<PAGE>
As filed with the Securities and Exchange Commission on June , 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
------------
FORM S-1
REGISTRATION STATEMENT
Under
THE SECURITIES ACT OF 1933
------------
DSL.net, Inc.
(Exact name of registrant as specified in its charter)
------------
Delaware 4813 06-1510312
(State or other (Primary Standard (I.R.S. Employer
jurisdiction Industrial Identification Number)
of incorporation or Classification Code Number)
organization)
------------
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)
------------
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)
------------
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 Harrison LLP
Boston, Massachusetts 06511 1633 Broadway, 47th Floor
02110 (203) 772-1000 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.
------------
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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CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Title of each class of Proposed maximum Amount of
securities to be registered aggregate offering price(1) registration fee
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<S> <C> <C>
Common Stock............... $115,000,000 $31,970.00
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</TABLE>
(1) In accordance with Rule 457(o) under the Securities Act of 1933, the number
of shares of common stock being registered and the proposed maximum
offering price per share are not included in this table. Estimated solely
for the purpose of calculating the registration fee in accordance with Rule
457(a) under the Securities Act of 1933.
------------
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 -- June 7, 1999
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Prospectus
, 1999
[LOGO]
DSL.net, Inc.
Shares
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DSL.net, Inc.: The Offering:
. We provide high- . We are offering
speed data shares of our common
communications stock.
services and
Internet access . The underwriters
using digital have an option to
subscriber line purchase up to an
technology to small additional shares
and medium sized to cover over-
businesses in select allotments.
second and third
tier cities. . This is the initial
public offering of
. DSL.net, Inc. our common stock,
545 Long Wharf Drive and no public market
New Haven, Connecticut currently exists for
06511 our shares. We
(203) 772-1000 anticipate that the
initial public
Proposed Symbol & offering price will
Market: be between $ and $
per share.
. DSLN
. We plan to use the
. Nasdaq National Market 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 proceeds to
acquire
complementary
businesses.
-------------------------------------------------
<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 6.
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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
The undersigned is facilitating Internet distribution.
DLJdirect Inc.
. Closing: , 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 6.
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Neither the SEC nor any state securities commission has determined whether this
prospectus is truthful or complete. Nor have they made, nor will they make, any
determination as to whether anyone should buy these securities. Any
representation to the contrary is a criminal offense.
- --------------------------------------------------------------------------------
Donaldson, Lufkin & Jenrette
Deutsche Banc Alex.Brown
The undersigned is facilitating Internet distribution.
DLJdirect Inc.
<PAGE>
[Map indicating current and planned locations]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary.................. 4
Risk Factors........................ 8
Use of Proceeds..................... 15
Dividend Policy..................... 15
Capitalization...................... 16
Dilution............................ 17
Selected Financial and Other Data... 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 20
Business............................ 25
</TABLE>
<TABLE>
<CAPTION>
Page
<S> <C>
Management....................... 38
Certain Transactions............. 42
Principal Stockholders........... 44
Description of Capital Stock..... 46
Shares Eligible for Future Sale.. 51
Underwriting..................... 53
Legal Matters.................... 55
Experts.......................... 55
Additional Information........... 55
Index to Financial Statements.... F-1
</TABLE>
------------
We use market data and industry forecasts throughout this prospectus, which
we have obtained from internal surveys, market research, publicly available
information and industry publications. Industry publications generally state
that the information they provide has been obtained from sources believed to be
reliable, but that the accuracy and completeness of this information is not
guaranteed. Similarly, we believe that the surveys and market research we or
others have performed is reliable, but we have not independently verified this
information. Neither we nor any of the underwriters represents that any such
information is accurate.
We own applications for federal registration and claim rights in the name
DSL.NET.
This prospectus also refers to trade names and trademarks of other
companies.
i
<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:
. our common stock will be sold at $ per share, which is the mid-point of
the range shown on the cover page of this prospectus;
. the underwriters will not exercise their over-allotment option; and
. all outstanding shares of our preferred stock will be converted into
shares of our common stock.
DSL.net
Our Business
We provide high-speed data communications and Internet access services
utilizing 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 1.2 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, such as dial-up, T1,
integrated services digital network, or ISDN, and frame relay.
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. Our primary services include Internet access, e-
mail, Internet protocol addressing and Web site hosting. We support both local
area and virtual private networks. In addition, through our service partners,
we intend to offer Web site design and development and applications enabling
customers to engage in electronic commerce. 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;
. symmetric connections, allowing for data transmission to and from the
customer at the same high speed;
. always-on connections to the Internet, eliminating the need to dial into
the network for each use;
. network architecture 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.
We install our equipment in and provide our services from collocation space
in the central offices of incumbent telecommunications carriers, such as the
Regional Bell Operating Companies. Our network design allows us to monitor
network components and customer traffic from our network operations center, or
NOC, located in New Haven, Connecticut. This enables us to identify and enhance
network quality, service and performance and address network problems promptly.
We have designed our network so that new capacity is added automatically as
each new customer receives a line.
We established our first point of presence, or POP, in Stamford, Connecticut
in May 1998. As of May 31, 1999, we provided service or had installed equipment
in 22 cities. We intend to continue our network
4
<PAGE>
expansion into a total of more than 60 cities by the end of 1999. We market
our services through our direct sales organization and through local channel
partners, such as network and systems integrators and consultants.
Our Market Opportunity
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.
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. Small and medium sized
businesses are increasingly using the Internet to compete more effectively
with larger organizations. This increasing demand for high-speed Internet
access and data communications services is straining the capacity of existing
telecommunications networks. These limitations principally relate to the local
access portion of the network, also known as the last mile. The last mile
typically consists of copper telephone lines originally designed for the
transmission of low-speed, analog voice signals. As a result of technological
developments and regulatory changes, DSL technology has emerged as a
commercially available, cost-effective means of providing high-speed digital
transmission using existing copper telephone lines in the local access portion
of the network. Several DSL service providers have taken advantage of this
opportunity in large metropolitan areas. However, the limited availability of
these services outside of large cities has created an opportunity to provide
DSL-based services to a significant, underserved market--small and medium
sized businesses in second and third tier cities.
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. 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 network and systems integrators 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 scaleable systems and network architecture to capitalize on
the cost efficiencies of DSL technology.
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.
5
<PAGE>
The Offering
Common stock offered........ shares
Common stock to be
outstanding after the
offering...................
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 June , 1999:
. shares of common stock reserved for issuance under our stock option
plans, of which shares with a weighted average exercise price of $
were subject to outstanding options;
. shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $ .
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. EBITDA, shown below under "Other Data," consists
of net loss excluding net interest, taxes, depreciation of capital assets,
amortization of deferred compensation and other noncash compensation expense.
We have provided EBITDA because it is a measure of financial performance
commonly used in the telecommunications industry, but other companies may
calculate it differently from us. We have presented EBITDA to enhance your
understanding of our operating results. You should not construe it as an
alternative to operating loss, as an indicator of our operating performance or
as an alternative to cash flows from operating activities as a measure of
liquidity.
The pro forma balance sheet information below reflects each of the following
items, all of which occurred after March 31, 1999:
. the issuance of 2,785,516 shares of Series C and 2,868,069 shares of
Series D preferred stock;
. the exchange of 3,500,000 outstanding warrants and 3,500,000 shares of
preferred stock for 6,500,000 shares of Series B preferred stock and
related reduction of approximately $8,500,000 to additional paid-in
capital;
. the surrender of 2,327,274 shares of common stock and the acceleration of
vesting on certain restricted stock; and
. the borrowing of $463,841 under our secured credit facility.
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 shares of common stock offered by us at an assumed
initial public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and offering expenses. See "Use of
Proceeds."
<TABLE>
<CAPTION>
Period
Period from Inception from Inception
(March 3, 1998) (March 3, 1998)
through Three Months Ended through
December 31, 1998 March 31, 1999 March 31, 1999
<S> <C> <C> <C>
Statement of Operations
Data:
Total revenue........... $ 31,533 $ 48,188 $ 79,721
Operating loss.......... (2,785,026) (1,693,088) (4,478,114)
Net loss................ (2,789,637) (1,686,614) (4,476,251)
Net loss per common
share.................. $ (0.73) $ (0.24) $ (0.98)
Pro forma net loss per
common share........... (0.73) (0.17) (0.84)
Other Data:
EBITDA.................. $ (356,010) $ (822,663) $(1,178,673)
Capital expenditures.... 290,082 1,509,826 1,799,908
Cash Flow Data:
Used in operating activ-
ities.................. $ (153,505) $ (543,308) $ (696,813)
Used in investing activ-
ities.................. (290,082) (1,509,826) (1,799,908)
Provided by financing
activities............. 483,066 3,332,093 3,815,159
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
----------------------------------
Pro Forma
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................. $1,318,438 $41,233,404 $
Fixed assets, net.......................... 1,745,999 2,209,840
Total assets............................... 3,552,990 43,931,797
Long-term obligations (including current
portion).................................. 106,168 570,009
Total stockholders' equity ................ 2,590,272 42,505,238
</TABLE>
7
<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 from our first point of
presence, or POP, in Stamford, Connecticut in May 1998. Several members of our
senior management team and other employees have only recently joined us and
therefore have worked together for only a short period of time. 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 this 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 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 March 31, 1999, we had an accumulated deficit of
$4,476,251. 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 expenditures during the remainder of 1999
and in subsequent years. In addition, we 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.
8
<PAGE>
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 outside of large metropolitan areas. 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 cities. 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. As
of May 31, 1999, we provided service or had installed equipment in only 22
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.
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.
Our failure to establish the necessary infrastructure to support our business
and to manage our growth could strain our resources and adversely affect our
financial condition
Our business plan anticipates that we will have established a significant
number of new POPs and added a significant number of new employees in
geographically-dispersed areas by the end of 1999. 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 an operations
support system to help manage customer service, bill customers, process
customer orders and coordinate with vendors and contractors. Implementation of
this system, which we expect to be completed by late 1999, could be delayed or,
when implemented, could cause disruptions in service or billing. In addition,
we are currently implementing a new financial and reporting system which will
interact with our operations support system. 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
9
<PAGE>
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;
. technical difficulties or network downtime;
. availability of incumbent carrier collocation facilities and timing of
the installation of our equipment in those facilities; 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, results of operations and cash flow.
Failure to develop relationships with local channel partners could adversely
affect our penetration of local markets
In addition to marketing through our direct sales force, we rely on
relationships with local channel partners, such as systems and network
integrators 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 quality channel partners or
assure you that they will recommend our services rather than our competitors'
services to their customers. Our failure to identify and maintain quality
channel partners could have a material adverse effect on our business,
prospects, financial condition and operating results.
Our success depends on negotiating and entering into interconnection
agreements with incumbent local exchange carriers
Our strategy requires that we enter into and renew interconnection
agreements with incumbent carriers in each of our markets on a timely basis. To
date, we have only entered into agreements with Bell Atlantic, BellSouth and
SNET. Delays in obtaining interconnection agreements would delay our entrance
into target markets and could have a material adverse effect on our business,
prospects, financial condition and results of operations. 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.
Failure to obtain collocation space in the central offices in our target
markets could adversely affect our business
Our strategy requires us to obtain collocation space for our DSL equipment
in those central offices that already serve a large number of our target
customers. Failure to obtain required collocation space on a timely basis could
have a material adverse effect on our business. In addition to negotiating and
entering into interconnection agreements with incumbent carriers, we must
negotiate and enter into collocation agreements for each central office in
which we collocate equipment. We cannot assure you that we will be able to
secure collocation space in the central offices of our choice on a timely
basis. We expect that central office space will
10
<PAGE>
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 incumbent carriers providing acceptable transmission
facilities and copper telephone lines
We interconnect with and use the networks of incumbent carriers 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 incumbent carriers to provide and
maintain their transmission facilities and the copper telephone lines between
our network and our customers' premises. Our dependence on incumbent carriers
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 incumbent carrier
to each customer's location. In many cases, the copper telephone lines must be
specially conditioned by the incumbent carrier to carry digital signals. We may
not be able to lease a sufficient number of acceptable telephone lines on
acceptable terms, if at all. Incumbent carriers 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.
Our success depends on contractors who install the equipment and wiring
necessary to utilize our service in the central offices of incumbent carriers
and at our customers' premises
We primarily utilize contractors to install necessary equipment and wiring
in the central offices of incumbent carriers 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 adversely affect our business, prospects, financial
condition 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 technologies for
local access connections, that include alternatives to traditional dial-up
modems, such as integrated services digital network, or ISDN, frame relay, T1
and DSL, and alternatives to traditional telecommunications networks such as
wireless, satellite-based and cable networks. We expect significant competition
from incumbent local exchange carriers, national long distance carriers,
Internet service providers, providers of DSL service and other providers of
alternative technologies. 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
We believe that our current capital resources, including existing equipment
lease and credit facilities, together with the proceeds of this offering, will
be sufficient to fund our operating losses, capital expenditures and working
capital requirements through 2000. 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
11
<PAGE>
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. At present, we have no agreements
or other arrangements with respect to any acquisition. An acquisition may not
produce the revenue, earnings or business synergies that we 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 adversely affect our business, prospects,
financial condition and results of operations. For example, the 1996
Telecommunications Act, which, among other things, requires incumbent carriers
to unbundle network elements and to collocate competitors' equipment in their
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 incumbent local exchange 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. Future federal and
state 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 Regulation."
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 in
select markets throughout the United States. The loss of key personnel or their
failure to work effectively as a team could have a material adverse effect on
our business, prospects, financial condition and results of operations. Our
senior management has worked together for only a short period of time and may
not work well together as a management team. Competition for qualified
executives in the data communication services industry is intense and there are
a limited number of persons with comparable experience. We do not have
employment agreements with any of our executive officers, so any of these
individuals may terminate his employment at any time.
12
<PAGE>
A breach of our network security could cause delays or interrupt service to
our customers
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 utilizing 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
business, prospects, financial condition and results of operations.
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, prospects, financial condition and
results of operations. 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.
We may be affected by unexpected Year 2000 technology problems
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 incumbent local exchange carriers 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 incumbent carriers 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 and directors will exercise significant control over
stockholder voting matters
After this offering, our executive officers and directors and their
affiliates will together control approximately % 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. 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.
13
<PAGE>
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
limitations 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.
Future sales by existing security holders could depress the market price of
our common stock
If our existing stockholders sell a large number of shares of our common
stock, the market price of the common stock could decline significantly.
