paid and nonassessable and issued in accordance with the registration or
qualification provisions of the Securities Act of 1933, as amended (the "Act"),
and any relevant state securities laws, or pursuant to valid exemptions
therefrom.
(d) Except for (A) the conversion privileges of the Preferred
Stock, (B) the rights provided in Section 2.4 of the Amended and Restated
Investors' Rights Agreement, and the options and warrants listed in Exhibit B,
---------
there are not outstanding any options, warrants, rights (including conversion or
preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. In addition to the aforementioned
warrants, the Company has reserved 7,400,000 shares of its Common Stock for
purchase upon exercise of options granted and to be granted in the future to
directors, officers, employees, consultants and advisors under the Company's
1999 Stock Plan (the "Option Plan"). Except for the Amended and Restated Voting
Agreement, dated as of May 12, 1999, by and among the Company and the Founders
and Series B Investors, Series C Investors and Series D Investors as defined
therein, the Company is not a party or subject to any agreement or
-2-
<PAGE>
understanding, and, to the best of the Company's knowledge, there is no
agreement or understanding between any persons and/or entities, which affects or
relates to the voting or giving of written consents with respect to any security
or by a director of the Company. Following the transactions contemplated hereby,
except as set forth in the Schedule of Exceptions and except as set forth in the
Amended and Restated Investors' Rights Agreement described in Section 4.8, there
will be no preemptive or similar rights to purchase or otherwise acquire shares
of capital stock of the Company pursuant to any provision of law, the Restated
Certificate or the By-Laws of the Company or any agreement to which the Company
is a party, or otherwise.
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the Amended and Restated Investors'
Rights Agreement described in Section 4.8, the performance of all obligations of
the Company hereunder and thereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Series E Preferred Stock
being sold hereunder and the Common Stock issuable upon conversion of the Series
E Preferred Stock being sold hereunder, has been taken or will be taken prior to
the Funding, and this Agreement and the Amended and Restated Investors' Rights
Agreement constitute, or will, upon execution thereof by the parties thereto,
constitute, valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws and principles relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in the Amended and Restated
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series E
--------------------------------------------
Preferred Stock that is being purchased by the Investor hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Amended and Restated
Investors' Rights Agreement and under applicable state and federal securities
laws. The Common Shares have been or will, prior to the Funding, be duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the Restated Certificate, will be duly and validly issued, fully paid, and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Amended and Restated
Investors' Rights Agreement and under applicable state and federal securities
laws.
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the consummation of the transactions
contemplated by this Agreement, except (i) the filing of the
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Restated Certificate with the Secretary of State of Delaware; and (ii) the
filings pursuant to Regulation D under the Act, and applicable state securities
laws, which filings will be effected within 15 days of the sale of the Series E
Preferred Stock hereunder, and such other post-Funding filings as may be
required.
2.7 Offering. Subject in part to the truth and accuracy of each
--------
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Series E Preferred Stock as contemplated by this
Agreement are exempt from the registration requirements of any applicable state
and federal securities laws, and neither the Company nor any authorized agent
acting on its behalf will take any action hereafter that would cause the loss of
such exemption.
2.8 Litigation. There is no action, suit, proceeding or known
----------
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of this Agreement or the Amended
and Restated Investors' Rights Agreement, or the right of the Company to enter
into such agreements, or to consummate the transactions contemplated hereby or
thereby, or that might result, either individually or in the aggregate, in any
material adverse changes in the assets, condition, affairs or prospects of the
Company, financially or otherwise, or any change in the current equity ownership
of the Company, nor is the Company aware that there is any basis for the
foregoing. The foregoing includes, without limitation, actions, suits,
proceedings or investigations pending or threatened (or any basis therefor known
to the Company) involving the prior employment of any of the Company's
employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information and Inventions Agreements. Each
-------------------------------------------------
employee and officer of the Company, and each consultant who has had access to
confidential or proprietary information of the Company, has executed a
Proprietary Information and Inventions Agreement or a non-disclosure agreement.
The Company is not aware that any of its employees, officers or consultants are
in violation thereof, and the Company will use its best efforts to prevent any
such violation.
2.10 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of or licenses to all patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
necessary for its business as now conducted and as proposed to be conducted
without any violation or infringement of the rights of others, except for such
items as have yet to be conceived or developed or that are expected to be
available for licensing on reasonable terms from third parties. The Company has
no patents or pending patent applications. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. The Company has not received any communications alleging
that the Company has violated or, by
-4-
<PAGE>
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement or the Amended
and Restated Investors' Rights Agreement, nor the carrying on of the Company's
business by the employees of the Company, nor the conduct of the Company's
business as proposed, will, to the best of the Company's knowledge, conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which any
of such employees is now obligated. The Company does not believe it is necessary
to utilize any inventions of any of its employees (or people it currently
intends to hire) made prior to or outside the scope of their employment by the
Company. To the best knowledge of the Company, all data, information, ideas,
concepts, know-how and materials that the Company treats as trade secrets, and
all other confidential information and intellectual property rights of the
Company, are not part of the public domain or knowledge, nor, to the best
knowledge of the Company, have they been used, divulged or appropriated for the
benefit of any person other than the Company or otherwise to the detriment of
the Company.
2.11 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provision of its Restated Certificate or Bylaws, or
of any instrument, judgment, order, writ, decree or contract to which it is a
party or by which it is bound. The Company has complied in all material
respects with all federal, state, local or foreign statutes, rules and
regulations and orders applicable to the Company, except where the failure to
comply would not have a material adverse effect on the business, properties or
financial condition of the Company. The execution, delivery and performance of
this Agreement and the Amended and Restated Investors' Rights Agreement, and the
consummation of the transactions contemplated hereby and thereby will not result
in any such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event that results
in the creation of any lien, charge or encumbrance upon any assets of the
Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of
any material permit, license, authorization, or approval applicable to the
Company, its business or operations or any of its assets or properties.
2.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby and the
Amended and Restated Investors' Rights Agreement, there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, affiliates, or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or by which it is bound that may involve (i) obligations
(contingent or otherwise) of, or payments to the Company in excess of, $200,000,
or (ii) the license of any patent, copyright, trade secret or
-5-
<PAGE>
other proprietary right to or from the Company (other than the license of the
Company's or generally available shrinkwrap software and products in the
ordinary course of business), or (iii) provisions restricting or affecting the
development, manufacture or distribution of the Company's products or services,
or (iv) indemnification by the Company with respect to infringements of
proprietary rights. The Company is not a party to any written or oral (a)
contract with any labor union; (b) contract for the future purchase of fixed
assets or for the future purchase of materials, supplies or equipment in excess
of normal operating requirements, in excess of $100,000 per annum for all such
contracts; (c) contract for the employment of any officer, employee or other
person or any contract with any person on a consulting basis; (d) agreement or
indenture relating to the borrowing of money; (e) lease or agreement under which
the Company is lessee of or holds or operates any property, real or personal,
owned by any other party, in excess of $100,000 per annum for all such
contracts; (f) lease or agreement under which the Company is lessor of or
permits any third party to hold or operate any property, real or personal, owned
or controlled by the Company, in excess of $100,000 per annum for all such
contracts; (g) contract, agreement or commitment under which the Corporation is
obligated to pay any broker's fees, finder's fees or any such similar fees, to
any third party other than for the hiring of employees; or (h) other contract,
agreement, arrangement or understanding which is material to the business of the
Company. The Company is not a party to any term sheet, memorandum or letter of
understanding which could lead to any such contract, agreement, arrangement,
understanding or commitment.
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $200,000 or, in the case of
indebtedness and/or liabilities individually less than $200,000, in excess of
$300,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Restated Certificate of Incorporation or Bylaws that adversely affects its
business as now conducted or as proposed to be conducted, its properties or its
financial condition.
(f) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting
-6-
<PAGE>
power of the Company is disposed of, or (iii) regarding any other form of
acquisition, liquidation, dissolution or winding up of the Company.
2.13 Related Party Transactions. No employee, officer, or director
--------------------------
of the Company or member of his or her immediate family is indebted to the
Company, nor is the Company indebted (or committed to make loans or extend or
guarantee credit) to any of them. To the best of the Company's knowledge, none
of such persons has any direct or indirect ownership interest in any firm or
corporation with which the Company is affiliated or with which the Company has a
business relationship, or any firm or corporation that competes with the
Company, except that employees, officers, or directors of the Company and
members of their immediate families may own stock in publicly traded companies
that may compete with the Company. No member of the immediate family of any
officer or director of the Company is directly or indirectly interested in any
material contract with the Company.
2.14 Permits. The Company has all franchises, permits, licenses, and
-------
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
2.15 Environmental and Safety Laws. To the best of its knowledge, the
-----------------------------
Company has complied with all applicable statutes, laws and regulations relating
to the environment or occupational health and safety, and to the best of its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.16 Manufacturing and Marketing Rights. The Company has not granted
----------------------------------
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market or sell
its products.
2.17 Disclosure. The Company has fully provided the Investor with all
----------
the information that the Investor has requested for deciding whether to purchase
the Series E Preferred Stock and all information that the Company believes is
reasonably necessary to enable the Investor to make such decision. Neither this
Agreement, the Amended and Restated Investors' Rights Agreement, nor any other
statements or certificates made or delivered in connection herewith or therewith
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading.