Moreover, the perception in the public market that our existing stockholders
might sell shares of common stock could depress the market price of our common
stock. 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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
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 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. Moreover, neither we nor any other
person assumes responsibility for the accuracy and completeness of such
statements. We are under no duty to update any of the forward-looking
statements, whether as a result of new information, further events or
otherwise.
14
<PAGE>
USE OF PROCEEDS
We estimate that the net proceeds from the sale of common stock in this
offering will be approximately $ million, based upon an assumed offering
price per share of $ 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 $ million. 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 specific understandings, 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. 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.
15
<PAGE>
CAPITALIZATION
The following table shows our capitalization at March 31, 1999 on an actual
basis, a pro forma basis and a pro forma as adjusted basis.
The pro forma balance sheet information below reflects each of the following
items, all of which occurred after March 31, 1999:
. the issuance of 2,785,516 shares of Series C and 2,868,069 shares of
Series D preferred stock;
. the exchange of 3,500,000 outstanding warrants and 3,500,000 shares of
preferred stock for 6,500,000 shares of Series B preferred stock and
related reduction of approximately $8,500,000 to additional paid-in
capital;
. the surrender of 2,327,274 shares of common stock and the acceleration of
vesting on certain restricted stock; and
. the borrowing of $463,841 under our secured credit facility.
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 shares of common stock offered by us at an assumed
initial public offering price of $ per share, after deducting estimated
underwriting discounts and commissions and offering expenses. See "Use of
Proceeds."
<TABLE>
<CAPTION>
As of March 31, 1999
-------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
<S> <C> <C> <C>
Cash and cash equivalents................ $ 1,318,438 $41,233,404
=========== ===========
Long-term debt, including current por-
tion.................................... 106,168 570,009
----------- -----------
Stockholders' equity:
Convertible preferred stock, $.001 par
value; 16,826,500 shares authorized;
Series A -- 3,725,000 shares issued
and outstanding; 225,000 issued and
outstanding pro forma and none
issued and outstanding pro forma as
adjusted............................. 2,497,244 225,000
Series B -- none issued and outstand-
ing; 6,500,000 issued and outstanding
pro forma; none issued and outstand-
ing pro forma as adjusted............ -- 11,925,000
Series C -- none issued and outstand-
ing; 2,785,516 issued and outstanding
pro forma; none issued and outstand-
ing pro forma as adjusted............ -- 9,941,104
Series D -- none issued and outstand-
ing; 2,868,069 issued and outstanding
pro forma; none issued and outstand-
ing pro forma as adjusted............ -- 29,973,862
Common stock, $.0005 par value;
51,725,000 shares
authorized; shares issued and
outstanding; issued and out-
standing pro forma; shares
issued and outstanding pro forma as
adjusted.............................. 6,464 5,882
Additional paid-in capital............. 10,752,909 1,551,468
Deferred compensation.................. (6,190,094) (5,410,464)
Accumulated deficit.................... (4,476,251) (5,706,614)
----------- -----------
Total stockholders' equity........... $ 2,590,272 $42,505,238
----------- ----------- ---
Total capitalization................. $ 2,696,440 $43,075,247
=========== =========== ===
</TABLE>
16
<PAGE>
DILUTION
As of March 31, 1999, our pro forma net tangible book value was $ , or $
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 issuances and exchanges of our
preferred stock and the surrender of certain shares of common stock which
occurred after March 31, 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 $ per share, after deducting
estimated underwriting discounts and commissions and offering expenses payable
by us, our pro forma net tangible book value at March 31, 1999 would have been
$ , or $ per share of common stock. This represents an immediate increase in
pro forma net tangible book value of $ per share of common stock to existing
stockholders, and an immediate dilution in pro forma net tangible book value of
$ 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........... $
----
Pro forma net tangible book value per share at March 31, 1999.. $
Increase in pro forma net tangible book value per share
attributable to new investors.................................
----
Pro forma net tangible book value per share after this offering..
----
Dilution per share to new investors.............................. $
====
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1999:
. the number of shares of our common stock purchased by existing
stockholders, the total consideration and the average price per share
paid to us for these shares;
. 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 $ 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......... % % $
New investors.................
------- --------- --- -----
Total....................... 100.0% 100.0%
======= ========= === =====
</TABLE>
This table assumes that none of the warrants or the stock options
outstanding upon the closing of this offering will be exercised, which as of
June , 1999 include:
. shares of common stock issuable upon exercise of outstanding stock
options at a weighted average exercise price of $ per share; and
. shares of common stock issuable upon exercise of outstanding warrants
at a weighted average exercise price of $ per share.
To the extent any of these stock options or warrants are exercised, new
investors will experience further dilution.
17
<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 March 31, 1999 and
the statement of operations and other data for the three months ended March 31,
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. EBITDA, shown below under "Other Data," consists of net
loss excluding net interest, taxes, depreciation of capital assets, and
amortization of deferred compensation and other noncash compensation expense.
The pro forma information gives effect to each of the following items, all
of which occurred after March 31, 1999:
. the issuance of 2,785,516 shares of Series C preferred stock and
2,868,069 shares of Series D preferred stock;
. the exchange of 3,500,000 outstanding warrants and 3,500,000 shares of
preferred stock for 6,500,000 shares of Series B preferred stock and
related reduction of approximately $8,500,000 to additional paid-in
capital;
. the surrender of 2,327,274 shares of common stock and the acceleration of
vesting on certain restricted stock; and
.the borrowing of $463,841 under our secured credit facility,
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 shares of common stock offered by us at an assumed
initial public offering price of $ 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 three
months ended March 31, 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 Three Months Ended through
December 31, 1998 March 31, 1999 March 31, 1999
(unaudited) (unaudited)
<S> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 31,533 $ 48,188 $ 79,721
Operating expenses:
Network and
operations........... 127,054 264,457 391,511
General and
administrative....... 230,272 525,184 755,456
Sales and marketing... 35,961 129,375 165,336
Stock compensation.... 2,423,272 822,260 3,245,532
----------- ----------- -----------
Total operating
expenses........... 2,816,559 1,741,276 4,557,835
----------- ----------- -----------
Operating loss.......... (2,785,026) (1,693,088) (4,478,114)
Interest expense (in-
come) ................. 4,611 (6,474) (1,863)
----------- ----------- -----------
Net loss................ $(2,789,637) $(1,686,614) $(4,476,251)
=========== =========== ===========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
Period
Period from Inception from Inception
(March 3, 1998) (March 3, 1998)
through Three Months Ended through
December 31, 1998 March 31, 1999 March 31, 1999
(unaudited) (unaudited)
<S> <C> <C> <C>
Net Loss per Common
Share Data:
Net loss per common
share.................. $ (0.73) $ (0.24) $ (0.98)
========== ========== ===========
Shares used in computing
net loss per share..... 3,839,716 7,030,719 4,579,897
Pro forma net loss per
common share...........
Shares used in computing
pro forma net loss per
share..................
Other Data:
EBITDA.................. $ (356,010) $ (822,663) $(1,178,673)
Capital expenditures.... 290,082 1,509,826 1,799,908
Cash Flow Data:
Used in operating activ-
ities.................. $ (153,505) $ (543,308) $ (696,813)
Used in investing activ-
ities.................. (290,082) (1,509,826) (1,799,908)
Provided by financing
activities............. 483,066 3,332,093 3,815,159
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1999
----------------------------------
December 31, Pro Forma
1998 Actual Pro Forma as Adjusted
<S> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents..... $ 39,479 $1,318,438 $41,233,404
Fixed assets, net............. 284,338 1,745,999 2,209,840
Total assets.................. 369,980 3,552,990 43,931,797
Long-term obligations, includ-
ing current portion.......... 433,161 106,168 570,009
Total stockholders' equity
(deficit).................... (315,865) 2,590,272 42,505,238
</TABLE>
19
<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. This discussion and analysis contains forward-looking
statements that involve risks and uncertainties. Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including, but not limited to, those set forth in
"Risk Factors" and 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
established our first point of presence, or POP, in May 1998 and, as of May 31,
1999, we provided service or had installed equipment in 22 cities. We intend to
continue our network expansion into a total of more than an additional 60
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 incumbent
carriers;
. acquiring collocation space and deploying our network equipment;
. launching service in target markets;
. selling and marketing to customers in markets where we have established
POPs;
. hiring management and other personnel;
. raising capital; and
. developing and implementing our operations support system and other back
office systems.
We have incurred operating losses, net losses and negative operating cash
flow for each month since our formation. As of December 31, 1998 and March 31,
1999, we had an accumulated deficit of approximately $2,790,000 and $4,476,000,
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 negative operating cash flow during our network build-out and during the
initial penetration of each new market we enter. These losses are expected to
continue and to increase as we expand our operations.
We incur certain network and operations expenses, sales and marketing
expenses and capital expenditures when we enter a new market. 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 DSL line cards, incremental digital subscriber
line access multiplexers, or DSLAMs, and customer premise equipment. 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;
20
<PAGE>
. amount and timing of customer revenue;
. cost and timing of the deployment of our network, including installation
of equipment in collocation facilities;
. commercial acceptance of our service and attaining expected penetration
levels 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;
. our ability to establish and maintain relationships with channel
partners;
. successful implementation of financial 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.
Results of Operations
Revenue. We derive a majority of our operating revenue from DSL access
services and bill our customers monthly based on the level of service they
purchased. In addition to monthly service fees, we bill our customers for
installation charges. In certain situations, we waive non-recurring
installation fees in order to obtain a sale. We first introduced services in
May 1998. We expect that, as a result of competitive forces, the prices for our
services will decline over time. Revenue in 1998 and for the three months ended
March 31, 1999 was approximately $32,000 and $48,000, respectively.
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 and other costs. Network and operations expenses
in 1998 and for the three months ended March 31, 1999 were approximately
$127,000 and $264,000, respectively.
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 and legal services.
General and administrative expenses in 1998 and the three months ended March
31, 1999 were approximately $230,000 and $525,000, respectively. General and
administrative expenses are expected 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 in
1998 and for the three months ended March 31, 1999 were approximately $36,000
and $129,000, respectively. Sales and marketing expenses are expected to
increase significantly as we continue to expand our business into new markets.
Stock compensation. We incurred stock compensation expenses of approximately
$2,423,000 and $822,000 in 1998 and for the three months ended March 31, 1999,
respectively. Expenses incurred in 1998 consist of current period charges
related to common stock issued to certain officers. The expenses incurred in
the three months ended March 31, 1999 consist of (i) amortization related to
stock options granted during the first quarter of 1999, (ii) amortization of
restricted stock to senior management during the first quarter of 1999 and
(iii) a current period charge related to common stock granted to an executive
for which there is no vesting requirement.
The unamortized balance of $6,190,000 at March 31, 1999 will be amortized
over the vesting period of each grant which is generally 48 months. Additional
grants to management and employees in the period from April 1, 1999 through
June 1, 1999 will result in $546,000 of amortization of deferred compensation
related to employee stock options and additional compensation charges of
approximately $1,230,000 related to the acceleration of vesting on certain
restricted common stock.
21
<PAGE>
Depreciation and amortization expense. Depreciation and amortization
expense, excluding deferred compensation expense, includes:
. depreciation of network infrastructure and customer premise equipment;
. depreciation of information systems, computer hardware and software,
furniture and fixtures; and
. amortization and depreciation of collocation costs and corporate
facilities.
Depreciation and amortization expense, excluding amortization of deferred
compensation, in 1998 and for the three months ended March 31, 1999 were
approximately $6,000 and $48,000, respectively. We expect depreciation and
amortization expense to increase significantly as more of our network becomes
operational and as we increase capital expenditures to expand.
Interest expense (income). Interest expense in 1998 was approximately
$5,000, and related primarily to a note payable which was paid in full in
January 1999. Net interest income for the three months ended March 31, 1999 was
approximately $6,000, and was primarily due to an increase in our cash balances
as a result of the issuance of preferred stock in January 1999.
Liquidity and Capital Resources
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 collocation space, and the
purchase and installation of all necessary equipment.
The number of central offices that we expect to target in a market will
vary, as will the average capital cost in a given market. Capital expenditures,
including collocation fees, were approximately $290,000 and $1,510,000 in 1998
and for the three months ended March 31, 1999, respectively. We expect to make
additional capital expenditures of approximately $20 million to $35 million for
the remainder of 1999.
To help implement our business plan, we raised approximately $43,725,000 in
private equity financing since inception.
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
$106,168 outstanding on this lease facility at March 31, 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%. The line of credit contains certain
restrictive covenants and amounts borrowed under this line of credit are
secured by certain of our assets. As of May 31, 1999, approximately $4,500,000
was available under this line of credit.
As of December 31, 1998 and March 31, 1999, we had an accumulated deficit of
approximately $2,790,000 and $4,476,000, and cash and cash equivalents of
approximately $39,000 and $1,318,000, respectively. In 1998 and for the three
months ended March 31, 1999, the net cash used in our operating activities was
approximately $154,000 and $543,000, respectively. This cash was used for a
variety of operating purposes, including salaries, consulting and legal
expenses, network operations and overhead expenses. The net cash used in
investing activities in 1998 and for the three months ended March 31, 1999 was
approximately $290,000 and $1,510,000, respectively, and was used primarily for
the purchase of equipment and payment of collocation costs. Net cash provided
by financing activities in 1998 and for the three months ended March 31, 1999
was approximately $483,000 and $3,332,000, respectively, and primarily resulted
from the sale of preferred stock, amounts drawn under our lease facility and
short-term bridge financings.
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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 expect our operating losses
and capital expenditures to increase substantially as we expand our network. We
expect that additional financing will be required in the 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, if at all, on terms that we consider acceptable. 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.
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
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.
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 incumbent carriers and other vendors
will be Year 2000 compliant or that Year 2000 problems among our target
customers will not negatively impact their decision to buy our service. We will
initiate a Year 2000 compliance check of incumbent carriers. Any Year 2000
related disruption of operations of the incumbent carriers 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.
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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.
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BUSINESS
Overview
We provide high-speed data communications and Internet access services
utilizing 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 1.2 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, such as dial-up, T1, integrated services digital network, or ISDN,
and frame relay.
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. Our primary services include Internet access, e-
mail, Internet protocol addressing and Web site hosting. We support local area
and virtual private networks. In addition, through our service partners, we
intend to offer Web site design and development and applications enabling
customers to engage in electronic commerce. 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;
. symmetric connections, allowing for data transmission to and from the
customer at the same high speed;
. always-on connections to the Internet, eliminating the need to dial into
the network for each use;
. network architecture designed to reduce the possibility of unauthorized
access and 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.
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. International Data Corporation
estimates that the value of goods and services sold worldwide through the
Internet will increase from $12 billion in 1997 to over $400 billion in 2002.