2.18 Offerees. The Company has not, either directly or through any
--------
agent, broker or finder, offered any securities exercisable for or convertible
into Common Stock or Preferred Stock or any security or securities similar to
any thereof, for sale to, or solicited any offers to buy any securities
exercisable for or convertible into Common Stock or Preferred Stock, or any such
similar security or securities from, or otherwise approached or negotiated in
respect thereof with, any person or entity other than the Investor, other
"accredited investors" (as that
-7-
<PAGE>
term is defined in Regulation D promulgated under the Securities Act) who have
not invested under this Agreement and employees, directors and consultants of
the Company, except for offers, solicitations or other actions that would not,
under applicable law, be integrated with the sale of the Series E Preferred
Stock hereunder.
2.19 Registration Rights. Except as provided in the Amended and
-------------------
Restated Investors' Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity.
2.20 Corporate Documents. Except for amendments necessary to satisfy
-------------------
representations and warranties or conditions contained herein (the form of which
amendments has been approved by the Investors), the Restated Certificate and
Bylaws of the Company are in the form attached to the certification by the
Company's Secretary pursuant to Section 4.5 hereof.
2.21 Title to Property and Assets . The Company owns its property
----------------------------
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens that arise in the ordinary course of business
and do not materially impair the Company's ownership or use of such property or
assets. With respect to the property and assets it leases, the Company is in
compliance with such leases and, to the best of its knowledge, holds a valid
leasehold interest free of any liens, claims or encumbrances.
2.22 Financial Statements. The Company has delivered to the Investor
--------------------
its audited financial statements (balance sheet and statement of operations) as
at and for the year ended December 31, 1998 and unaudited financial statements
for the three-month period ended March 31, 1999 (the "Financial Statements").
The Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered thereby. The Financial Statements fairly present the financial
condition and operating results of the Company as of the dates, and for the
periods, indicated therein, subject to normal year-end audit adjustments. Except
as set forth in the Financial Statements, the Company has no material
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to March 31, 1999 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
the Financial Statements, which, in both cases, individually or in the
aggregate, are not material to the financial condition or operating results of
the Company. Except as disclosed in the Financial Statements, the Company is not
a guarantor or indemnitor of any indebtedness of any other person, firm or
corporation. The Company maintains and will continue to maintain a standard
system of accounting established and administered in accordance with generally
accepted accounting principles.
2.23 Changes. Since March 31, 1999, there has not been any adverse
-------
change in the assets, liabilities, financial condition or operating results of
the Company from that reflected in the Financial Statements, except changes in
the ordinary course of business that have not been, in the aggregate, materially
adverse.
2.24 Employee Benefit Plans. The Company does not have any Employee
-----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
-8-
<PAGE>
2.25 Tax Returns, Payments and Elections. The Company has filed all
------------------------------------
tax returns and reports (including information returns and reports) as required
by law. These returns and reports are true and correct in all material respects.
The Company has paid all taxes and other assessments due, except those contested
by it in good faith that are listed in the Schedule of Exceptions. The provision
for taxes of the Company as shown in the Financial Statements is adequate for
taxes due or accrued as of the date thereof. The Company has not elected
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
treated as a Subchapter S corporation pursuant to Section 1362(a) of the Code,
nor has it made an election pursuant to Section 341(f) of the Code, nor has it
made any other elections pursuant to the Code (other than elections that relate
solely to methods of accounting, depreciation or amortization) that would have a
material adverse effect on the Company, its financial condition, its business as
presently conducted or proposed to be conducted or any of its properties or
material assets. The Company has never had any tax deficiency proposed or
assessed against it and has not executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge.
None of the Company's federal income tax returns and none of its state income or
franchise tax or sales or use tax returns has ever been audited by governmental
authorities. Since the date of the Financial Statements, the Company has not
incurred any taxes, assessments or governmental charges other than in the
ordinary course of business and the Company has made adequate provisions on its
books of account for all taxes, assessments and governmental charges with
respect to its business, properties and operations for such period. The Company
has withheld or collected from each payment made to each of its employees, the
amount of all taxes (including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes)
required to be withheld or collected therefrom, and has paid the same to the
proper tax receiving officers or authorized depositories. The Company is not
party to any contract, arrangement or understanding that could obligate the
Company to make a payment to an individual that would be a "parachute payment"
to a "disqualified individual," as those terms are defined in Section 280G of
the Code, without regard to whether such payment might constitute reasonable
compensation for personal services performed or to be performed in the future.
2.26 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
2.27 Minutes. The minutes of the Company provided to the Investor
-------
contain a complete summary of all meetings of directors and stockholders since
the time of incorporation and reflect all transactions referred to in such
minutes accurately in all material respects.
2.28 Labor Agreements and Actions; Employee Compensation. The
----------------------------------------------------
Company is not bound by or subject to (and none of its assets or properties is
bound by or subject to) any written or oral, express or implied, contract,
commitment or arrangement with any labor union, and no labor union has requested
or, to the best of the Company's knowledge, has sought to represent any of the
employees, representatives or agents of the Company. There is no strike or other
labor dispute involving the Company pending, or to the best of the Company's
knowledge, threatened, that could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the Company
(as such business is presently conducted and as it is proposed to be conducted),
nor is the Company aware of any labor organization activity
-9-
<PAGE>
involving its employees. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each officer
and employee of the Company is terminable at the will of the Company. To the
best of its knowledge, the Company has complied in all material respects with
all applicable state and federal equal employment opportunity and other laws
related to employment. The Company is not a party to or bound by any currently
effective employment contract, deferred compensation agreement, bonus plan,
incentive plan, profit sharing plan, retirement agreement, or other employee
compensation agreement.
2.29 Section 83(b) Elections. To the best of the Company's
-----------------------
knowledge, all individuals who have purchased unvested shares of the Company's
Common Stock have timely filed or will timely file elections under Section 83(b)
of the Code and any analogous provisions of applicable state tax laws.
2.30 Real Property Holding Company. The Company is not currently, and
-----------------------------
has not been during the prior five years, a United States real property holding
corporation within the meaning of Section 897 of the Code and the Company has
filed with the Internal Revenue Service all statements, if any, with its United
States income tax returns which are required under Section 1.897-2(h) of the
Treasury Regulations.
2.31 Net Operating Loss Carryforward. The information contained in
-------------------------------
the Schedule of Exceptions or otherwise provided to counsel for the Investors
regarding the application of Section 382 of the Code to the Company's federal
net operating loss carryforward is true and correct to the best of the Company's
knowledge.
2.32 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
2.33 Significant Customers and Suppliers. No customer or supplier
-----------------------------------
that was or is significant to the Company has terminated, materially reduced or
threatened to terminate or materially reduce its purchases from or provision of
products or services to the Company, as the case may be.
2.34 Year 2000. The Company's proprietary software is capable of
---------
recording, storing, processing, calculating and displaying calendar dates
falling before, on and after January 1, 2000, without loss of functionality or
data integrity, except where the failure to do so could not reasonably be
expected to have a material adverse affect on the assets, properties, financial
condition, operating results or business of the Company. The foregoing does not
constitute a warranty or representation that the Company's software will be
capable of recording, storing, processing, calculating and displaying correct
calendar dates based on software supplied by or licensed from any party other
than the Company, or that the Company's software will properly interact with
such third party software.
2.35 Reliance. The foregoing representations and warranties are made
--------
by the Company with the knowledge and expectation that Microsoft is placing
reliance thereon.
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<PAGE>
3. Representations and Warranties of the Investor. The Investor
---------------------------
hereby represents and warrants to the Company, for each Investor itself and only
for itself, that:
3.1 Authorization. The Investor has full power and authority to
-------------
enter into this Agreement and the Amended and Restated Investors' Rights
Agreement, and each such Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Amended and Restated Investors'
Rights Agreement may be limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Series E Preferred Stock to be received by such Investor and
the Common Stock issuable upon conversion of the Series E Preferred Stock
(collectively, the "Securities") will be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, the Investor further represents that the
Investor does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Securities.
3.3 Disclosure of Information. The Investor represents that it has
------------------------
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series E Preferred
Stock, and the business, properties, prospects and financial condition of the
Company. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Investor to rely thereon.
3.4 Investment Experience. The Investor is an investor in securities
---------------------
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Series E Preferred Stock. If other
than an individual, such Investor also represents it has not been organized for
the purpose of acquiring the Series E Preferred Stock.
3.5 Accredited Investor. The Investor is an "accredited investor"
-------------------
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 Restricted Securities. The Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without
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<PAGE>
registration under the Act, only in certain limited circumstances. In this
connection, the Investor represents that it is familiar with SEC Rule 144, as
presently in effect, and understands the resale limitations imposed thereby and
by the Act.
3.7 Qualified Institutional Buyer. The Investor is a "qualified
institutional buyer" within the meaning of SEC Rule 144A, as presently in
effect.
3.8 Qualified Passive Investor. The Investor represents and
warrants to the Company that the voting securities of the Company are being
acquired by, and will be held by the Investor solely for the purpose of
investment within the meaning of Section 7A(c)(9) of the Clayton Act, and 16
C.F.R. Sections 801.1(j) and 802.9, and that the Investor has no intention of
participating in the formulation, determination, or direction of the basic
business decisions of the Company.
3.9 Further Limitations on Disposition. Without in any way
----------------------------------
limiting the representations set forth above, the Investor further agrees not to
make any disposition of all or any portion of the Securities unless and until
the transferee has agreed in writing for the benefit of the Company to be bound
by this Section 3 and the Amended and Restated Investors' Rights Agreement
provided and to the extent this Section and such agreement are then applicable,
and:
(a) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) The Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, the Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of Paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were an original Investor hereunder.
3.10 Legends. It is understood that the certificates evidencing the
-------
Series D Preferred Stock and the Common Shares may bear the following legend:
"These securities have not been registered under the Securities Act of
1933, as amended, or any state securities laws. They may not be sold,
offered for sale, pledged or hypothecated in the absence of a registration
statement in effect with respect to the securities under such Act and any
applicable state securities laws or pursuant to an
-12-
<PAGE>
opinion of counsel satisfactory to the Company that such registration is
not required or unless sold pursuant to Rule 144 of such Act."
3.11 Investor's State of Residence. The Investor represents that, as
-----------------------------
of the Funding, it is a resident of the state listed as its address on Schedule
--------
A hereto.
- -
4. Conditions of Investor's Obligations at Funding. The
-----------------------------------------------
obligations of the Investor under subsection 1.1(c) of this Agreement are
subject to the fulfillment on or before the Funding of each of the following
conditions, the waiver of which shall not be effective against the Investor if
the Investor does not consent thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Funding with the same effect as though such representations and warranties had
been made on and as of the date of such Funding.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Funding.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to the Investor at the Funding a certificate stating that the conditions
specified in Sections 4.1 and 4.2 have been fulfilled and stating that there
shall have been no adverse change in the business, affairs, prospects,
operations, properties, assets or condition of the Company since March 31, 1999
("No Material Adverse Change").
4.4 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
4.5 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Funding and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investor's counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request. This may include, without limitation, good standing
certificates and certification by the Company's Secretary regarding the Restated
Certificate and Bylaws and Board of Director and stockholder resolutions
relating to this transaction.
4.6 Proprietary Information and Inventions Agreement. Each employee
------------------------------------------------
of the Company who has had access to confidential or proprietary information
of the Company, shall have entered into a Proprietary Information and Inventions
Agreement. Each consultant to the Company who has had access to confidential or
proprietary information of the Company, shall have entered into a proprietary
information and inventions agreement or a non-disclosure agreement with the
Company.
-13-
<PAGE>
4.7 Opinion of Company Counsel. The Investor shall have received
--------------------------
from Day, Berry & Howard LLP, counsel for the Company, an opinion, dated as of
the Funding, in form and substance reasonably acceptable to the Investor.
4.8 Amended and Restated Investors' Rights Agreement. The Company,
-------------------------------------------------
the Founders, the Series B Investors, Series C Investors, Series D Investors (as
named therein), Raymond C. Allieri and the Investor shall have entered into the
Amended and Restated Investors' Rights Agreement in the form attached as Exhibit
-------
C hereto.
- -
4.9 Commercial Agreement. The Company and the Investor shall have
--------------------
entered into a Portal Co-Marketing Agreement in the form attached as Exhibit D
hereto.
4.10 Due Diligence and No Material Adverse Change. The Company shall
--------------------------------------------
have provided the Investor access to such information as the Investor has
reasonably requested in connection with its due diligence review and the
Investor shall have concluded its due diligence review of the Company to its
complete satisfaction and shall be reasonably satisfied that there has been No
Material Adverse Change.
5. Conditions of the Company's Obligations at Funding. The
--------------------------------------------------
obligations of the Company to the Investor under this Agreement is subject to
the fulfillment on or before the Funding of each of the following conditions by
the Investor:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 3 shall be true on and as of the
Funding with the same effect as though such representations and warranties had
been made on and as of the Funding.
5.2 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
5.3 Commercial Agreement. The Company and the Investor shall have
--------------------
entered into a Portal Co-Marketing Agreement in the form attached as Exhibit D
hereto.
6. Miscellaneous.
-------------
6.1 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company and the Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Funding and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investor or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
-14-
<PAGE>
6.3 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of Connecticut as applied to agreements
among Connecticut residents entered into and to be performed entirely within
Connecticut.
6.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties. In the case of Investor, a copy of any notices to be delivered to
Investor shall also be delivered to General Counsel, Finance and Operations, at
the address indicated on the signature page hereof.
6.7 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finders' fee or commission in connection with this
transaction. The Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless the Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
6.8 Expenses. Irrespective of whether the Funding is effected, the
--------
parties hereto shall each pay all of the costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the Amended and Restated Investors'
Rights Agreement or the Restated Certificate, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.9 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock issuable or issued upon conversion of the Series
E Preferred Stock. Any amendment or waiver effected in accordance with this
paragraph shall be binding upon each holder of any securities purchased under
this Agreement at
-15-
<PAGE>
the time outstanding (including securities into which such securities are
convertible), each future holder of all such securities, and the Company.
6.10 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
6.11 Public Announcements. No information concerning this Agreement
--------------------
and the transactions contemplated herein shall be disclosed by either party
without the consent of the other party prior to or after the Funding, provided,
--------
however, that a party may acknowledge the existence and general nature of this
- -------
Agreement without the consent of the other party. Nothing contained herein shall
prevent either party at any time from furnishing any information to the extent
required by judicial or administrative process or from issuing any release when
it believes in good faith and after consultation with the other party that it is
legally required to do so.
6.12 Aggregation of Stock. All shares of the Preferred Stock held or
--------------------
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
6.13 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties with respect to the
subject matter hereof and no party shall be liable or bound to any other party
in any manner by any warranties, representations, or covenants with respect to
such subject matter except as specifically set forth herein or therein.
[Signature Pages Follow]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY
dsl.net, inc.
By: _____________________________________
Title: _________________________________
Address: 545 Long Wharf Drive
New Haven, CT 06511
INVESTOR
Microsoft Corporation
By: _____________________________________
Title: __________________________________
Address: One Microsoft Way
Redmond, WA 98052
-17-
<PAGE>
SCHEDULE OF EXCEPTIONS
<PAGE>
Schedule A
Schedule of Investors
Purchase Price
Name and Address Series E Shares Purchased of Series E Shares
- ---------------- ------------------------- ------------------
Microsoft Corporation 761,421 $14,999,993.70
One Microsoft Way
Redmond, WA 98502
<PAGE>
Exhibit 10.17
dsl.net, inc.
SERIES E PREFERRED STOCK
PURCHASE AGREEMENT
July 16, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. Purchase and Sale of Stock........................................................... 1
1.1 Sale and Issuance of Series E Preferred Stock........................................ 1
1.2 Funding.............................................................................. 1
2. Representations and Warranties of the Company........................................ 1
2.1 Organization, Good Standing and Qualification........................................ 2
2.2 Capitalization and Voting Rights..................................................... 2
2.3 Subsidiaries......................................................................... 3
2.4 Authorization........................................................................ 3
2.5 Valid Issuance of Preferred and Common Stock......................................... 3
2.6 Governmental Consents................................................................ 4
2.7 Offering............................................................................. 4
2.8 Litigation........................................................................... 4
2.9 Proprietary Information and Inventions Agreements.................................... 4
2.10 Patents and Trademarks............................................................... 5
2.11 Compliance with Other Instruments.................................................... 5
2.12 Agreements; Action................................................................... 6
2.13 Related Party Transactions........................................................... 7
2.14 Permits.............................................................................. 7
2.15 Environmental and Safety Laws........................................................ 7
2.16 Manufacturing and Marketing Rights................................................... 7
2.17 Disclosure........................................................................... 8
2.18 Offerees............................................................................. 8
2.19 Registration Rights.................................................................. 8
2.20 Corporate Documents.................................................................. 8
2.21 Title to Property and Assets......................................................... 8
2.22 Financial Statements................................................................. 8
2.23 Changes.............................................................................. 9
2.24 Employee Benefit Plans............................................................... 9
2.25 Tax Returns, Payments and Elections.................................................. 9
2.26 Insurance............................................................................ 10
2.27 Minutes.............................................................................. 10
2.28 Labor Agreements and Actions; Employee Compensation.................................. 10
2.29 Section 83(b) Elections.............................................................. 10
2.30 Real Property Holding Company........................................................ 10
2.31 Net Operating Loss Carryforward...................................................... 11
2.32 Brokers.............................................................................. 11
2.33 Significant Customers and Suppliers.................................................. 11
2.34 Year 2000............................................................................ 11
2.35 Reliance............................................................................. 11
3. Representations and Warranties of the Investor....................................... 11
3.1 Authorization........................................................................ 11
3.2 Purchase Entirely for Own Account.................................................... 11
</TABLE>
-1-
<PAGE>
<TABLE>
<S> <C>
3.3 Disclosure of Information............................................................ 12
3.4 Investment Experience................................................................ 12
3.5 Accredited Investor.................................................................. 12
3.6 Restricted Securities................................................................ 12
3.7 Qualified Institutional Buyer........................................................ 12
3.8 Qualified Passive Investor........................................................... 12
3.9 Further Limitations on Disposition................................................... 13
3.10 Legends.............................................................................. 13
3.11 Investor's State of Residence........................................................ 13
4. Conditions of Investor's Obligations at Funding...................................... 13
4.1 Representations and Warranties....................................................... 14
4.2 Performance.......................................................................... 14
4.3 Compliance Certificate............................................................... 14
4.4 Qualifications....................................................................... 14
4.5 Proceedings and Documents............................................................ 14
4.6 Proprietary Information and Inventions Agreement..................................... 14
4.7 Opinion of Company Counsel........................................................... 14
4.8 Amended and Restated Investors' Rights Agreement..................................... 14
4.9 Commercial Agreement................................................................. 15
4.10 Due Diligence and No Material Adverse Change......................................... 15
5. Conditions of the Company's Obligations at Funding................................... 15
5.1 Representations and Warranties....................................................... 15
5.2 Qualifications....................................................................... 15
5.3 Commercial Agreement................................................................. 15
6. Miscellaneous........................................................................ 15
6.1 Survival of Warranties............................................................... 15
6.2 Successors and Assigns............................................................... 15
6.3 Governing Law........................................................................ 16
6.4 Counterparts......................................................................... 16
6.5 Titles and Subtitles................................................................. 16
6.6 Notices.............................................................................. 16
6.7 Finder's Fee......................................................................... 16
6.8 Expenses............................................................................. 16
6.9 Amendments and Waivers............................................................... 16
6.10 Severability......................................................................... 17
6.11 Public Announcements................................................................. 17
6.12 Aggregation of Stock................................................................. 17
6.13 Entire Agreement..................................................................... 17
6.14 Special Approval Rights of Series E Preferred Stockholders........................... 16
</TABLE>
SCHEDULE OF EXCEPTIONS
SCHEDULE A Investor Schedule
EXHIBIT A Restated Certificate of Incorporation
EXHIBIT B List of Stockholders
EXHIBIT C Amended and Restated Investors' Rights Agreement
-2-
<PAGE>
dsl.net, inc.