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
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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 7,245 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
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
high-
speed, fiber-optic cables and high-speed switches that connect with the central
offices of incumbent local exchange carriers, such as the Regional Bell
Operating Companies. 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, 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. In addition, DSL technology uses
packet-based network transmission, allowing 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 line.
The deployment of DSL-based solutions by competitive local exchange carriers
has been facilitated by changes in the regulatory framework in recent years.
Under the 1996 Telecommunications Act, incumbent carriers are generally
required to lease phone lines to competitive carriers on a wholesale basis
through resale or unbundling and to allow these competitive carriers to locate
certain of their equipment in the incumbent carriers' 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 cities have created an opportunity to provide DSL-
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based services to a significant, underserved market -- small and medium sized
businesses located in second and third tier cities. These businesses
increasingly require high-speed data communications capabilities to compete
effectively. Incumbent carriers 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 1.2 megabits per second. Our network architecture is designed to provide
symmetric data transmission, allowing for the same speed of data transport to
and from the customer. We believe that symmetric data transmission is best
suited for business applications, because users require fast connections to
send and 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, Internet protocol addressing, and Web
site hosting and support both local area and virtual private networks. Through
our service partners, we also will provide Web site design and development and
applications enabling electronic commerce. Our network architecture 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 are continuously
connected to the Internet without having to dial into the network for each use.
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. 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 architecture 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 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. Before entering a market, we
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<PAGE>
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 incumbent carrier's central offices,
and the proximity of our target customers to those central offices. Our goal is
to locate our POPs in central offices with a high density of small and medium
sized businesses that we believe will use our services. We are seeking to have
regulatory approval to operate as a competitive local exchange carrier in all
50 states and the District of Columbia and to have entered into interconnection
agreements with the Regional Bell Operating Companies and certain other
incumbent carriers 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
POP. We utilize third-party field service organizations, who have the required
authorizations from incumbent carriers, 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 network and systems integrators and consultants, who
market our services and provide customer referrals. These local channel
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
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 Scaleable Systems and Network Architecture. 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 architecture
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 integrated service
offerings, we function as our customer's Internet service provider and deliver
a broad range of Internet-based, value-added solutions. As of May 31, 1999, we
provided service or had installed equipment in 22 cities.
Our goal is to deliver services which:
. provide reliable, always-on, secure, high-speed Internet connections up
to 1.2 megabits per second;
. are easily upgradable to higher speeds with simple software changes that
can be affected remotely from our offices;
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<PAGE>
. are more reliable and enable greater productivity than dial-up modems;
and
. are easier to provision, install and support than existing high-speed
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, Internet protocol addressing
and Web site hosting. We support both local area and virtual private networks.
In addition, through our service partners, 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>
Bandwidth*
------------------- Maximum
Speed to Speed from Distance from
Services Customer Customer Central Office
<S> <C> <C> <C>
NetGAIN Standard....................... 384 kb/s 384 kb/s 18,000 feet
NetGAIN Plus........................... 768 kb/s 768 kb/s 12,000 feet
NetGAIN Pro............................ 1.2 mb/s 1.2 mb/s 6,000 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.
Customers 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, Internet protocol addressing and
domain naming services. Generally, customers subscribe to our NetGAIN services
for at least one year.
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 objective is to become the leading provider of DSL-based, high-speed
data communications services to small and medium sized businesses in second and
third tier cities. In particular, we believe the following are especially
attractive customers:
. businesses currently using T1, ISDN, frame relay or analog 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.
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
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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.
Direct Sales Channels. Our direct sales efforts are centered around city
managers, who are assigned to one or more local areas. These city managers are
responsible for assessing business opportunities and identifying local channel
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 city managers and 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 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.
Channel Partners. Our city managers identify local information technology
professionals, such as network and systems integrators and consultants, to
assist in the sale of our NetGAIN services. We select channel partners based on
several factors, including brand name, local market presence, complementary
technology or product lines, and a strong distribution channel. Our local
channel 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 believe that relationships with channel partners are
important in establishing a long-term presence in the local community and
leveraging our direct sales force.
Customer Support and Operations
Our customer support professionals work to minimize the complexity and
inconvenience of data communications 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 incumbent carrier. These lines run
from our equipment located in the incumbent carrier's central office to our
customer. We test these lines to determine whether they meet our specifications
and work with the incumbent carrier 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 trouble ticket management system
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 System. We are in the process of implementing an
operations support system that will integrate many of our business systems,
including customer billing, provisioning, inventory control, customer care
reports and trouble ticket tracking. This operations support system has been
designed to provide us with accurate, up-to-date information in these areas. We
believe that our operations support system will provide us with the flexibility
to add additional services for our customers as well as to meet our expansion
goals. We expect that the operations support systems will be implemented by the
end of 1999.
Network Architecture
Our network delivers high-speed Internet access and data communication
services. It offers scaleability, reliability, security and high performance.
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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 packet-based
networks such as ours will eventually replace many of the existing dial-
up modems currently connected to circuit-switched networks. We have
designed our network for scaleability and consistent performance. New
capacity is added automatically as each new user receives a line. We also
use asynchronous transfer mode, or ATM, equipment in our network, which
implements packet switching directly in integrated circuits, in contrast
to slower router-based designs that implement switching in router
software.
. Security. Our network architecture is designed to reduce the possibility
of unauthorized access and to allow our customers to safely transmit and
receive sensitive information and applications. We also utilize customer
premise equipment that is designed with enhanced security features and
works in conjunction with installed firewalls 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 incumbent carrier's copper
line. We contract with independent field service organizations to perform
these services, in addition to using a small internal staff.
. Copper Telephone Lines. We lease the copper telephone lines running to
the customer from our equipment in the incumbent carrier's central office
under terms specified in our interconnection agreements with these
carriers. The copper lines must be provisioned by the incumbent carrier
to carry digital signals, typically for an additional charge.
. Central Office Collocation Points. Through our interconnection
agreements, we seek to secure collocation space in the central offices of
incumbent carriers and offer our services from these locations. These
collocation spaces are designed to offer the same high reliability and
availability standards as the incumbent carriers' other central office
space. We place our DSL line cards, digital subscriber line access
multiplexers, or DSLAMs, and other equipment necessary to provide high-
speed DSL signals to our customers in the collocation spaces. We have
continuous access to these spaces to install and maintain our equipment.
. Backbone Network. Network traffic gathered at each central office is
routed to a regional hub 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 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 are provisioned
with redundant equipment and backup power and are actively monitored from
our network operations center.
. Network Operations Center. Our network is managed from our network
operations center, or NOC, 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 NOC, we can monitor individual
customer lines and the equipment and circuits in each regional network
and central office.
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. 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 ATM communications circuits that will connect our hubs to our
equipment in individual POPs. 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:
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
carriers, including other DSL providers, the right to negotiate interconnection
agreements with incumbent carriers, 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
incumbent carriers' circuit switched networks at ISDN speeds or below. 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 carriers.
Incumbent Local Exchange Carriers. Many of the incumbent local exchange
carriers, including the Regional Bell Operating Companies, are conducting
technical or market trials or have begun deploying DSL-based services. These
incumbent carriers 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 analog voice services to achieve a
competitive advantage in serving customers. We believe that the incumbent
carriers have the potential to quickly deploy symmetric DSL services, although
many to date have only deployed asymmetric DSL.
National Long Distance Carriers. National long distance carriers, such as
AT&T, MCI WorldCom, Qwest and Sprint, have deployed large-scale Internet access
networks and automated ATM networks, sell connectivity to businesses and
residential customers, and have high brand recognition. They also have
interconnection agreements with many of the incumbent carriers 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 incumbent carriers 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 hybrid fiber coaxial cable networks to consumers. @Work, a
division of At Home, has positioned itself to do the same for businesses. 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 bandwidth available on
their cable networks among multiple end users.
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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, such as terrestrial wireless services, point-to-
point and point-to-multipoint fixed wireless services and satellite-based
network 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.
Government Regulation
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. The following summary of regulatory developments does not describe
all present and proposed federal, state and local regulations and legislation
affecting the telecommunications industry. 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. 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.
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The FCC has established different levels of regulation for dominant and non-
dominant carriers. Of domestic carriers, only GTE, the Regional Bell Operating
Companies, and other incumbent local exchange carriers 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 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 local
exchange competition 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 exchange market.
The 1996 Telecommunications Act places substantial interconnection
requirements on the incumbent local exchange carriers. It requires the
incumbent local exchange carriers 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 incumbent local exchange carriers,
and virtual collocation only if requested or if physical collocation is
demonstrated to be technically infeasible;
. unbundle components of their local service networks so that other
providers of local service can compete for a wide range of local service
customers;
. establish "wholesale" rates for their services to promote resale by
competitive local exchange carriers and other competitors;
. establish number portability, which allows a customer to retain its
existing phone number if it switches from the incumbent local exchange
carriers to a competitive local service provider;
. establish dialing parity, which ensures that customers will not detect a
quality difference in dialing telephone numbers or accessing operators or
emergency services; and
. provide nondiscriminatory access to telephone poles, ducts, conduits and
rights-of-way. In addition, the 1996 Telecommunications Act requires
incumbent local exchange carriers 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.
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 incumbent carriers to combine unbundled elements for
competitors, and to allow competitors to pick and
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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 FCC implemented a public rulemaking
seeking comment on these issues, including particularly, which network elements
should be offered on an unbundled basis by incumbent carriers, and a decision
is expected later this year. Although the FCC has tentatively concluded that
local loops 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 incumbent local exchange carriers will be required to
unbundle. Moreover, this proceeding, as well as a companion FCC rulemaking,
address related issues of significant importance to us, including:
. the manner in which loops should be subject to sub-unbundling;
. spectrum compatibility among DSL services and between DSL and non-DSL
services; and
. line or loop sharing between DSL services offered by one provider and
analog voice services offered by another provider.
In addition, some incumbent carriers may take the position that they have no
obligation to provide unbundled elements, including loops, until the FCC issues
new rules, which could adversely affect our business.
In March 1998, several Regional Bell Operating Companies petitioned the FCC
to be relieved of certain regulatory requirements in connection with their own
DSL and other advanced data services, including obligations to unbundle DSL
loops and to resell DSL services. In October 1998, the FCC ruled that DSL
services are telecommunications services subject to the requirements of the
1996 Telecommunications Act and therefore, the incumbent local exchange
carriers must unbundle such services and offer them for resale. The FCC also
issued a notice of proposed rulemaking indicating its tentative conclusion to
allow incumbent carriers to create separate affiliates for their DSL businesses
that would have to operate as competitive carriers and would be permitted to
operate free of the resale and unbundling obligations of the 1996
Telecommunications Act. While there has been no final FCC decision in this
proceeding, in March 1999, the FCC announced new rules for collocation and
interconnection. These rules are subject to reconsideration and appeal. The
final outcome of these proceedings interpreting the requirements of the 1996
Telecommunications Act may adversely affect our business.
The FCC recently adopted regulations which strengthen our leverage and that
of competitive carriers in negotiating interconnection arrangements. Most
significant for us, the FCC determined that incumbent local exchange carriers
must make shared cage and cageless collocation available to competitive local
exchange carriers, including DSL.net, and permit these competitors to collocate
any equipment used for interconnection and access to unbundled network
elements, even if the competitor's equipment includes switching or enhanced
service functions. The incumbent carriers may not require that switching
functions be disengaged. These rules are currently subject to appeal by several
incumbent carriers.
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 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.
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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 we are not subject to
price or rate of return regulation for tariffed intrastate services. Actions by
state public utility commissions may adversely affect our business and could
cause us to incur substantial legal and administrative expenses.
To date, we have been able to obtain authorizations to operate as a
competitive local exchange carrier in Alabama, Colorado, Illinois, Indiana,
Kentucky, Massachusetts, Montana, New Hampshire, New York, North Carolina,
Ohio, Pennsylvania (interim authorization), Rhode Island, South Carolina,
Tennessee and Washington, and we have filed for competitive local exchange
carriers status in the remaining states and the District of Columbia. 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.
Under the 1996 Telecommunications Act, incumbent carriers 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 Bell Atlantic, BellSouth and SNET and
are currently negotiating agreements with Ameritech, Southwestern Bell and
Pacific Bell. 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.
During these interconnection negotiations, either the incumbent carrier or
we may submit disputes to the state regulatory commissions for mediation and,
after the expiration of the statutory negotiation period set forth in the 1996
Telecommunications Act, we may submit outstanding disputes to the states for
arbitration, as well as ask the state 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.
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. If municipal governments impose conditions on granting permits or
other authorizations or if they fail to act in granting such permits or other
authorizations, our business could be adversely affected.
Employees
As of June 1, 1999, we had approximately 67 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.
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Properties
Our headquarters consists of 12,000 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. In addition,
we have a right of first refusal for additional space in the office building
under certain circumstances. We also lease office space for local sales
personnel and space for network equipment installations in a number of other
locations.
Legal Proceedings
We are not a party to any legal proceedings, other than those related to
regulatory approvals. We are, however, 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 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....... 58 Director
William J. Marshall..... 43 Director
James D. Marver......... 49 Director
William Seifert......... 49 Director
</TABLE>
- ---------------------
(1) Member of the compensation committee
(2) Member of the audit committee
Directors and Executive Officers
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.
Robert Q. Berlin has served 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.
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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, 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 compensation committee consists of Messrs. and . Our
compensation committee has the power to create the executive compensation
policy of DSL.net and must report to the board of directors when asked to do
so. It also reviews and evaluates the salaries and incentive compensation of
our management and key employees and makes recommendations concerning these
matters to the board of directors. Our compensation committee also administers
our 1999 Stock Plan.
Our audit committee consists of Messrs. and . 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
In February 1999, our board of directors approved the grant of non-qualified
stock options to purchase shares of our common stock to each of Mr.
Gilbertson and Mr. Marshall for their services as directors and shares to
Mr. Marver for his service on our advisory board, in each case at an exercise
price of $ per share. Each of these options provides that 25% of the shares
subject to the option will become exercisable one year after the date of grant
with the remaining amount becoming exercisable equally over the next 36 months.
The board of directors has also provided that all options granted under the
1999 Stock Plan to
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a member of our board of directors or a member of the advisory board will vest
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 Plan."
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...................................... $34,867 $30,000 $6,682
President and Chief Executive Officer
John M. Jaser...................................... 20,975 -- 955
Vice President, Technology*
</TABLE>
- ---------------------
* Mr. Jaser served as President from March 1998 to November 1998.