SERIES E PREFERRED STOCK PURCHASE AGREEMENT
THIS SERIES E PREFERRED STOCK PURCHASE AGREEMENT is made as of the 16th day
of July, 1999, by and between dsl.net, inc., a Delaware corporation (the
"Company"), and Staples, Inc., a Delaware corporation (the "Investor").
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series E Preferred Stock.
(a) The Company filed on July 6, 1999 with the Secretary of State of
Delaware the Restated Certificate of Incorporation in the form attached hereto
as Exhibit A (the "Restated Certificate").
---------
(b) On or prior to the Funding (as defined below), the Company shall
have authorized (i) the sale and issuance to the Investor of 177,665 shares of
Series E Preferred Stock (as defined below), (ii) the issuance of the shares of
Common Stock (as defined below) to be issued upon conversion of the Series E
Preferred Stock (the "Common Shares"). The Series E Preferred Stock shall have
the rights, preferences, privileges and restrictions set forth herein, in the
Amended and Restated Investors' Rights Agreement in the form attached hereto as
Exhibit C and in the Restated Certificate.
(c) Subject to the terms and conditions of this Agreement, the
Investor agrees to purchase at the Funding and the Company agrees to sell and
issue to the Investor at the Funding that number of shares of the Company's
Series E Preferred Stock set forth opposite the Investor's name on Schedule A
----------
hereto for the purchase price set forth thereon.
1.2 Funding. The funding and delivery of the Series E Preferred
-------
Stock shall take place at the offices of Day, Berry & Howard LLP, CityPlace I,
Hartford, Connecticut, at 9:30 A.M., on July 16, 1999, or at such other time and
place as the Company and Investors mutually agree upon orally or in writing
(which time and place are designated as the "Funding"). At the Funding the
Company shall deliver to the Investor a certificate representing the Series E
Preferred Stock purchased thereby against payment of the purchase price therefor
by wire transfer, cancellation of indebtedness, or any combination thereof. In
the event that payment by an Investor is made, in whole or in part, by
cancellation of indebtedness, then the Investor shall surrender to the Company
for cancellation at the Funding any evidence of such indebtedness or shall
execute an instrument of cancellation in form and substance acceptable to the
Company.
2. Representations and Warranties of the Company. The Company
---------------------------------------------
hereby represents and warrants to the Investor that, except as set forth on a
Schedule of Exceptions (the "Schedule of Exceptions") furnished to the Investor
and counsel for the Investor, specifically identifying the relevant subparagraph
hereof, which exceptions shall be deemed to be representations and warranties as
if made hereunder:
<PAGE>
2.1 Organization, Good Standing and Qualification. The Company 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
carry on its business as now conducted and as proposed to be conducted. The
Company is duly qualified to transact business and is in good standing in each
jurisdiction in which the failure to so qualify would have a material adverse
effect on its business or properties.
2.2 Capitalization and Voting Rights.
--------------------------------
(a) The authorized capital of the Company consists, or will
consist at the time of the Funding, of: (i) 18,962,500 shares of Preferred
Stock, par value $.001 per share (the "Preferred Stock"), 3,862,500 of which
will be designated Series A Preferred Stock (the "Series A Preferred Stock"),
225,000 of which will be issued and outstanding at the time of the Funding,
6,500,000 of which will be designated Series B Preferred Stock (the "Series B
Preferred Stock"), of which 6,500,000 will be issued and outstanding at the time
of the Funding, 3,500,000 of which will be designated Series C Preferred Stock
(the "Series C Preferred Stock"), 2,785,516 of which will be issued and
outstanding at the time of the Funding, 3,000,000 of which will be designated
Series D Preferred Stock (the "Series D Preferred Stock"), 2,963,672 of which
will be issued and outstanding at the time of the Funding, and 2,100,000 of
which will be designated Series E Preferred Stock (the "Series E Preferred
Stock"), 761,421 of which will be issued and outstanding at the time of the
Funding and up to 177,665 of which will be issuable pursuant to this Agreement;
and (ii) 55,925,000 shares of common stock, par value $.0005 per share ("Common
Stock"), of which 10,600,000 shares will be issued and outstanding at the time
of the Funding. The rights, privileges and preferences of the Common Stock,
Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock,
Series D Preferred Stock and Series E Preferred Stock will be as stated in the
Restated Certificate.
(b) The outstanding shares of Common Stock and Preferred Stock
will be owned by the stockholders, in the numbers specified and subject to the
restrictions set forth in Exhibit B hereto, at the time of the Funding.
---------
(c) At the time of the Funding, the outstanding shares of Common
Stock and Preferred Stock will all be duly and validly authorized and issued,
fully paid and nonassessable and issued in accordance with the registration or
qualification provisions of the Securities Act of 1933, as amended (the "Act"),
and any relevant state securities laws, or pursuant to valid exemptions
therefrom.
(d) Except for (A) the conversion privileges of the Preferred
Stock, (B) the rights provided in Section 2.4 of the Amended and Restated
Investors' Rights Agreement, and the options and warrants listed in Exhibit B,
---------
there are not outstanding any options, warrants, rights (including conversion or
preemptive rights) or agreements for the purchase or acquisition from the
Company of any shares of its capital stock. In addition to the aforementioned
warrants, the Company has reserved 7,400,000 shares of its Common Stock for
purchase upon exercise of options granted and to be granted in the future to
directors, officers, employees, consultants and advisors under the Company's
1999 Stock Plan (the "Option Plan"). Except for the Amended and Restated Voting
Agreement, dated as of May 12, 1999, by and among the Company and the Founders
and Series B Investors, Series C Investors and Series D
-2-
<PAGE>
Investors as defined therein, the Company is not a party or subject to any
agreement or understanding, and, to the best of the Company's knowledge, there
is no agreement or understanding between any persons and/or entities, which
affects or relates to the voting or giving of written consents with respect to
any security or by a director of the Company. Following the transactions
contemplated hereby, except as set forth in the Schedule of Exceptions and
except as set forth in the Amended and Restated Investors' Rights Agreement
described in Section 4.8, there will be no preemptive or similar rights to
purchase or otherwise acquire shares of capital stock of the Company pursuant to
any provision of law, the Restated Certificate or the By-Laws of the Company or
any agreement to which the Company is a party, or otherwise.
2.3 Subsidiaries. The Company does not presently own or control,
------------
directly or indirectly, any interest in any other corporation, association, or
other business entity. The Company is not a participant in any joint venture,
partnership, or similar arrangement.
2.4 Authorization. All corporate action on the part of the Company,
-------------
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement and the Amended and Restated Investors'
Rights Agreement described in Section 4.8, the performance of all obligations of
the Company hereunder and thereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Series E Preferred Stock
being sold hereunder and the Common Stock issuable upon conversion of the Series
E Preferred Stock being sold hereunder, has been taken or will be taken prior to
the Funding, and this Agreement and the Amended and Restated Investors' Rights
Agreement constitute, or will, upon execution thereof by the parties thereto,
constitute, valid and legally binding obligations of the Company, enforceable in
accordance with their respective terms, except (i) as limited by applicable
bankruptcy, insolvency, reorganization, moratorium, and other laws of general
application affecting enforcement of creditors' rights generally, (ii) as
limited by laws and principles relating to the availability of specific
performance, injunctive relief, or other equitable remedies, and (iii) to the
extent the indemnification provisions contained in the Amended and Restated
Investors' Rights Agreement may be limited by applicable federal or state
securities laws.
2.5 Valid Issuance of Preferred and Common Stock. The Series E
--------------------------------------------
Preferred Stock that is being purchased by the Investor hereunder, when issued,
sold and delivered in accordance with the terms of this Agreement for the
consideration expressed herein, will be duly and validly issued, fully paid, and
nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Amended and Restated
Investors' Rights Agreement and under applicable state and federal securities
laws. The Common Shares have been or will, prior to the Funding, be duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the Restated Certificate, will be duly and validly issued, fully paid, and
nonassessable and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Amended and Restated
Investors' Rights Agreement and under applicable state and federal securities
laws.