All other compensation includes an amount equal to the fair market value of
common stock, as determined by the Company's board of directors, purchased in
December 1998 by each named executive officer in exchange for a promissory
note. The notes were subsequently forgiven. Based on the issuance of the Series
A preferred stock and our intention 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 Plan
1999 Stock Plan. Our 1999 Stock Plan was adopted by the board of directors
in February 1999 and approved by the stockholders in March 1999. A total of
shares of common stock have been authorized and reserved for issuance
under the 1999 Stock Plan. Under the terms of the 1999 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.
The 1999 Stock Plan is administered by our compensation committee. Our
compensation committee 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 1999 Stock Plan. 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. 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 1999 Stock Plan also provides that, if at any time following a
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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 all options granted under
the 1999 Stock Plan to any person serving as president, chief executive
officer, vice president, chief financial officer, chief technology officer,
chairman of our board of directors, a member of our board of directors or a
member of our advisory board will vest 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 1999 Stock Plan is ten years, unless sooner terminated by vote of
our board of directors.
Compensation Committee Interlocks and Insider Participation
Prior to February 1999, we did not have a separate compensation committee or
other board committee performing equivalent functions and these functions were
performed by our board of directors. In February 1999, we established a
compensation committee. Our compensation committee makes recommendations
concerning salaries and incentive compensation for our employees and
consultants and administers and grants stock options pursuant to the 1999 Stock
Plan. Other than John Jaser, none of our executive officers has served as a
director or member of the compensation committee, or other committee serving an
equivalent function, of any other entity, whose executive officers served as a
director or member of our compensation committee. Mr. Jaser was our sole
director and president for a portion of 1998 and also a director and executive
officer of FutureComm, Inc.
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CERTAIN TRANSACTIONS
Organization of DSL.net
In connection with our formation in 1998, we issued and sold shares of
common stock for an aggregate of $500 to our founders, John Jaser and Felix
Tang, and 20,000 shares of a prior series A preferred stock for an aggregate of
$50,000 to another founder, Paul Sun. Mr. Jaser is our Vice President,
Technology, Mr. Tang is our Director of Network Engineering and Mr. Sun is the
chairman of the board of directors and chief technology officer.
Sales of Stock, Notes and Warrants
In November 1998, we issued five convertible promissory notes in the
aggregate principal amount of $350,000, two warrants to purchase an aggregate
of 31,250 shares of Series A preferred stock at an exercise price of $1.00 per
share and rights to warrants to purchase an aggregate of 56,250 shares of
Series A preferred stock at an exercise price of $1.00 per share. Of that
amount, we issued one secured convertible promissory note in the principal
amount of $41,667 and one 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 one secured convertible promissory
note in the principal amount of $83,333 and one warrant to purchase 20,834
shares of Series A preferred stock to VantagePoint Communications Partners,
L.P. Each of the convertible promissory notes payable to each of the
VantagePoint entities provided for interest at 6.0% and was repayable on demand
beginning on January 17, 1999. Upon completion of this offering, these warrants
will be exercisable for an aggregate of shares of common stock at an
exercise price of $ per share. We also issued one convertible demand note in
the principal amount of $100,000 and the right to a warrant to purchase 25,000
shares of Series A preferred stock to Robert Gilbertson, one of our directors.
This warrant will expire and no longer be exercisable upon the completion of
this offering. The convertible promissory note issued to Mr. Gilbertson
provided for interest at 5.56% and was repayable on demand if we failed to
complete a qualified financing, as defined therein, on or before September 30,
2000.
In December 1998, we exchanged and cancelled 20,000 shares of a prior series
A preferred stock and issued shares of our common stock to Mr. Sun. In
addition, we issued shares of common stock to Mr. Jaser in exchange for
his promissory note in the principal amount of $ and shares of common
stock to David Struwas in exchange for his promissory note in the principal
amount of $ . Simultaneously with the issuance of the common stock in
exchange for promissory notes from each of Mr. Jaser and Mr. Struwas, we
entered into agreements with each that provided for additional compensation in
the amount of $ and $ , respectively. The promissory notes of each of Mr.
Jaser and Mr. Struwas were forgiven in January 1999 in 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. 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. 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 convertible promissory notes from DSL.net to
them in the aggregate principal amount of $125,000. We also issued an aggregate
of 225,000 shares of Series A preferred stock in conversion of three
convertible promissory notes in an aggregate principal amount of $225,000. Of
that amount, 100,000 shares of Series A preferred stock were issued to Mr.
Gilbertson. In addition, we issued one warrant to purchase 25,000 shares of
Series A preferred stock at an exercise price of $1.00 per share to Mr.
Gilbertson. Finally, we issued shares of common stock to Mr. Tang for
aggregate consideration of $ .
In March 1999, we issued shares of common stock having a value of $
to Mr. Struwas as a bonus.
42
<PAGE>
In April 1999, we issued 2,166,667 shares of Series B preferred stock to
VantagePoint Venture Partners 1996, L.P. in exchange for 1,666,667 shares of
Series A preferred stock and the cancellation of warrants to purchase 1,666,667
shares of a prior series B preferred stock. We also issued 4,333,333 shares of
Series B preferred stock to VantagePoint Communications Partners, L.P. in
exchange for 2,333,333 shares of Series A preferred stock and the cancellation
of warrants to purchase 2,333,333 shares of a prior series B preferred stock.
In addition, in April 1999, Mr. Jaser surrendered shares of common
stock, Mr. Tang surrendered shares of common stock and Mr. Sun surrendered
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. 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 $30,000,000, including a secured promissory note of
VantagePoint Venture Partners III, L.P. in an aggregate principal amount of
$5,999,429. 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 $999,912. The promissory note matures on July 6, 1999 and provides for
interest at 6.00% per annum.
In connection with the preferred stock financings, we granted demand
registration rights to certain holders of preferred stock and common stock. See
"Description of Capital Stock--Registration Rights."
Issuance of Options
In February 1999, we issued options to purchase shares of our common
stock to each of Messrs. Gilbertson and Marshall and options to purchase
shares of our common stock to Mr. Marver.
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 system. In addition, DMW will install and modify the software, and
provide training, maintenance and support services in connection with the
software. Two of our stockholders, VantagePoint Venture Parners 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.
43
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of June , 1999, and as adjusted to reflect
the sale of the shares of common stock offered hereby, by: (1) each person
known by us to be the beneficial owner of more than 5% of our common stock; (2)
each named executive officer; (3) each of our directors; and (4) 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 and except as set forth in
the footnotes to the table.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock issuable by us to
that person pursuant to options or warrants which may be exercised within 60
days after June , 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 or entity. However, these shares are not deemed to be
beneficially owned and outstanding for purposes of computing the percentage
beneficially owned by any other person or entity.
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 June , 1999;
. shares of common stock issuable upon the conversion of preferred stock
outstanding as of June , 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 June , 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.
44
<PAGE>
<TABLE>
<CAPTION>
Percent of Common
Shares Stock Outstanding
Beneficially ------------------------------
Owned Before Offering After Offering
<S> <C> <C> <C>
David Struwas...................... 8.44%
John Jaser......................... 4.61
Robert Gilbertson(1)............... *
James D. Marver(2)................. 46.25
William J. Marshall(2)............. 46.25
William Seifert(3)................. 8.37
Paul Sun........................... 6.54
The VantagePoint Entities(2)....... 46.25
1001 Bayhill Drive
Suite 100
San Bruno, CA 94066
Prism Venture Partners II, 8.37
L.P.(3)...........................
100 Lowder Brook Drive
Suite 2500
Westwood, MA 02090
The Oak Entities(4)................ 7.66
One Gorham Island
Westport, CT 06830
Stephen K. Gellman and Cecila S. 6.40
Wu(5).............................
Shipman & Goodwin L.L.P.
One American Row
Hartford, CT 06103
All executive officers and
directors as a group
(7 persons)(6).................... 74.77%
</TABLE>
- ---------------------
* Less than 1%
(1) Includes 100,000 shares held by Mr. Gilbertson. Also includes shares of
common stock issuable upon exercise of a warrant held by Mr. Gilbertson.
(2) Includes 2,574,822 shares and warrants to purchase 10,416 shares held by
VantagePoint Venture Partners 1996, L.P., of which VantagePoint Associates,
LLC is the general partner. Also includes 5,087,145 shares and warrants to
purchase 20,834 shares held by VantagePoint Communications Partners, L.P.,
of which VantagePoint Communications Associates, LLC is the general partner
and 573,614 shares held by VantagePoint Venture Partners III, L.P., of
which VantagePoint Ventures Associates III, LLC is the general partner.
Messrs Marver and Marshall are members of the general partner of each of
the VantagePoint entities. Each of Mr. Marver and Mr. Marshall may be
deemed to share voting and investment power with respect to such shares and
each disclaims beneficial ownership of such shares.
(3) Includes 1,488,360 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.
(4) Includes 1,335,601 shares held by Oak Investment Partners VIII, L.P., of
which Oak Associates VIII, LLC is the general partner. Also inlcudes 25,867
shares held by Oak VIII Affiliates Fund, L.P., of which Oak VIII Affiliates
Fund, LLC is the general partner.
(5) Includes an aggregate of shares held in trust for Mr. Sun's children,
of which Mr. Gellman and Ms. Wu are co-trustees, and 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.
(6) See Notes 1 through 3.
45
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, our authorized capital stock
will consist of shares of common stock, with a par value of $ per share,
and shares of preferred stock, with a par value of $ per share.
Common Stock
As of June , 1999 there were shares of common stock outstanding and
held of record by 22 stockholders, after giving effect to the conversion of all
outstanding shares of preferred stock upon the closing of this offering.
Based upon the number of shares outstanding as of June , 1999 and giving
effect to the issuance of the shares of common stock offered by us hereby,
there will be shares of common stock outstanding upon the closing of this
offering. In addition, as of June , 1999, there were outstanding stock options
for the purchase of a total of shares of common stock, and outstanding
warrants for the purchase of a total of 129,226 shares of Series A preferred
stock. Upon completion of this offering, the warrants will be exercisable for
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
A new certificate of incorporation will be filed immediately after the
closing of this offering and will delete all references to the Series A, B, C
and D 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 shares of preferred 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.
46
<PAGE>
Warrants
As of June 3, 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 shares of
common stock at an exercise price of $ 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 shares of
common stock at an exercise price of $ per share. All of the outstanding
warrants contain certain protections against dilution resulting from stock
splits, stock dividends and similar events.
Registration Rights
Under the terms of the investors' rights agreement dated as of May 12, 1999,
the holders of an aggregate of 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 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 effective 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.
47
<PAGE>
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 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. This provision 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.
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, though 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 earlier
of the day such notice was mailed or 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 the 10th day
following the earlier of the day such notice was mailed or 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
48
<PAGE>
board of directors, to inform stockholders about such matters. The notice
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 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.
49
<PAGE>
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 that the
limitation shall not eliminate or limit liability to the extent that the
elimination or limitation of such liability is not permitted by the Delaware
General Corporation Law as the same exists or may hereafter be amended.
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 .
50
<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
shares of our common stock, assuming no exercise of the underwriters'
over-allotment option and no exercise of outstanding options or warrants. As of
June , 1999, we had approximately 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 shares eligible for sale in the
public market as follows:
<TABLE>
<CAPTION>
Number of Shares Date
------------------- ---------------------------------
<C> <S>
After the date of this
prospectus.
After 180 days from the date of
this prospectus (subject, in some
cases, to volume limitations).
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, 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.
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:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 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 , 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
51
<PAGE>
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.
Following this offering, we intend to file registration statements under the
Securities Act covering approximately shares of common stock issued upon
the exercise of stock options, subject to outstanding options or reserved for
issuance under the 1999 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 Plan."
52
<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 and BT Alex. Brown
Incorporated 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....................................
---
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.
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 $ million.
DLJdirect Inc., an affiliate of Donaldson, Lufkin & Jenrette Securities
Corporation and a member of the selling group, is facilitating the distribution
of the shares sold in the offering over the Internet. The underwriters have
agreed to allocate a limited number of shares to DLJdirect Inc. for sale to its
brokerage account holders.
We have granted to the underwriters an option, exercisable for 30 days after
the date of this prospectus, to purchase up to 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.
53
<PAGE>
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: (1) offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of our common stock or any securities
convertible into or exercisable or exchangeable for our common stock; or (2)
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 described in clause (1) or (2) is
to be settled by the delivery of common stock, or such other securities, in
cash or otherwise.
However, we may:
. grant stock options or stock awards under the 1999 Stock Plan;
. issue shares of our stock upon the exercise of options, warrants or
rights or the conversion of currently outstanding securities; and
. 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.
Prior to this offering, there was no established trading market for our
common stock. The initial public offering price for the common stock in this
offering will be determined by negotiation among us and the representatives of
the underwriters. The factors to be considered in determining the initial
public offering price include the history of and the prospects for the industry
in which we compete, the ability of our management, our past and present
operations, our prospects for future earnings, the general condition of the
securities markets at the time of this offering and the recent market prices of
securities of generally comparable companies.
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
54
<PAGE>
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.
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.
55
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1998 and March 31, 1999 (unaudited)..... F-3
Statements of Operations for the period from inception (March 3, 1998)
through December 31, 1998, for the three months ended March 31, 1999
(unaudited), and for the period from inception (March 3, 1998) through
March 31, 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
three months ended March 31, 1999 (unaudited)............................ F-5
Statements of Cash Flows for the period from inception (March 3, 1998)
through December 31, 1998, for the three months ended March 31, 1999
(unaudited), and for the period from inception (March 3, 1998) through
March 31, 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
F-2
<PAGE>
DSL.net, Inc.
(a development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
Proforma
March 31,
December 31, March 31, 1999
1998 1999 (Note 2)
(unaudited) (unaudited)
<S> <C> <C> <C>
Assets
Current assets:
Cash and cash equivalents............. $ 39,479 $ 1,318,438 $ 1,318,438
Accounts receivable................... 30,597 24,997 24,997
---------- ----------- -----------
Total current assets................ 70,076 1,343,435 1,343,435
Fixed assets, net (Note 3).............. 284,338 1,745,999 1,745,999
Other assets............................ 15,566 463,556 463,556
---------- ----------- -----------
Total assets........................ $ 369,980 $ 3,552,990 $ 3,552,990
========== =========== ===========
Liabilities and Stockholders' Equity
(Deficit)
Current liabilities:
Accounts payable...................... $ 231,073 $ 100,119 $ 100,119
Accrued liabilities................... 16,219 745,850 745,850
Deferred revenue...................... 5,392 10,581 10,581
Current portion of capital lease
payable (Note 5)..................... 16,494 46,202 46,202
Current portion of notes payable (Note
4)................................... 66,667 -- --
---------- ----------- -----------
Total current liabilities........... 335,845 902,752 902,752
Long-term portion of capital lease
payable (Note 5)....................... -- 59,966 59,966
Notes payable (Note 4).................. 350,000 -- --
---------- ----------- -----------
Commitments and contingencies (Note 5)
Total liabilities................... 685,845 962,718 962,718
---------- ----------- -----------
Stockholders' equity (deficit) (Notes 7
and 9):
Series A convertible preferred stock,
$0.001 par value; none and 4,000,000
(unaudited) shares authorized,
respectively; none and 3,725,000
(unaudited) and no shares pro forma
issued and outstanding,
respectively......................... -- 2,497,244 --
Common stock, $0.0005 par value;
381,818,000 and 40,000,000 shares
authorized, respectively; 12,600,000
and 12,927,274 (unaudited) and
16,652,274 shares pro forma shares
issued and outstanding,
respectively......................... 6,300 6,464 8,326
Additional paid-in capital.............. 2,467,472 10,752,909 13,248,291
Deferred compensation................... -- (6,190,094) (6,190,094)
Accumulated deficit..................... (2,789,637) (4,476,251) (4,476,251)
---------- ----------- -----------
Total stockholders' equity
(deficit).......................... $ (315,865) $ 2,590,272 $ 2,590,272
---------- ----------- -----------
Total liabilities and stockholders'
equity............................. $ 369,980 $ 3,552,990 $ 3,552,990
========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DSL.net, Inc.
(a development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period For the Period
From Inception From Inception
(March 3, 1998) Three (March 3, 1998)
Through Months Ended Through
December 31, March 31, March 31,
1998 1999 1999
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenue......................... $ 31,533 $ 48,188 $ 79,721
----------- ----------- -----------
Operating expenses:
Network and operations........ 127,054 264,457 391,511
General and administrative.... 230,272 525,184 755,456
Sales and marketing........... 35,961 129,375 165,336
Stock compensation............ 2,423,272 822,260 3,245,532
----------- ----------- -----------
Total operating expenses.... $ 2,816,559 $ 1,741,276 $ 4,557,835
----------- ----------- -----------
Operating loss.................. $(2,785,026) $(1,693,088) $(4,478,114)
----------- ----------- -----------
Interest expense (income), net.. 4,611 (6,474) (1,863)
----------- ----------- -----------
Net loss.................... $(2,789,637) $(1,686,614) $(4,476,251)
=========== =========== ===========
Net loss per share-basic and
diluted........................ $ (0.73) $ (0.24) $ (0.98)
=========== =========== ===========
Shares used in computing net
loss per share................. 3,839,716 7,030,719 4,579,897
=========== =========== ===========
Pro forma net loss per common
share.......................... $ (0.73) $ (0.17) $ (0.84)
=========== =========== ===========
Pro forma shares used in
computing net loss per common
share.......................... 3,839,716 10,219,608 5,319,588
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DSL.net, Inc.
(a development stage company)
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Deficit
Accumulated
Preferred Stock Common Stock Additional During the
--------------------- ------------------ Paid-in Deferred Development
Shares Amount Shares Amount Capital Compensation Stage Total
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization,
including retroactive
effect of stock
splits................. 20,000 $ 50,000 3,818,180 $ 500 $ -- $ -- $ -- $ 50,500
Exchange of Series A
preferred stock for
common stock........... (20,000) (50,000) 5,727,270 4,273 1,445,727 -- -- 1,400,000
Issuance of common
stock.................. -- -- 3,054,550 1,527 1,021,745 -- -- 1,023,272
Net loss................ -- -- -- -- -- -- (2,789,637) (2,789,637)
--------- ---------- ---------- ------- ----------- ----------- ----------- -----------
Balance at December 31,
1998................... -- $ -- 12,600,000 $ 6,300 $ 2,467,472 $ -- $(2,789,637) $ (315,865)
Deferred compensation--
restricted stock....... -- -- -- -- 3,733,854 (3,733,854) -- --
Issuance of preferred
stock and warrants..... 3,500,000 2,272,244 -- -- 1,155,000 -- -- 3,427,244
Conversion of notes
payable................ 225,000 225,000 -- -- -- -- -- 225,000
Stock compensation...... -- -- 327,274 164 587,293 -- -- 587,457
Deferred compensation--
stock options.......... -- -- -- -- 2,697,290 (2,697,290) -- --
Amortization of deferred
compensation........... -- -- -- -- -- 241,050 -- 241,050
Issuance of warrants.... -- -- -- -- 112,000 -- -- 112,000
Net loss................ -- -- -- -- -- -- (1,686,614) (1,686,614)
--------- ---------- ---------- ------- ----------- ----------- ----------- -----------
Balance at March 31,
1999
(unaudited)............ 3,725,000 $2,497,244 12,927,274 $ 6,464 $10,752,909 $(6,190,094) $(4,476,251) $ 2,590,272
========= ========== ========== ======= =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DSL.net, Inc.
(a development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the Period
From Inception For the From Inception
(March 3, 1998) Three (March 3, 1998)
through Months Ended through
December 31, March 31, March 31,
1998 1999 1999
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss......................... $(2,789,637) $(1,686,614) $(4,476,251)
Adjustments to reconcile net loss
to net cash used by
operating activities:
Depreciation and amortization... 5,744 48,165 53,909
Noncash compensation expense.... 2,423,272 822,260 3,245,532
Changes in operating assets and
liabilities:
(Increase) decrease in accounts
receivable.................... (30,597) 5,600 (24,997)
Increase in other assets....... (15,566) (335,990) (351,556)
Increase (decrease) in accounts
payable....................... 231,073 (130,954) 100,119
Increase in accrued
liabilities................... 16,814 729,036 745,850
Increase in deferred revenue... 5,392 5,189 10,581
----------- ----------- -----------
Net cash used in operating
activities................... (153,505) (543,308) (696,813)
----------- ----------- -----------
Cash flows from investing
activities:
Purchases of fixed assets...... (290,082) (1,509,826) (1,799,908)
----------- ----------- -----------
Net cash used in investing
activities................... (290,082) (1,509,826) (1,799,908)
----------- ----------- -----------
Cash flows from financing
activities:
Initial capitalization......... 50,500 -- 50,500
Proceeds from bridge
financing..................... 350,000 -- 350,000
Proceeds from equipment notes
payable....................... 124,000 93,059 217,059
Proceeds from preferred stock
issuance...................... -- 3,308,491 3,308,491
Payments on equipment notes
payable....................... (41,434) (66,667) (108,101)
Principal payments under
capital lease obligation...... -- (2,790) (2,790)
----------- ----------- -----------
Net cash provided by financing
activities................... 483,066 3,332,093 3,815,159
----------- ----------- -----------
Net increase in cash and cash
equivalents...................... 39,479 1,278,959 1,318,438
Cash and cash equivalents at
beginning of period.............. -- 39,479 --
----------- ----------- -----------
Cash and cash equivalents at end
of period........................ $ 39,479 $ 1,318,438 $ 1,318,438
=========== =========== ===========
Supplemental disclosure:
Cash paid (received):
Interest........................ $ 2,524 $ (6,474) $ (3,950)
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DSL.net, Inc.
(a development stage company)
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. The Company is considered a development stage company
in accordance with Statement of Financial Accounting Standards No. 7, as
planned principal operations have commenced, but there has been no significant
revenue therefrom.
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 March 31, 1999, the unaudited statements
of operations and cash flows for the three months ended March 31, 1999 and for
the period from inception through March 31, 1999, and the unaudited statement
of changes in stockholders equity for the three months ended March 31, 1999,
have been prepared in accordance with generally accepted accounting principles
for interim financial information and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles. In the opinion of management, all
adjustments (consisting of only normal recurring accruals) considered
necessary for a fair presentation have been included. Operating results for
the three months ended March 31, 1999 are not necessarily indicative of
results that may be expected for the year ending December 31, 1999.
Operations commenced March 28, 1998. Operating activity for the three
months ended March 31, 1998 was therefore immaterial.
Unaudited pro forma balance sheet
Upon the closing of DSL's anticipated initial public offering, all of the
outstanding shares of Series A convertible preferred stock will automatically
convert into common stock. This conversion has been reflected in the unaudited
pro forma balance sheet as of March 31, 1999.
Cash and cash equivalents
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents.
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. Maintenance and repairs are charged to expense as
F-7
<PAGE>
DSL.net, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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, generally on a
monthly service fee basis. Deferred revenue represents payments received in
advance of the services provided. Revenue related to installation fees are
recognized to the extent of direct costs incurred. Such revenue is not expected
to exceed the direct costs. In certain situations, the Company waives non-
recurring installation fees in order to obtain a sale. The Company expenses the
related 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 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.
F-8
<PAGE>
DSL.net, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 three months ended March 31, 1999
totaled $2,423,272 and $822,260, 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.
The following table presents the calculation of basic and diluted net loss
per share:
<TABLE>
<CAPTION>
Period from inception
(March 3, 1998) Three months ended
to December 31, 1998 March 31, 1999
<S> <C> <C>
Net loss.......................... $(2,789,637) $(1,686,614)
----------- -----------
Basic & Diluted:
Weighted average shares of common
stock outstanding............... 3,839,716 7,030,719
----------- -----------
Basic and diluted net loss per
share........................... $ (0.73) $ (0.24)
=========== ===========
</TABLE>
The dilutive effect of options, warrants and convertible preferred stock has
not been considered as their effect 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 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.
F-9
<PAGE>
DSL.net, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. Fixed Assets
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
(unaudited)
<S> <C> <C>
Network equipment.................................. $161,814 $ 781,060
Furniture, fixtures, office equipment and
software.......................................... 61,535 260,890
Vehicles........................................... -- 45,328
Collocation costs.................................. 66,733 712,630
-------- ----------
290,082 1,799,908
Less: accumulated depreciation and amortization.. 5,744 53,909
-------- ----------
$284,338 $1,745,999
======== ==========
</TABLE>
As of December 31, 1998 and March 31, 1999, the recorded cost of the
equipment under capital lease was $22,699 and $115,163 (unaudited),
respectively. Accumulated amortization for this equipment under capital lease
was $1,265 and $4,704 (unaudited) as of December 31, 1998 and March 31, 1999,
respectively.
Depreciation and amortization expense, excluding amortization of deferred
compensation, was $5,744 and $48,165 (unaudited) for the period from inception
March 3, 1998 to December 31, 1998 and for the three months ended March
31,1999, 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 expire in January 1999 or November 2003,
bear interest at 5.56% or 6.0% per annum and are convertible into preferred
shares at a rate equal to the Company's next qualified equity financing. The
Bridge Warrants are exercisable for a period of five years or 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.
5. Commitment and Contingencies
Leases
Rent expense under operating leases was approximately $14,275 and $46,745
(unaudited), for the period from inception (March 3, 1998) through December 31,
1998 and for the three months ended March 31, 1999.
F-10
<PAGE>
DSL.net, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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 March 31, 1999 was $106,168
(unaudited.)
Purchase Commitments
In April 1999, the Company entered into a commitment to license and
implement an operations support system valued at approximately $2.0 million. In
May 1999, the Company issued purchase orders to a supplier for the purchase of
network equipment totaling $1.1 million.
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.
The Company has entered into interconnection and collocation 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.
F-11
<PAGE>
DSL.net, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
In May 1999, the Company entered into an agreement to license and implement
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. Stockholders' Equity
Capital stock transactions
In March 1998, the Company's founding stockholders were issued 3,818,180
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 5,727,270 shares of common
stock, adjusted for stock splits.
In December 1998, the Company issued 3,054,550 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 has
been recognized related to this issuance.
In March 1999, the Company issued 327,274 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 2,327,274
shares of common stock. Such stock was previously made subject to certain
employment tenure and performance vesting criteria. In exchange, the vesting
criteria on certain other shares owned by the founders was removed. This share
surrender and acceleration of vesting resulted in a compensation charge of
approximately $1.2 million and eliminated approximately $780,000 from deferred
compensation.
In May 1999, the Company declared a 2:1 split of its Common Stock. The
accompanying financial statements have been restated to reflect this stock
split.
Convertible voting preferred stock
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 below, certain
employment tenure and performance criteria were required of management in order
to fully vest in a portion of their shares. The value attributed to these
nonvested shares is reflected in deferred compensation of approximately
$3,734,000 and is being amortized over the related employment term, which may
be accelerated based upon the likelihood of attaining certain performance of
measures.
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 "Warrant
Shares"), at an exercise price of $1.00 per share, for an aggregate of
$3,500,000.
The Warrant Shares, which are exercisable for a period of 5 years, are
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 exercises its repurchase right, it shall be obligated to pay the holder
the original exercise price plus interest from the date of exercise at 8% per
annum.
F-12
<PAGE>
DSL.net, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
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.
In April 1999, the certain holders of the Series A Preferred Stock exchanged
3,500,000 shares of Series A Preferred Stock and warrants to purchase 3,500,000
shares of series B preferred stock, 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 lower
than the deemed fair market value of the common stock at the time of exchange.
The difference between the exchange rate and the deemed fair market value will
be treated as an imputed non-cash dividend for purposes of calculating net loss
per common share, although no assets of the Company were expended. The imputed
dividend, which reduces additional paid-in capital and increases the carrying
value of the Series B Preferred Stock, will be approximately $8.5 million at
June 30, 1999 and for the three month period then ended. The imputed dividend
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 1999, the Company issued 2,868,069 shares of convertible voting
preferred stock designated as Series D Preferred Stock at $10.46 per share for
net proceeds of $29,973,862 (unaudited).
Rights and preferences
The Series A, Series B, Series C and Series D Preferred stockholders are
entitled to receive noncumulative cash dividends of $0.08 per share, $0.04 per
share, $0.29 per share and $0.84 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.
At the option of the Preferred stockholders, their shares may be converted
to common stock at the rate of one share of common stock for one share of
Preferred Stock adjusted for certain dilutive issuances, stock splits or
combinations. 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 $5 per share of common stock, and the aggregate net proceeds are not less
than $30 million.
The Series A, Series B, Series C and Series D Preferred stockholders shall
have voting rights similar to common shareholders and other rights, 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 and D together with common shareholders elect two directors. In addition,
the holders of common stock elect two directors.