2.6 Governmental Consents. No consent, approval, order or
---------------------
authorization of, or registration, qualification, designation, declaration or
filing with, any federal, state or local governmental authority on the part of
the Company is required in connection with the
-3-
<PAGE>
consummation of the transactions contemplated by this Agreement except the
filings pursuant to Regulation D under the Act, and applicable state securities
laws, which filings will be effected within 15 days of the sale of the Series E
Preferred Stock hereunder, and such other post-Funding filings as may be
required.
2.7 Offering. Subject in part to the truth and accuracy of each
--------
Investor's representations set forth in Section 3 of this Agreement, the offer,
sale and issuance of the Series E Preferred Stock as contemplated by this
Agreement are exempt from the registration requirements of any applicable state
and federal securities laws, and neither the Company nor any authorized agent
acting on its behalf will take any action hereafter that would cause the loss of
such exemption.
2.8 Litigation. There is no action, suit, proceeding or known
----------
investigation pending or, to the Company's knowledge, currently threatened
against the Company that questions the validity of this Agreement or the Amended
and Restated Investors' Rights Agreement, or the right of the Company to enter
into such agreements, or to consummate the transactions contemplated hereby or
thereby, or that might result, either individually or in the aggregate, in any
material adverse changes in the assets, condition, affairs or prospects of the
Company, financially or otherwise, or any change in the current equity ownership
of the Company, nor is the Company aware that there is any basis for the
foregoing. The foregoing includes, without limitation, actions, suits,
proceedings or investigations pending or threatened (or any basis therefor known
to the Company) involving the prior employment of any of the Company's
employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior employers. The
Company is not a party or subject to the provisions of any order, writ,
injunction, judgment or decree of any court or government agency or
instrumentality. There is no action, suit, proceeding or investigation by the
Company currently pending or that the Company intends to initiate.
2.9 Proprietary Information and Inventions Agreements. Each
-------------------------------------------------
employee and officer of the Company, and each consultant who has had access to
confidential or proprietary information of the Company, has executed a
Proprietary Information and Inventions Agreement or a non-disclosure agreement.
The Company is not aware that any of its employees, officers or consultants are
in violation thereof, and the Company will use its best efforts to prevent any
such violation.
2.10 Patents and Trademarks. The Company has sufficient title and
----------------------
ownership of or licenses to all patents, trademarks, service marks, trade names,
copyrights, trade secrets, information, proprietary rights and processes
necessary for its business as now conducted and as proposed to be conducted
without any violation or infringement of the rights of others, except for such
items as have yet to be conceived or developed or that are expected to be
available for licensing on reasonable terms from third parties. The Company has
no patents or pending patent applications. There are no outstanding options,
licenses, or agreements of any kind relating to the foregoing, nor is the
Company bound by or a party to any options, licenses or agreements of any kind
with respect to the patents, trademarks, service marks, trade names, copyrights,
trade secrets, licenses, information, proprietary rights and processes of any
other person or entity. The Company has not received any communications alleging
that the Company has violated or, by
-4-
<PAGE>
conducting its business as proposed, would violate any of the patents,
trademarks, service marks, trade names, copyrights or trade secrets or other
proprietary rights of any other person or entity. The Company is not aware that
any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement or the Amended
and Restated Investors' Rights Agreement, nor the carrying on of the Company's
business by the employees of the Company, nor the conduct of the Company's
business as proposed, will, to the best of the Company's knowledge, conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which any
of such employees is now obligated. The Company does not believe it is necessary
to utilize any inventions of any of its employees (or people it currently
intends to hire) made prior to or outside the scope of their employment by the
Company. To the best knowledge of the Company, all data, information, ideas,
concepts, know-how and materials that the Company treats as trade secrets, and
all other confidential information and intellectual property rights of the
Company, are not part of the public domain or knowledge, nor, to the best
knowledge of the Company, have they been used, divulged or appropriated for the
benefit of any person other than the Company or otherwise to the detriment of
the Company.
2.11 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provision of its Restated Certificate or Bylaws, or
of any instrument, judgment, order, writ, decree or contract to which it is a
party or by which it is bound. The Company has complied in all material respects
with all federal, state, local or foreign statutes, rules and regulations and
orders applicable to the Company, except where the failure to comply would not
have a material adverse effect on the business, properties or financial
condition of the Company. The execution, delivery and performance of this
Agreement and the Amended and Restated Investors' Rights Agreement, and the
consummation of the transactions contemplated hereby and thereby will not result
in any such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such provision,
instrument, judgment, order, writ, decree or contract or an event that results
in the creation of any lien, charge or encumbrance upon any assets of the
Company or the suspension, revocation, impairment, forfeiture, or nonrenewal of
any material permit, license, authorization, or approval applicable to the
Company, its business or operations or any of its assets or properties.
2.12 Agreements; Action.
------------------
(a) Except for agreements explicitly contemplated hereby and
the Amended and Restated Investors' Rights Agreement, there are no agreements,
understandings or proposed transactions between the Company and any of its
officers, directors, affiliates, or any affiliate thereof.
(b) There are no agreements, understandings, instruments,
contracts, proposed transactions, judgments, orders, writs or decrees to which
the Company is a party or by which it is bound that may involve (i) obligations
(contingent or otherwise) of, or payments to the Company in excess of, $200,000,
or (ii) the license of any patent, copyright, trade secret or
-5-
<PAGE>
other proprietary right to or from the Company (other than the license of the
Company's or generally available shrinkwrap software and products in the
ordinary course of business), or (iii) provisions restricting or affecting the
development, manufacture or distribution of the Company's products or services,
or (iv) indemnification by the Company with respect to infringements of
proprietary rights. The Company is not a party to any written or oral (a)
contract with any labor union; (b) contract for the future purchase of fixed
assets or for the future purchase of materials, supplies or equipment in excess
of normal operating requirements, in excess of $100,000 per annum for all such
contracts; (c) contract for the employment of any officer, employee or other
person or any contract with any person on a consulting basis; (d) agreement or
indenture relating to the borrowing of money; (e) lease or agreement under which
the Company is lessee of or holds or operates any property, real or personal,
owned by any other party, in excess of $100,000 per annum for all such
contracts; (f) lease or agreement under which the Company is lessor of or
permits any third party to hold or operate any property, real or personal, owned
or controlled by the Company, in excess of $100,000 per annum for all such
contracts; (g) contract, agreement or commitment under which the Corporation is
obligated to pay any broker's fees, finder's fees or any such similar fees, to
any third party other than for the hiring of employees; or (h) other contract,
agreement, arrangement or understanding which is material to the business of the
Company. The Company is not a party to any term sheet, memorandum or letter of
understanding which could lead to any such contract, agreement, arrangement,
understanding or commitment.
(c) The Company has not (i) declared or paid any dividends or
authorized or made any distribution upon or with respect to any class or series
of its capital stock, (ii) incurred any indebtedness for money borrowed or any
other liabilities individually in excess of $200,000 or, in the case of
indebtedness and/or liabilities individually less than $200,000, in excess of
$300,000 in the aggregate, (iii) made any loans or advances to any person, other
than ordinary advances for travel expenses, or (iv) sold, exchanged or otherwise
disposed of any of its assets or rights, other than the sale of its inventory in
the ordinary course of business.
(d) For the purposes of subsections (b) and (c) above, all
indebtedness, liabilities, agreements, understandings, instruments, contracts
and proposed transactions involving the same person or entity (including persons
or entities the Company has reason to believe are affiliated therewith) shall be
aggregated for the purpose of meeting the individual minimum dollar amounts of
such subsections.
(e) The Company is not a party to and is not bound by any
contract, agreement or instrument, or subject to any restriction under its
Restated Certificate of Incorporation or Bylaws that adversely affects its
business as now conducted or as proposed to be conducted, its properties or its
financial condition.
(f) The Company has not engaged in the past three (3) months in
any discussion (i) with any representative of any corporation or corporations
regarding the consolidation or merger of the Company with or into any such
corporation or corporations, (ii) with any corporation, partnership, association
or other business entity or any individual regarding the sale, conveyance or
disposition of all or substantially all of the assets of the Company or a
transaction or series of related transactions in which more than fifty percent
(50%) of the voting
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<PAGE>
power of the Company is disposed of, or (iii) regarding any other form of
acquisition, liquidation, dissolution or winding up of the Company.
2.13 Related Party Transactions. No employee, officer, or director of
--------------------------
the Company or member of his or her immediate family is indebted to the Company,
nor is the Company indebted (or committed to make loans or extend or guarantee
credit) to any of them. To the best of the Company's knowledge, none of such
persons has any direct or indirect ownership interest in any firm or corporation
with which the Company is affiliated or with which the Company has a business
relationship, or any firm or corporation that competes with the Company, except
that employees, officers, or directors of the Company and members of their
immediate families may own stock in publicly traded companies that may compete
with the Company. No member of the immediate family of any officer or director
of the Company is directly or indirectly interested in any material contract
with the Company.
2.14 Permits. The Company has all franchises, permits, licenses, and
-------
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects, or financial condition of the Company, and the
Company believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
2.15 Environmental and Safety Laws. To the best of its knowledge, the
-----------------------------
Company has complied with all applicable statutes, laws and regulations relating
to the environment or occupational health and safety, and to the best of its
knowledge, no material expenditures are or will be required in order to comply
with any such existing statute, law or regulation.