Common stock reserved
The Company has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
(unaudited)
<S> <C> <C>
Conversion of Series A Preferred stock.............. -- 7,450,000
1999 Stock Plan..................................... -- 7,400,000
Conversion of promissory notes...................... 700,000 --
Stock warrants...................................... 175,000 7,258,452
------- ----------
875,000 22,108,452
======= ==========
</TABLE>
F-13
<PAGE>
DSL.net, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock warrants
At December 31, 1998 and March 31, 1999 the Company had outstanding stock
purchase warrants to purchase preferred stock totaling 87,500 and 3,629,226
(unaudited), respectively, adjusted for stock splits:
<TABLE>
<CAPTION>
December 31, March 31,
1998 1999
------------ ---------
<S> <C> <C>
Warrants for Series B Preferred Stock................. -- 3,500,000
Lease Warrants for Series A Preferred Stock........... -- 41,726
Bridge Warrants for Series A Preferred Stock.......... 87,500 87,500
------ ---------
87,500 3,629,226
====== =========
</TABLE>
As discussed above, the 3,500,000 of warrants to acquire Series B Preferred
Stock were exchanged in April 1999.
8. 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.
9. 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 7,400,000 shares were authorized under the Plan.
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.
F-14
<PAGE>
DSL.net, Inc.
(a development stage company)
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of activity under the Plan as of March 31, 1999 (unaudited) is as
follows:
<TABLE>
<CAPTION>
Weighted
Average
--------------
Number of Fair Exercise
Shares Value Price
<S> <C> <C> <C>
Outstanding at Inception............................ -- $ -- $ --
Granted............................................. 2,698,000 0.73 0.07
Exercised........................................... -- -- --
Canceled............................................ -- -- --
--------- ----- -----
Outstanding at March 31, 1999 (unaudited)........... 2,698,000 $0.73 $0.07
========= ===== =====
</TABLE>
The following summarizes the outstanding and exercisable options under the
Plan as of March 31, 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>
$0.05 -
0.09 2,698,000 9.94 years $0.07 -- --
</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 three months ended
March 31, 1999 (unaudited) would have been as follows:
<TABLE>
<S> <C>
Net loss:
As reported.................................................. $(1,686,614)
Pro forma under FAS 123...................................... (4,214,572)
Basic and diluted net loss per share:
As reported.................................................. $ (0.24)
Pro forma under FAS 123...................................... $ (0.41)
</TABLE>
The estimated fair value at date of grant for options granted for the three
months ended March 31, 1999 (unaudited) ranged from $0.16 to $1.20. 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% - 5.10%
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.
Deferred compensation of approximately $2,528,000 (unaudited) has been
attributed to those common stock options granted during the three months ended
March 31, 1999, with an exercise price below estimated fair value. Stock
compensation expense is recognized over the four year vesting period and
totaled $61,570 (unaudited) for the three months ended March 31, 1999.
F-15
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
, 1999
[DSL.net LOGO]
DSL.net, Inc.
Shares
----------------------
PROSPECTUS
----------------------
Donaldson, Lufkin & Jenrette
Deutsche Banc Alex. Brown
------------
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............................................. $31,970
NASD filing fee.................................................. 12,000
Nasdaq National Market listing fee............................... *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses (including legal fees)................ *
Transfer agent and registrar fees and expenses................... *
Miscellaneous.................................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
- ---------------------
*To be filed by Amendment.
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) shares of
common stock for an aggregate of $ and (ii) 20,000 shares of a prior Series
A preferred stock for an aggregate of $50,000.
In August 1998, DSL.net issued a promissory note in the aggregate principal
amount of $100,000.
II-1
<PAGE>
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 old Series A preferred stock at
a price of $1.00 per share.
In December 1998, DSL.net issued and sold an aggregate of (i) shares of
common stock in exchange for 20,000 shares of a prior series A preferred stock
and (ii) shares of common stock in exchange for promissory notes in an
aggregate principal amount of $ .
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. Finally, DSL.net issued shares of
common stock for aggregate consideration of $ .
In March 1999, DSL.net issued and sold an aggregate of shares of common
stock for services valued at $ . 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.
In May 1999, DSL.net issued and sold an aggregate of 2,868,069 shares of
Series D preferred stock for an aggregate 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.
In June, DSL.net issued an aggregate of 95,603 shares of Series D preferred
stock for an aggregate consideration of $1,000,007, including a secured
promissory note in an aggregate principal amount of $999,912.
(b) Grants and Exercises of Stock Options
As of June , 1999, DSL.net has granted options to purchase an aggregate of
shares of common stock under the 1999 Stock Plan exercisable at a weighted
average exercise price of per share. 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-2
<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* Restated Certificate of Incorporation of DSL.net, as amended.
3.02* Form of 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.
4.04 Form of Warrant Agreement dated as of January , 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 Registration Rights Provisions contained in the Amended and Restated
Investors' Rights Agreement dated as of May 12, 1999 between DSL.net
and the purchasers named therein.
10.03 Master Lease Agreement dated as of March 4, 1999 between Comdisco,
Inc. and DSL.net, as modified by the Addendum thereto.
10.04 Credit Agreement dated as of May 12, 1999 by and between DSL.net and
Fleet National Bank.
10.05 Security Agreement dated as of May 12, 1999 by and between DSL.net and
Fleet National Bank.
10.06 Lease Agreement dated February 5, 1999 by and between DSL.net and Long
Wharf Drive, LLC.
10.07* Amended and Restated Shareholders' Agreement, as amended, by and among
DSL.net and certain investors.
23.01* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.01).
23.02 Consent of PricewaterhouseCoopers, LLP.
24.01 Power of Attorney (contained on page II-5).
27.01 Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
** Indicates a management contract or any compensatory plan, contract or
arrangement.
(b) Financial Statement Schedules
None.
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.
II-3
<PAGE>
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-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in New Haven, Connecticut
on June 7, 1999.
DSL.NET, INC.
/s/ David F. Struwas
By: _________________________________
David F. Struwas
President, Chief Executive
Officer and Director
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of DSL.net, Inc., hereby
severally constitute and appoint David F. Struwas, Robert Q. Berlin and Stephen
Zamarsky, and each of them singly, our true and lawful attorneys, with full
power to them and each of them singly, to sign for us in our names in the
capacities indicated below, any registration statement related to the offering
that is to be effective upon filing pursuant to Rule 462(b) under the
Securities Act of 1933 (a "462(b) Registration Statement"), any and all
amendments and exhibits to this registration statement or any 462(b)
Registration Statement, and any and all applications and other documents to be
filed with the Securities and Exchange Commission pertaining to the
registration of the securities covered hereby or thereby, and generally to do
all things in our names and on our behalf in such capacities to enable DSL.net,
Inc. to comply with the provisions of the Securities Act of 1933 and all
requirements of the Securities and Exchange Commission.
Pursuant to the requirements of the Securities Act of 1933, this
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>
/s/ David F. Struwas President, Chief Executive June 7, 1999
______________________________________ Officer and Director
David F. Struwas (Principal Executive
Officer)
/s/ Robert Q. Berlin Vice President, Strategic June 7, 1999
______________________________________ Planning (Principal
Robert Q. Berlin Financial and Accounting
Officer)
/s/ Robert Gilbertson Director June 7, 1999
______________________________________
Robert Gilbertson
/s/ William J. Marshall Director June 7, 1999
______________________________________
William J. Marshall
/s/ William Seifert Director June 7, 1999
______________________________________
William Seifert
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ James D. Marver Director June 7, 1999
______________________________________
James D. Marver
/s/ Paul K. Sun Director June 7, 1999
______________________________________
</TABLE> Paul K. Sun
II-6
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
1.01* Form of Underwriting Agreement.
3.01* Restated Certificate of Incorporation of DSL.net, as amended.
3.02* Form of 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.
4.04 Form of Warrant Agreement 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 Registration Rights Provisions contained in the Amended and Restated
Investors' Rights Agreement dated as of May 12, 1999 between DSL.net
and the purchasers named therein.
10.03 Master Lease Agreement dated as of March 4, 1999 between Comdisco,
Inc. and DSL.net, as modified by the Addendum thereto.
10.04 Credit Agreement dated as of May 12, 1999 by and between DSL.net and
Fleet National Bank.
10.05 Security Agreement dated as of May 12, 1999 by and between DSL.net and
Fleet National Bank.
10.06 Lease Agreement dated February 5, 1999 by and between DSL.net and Long
Wharf Drive, LLC.
10.07* Amended and Restated Shareholders' Agreement, as amended, by and among
DSL.net and certain investors.
23.01* Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.01).
23.02 Consent of PricewaterhouseCoopers, LLP.
24.01 Power of Attorney (contained on page II-5).
27.01 Financial Data Schedule.
</TABLE>
- ---------------------
* To be filed by amendment.
** Indicates a management contract or any compensatory plan, contract or
arrangement.
<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>
-2-
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
--------------
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
---------------
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)
-------
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>
-3-
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
--------------------------------------------------
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>
-4-
(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>
-5-
14. Governing Law. This Warrant shall be governed by the laws of the State of
-------------
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
---------
Address: 50 Washington Street
Norwalk, CT 06854
<PAGE>
EXHIBIT 4.04
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 WARRANT (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.
DSL.NET, INC.
No. [__]
Warrant to Subscribe for [____________]
STOCK SUBSCRIPTION
WARRANT
[________, 19___]
Not Transferable or Exercisable
-------------------------------
Except Upon Conditions Herein Specified
---------------------------------------
THIS CERTIFIES that for value received, [Name of Subscriber] (the
"Subscriber"), an individual with an address at [Address of Subscriber], is
entitled to subscribe for and purchase from DSL.NET, INC., a Delaware
corporation (the "Corporation"), [____] shares (such number subject to
adjustment from time to time as hereinafter provided), of ________ Stock, $____
par value per share ("Warrant Stock"), of the Corporation, at the price of $____
per share (such price from time to subject to adjustment in accordance with
Section 4 hereof and hereinafter called the "Warrant Price"), at any time or
from to time during the period beginning on the date hereof and ending on the
first to occur of (i) the date five (5) years thereafter and (ii) the date on
which the Corporation consummates an initial public offering of its capital
stock registered under the Securities Act of 1933, as amended (the "Term of this
Warrant").
1
<PAGE>
This Warrant is issued pursuant to, and is subject to, that certain
Subscription Agreement, dated as of [_______], 1998, by and between the
Corporation and the Subscriber (the "Subscription Agreement"), as the same may
be amended from time to time, copies of which may be inspected by the legal
holder hereof at the principal office of the Corporation. Capitalized terms not
otherwise defined herein shall have the meanings set forth in the Subscription
Agreement.
SECTION 1. Exercise of Warrant. The rights represented by this Warrant
-------------------
may be exercised by the holder hereof, in whole at any time or in part from time
to time during the Term of this Warrant, but not as to a fractional share of
Warrant Stock, by the surrender of this Warrant (properly endorsed) at the
office of the Corporation, at 50 Washington Street, 7th Floor East, Norwalk,
Connecticut 06854 (or at such other agency or office of the Corporation in the
United States of America as it may designate by notice in writing to the holder
hereof at the address of such holder appearing on the books of the Corporation),
and by payment to the Corporation of the Warrant Price in cash or by certified
or cashier's check or wire transfer for each share being purchased. In the
event of any exercise of the rights represented by this Warrant, a certificate
or certificates for the shares of Warrant Stock so purchased, registered in the
name of the holder, shall be delivered to the holder hereof within a reasonable
time, not exceeding twenty-five days, after the rights represented by this
Warrant shall have been so exercised; and, unless this Warrant has expired, a
new Warrant representing the number of shares, if any, with respect to which
this Warrant shall not then have been exercised shall also be issued to the
holder hereof within such time. The person in whose name any certificate for
shares of Warrant Stock is issued upon exercise of this Warrant shall for all
purposes be deemed to have become the holder of record of such shares on the
date on which the Warrant was surrendered and payment of the Warrant Price and
any applicable taxes was made, irrespective of the date of delivery of such
certificate, except that, if the date of such surrender and payment is a date
when the stock transfer books of the Corporation are closed, such person shall
be deemed to have become the holder of such shares at the close of business on
the next succeeding date on which the stock transfer books are open. The
Corporation shall pay any issue tax imposed on exercise of this Warrant for
Warrant Stock, provided, however, that the Subscriber shall be required to pay
-------- -------
any and all taxes which may be payable in respect of any transfer involved in
the issuance and delivery of any certificate in a name other than that of the
Subscriber as reflected upon the books of the Company.
Notwithstanding the foregoing or anything to the contrary herein, this
Warrant may be exercised only upon the delivery to the Company of any
certificates, legal opinions, or other documents reasonably requested by the
Company or its counsel to satisfy the Company and its counsel that the proposed
exercise of this Warrant may be effected without registration under the
Securities Act of 1933, as amended. The Holder shall not be entitled to
exercise this Warrant, or any part hereof, unless and until such certificates,
legal opinions or other documents are reasonably acceptable to the Company and
its counsel.
SECTION 2. Covenants as to Warrant Stock. The Corporation covenants and
-----------------------------
agrees that all shares of Warrant Stock that may be issued upon the exercise of
the rights represented by this Warrant will, upon issuance, be validly issued,
fully paid and nonassessable, and free from all taxes, liens and charges with
respect to the issue thereof. The Corporation further covenants and agrees that
the Corporation will at all times have authorized and reserved, free from
2
<PAGE>
preemptive rights, a sufficient number of shares of its Warrant Stock to provide
for the exercise of the rights represented by this Warrant. The Corporation
further covenants and agrees that if any shares of capital stock to be reserved
for the purpose of the issuance of shares upon the exercise of this Warrant
require registration with or approval of any governmental authority under any
Federal or State law before such shares may be validly issued or delivered upon
exercise, then the Corporation will in good faith and as expeditiously as
possible endeavor to secure such registration or approval, as the case may be.
If and so long as the Warrant Stock issuable upon the exercise of this Warrant
is listed on any national securities exchange, the Corporation will, if
permitted by the rules of such exchange, list and keep listed on such exchange,
upon official notice of issuance, all shares of such Warrant Stock issuable upon
exercise of this Warrant.
SECTION 3. Adjustment of Number of Shares. Upon each adjustment of the
------------------------------
Warrant Price as provided in Section 4, the holder of this Warrant shall
thereafter be entitled to purchase, at the Warrant Price resulting from such
adjustment, the number of shares (calculated to the nearest tenth of a share)
obtained by multiplying the Warrant Price in effect immediately prior to such
adjustment by the number of shares purchasable pursuant hereto immediately prior
to such adjustment and dividing the product thereof by the Warrant Price
resulting from such adjustment.
SECTION 4. Adjustment of Warrant Price. The Warrant Price and the
---------------------------
securities purchasable upon exercise of this Warrant shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Warrant Stock outstanding is increased by a stock dividend
payable in shares of Warrant Stock or by a subdivision or split-up
of shares of Warrant Stock, then, following the record date fixed
for the determination of holders of Warrant Stock entitled to
receive such stock dividend, subdivision or split-up, the Warrant
Price shall be appropriately decreased so that the number of shares
of Warrant Stock issuable upon the exercise hereof shall be
increased in proportion to such increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Warrant Stock outstanding is decreased by a combination of
the outstanding shares of Warrant Stock, then, following the record
date for such combination, the Warrant Price shall appropriately
increase so that the number of shares of Warrant Stock issuable upon
the exercise hereof shall be decreased in proportion to such
decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, of any capital
reorganization, any reclassification of the stock of the Corporation
(other than a change in par value or from par value to no par value
or from no par value to par value or as a result of a stock dividend
or subdivision, split-up or combination of shares), the
consolidation or merger of the Corporation with or into another
corporation (other than a consolidation or merger in which the
Corporation is the continuing corporation and which does not result
in any change in the Warrant Stock), or the
3
<PAGE>
sale of all or substantially all the properties and assets of the
Corporation as an entity to any other corporation, then this Warrant
shall, after such reorganization, reclassification, consolidation,
merger or sale, be exercisable for the kind and number of shares of
stock or other securities or property of the Corporation or of the
corporation resulting from such consolidation or surviving such
merger or to which such properties and assets shall have been sold
to which such holder would have been entitled if he had held the
Warrant Stock issuable upon the exercise hereof immediately prior to
such reorganization, reclassification, consolidation, merger or
sale.
(iv) Whenever the Warrant Price shall be adjusted as provided in this
Section 4, the Corporation shall prepare a statement showing the
facts requiring such adjustment and the Warrant Price that shall be
in effect after such adjustment. The Corporation shall cause a copy
of such statement to be sent by mail, first class postage prepaid,
to each holder of this Warrant at his address appearing on the
Corporation's records. Where appropriate, such copy may be given in
advance and may be included as part of the notice required to be
mailed under the provisions of subsection (vi) of this Section 4.
(v) Adjustments made pursuant to clauses (i) and (ii) above shall be
made on the date such dividend, subdivision, split-up, combination
or distribution, as the case may be, is made, and shall become
effective at the opening of business on the business day next
following the record date for the determination of stockholders
entitled to such dividend, subdivision, split-up, combination or
distribution.
(vi) In the event the Corporation shall propose to take any action of the
types described in clauses (i), (ii) or (iii) of this Section 4, the
Corporation shall forward, at the same time and in the same manner,
to the holder of this Warrant such notice, if any, which the
Corporation shall give to the holders of capital stock of the
Corporation. Failure to give such notice, or any defect therein,
shall not affect the legality or validity of any such action.
(vii) In any case in which the provision of this Section 4 shall require
that an adjustment shall become effective immediately after a record
date for an event, the Corporation may defer until the occurrence of
such event issuing to the holder of all or any part of this Warrant
which is exercised after such record date and before the occurrence
of such event the additional shares of capital stock issuable upon
such exercise by reason of the adjustment required by such event
over and above the shares of capital stock issuable upon such
exercise before giving effect to such adjustment exercise; provided,
--------
however, that the Corporation shall deliver to such holder a due
-------
bill or other appropriate instrument evidencing such holder's right
to receive such additional shares upon the occurrence of the event
requiring such adjustment.
(viii) The sale or other disposition of any Warrant Stock theretofore held
in the treasury of the Corporation shall be deemed to be an issuance
thereof.
4
<PAGE>
SECTION 5. Conversion of Preferred Stock. In the event that the Warrant
-----------------------------
Stock is a class or type of security which is convertible into Common Stock of
the Corporation, as now or as hereafter constituted ("Common Stock"), then, at
such time as there are no outstanding shares of Warrant Stock (due to conversion
into Common Stock or otherwise), this Warrant, without any action of the
Corporation, 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 Warrant Stock for which this Warrant
could have been exercised immediately prior to the time that the Warrant Stock
ceased to be outstanding. Thereafter, all references to (i) "Warrant Stock"
shall mean "Common Stock", and (ii) "Warrant Shares" shall refer to shares of
"Common Stock" rather than shares of "Warrant Stock." Notwithstanding any
provisions herein to the contrary, the Corporation 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 Corporation shall not be required to
-------- -------
issue a new Warrant if this Warrant has been exercised or expired.
SECTION 6. No Stockholder Rights. Except as specifically provided for in
---------------------
this Warrant, this Warrant shall not entitle the holder hereof to any voting
rights or other rights as a stockholder of the Corporation.
SECTION 7. Transfer of Warrant. Subject to the provisions of the
-------------------
Subscription Agreement, this Warrant and all rights hereunder are transferable,
in whole or in part, but only to a person or entity controlling, controlled by,
or under common control with, the holder hereof including the partners of the
holder, at the agency or office of the Corporation referred to in Section 1, by
the holder hereof in person or by duly authorized attorney, upon surrender of
this Warrant properly endorsed. Each taker and holder of this Warrant, by
taking or holding the same, consents and agrees that this Warrant, when
endorsed, in blank, shall be deemed negotiable, and when so endorsed the holder
hereof may be treated by the Corporation and all other persons dealing with this
Warrant as the absolute owner hereof for any purposes and as the person entitled
to exercise the rights represented by this Warrant, or to the transfer hereof on
the books of the Corporation, any notice to the contrary notwithstanding; but
until such transfer on such books, the Corporation may treat the registered
holder hereof as the owner hereof for all purposes.
SECTION 8. Exchange of Warrant. This Warrant is exchangeable, upon
-------------------
surrender hereof by the holder hereof at the office or agency of the Corporation
designated in Section 1 hereof, for new Warrants of like tenor representing in
the aggregate the right to subscribe for and purchase the number of shares which
may be subscribed for and purchased hereunder, each of such new Warrants to
represent the right to subscribe for and purchase such number of shares as shall
be designated by said holder hereof at the time of such surrender.
SECTION 9. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
--------------------------------------------
is lost, stolen, mutilated or destroyed, the Corporation may, on such terms as
to indemnity or otherwise as it may in its discretion impose (which shall, in
the case of a mutilated Warrant, include the
5
<PAGE>
surrender thereof), issue a new Warrant of like denomination and tenor as the
Warrant so lost, stolen, mutilated or destroyed. Any such new Warrant shall
constitute an original contractual obligation of the Corporation, whether or not
the allegedly lost, stolen, mutilated or destroyed Warrant shall be at any time
enforceable by anyone.
SECTION 10. Fractional Shares. Fractional shares shall not be issued upon
-----------------
the exercise of this Warrant, but in any case where the Subscriber would, except
for the provisions of this Section 10, be entitled under the terms hereof to
receive a fractional share upon the complete exercise of this Warrant, the
Corporation shall, upon the exercise of this Warrant for the largest number of
whole shares then called for, cancel this Warrant and pay a sum in cash equal to
the value of such fractional share (determined in such reasonable manner as may
be prescribed in good faith by the Board of Directors of the Corporation).
SECTION 11. Information by Holder. Each Subscriber shall furnish to the
---------------------
Corporation such information regarding such Subscriber as the Corporation may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance.
SECTION 12. Law Governing. This Warrant shall be governed by, and
-------------
construed and enforced in accordance with, the laws of the State of Delaware,
without giving effect to the principles of conflicts of law thereof.
SECTION 13. Miscellaneous.
-------------
(a) This Warrant and any provision hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the party
(or any predecessor in interest thereof) against which enforcement of the same
is sought. The headings in this Warrant are for purposes of reference only and
shall not affect the meaning or construction of any of the provisions hereof.
(b) Any provision of this Warrant which is prohibited or unenforceable in
any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of
such prohibition or unenforceability without invalidating the remaining
provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.
6
<PAGE>
IN WITNESS WHEREOF, DSL.NET, INC. has caused this Warrant to be executed by
its duly authorized officer, and this Warrant to be dated [______], 1998.
DSL.NET, INC.
By:
--------------------------------------
Name:
Title:
ATTEST:
Name:
7
<PAGE>
EXHIBIT 4.05
THE SECURITIES REPRESENTED BY THIS CERTIFICATE (I) ARE SUBJECT TO THE
RESTRICTIONS ON TRANSFER AND OTHER TERMS CONTAINED IN A SUBSCRIPTION AGREEMENT
DATED MARCH 4, 1999, BETWEEN THE COMPANY AND THE HOLDER OF THIS WARRANT (A COPY
OF WHICH IS AVAILABLE WITHOUT CHARGE FROM THE COMPANY), AND (II) HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR ANY 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.
DSL.NET, INC.
No. 4
Warrant to Subscribe for Series A Preferred Stock
STOCK SUBSCRIPTION
WARRANT
March 4, 1999
Not Transferable or Exercisable
-------------------------------
Except Upon Conditions Herein Specified
---------------------------------------
THIS CERTIFIES that, for value received, Comdisco, Inc., a Delaware
corporation (the "Subscriber") with an address at 6111 North River Road,
Rosemont, Illinois, 60018, is entitled to subscribe for and purchase from
DSL.NET, INC., a Delaware corporation (the "Company"), that number of shares
(such number subject to adjustment from time to time as hereinafter provided) of
Series A Preferred Stock, $0.001 par value per share ("Warrant Stock"), of the
Company equal to ONE HUNDRED THOUSAND and 00/100 Dollars ($100,000) divided by
the Warrant Price. The Warrant Price shall equal the Last Round Price plus the
product of (a) the difference between the Next Round Price and the Last Round
Price, multiplied by (b) the fraction resulting from dividing (x) the number of
days from the Last Round Closing Date to the date hereof, by (y) the number of
days from the Last Round Closing Date to the date of the closing of the Next
Round. The Warrant Price is subject to adjustment as provided in Section 4
hereof. For purposes of this paragraph, "Last Round Price" shall mean $1.00 per
share; "Last Round Closing Date" shall mean January 8, 1999; "Next Round" shall
mean the sale by the Company after the date hereof of preferred stock having an
aggregate cash purchase price of $1,000,000 or more,
1
<PAGE>
not including sales or issuances upon the exercise of options, warrants or
convertible securities; and "Next Round Price" shall mean the price per share of
preferred stock issued in the Next Round. This Warrant shall be exercisable at
any time or from time to time during the period beginning on the date of the
closing of the Next Round and ending on the first to occur of (i) March 4, 2006,
and (ii) three (3) years from the date on which the Company consummates an
initial public offering of its capital stock registered under the Securities Act
of 1933, as amended (the "Term of this Warrant").
This Warrant remains subject to the terms and provisions of the
Subscription Agreement, dated March 4, 1999 (the "Subscription Agreement"),
between the Company and the Subscriber.
SECTION 1. Exercise of Warrant. The rights represented by this Warrant
-------------------
may be exercised by the holder hereof, in whole at any time or in part from time
to time during the Term of this Warrant, but not as to a fractional share of
Warrant Stock, by the surrender of this Warrant (properly endorsed) and the
form of Subscription attached hereto at the office of the Company, at 545 Long
Wharf Drive, New Haven, Connecticut 06511 (or at such other agency or office of
the Company in the United States of America as it may designate by notice in
writing to the holder hereof at the address of such holder appearing on the
books of the Company), and by payment to the Company of the Warrant Price in
cash or by certified or cashier's check or wire transfer for each share being
purchased.
In lieu of exercising this Warrant as permitted in the preceding sentence,
the Subscriber may elect to exercise this Warrant or a portion hereof by way of
cashless exercise by surrendering this Warrant (properly endorsed) and the form
of Subscription attached hereto at the office of the Company, in which event the
Company shall issue to the Subscriber that number of shares of Warrant Stock
computed using the following formula:
X = Y (A-B)
-------
A
Where:
X equals the number of shares of Preferred Stock to be issued to the
Subscriber;
Y equals the number of shares of Warrant Stock purchasable under the
Warrant;
A equals the fair market value of one share of the Warrant Stock; and
B equals the Warrant Price (as adjusted to the date of such calculations).
For purposes of this Paragraph 5, the fair market value of Warrant Stock shall
mean the average closing bid and asked prices of the Warrant Stock quoted in the
over-the-counter market in which the Warrant Stock is traded or the closing
price quoted on any exchange on which the Warrant 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
value (or such shorter period of time during which such stock was traded over-
the-counter or on such
2
<PAGE>
exchange). If the Warrant 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 Warrant 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.
In the event of any exercise of the rights represented by this Warrant, a
certificate or certificates for the shares of Warrant Stock so purchased,
registered in the name of the holder, shall be delivered to the holder hereof
within a reasonable time, not exceeding twenty-one days, after the rights
represented by this Warrant shall have been so exercised; and, unless this
Warrant has expired, a new Warrant representing the number of shares, if any,
with respect to which this Warrant shall not then have been exercised shall also
be issued to the holder hereof within such time. The person in whose name any
certificate for shares of Warrant Stock is issued upon exercise of this Warrant
shall for all purposes be deemed to have become the holder of record of such
shares on the date on which the Warrant was surrendered and payment of the
Warrant Price and any applicable taxes was paid, irrespective of the date of
delivery of such certificate, except that, if the date of such surrender and
payment is a date when the stock transfer books of the Company are closed, such
person shall be deemed to have become the holder of such shares at the close of
business on the next succeeding date on which the stock transfer books are open.
The Company shall pay any issue tax imposed on exercise of this Warrant for
Warrant Stock, provided, however, that the Subscriber shall be required to pay
-------- -------
any and all taxes which may be payable in respect of any transfer involved in
the issuance and delivery of any certificate in a name other than that of the
Subscriber as reflected upon the books of the Company.
Notwithstanding the foregoing or anything to the contrary herein, this
Warrant may be exercised only upon the delivery to the Company of any
certificates, legal opinions (if the Company's legal counsel advises it that
such opinion is necessary, which opinion may be delivered by either inside or
outside counsel to the Subscriber), or other documents reasonably requested by
the Company or its counsel to satisfy the Company and its counsel that the
proposed exercise of this Warrant may be effected without registration under the
Securities Act of 1933, as amended (the "1933 Act"). The Subscriber shall not
be entitled to exercise this Warrant, or any part hereof, unless and until such
certificates, legal opinions or other documents are reasonably acceptable to the
Company and its counsel; provided, however, that if the Subscriber provides
acceptable certificates, legal opinions or other documents pursuant to the
Company's request, the exercise of the Warrant shall be deemed effective as of
the date that the Subscriber surrendered the Warrant for exercise in accordance
with the provisions of this Section 1.