2.16 Manufacturing and Marketing Rights. The Company has not granted
----------------------------------
rights to manufacture, produce, assemble, license, market, or sell its products
to any other person and is not bound by any agreement that affects the Company's
exclusive right to develop, manufacture, assemble, distribute, market or sell
its products.
2.17 Disclosure. The Company has fully provided the Investor with all
----------
the information that the Investor has requested for deciding whether to purchase
the Series E Preferred Stock and all information that the Company believes is
reasonably necessary to enable the Investor to make such decision. Neither this
Agreement, the Amended and Restated Investors' Rights Agreement, nor any other
statements or certificates made or delivered in connection herewith or therewith
contains any untrue statement of a material fact or omits to state a material
fact necessary to make the statements herein or therein not misleading.
2.18 Offerees. The Company has not, either directly or through any
--------
agent, broker or finder, offered any securities exercisable for or convertible
into Common Stock or Preferred Stock or any security or securities similar to
any thereof, for sale to, or solicited any offers to buy any securities
exercisable for or convertible into Common Stock or Preferred Stock, or any such
similar security or securities from, or otherwise approached or negotiated in
respect thereof with, any person or entity other than the Investor, other
"accredited investors" (as that
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<PAGE>
term is defined in Regulation D promulgated under the Securities Act) who have
not invested under this Agreement and employees, directors and consultants of
the Company, except for offers, solicitations or other actions that would not,
under applicable law, be integrated with the sale of the Series E Preferred
Stock hereunder.
2.19 Registration Rights. Except as provided in the Amended and
-------------------
Restated Investors' Rights Agreement, the Company has not granted or agreed to
grant any registration rights, including piggyback rights, to any person or
entity.
2.20 Corporate Documents. Except for amendments necessary to satisfy
-------------------
representations and warranties or conditions contained herein (the form of which
amendments has been approved by the Investors), the Restated Certificate and
Bylaws of the Company are in the form attached to the certification by the
Company's Secretary pursuant to Section 4.5 hereof.
2.21 Title to Property and Assets. The Company owns its property and
----------------------------
assets free and clear of all mortgages, liens, loans and encumbrances, except
such encumbrances and liens that arise in the ordinary course of business and do
not materially impair the Company's ownership or use of such property or assets.
With respect to the property and assets it leases, the Company is in compliance
with such leases and, to the best of its knowledge, holds a valid leasehold
interest free of any liens, claims or encumbrances.
2.22 Financial Statements. The Company has delivered to the Investor
--------------------
its audited financial statements (balance sheet and statement of operations) as
at and for the year ended December 31, 1998 and unaudited financial statements
for the three-month period ended March 31, 1999 (the "Financial Statements").
The Financial Statements have been prepared in accordance with generally
accepted accounting principles applied on a consistent basis throughout the
periods covered thereby. The Financial Statements fairly present the financial
condition and operating results of the Company as of the dates, and for the
periods, indicated therein, subject to normal year-end audit adjustments. Except
as set forth in the Financial Statements, the Company has no material
liabilities, contingent or otherwise, other than (i) liabilities incurred in the
ordinary course of business subsequent to March 31, 1999 and (ii) obligations
under contracts and commitments incurred in the ordinary course of business and
not required under generally accepted accounting principles to be reflected in
the Financial Statements, which, in both cases, individually or in the
aggregate, are not material to the financial condition or operating results of
the Company. Except as disclosed in the Financial Statements, the Company is not
a guarantor or indemnitor of any indebtedness of any other person, firm or
corporation. The Company maintains and will continue to maintain a standard
system of accounting established and administered in accordance with generally
accepted accounting principles.
2.23 Changes. Since March 31, 1999, there has not been any adverse
-------
change in the assets, liabilities, financial condition or operating results of
the Company from that reflected in the Financial Statements, except changes in
the ordinary course of business that have not been, in the aggregate, materially
adverse.
2.24 Employee Benefit Plans. The Company does not have any Employee
----------------------
Benefit Plan as defined in the Employee Retirement Income Security Act of 1974.
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<PAGE>
2.25 Tax Returns, Payments and Elections. The Company has filed all
-----------------------------------
tax returns and reports (including information returns and reports) as required
by law. These returns and reports are true and correct in all material respects.
The Company has paid all taxes and other assessments due, except those contested
by it in good faith that are listed in the Schedule of Exceptions. The provision
for taxes of the Company as shown in the Financial Statements is adequate for
taxes due or accrued as of the date thereof. The Company has not elected
pursuant to the Internal Revenue Code of 1986, as amended (the "Code"), to be
treated as a Subchapter S corporation pursuant to Section 1362(a) of the Code,
nor has it made an election pursuant to Section 341(f) of the Code, nor has it
made any other elections pursuant to the Code (other than elections that relate
solely to methods of accounting, depreciation or amortization) that would have a
material adverse effect on the Company, its financial condition, its business as
presently conducted or proposed to be conducted or any of its properties or
material assets. The Company has never had any tax deficiency proposed or
assessed against it and has not executed any waiver of any statute of
limitations on the assessment or collection of any tax or governmental charge.
None of the Company's federal income tax returns and none of its state income or
franchise tax or sales or use tax returns has ever been audited by governmental
authorities. Since the date of the Financial Statements, the Company has not
incurred any taxes, assessments or governmental charges other than in the
ordinary course of business and the Company has made adequate provisions on its
books of account for all taxes, assessments and governmental charges with
respect to its business, properties and operations for such period. The Company
has withheld or collected from each payment made to each of its employees, the
amount of all taxes (including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act taxes)
required to be withheld or collected therefrom, and has paid the same to the
proper tax receiving officers or authorized depositories. The Company is not
party to any contract, arrangement or understanding that could obligate the
Company to make a payment to an individual that would be a "parachute payment"
to a "disqualified individual," as those terms are defined in Section 280G of
the Code, without regard to whether such payment might constitute reasonable
compensation for personal services performed or to be performed in the future.
2.26 Insurance. The Company has in full force and effect fire and
---------
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its properties
that might be damaged or destroyed.
2.27 Minutes. The minutes of the Company provided to the Investor
-------
contain a complete summary of all meetings of directors and stockholders since
the time of incorporation and reflect all transactions referred to in such
minutes accurately in all material respects.
2.28 Labor Agreements and Actions; Employee Compensation. The Company
---------------------------------------------------
is not bound by or subject to (and none of its assets or properties is bound by
or subject to) any written or oral, express or implied, contract, commitment or
arrangement with any labor union, and no labor union has requested or, to the
best of the Company's knowledge, has sought to represent any of the employees,
representatives or agents of the Company. There is no strike or other labor
dispute involving the Company pending, or to the best of the Company's
knowledge, threatened, that could have a material adverse effect on the assets,
properties, financial condition, operating results, or business of the Company
(as such business is presently conducted and as it is proposed to be conducted),
nor is the Company aware of any labor organization activity
-9-
<PAGE>
involving its employees. The Company is not aware that any officer or key
employee, or that any group of key employees, intends to terminate their
employment with the Company, nor does the Company have a present intention to
terminate the employment of any of the foregoing. The employment of each officer
and employee of the Company is terminable at the will of the Company. To the
best of its knowledge, the Company has complied in all material respects with
all applicable state and federal equal employment opportunity and other laws
related to employment. The Company is not a party to or bound by any currently
effective employment contract, deferred compensation agreement, bonus plan,
incentive plan, profit sharing plan, retirement agreement, or other employee
compensation agreement.
2.29 Section 83(b) Elections. To the best of the Company's knowledge,
-----------------------
all individuals who have purchased unvested shares of the Company's Common Stock
have timely filed or will timely file elections under Section 83(b) of the Code
and any analogous provisions of applicable state tax laws.
2.30 Real Property Holding Company. The Company is not currently, and
-----------------------------
has not been during the prior five years, a United States real property holding
corporation within the meaning of Section 897 of the Code and the Company has
filed with the Internal Revenue Service all statements, if any, with its United
States income tax returns which are required under Section 1.897-2(h) of the
Treasury Regulations.
2.31 Net Operating Loss Carryforward. The information contained in
-------------------------------
the Schedule of Exceptions or otherwise provided to counsel for the Investors
regarding the application of Section 382 of the Code to the Company's federal
net operating loss carryforward is true and correct to the best of the Company's
knowledge.
2.32 Brokers. The Company has no contract, arrangement or
-------
understanding with any broker, finder or similar agent with respect to the
transactions contemplated by this Agreement.
2.33 Significant Customers and Suppliers. No customer or supplier
-----------------------------------
that was or is significant to the Company has terminated, materially reduced or
threatened to terminate or materially reduce its purchases from or provision of
products or services to the Company, as the case may be.
2.34 Year 2000. The Company's proprietary software is capable of
---------
recording, storing, processing, calculating and displaying calendar dates
falling before, on and after January 1, 2000, without loss of functionality or
data integrity, except where the failure to do so could not reasonably be
expected to have a material adverse affect on the assets, properties, financial
condition, operating results or business of the Company. The foregoing does not
constitute a warranty or representation that the Company's software will be
capable of recording, storing, processing, calculating and displaying correct
calendar dates based on software supplied by or licensed from any party other
than the Company, or that the Company's software will properly interact with
such third party software.
2.35 Reliance. The foregoing representations and warranties are made
--------
by the Company with the knowledge and expectation that the Investor is placing
reliance thereon.
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<PAGE>
3. Representations and Warranties of the Investor. The Investor
---------------------------
hereby represents and warrants to the Company, for each Investor itself and only
for itself, that:
3.1 Authorization. The Investor has full power and authority to
-------------
enter into this Agreement and the Amended and Restated Investors' Rights
Agreement, and each such Agreement constitutes its valid and legally binding
obligation, enforceable in accordance with its terms except (i) as limited by
applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of
general application affecting enforcement of creditors' rights generally, (ii)
as limited by laws relating to the availability of specific performance,
injunctive relief, or other equitable remedies, and (iii) to the extent the
indemnification provisions contained in the Amended and Restated Investors'
Rights Agreement may be limited by applicable federal or state securities laws.
3.2 Purchase Entirely for Own Account. This Agreement is made with
---------------------------------
the Investor in reliance upon the Investor's representation to the Company,
which by the Investor's execution of this Agreement the Investor hereby
confirms, that the Series E Preferred Stock to be received by such Investor and
the Common Stock issuable upon conversion of the Series E Preferred Stock
(collectively, the "Securities") will be acquired for investment for the
Investor's own account, not as a nominee or agent, and not with a view to the
resale or distribution of any part thereof, and that the Investor has no present
intention of selling, granting any participation in, or otherwise distributing
the same. By executing this Agreement, the Investor further represents that the
Investor does not have any contract, undertaking, agreement or arrangement with
any person to sell, transfer or grant participations to such person or to any
third person, with respect to any of the Securities.
3.3 Disclosure of Information. The Investor represents that it has
-------------------------
had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Series E Preferred
Stock, and the business, properties, prospects and financial condition of the
Company. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Investor to rely thereon.
3.4 Investment Experience. The Investor is an investor in securities
---------------------
of companies in the development stage and acknowledges that it is able to fend
for itself, can bear the economic risk of its investment, and has such knowledge
and experience in financial or business matters that it is capable of evaluating
the merits and risks of the investment in the Series E Preferred Stock. If other
than an individual, such Investor also represents it has not been organized for
the purpose of acquiring the Series E Preferred Stock.
3.5 Accredited Investor. The Investor is an "accredited investor"
-------------------
within the meaning of Securities and Exchange Commission ("SEC") Rule 501 of
Regulation D, as presently in effect.
3.6 Restricted Securities. The Investor understands that the
---------------------
Securities it is purchasing are characterized as "restricted securities" under
the federal securities laws inasmuch as they are being acquired from the Company
in a transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without
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<PAGE>
registration under the Act, only in certain limited circumstances. In this
connection, the Investor represents that it is familiar with SEC Rule 144, as
presently in effect, and understands the resale limitations imposed thereby and
by the Act.
3.7 Qualified Institutional Buyer. The Investor is a "qualified
institutional buyer" within the meaning of SEC Rule 144A, as presently in
effect.
3.8 Qualified Passive Investor. The Investor represents and warrants
to the Company that the voting securities of the Company are being acquired by,
and will be held by the Investor solely for the purpose of investment within the
meaning of Section 7A(c)(9) of the Clayton Act, and 16 C.F.R. Sections 801.1(j)
and 802.9, and that the Investor has no intention of participating in the
formulation, determination, or direction of the basic business decisions of the
Company.
3.9 Further Limitations on Disposition. Without in any way limiting
----------------------------------
the representations set forth above, the Investor further agrees not to make any
disposition of all or any portion of the Securities unless and until the
transferee has agreed in writing for the benefit of the Company to be bound by
this Section 3 and the Amended and Restated Investors' Rights Agreement provided
and to the extent this Section and such agreement are then applicable, and:
(a) There is then in effect a Registration Statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such Registration Statement; or
(b) (i) The Investor shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, the Investor shall have furnished the
Company with an opinion of counsel, reasonably satisfactory to the Company, that
such disposition will not require registration of such shares under the Act. It
is agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 except in unusual circumstances.
(c) Notwithstanding the provisions of Paragraphs (a) and (b)
above, no such registration statement or opinion of counsel shall be necessary
for a transfer by an Investor that is a partnership to a partner of such
partnership or a retired partner of such partnership who retires after the date
hereof, or to the estate of any such partner or retired partner or the transfer
by gift, will or intestate succession of any partner to his or her spouse or to
the siblings, lineal descendants or ancestors of such partner or his or her
spouse, if the transferee agrees in writing to be subject to the terms hereof to
the same extent as if he or she were an original Investor hereunder.
3.10 Legends. It is understood that the certificates evidencing the
-------
Series E Preferred Stock and the Common Shares may bear the following legend:
"These securities have not been registered under the Securities Act of
1933, as amended, or any state securities laws. They may not be sold,
offered for sale, pledged or hypothecated in the absence of a registration
statement in effect with respect to the securities under such Act and any
applicable state securities laws or pursuant to an
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<PAGE>
opinion of counsel satisfactory to the Company that such registration is
not required or unless sold pursuant to Rule 144 of such Act."
3.11 Investor's State of Residence. The Investor represents that, as
-----------------------------
of the Funding, it is a resident of the state listed as its address on Schedule
--------
A hereto.
- -
4. Conditions of Investor's Obligations at Funding. The
-----------------------------------------------
obligations of the Investor under subsection 1.1(c) of this Agreement are
subject to the fulfillment on or before the Funding of each of the following
conditions, the waiver of which shall not be effective against the Investor if
the Investor does not consent thereto:
4.1 Representations and Warranties. The representations and
------------------------------
warranties of the Company contained in Section 2 shall be true on and as of the
Funding with the same effect as though such representations and warranties had
been made on and as of the date of such Funding.
4.2 Performance. The Company shall have performed and complied with
-----------
all agreements, obligations and conditions contained in this Agreement that are
required to be performed or complied with by it on or before the Funding.
4.3 Compliance Certificate. The President of the Company shall
----------------------
deliver to the Investor at the Funding a certificate stating that the conditions
specified in Sections 4.1 and 4.2 have been fulfilled and stating that there
shall have been no adverse change in the business, affairs, prospects,
operations, properties, assets or condition of the Company since March 31, 1999
("No Material Adverse Change").
4.4 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
4.5 Proceedings and Documents. All corporate and other proceedings
-------------------------
in connection with the transactions contemplated at the Funding and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investor's counsel, and they shall have received all such
counterpart original and certified or other copies of such documents as they may
reasonably request. This may include, without limitation, good standing
certificates and certification by the Company's Secretary regarding the Restated
Certificate and Bylaws and Board of Director and stockholder resolutions
relating to this transaction.
4.6 Proprietary Information and Inventions Agreement. Each employee
------------------------------------------------
of the Company who has had access to confidential or proprietary information of
the Company, shall have entered into a Proprietary Information and Inventions
Agreement. Each consultant to the Company who has had access to confidential or
proprietary information of the Company, shall have entered into a proprietary
information and inventions agreement or a non-disclosure agreement with the
Company.
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<PAGE>
4.7 Opinion of Company Counsel. The Investor shall have received
--------------------------
from Day, Berry & Howard LLP, counsel for the Company, an opinion, dated as of
the Funding, in form and substance reasonably acceptable to the Investor.
4.8 Amended and Restated Investors' Rights Agreement. The Company,
------------------------------------------------
the Founders, the Series B Investors, Series C Investors, Series D Investors,
Series E Investors (as named therein), Raymond C. Allieri and the Investor shall
have entered into the Amended and Restated Investors' Rights Agreement in the
form attached as Exhibit C hereto.
---------
4.9 Commercial Agreement. The Company and the Investor shall have
--------------------
entered into a Marketing Agreement in the form attached as Exhibit D hereto.
4.10 Due Diligence and No Material Adverse Change. The Company shall
--------------------------------------------
have provided the Investor access to such information as the Investor has
reasonably requested in connection with its due diligence review and the
Investor shall have concluded its due diligence review of the Company to its
complete satisfaction and shall be reasonably satisfied that there has been No
Material Adverse Change.
5. Conditions of the Company's Obligations at Funding. The
--------------------------------------------------
obligations of the Company to the Investor under this Agreement is subject to
the fulfillment on or before the Funding of each of the following conditions by
the Investor:
5.1 Representations and Warranties. The representations and
------------------------------
warranties of the Investor contained in Section 3 shall be true on and as of the
Funding with the same effect as though such representations and warranties had
been made on and as of the Funding.
5.2 Qualifications. All authorizations, approvals, or permits, if
--------------
any, of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale of
the Securities pursuant to this Agreement shall be duly obtained and effective
as of the Funding.
5.3 Commercial Agreement. The Company and the Investor shall have
--------------------
entered into a Marketing Agreement in the form attached as Exhibit D hereto.
6. Miscellaneous.
-------------
6.1 Survival of Warranties. The warranties, representations and
----------------------
covenants of the Company and the Investor contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Funding and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Investor or the Company.
6.2 Successors and Assigns. Except as otherwise provided herein,
----------------------
the terms and conditions of this Agreement shall inure to the benefit of and be
binding upon the respective successors and assigns of the parties (including
transferees of any Securities). Nothing in this Agreement, express or implied,
is intended to confer upon any party other than the parties hereto or their
respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement.
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<PAGE>
6.3 Governing Law. This Agreement shall be governed by and
-------------
construed under the laws of the State of Connecticut as applied to agreements
among Connecticut residents entered into and to be performed entirely within
Connecticut.
6.4 Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.5 Titles and Subtitles. The titles and subtitles used in this
--------------------
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
6.6 Notices. Unless otherwise provided, any notice required or
-------
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or upon
deposit with the United States Post Office, by registered or certified mail,
postage prepaid and addressed to the party to be notified at the address
indicated for such party on the signature page hereof, or at such other address
as such party may designate by ten (10) days' advance written notice to the
other parties. In the case of Investor, a copy of any notices to be delivered to
Investor shall also be delivered to General Counsel, Finance and Operations, at
the address indicated on the signature page hereof.
6.7 Finder's Fee. Each party represents that it neither is nor will
------------
be obligated for any finders' fee or commission in connection with this
transaction. The Investor agrees to indemnify and to hold harmless the Company
from any liability for any commission or compensation in the nature of a
finders' fee (and the costs and expenses of defending against such liability or
asserted liability) for which the Investor or any of its officers, partners,
employees, or representatives is responsible.
The Company agrees to indemnify and hold harmless the Investor from any
liability for any commission or compensation in the nature of a finders' fee
(and the costs and expenses of defending against such liability or asserted
liability) for which the Company or any of its officers, employees or
representatives is responsible.
6.8 Expenses. Irrespective of whether the Funding is effected, the
--------
parties hereto shall each pay all of the costs and expenses that it incurs with
respect to the negotiation, execution, delivery and performance of this
Agreement. If any action at law or in equity is necessary to enforce or
interpret the terms of this Agreement, the Amended and Restated Investors'
Rights Agreement or the Restated Certificate, the prevailing party shall be
entitled to reasonable attorney's fees, costs and necessary disbursements in
addition to any other relief to which such party may be entitled.
6.9 Amendments and Waivers. Any term of this Agreement may be
----------------------
amended and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders of
a majority of the Common Stock issuable or issued upon conversion of the Series
E Preferred Stock sold hereunder. Any amendment or waiver effected in accordance
with this paragraph shall be binding upon each holder of any securities
purchased
-15-
<PAGE>
under this Agreement at the time outstanding (including securities into which
such securities are convertible), each future holder of all such securities, and
the Company.
6.10 Severability. If one or more provisions of this Agreement are
------------
held to be unenforceable under applicable law, such provision shall be excluded
from this Agreement and the balance of the Agreement shall be interpreted as if
such provision were so excluded and shall be enforceable in accordance with its
terms.
6.11 Public Announcements. No information concerning this Agreement
--------------------
and the transactions contemplated herein shall be disclosed by either party
without the consent of the other party prior to or after the Funding, provided,
however, that a party may acknowledge the existence and general nature of this
Agreement without the consent of the other party. Nothing contained herein shall
prevent either party at any time from furnishing any information to the extent
required by judicial or administrative process or from issuing any release when
it believes in good faith and after consultation with the other party that it is
legally required to do so.
6.12 Aggregation of Stock. All shares of the Preferred Stock held or
--------------------
acquired by affiliated entities or persons shall be aggregated together for the
purpose of determining the availability of any rights under this Agreement.
6.13 Entire Agreement. This Agreement and the documents referred to
----------------
herein constitute the entire agreement among the parties with respect to the
subject matter hereof and no party shall be liable or bound to any other party
in any manner by any warranties, representations, or covenants with respect to
such subject matter except as specifically set forth herein or therein.
6.14 Special Approval Rights of Series E Preferred Stockholders.
----------------------------------------------------------
Without limiting any right of the holders of the Series E Preferred Stock, the
Company shall not take any action that would alter or change the powers,
preferences or special rights of the shares of the Series E Preferred Stock
without the approval of a majority of the holders of the Series E Preferred
Stock.
[Signature Pages Follow]
-16-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY
dsl.net, inc.
By: ____________________________________
Title: _________________________________
Address: 545 Long Wharf Drive
New Haven, CT 06511
INVESTOR
Staples, Inc.
By: ____________________________________
Title: _________________________________
Address:
-17-
<PAGE>
SCHEDULE OF EXCEPTIONS
<PAGE>
Schedule A
Schedule of Investors
<TABLE>
<CAPTION>
Purchase Price
Name and Address Series E Shares Purchased of Series E Shares
- ---------------- ------------------------- -----------------
<S> <C> <C>
Staples, Inc. 177,665 $3,500,000.50
</TABLE>
<PAGE>
Exhibit 10.18
ADDITIONAL COMPENSATION AGREEMENT
AGREEMENT made this 29th day of December, 1998 between dsl.net, inc., a
Delaware corporation (the "Company"), and David Struwas, President and Chief
Executive Officer of the Company (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is, and will be, rendering valuable assistance to
the Company; and
WHEREAS, it is important to the Company to retain an experienced management
team, and the Company, in recognition of such services rendered and to be
rendered, wishes to award the Executive a retention bonus.
NOW, THEREFORE, in consideration of the premises and the services rendered
and to be rendered by the Executive to the Company, the parties hereto agree as
follows:
1. Compensation. The Company agrees to pay to the Executive as
compensation, in addition to all other compensation paid or payable to him by
the Company, (a) an amount such that the net amount paid to the Executive after
all required withholding pursuant to all applicable federal, state or other
taxes with respect to such payment, equals $6,681.82 plus interest thereon at a
rate of 5.56% from the date hereof to the date of such payment, and (b) any
additional amount that the Executive owes on account of federal, state or other
income taxes with respect to the amount paid to the Executive pursuant to (a)
above.
2. Payment. The amount payable pursuant to Section 1(a) shall be paid to
the Executive as early as practicable in calendar year 1999. The Company may
either pay such amount in cash or forgive any indebtedness of Executive to the
Company, up to such amount, in lieu of cash payment thereof. The amount payable
pursuant to Section 1(b) shall be paid to the Executive within 30 days after the
Executive notifies the Company that such amount is due.
3. Withholding. The Company shall be permitted to withhold from any payment
to the Executive hereunder all federal, state and other taxes which may be
required with respect to such payment.
<PAGE>
-2-
4. Miscellaneous.
(a) Binding Effect; Assignment. The provisions of this Agreement shall
be binding upon and shall inure to the benefit of the Company and its successors
and assigns and the Executive and his heirs and legal representatives.
(b) Amendments. This Agreement may not be amended or modified except by
an instrument in writing signed by both parties hereto.
(c) Law Governing. This Agreement shall be governed by and enforced in
accordance with the laws of the State of Connecticut, without regard to the
conflicts of laws provision thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
DSL.NET, INC.
By:_____________________________
Name:
Title:
________________________________
David Struwas
<PAGE>
Exhibit 10.19
ADDITIONAL COMPENSATION AGREEMENT
AGREEMENT made this 29th day of December, 1998 between dsl.net, inc., a
Delaware corporation (the "Company"), and John Jaser, Secretary, Treasurer and
Vice President, Business Development, of the Company (the "Executive").
W I T N E S S E T H:
WHEREAS, the Executive is, and will be, rendering valuable assistance to
the Company; and
WHEREAS, it is important to the Company to retain an experienced management
team, and the Company, in recognition of such services rendered and to be
rendered, wishes to award the Executive a retention bonus.
NOW, THEREFORE, in consideration of the premises and the services rendered
and to be rendered by the Executive to the Company, the parties hereto agree as
follows:
1. Compensation. The Company agrees to pay to the Executive as
compensation, in addition to all other compensation paid or payable to him by
the Company, (a) an amount such that the net amount paid to the Executive after
all required withholding pursuant to all applicable federal, state or other
taxes with respect to such payment, equals $954.55 plus interest thereon at a
rate of 5.56% from the date hereof to the date of such payment, and (b) any
additional amount that the Executive owes on account of federal, state or other
income taxes with respect to the amount paid to the Executive pursuant to (a)
above.
2. Payment. The amount payable pursuant to Section 1(a) shall be paid to
the Executive as early as practicable in calendar year 1999. The Company may
either pay such amount in cash or forgive any indebtedness of Executive to the
Company, up to such amount, in lieu of cash payment thereof. The amount payable
pursuant to Section 1(b) shall be paid to the Executive within 30 days after the
Executive notifies the Company that such amount is due.
3. Withholding. The Company shall be permitted to withhold from any payment
to the Executive hereunder all federal, state and other taxes which may be
required with respect to such payment.
<PAGE>
-2-
4. Miscellaneous.
(a) Binding Effect; Assignment. The provisions of this Agreement shall
be binding upon and shall inure to the benefit of the Company and its successors
and assigns and the Executive and his heirs and legal representatives.
(b) Amendments. This Agreement may not be amended or modified except by
an instrument in writing signed by both parties hereto.
(c) Law Governing. This Agreement shall be governed by and enforced in
accordance with the laws of the State of Connecticut, without regard to the
conflicts of laws provision thereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
DSL.NET, INC.
By:_____________________________
Name:
Title:
________________________________
John Jaser
<PAGE>
Exhibit 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Amendment No. 3 to the Registration Statement on Form S-1 of our report dated
May 26, 1999, except as to the stock dividend described in Note 8 which is as of
July 21, 1999, relating to the financial statements and financial statement
schedule of DSL.net, Inc., which appear in such Prospectus. We also consent to
the references to us under the headings "Experts" and "Selected Financial Data"
in such Prospectus.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
August 27, 1999