SECTION 2. Covenants as to Warrant Stock. The Company covenants and
-----------------------------
agrees that all shares of Warrant Stock that may be issued upon the exercise of
the rights represented by this Warrant will, upon issuance, be validly issued,
fully paid and nonassessable, and free from all taxes, liens and charges with
respect to the issue thereof. The Company further covenants and agrees that the
Company will at all times have authorized and reserved, free from preemptive
rights, a sufficient number of shares of its Warrant Stock to provide for the
exercise of the rights represented by this Warrant. The Company further
covenants and agrees that if any shares of capital stock to be reserved for the
purpose of the issuance of shares upon the exercise of this Warrant require
registration with or approval of any governmental authority under any Federal or
3
<PAGE>
State law (other than Federal or State securities laws) before such shares may
be validly issued or delivered upon exercise, then the Company will in good
faith and as expeditiously as possible endeavor to secure such registration or
approval, as the case may be. If and so long as the Warrant Stock issuable upon
the exercise of this Warrant is listed on any national securities exchange, the
Company will, if permitted by the rules of such exchange, list and keep listed
on such exchange, upon official notice of issuance, all shares of such Warrant
Stock issuable upon exercise of this Warrant.
The Company shall maintain a registry showing the name and address of the
registered holder of this Warrant.
At such time as the Company is subject to the reporting obligations of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), at the written
request of the Subscriber, who proposes to sell Warrant Stock upon the exercise
of the Warrant in compliance with Rule 144 promulgated by the Securities and
Exchange Commission, the Company shall furnish to the Subscriber within ten days
after receipt of such request, a written statement as to its compliance with the
reporting requirements of the Securities and Exchange Commission under Section
13 or Section 15(d) of the Exchange Act.
SECTION 3. Adjustment of Number of Shares. Upon each adjustment of the
------------------------------
Warrant Price as provided in Section 4, the holder of this Warrant shall
thereafter be entitled to purchase, at the Warrant Price resulting from such
adjustment, the number of shares (calculated to the nearest tenth of a share)
obtained by multiplying the Warrant Price in effect immediately prior to such
adjustment by the number of shares purchasable pursuant hereto immediately prior
to such adjustment and dividing the product thereof by the Warrant Price
resulting from such adjustment.
SECTION 4. Adjustment of Warrant Price. The Warrant Price and the
---------------------------
securities purchasable upon exercise of this Warrant shall be subject to
adjustment from time to time as follows:
(i) If, at any time during the Term of this Warrant, the number of
shares of Warrant Stock outstanding is increased by a stock dividend
or any other pro rata distribution without consideration to the
holders of Warrant Stock (except a distribution specifically
provided for in Section 4(iii)) payable in shares of Warrant Stock
or by a subdivision or split-up of shares of Warrant Stock, then,
following the record date fixed for the determination of holders of
Warrant Stock entitled to receive such stock dividend, distribution,
subdivision or split-up, the Warrant Price shall be appropriately
decreased so that the number of shares of Warrant Stock issuable
upon the exercise hereof shall be increased in proportion to such
increase in outstanding shares.
(ii) If, at any time during the Term of this Warrant, the number of
shares of Warrant Stock outstanding is decreased by a combination of
the outstanding shares of Warrant Stock, then, following the record
date for such combination, the Warrant Price shall appropriately
increase so that the number of shares of Warrant Stock
4
<PAGE>
issuable upon the exercise hereof shall be decreased in proportion
to such decrease in outstanding shares.
(iii) In case, at any time during the Term of this Warrant, of any capital
reorganization, any reclassification of the stock of the Company
(other than a change in par value or from par value to no par value
or from no par value to par value or as a result of a stock dividend
or subdivision, split-up or combination of shares), the
consolidation or merger of the Company with or into another
corporation (other than a consolidation or merger in which the
Company is the continuing corporation and which does not result in
any change in the Warrant Stock), or the sale of all or
substantially all the properties and assets of the Company as an
entity to any other corporation, then this Warrant shall, after such
reorganization, reclassification, consolidation, merger or sale, be
exercisable for the kind and number of shares of stock or other
securities or property of the Company or of the corporation
resulting from such consolidation or surviving such merger or to
which such properties and assets shall have been sold to which such
holder would have been entitled if he had held the Warrant Stock
issuable upon the exercise hereof immediately prior to such
reorganization, reclassification, consolidation, merger or sale. In
any such case, appropriate adjustment (as determined in good faith
by the Company's Board of Directors) shall be made (consistent with
the rights of the Company's other security holders) in the
application of the provisions of this Warrant with respect to the
rights and interests of the Subscriber after such reorganization,
reclassification, consolidation, merger or sale to the end that the
provisions of this Warrant (including adjustments to the Warrant
Price and the number of shares of Warrant Stock purchasable) shall
be applicable to the greatest extent possible.
(iv) Whenever the Warrant Price shall be adjusted as provided in this
Section 4, the Company shall prepare a statement showing the facts
requiring such adjustment and the Warrant Price that shall be in
effect after such adjustment. The Company shall cause a copy of such
statement to be sent by mail, first class postage prepaid, to each
holder of this Warrant at his address appearing on the Company's
records. Where appropriate, such copy may be given in advance and
may be included as part of the notice required to be mailed under
the provisions of subsection (vi) of this Section 4.
(v) Adjustments made pursuant to clauses (i) and (ii) above shall be
made on the date such dividend, subdivision, split-up, combination
or distribution, as the case may be, is made, and shall become
effective at the opening of business on the business day next
following the record date for the determination of stockholders
entitled to such dividend, subdivision, split-up, combination or
distribution.
(vi) In the event the Company shall propose to take any action of the
types described in clauses (i), (ii) or (iii) of this Section 4, the
Company shall forward, at the same time and in the same manner, to
the holder of this Warrant such notice, if any, which the Company
shall give to the holders of capital stock of the Company.
5
<PAGE>
Each such written notice shall set forth, in reasonable detail, (i)
the event requiring the adjustment, (ii) the amount of the
adjustment, (iii) the method by which such adjustment was
calculated, (iv) the Warrant Price, and (v) the number of shares
subject to purchase hereunder after giving effect to such
adjustment, and shall be given by first class mail, postage prepaid,
addressed to the Subscriber, at the address shown in the Company's
records. Failure to give such notice, or any defect therein, shall
not affect the legality or validity of any such action.
(vii) In any case in which the provision of this Section 4 shall require
that an adjustment shall become effective immediately after a record
date for an event, the Company may defer until the occurrence of
such event issuing to the holder of all or any part of this Warrant
which is exercised after such record date and before the occurrence
of such event the additional shares of capital stock issuable upon
such exercise by reason of the adjustment required by such event
over and above the shares of capital stock issuable upon such
exercise before giving effect to such adjustment exercise; provided,
--------
however, that the Company shall deliver to such holder a due bill or
-------
other appropriate instrument evidencing such holder's right to
receive such additional shares upon the occurrence of the event
requiring such adjustment.
(viii) The sale or other disposition of any Warrant Stock theretofore held
in the treasury of the Company shall be deemed to be an issuance
thereof.
(ix) Additional antidilution rights applicable to the Warrant Stock
purchasable hereunder are as set forth in the Company's Certificate
of Incorporation, as amended and restated from time to time.
SECTION 5. Conversion of Preferred Stock. At such time as there are no
-----------------------------
outstanding shares of Warrant Stock (due to conversion into Common Stock, par
value $.001 per share, of the Company ("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
Warrant Stock for which this Warrant could have been exercised immediately prior
to the time that the Warrant Stock ceased to be outstanding (after appropriate
adjustments to the Warrant Price, if any, such that the aggregate Warrant Price
remains unchanged). Thereafter, all references to (i) "Warrant Stock" shall
mean "Common Stock", and (ii) "Warrant Shares" shall refer to shares of "Common
Stock" rather than shares of "Warrant 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
-------- -------
a new Warrant if this Warrant has been exercised or expired.
SECTION 6. No Stockholder Rights. Except as specifically provided for in
---------------------
this Warrant, this Warrant shall not entitle the holder hereof to any voting
rights or other rights as a stockholder of the Company.
6
<PAGE>
SECTION 7. Transfer of Warrant. Subject to the provisions of the
-------------------
Subscription Agreement, this Warrant and all rights hereunder are transferable.
Such transfer may be made, in whole or in part, only upon the prior written
consent of the Company, which consent shall not be unreasonably withheld, by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant properly endorsed; provided, however, that any transferee of this
Warrant or any part hereof, shall agree in writing in advance with the Company
to be bound by and comply with all applicable provisions of the Subscription
Agreement. Each taker and holder of this Warrant, by taking or holding the
same, consents and agrees that this Warrant, when endorsed, in blank, and
accompanied by the form of Assignment attached hereto, shall be deemed
negotiable, and when so endorsed the holder hereof may be treated by the Company
and all other persons dealing with this Warrant as the absolute owner hereof for
any purposes and as the person entitled to exercise the rights represented by
this Warrant, or to the transfer hereof on the books of the Company, any notice
to the contrary notwithstanding; but until such transfer on such books, the
Company may treat the registered holder hereof as the owner hereof for all
purposes.
In no event will the Subscriber make a disposition of any of its rights to
acquire Warrant Stock or Warrant Stock issuable upon exercise of such rights
unless and until (i) it shall have notified the Company of the proposed
disposition and obtained the Company's prior consent in accordance with the
terms above, and (ii) if requested by the Company, it shall have furnished the
Company with an opinion of counsel (which counsel may be either inside or
outside counsel to the Subscriber) satisfactory to the Company and its counsel
to the effect that (A) appropriate action necessary for compliance with the 1933
Act has been taken, or (B) an exemption from the registration requirements of
the 1933 Act is available. Notwithstanding the foregoing, the restrictions
imposed upon the transferability of any of its rights to acquire Warrant Stock
or Warrant Stock issuable on the exercise of such rights do not apply to
transfers from the beneficial owner of any of the aforementioned securities to
its nominee or from such nominee to its beneficial owner, and shall terminate as
to any particular share of Warrant Stock when (1) such security shall have been
effectively registered under the 1933 Act and sold by the holder thereof in
accordance with such registration or (2) such security shall have been sold
without registration in compliance with Rule 144 under the 1933 Act, or (3) a
letter shall have been issued to the Subscriber at its request by the staff of
the Securities and Exchange Commission or a ruling shall have been issued to the
Subscriber at its request by such Commission stating that no action shall be
recommended by such staff or taken by such Commission, as the case may be, if
such security is transferred without registration under the 1933 Act in
accordance with the conditions set forth in such letter or ruling and such
letter or ruling specifies that no subsequent restrictions on transfer are
required. Whenever the restrictions imposed hereunder shall terminate, as
hereinabove provided, the Subscriber or holder of a share of Warrant Stock then
outstanding as to which such restrictions have terminated shall be entitled to
receive from the Company, without expense to such holder, one or more
certificates for the Warrant or for such shares of Warrant Stock not bearing any
restrictive legend.
SECTION 8. Exchange of Warrant. This Warrant is exchangeable, upon
-------------------
surrender hereof by the holder hereof at the office or agency of the Company
designated in Section 1 hereof, for new Warrants of like tenor representing in
the aggregate the right to subscribe for and purchase the number of shares which
may be subscribed for and
7
<PAGE>
purchased hereunder, each of such new Warrants to represent the right to
subscribe for and purchase such number of shares as shall be designated by said
holder hereof at the time of such surrender.
SECTION 9. Lost, Stolen, Mutilated or Destroyed Warrant. If this Warrant
--------------------------------------------
is lost, stolen, mutilated or destroyed, the Company may, on such terms as to
indemnity or otherwise as it may in its discretion impose (which shall, in the
case of a mutilated Warrant, include the surrender thereof), issue a new Warrant
of like denomination and tenor as the Warrant so lost, stolen, mutilated or
destroyed. Any such new Warrant shall constitute an original contractual
obligation of the Company, whether or not the allegedly lost, stolen, mutilated
or destroyed Warrant shall be at any time enforceable by anyone.
SECTION 10. Fractional Shares. Fractional shares shall not be issued upon
-----------------
the exercise of this Warrant, but in any case where the Subscriber would, except
for the provisions of this Section 10, be entitled under the terms hereof to
receive a fractional share upon the complete exercise of this Warrant, the
Company shall, upon the exercise of this Warrant for the largest number of whole
shares then called for, cancel this Warrant and pay a sum in cash equal to the
value of such fractional share (determined in such reasonable manner as may be
prescribed in good faith by the Board of Directors of the Company).
SECTION 11. Information by Subscriber. Each Subscriber shall furnish to
-------------------------
the Company such information regarding such Subscriber as the Company may
reasonably request in writing and as shall be reasonably required in connection
with any registration, qualification or compliance.
SECTION 12. Law Governing. This Warrant shall be governed by, and
-------------
construed and enforced in accordance with, the laws of the State of Delaware,
without giving effect to the principles of conflicts of law thereof.
SECTION 13. Miscellaneous.
-------------
(a) The provisions of this Warrant shall be construed and shall be
given effect in all respects as if it had been executed and delivered by
the Company on the date hereof. This Warrant shall be binding on any
successors or assigns of the Company.
(b) In any litigation, arbitration or court proceeding between the
Company and the Subscriber relating hereto, the prevailing party shall be
entitled to reasonable attorneys' fees and expenses and all reasonable
costs of proceedings incurred in enforcing this Warrant.
(c) Any notice required or permitted hereunder shall be given in
writing and shall be deemed effectively given upon personal delivery,
facsimile transmission (provided that the original is sent by personal
delivery or mail as hereinafter set forth) or seven days after deposit in
the United States mail, addressed (i) to the Subscriber at 6111 North River
Road, Rosemont, Illinois 60018, Attention: James Labe, Venture Group, cc:
Legal Department, Attention: General Counsel (and/or if by facsimile, (847)
518-5465 and (847) 518-5088), or at such other address as the Subscriber
may indicate in writing to the Company, and (ii) to the Company at 545 Long
Wharf Drive, New Haven, Connecticut 06511, Attention: President (and/or by
facsimile at (860) 624-3612), or at such other address as the Company may
indicate in a notice given to its security holders.
8
<PAGE>
(d) In the event of any default hereunder, the non-defaulting party
may proceed to protect and enforce its rights either by suit in equity
and/or by action at law, including but not limited to an action for damages
as a result of any such default, and/or an action for specific performance
for any default where Subscriber will not have an adequate remedy at law.
(e) The Company will not, by amendment of its Charter or through any
other means, avoid or seek to avoid the observance or performance of any
terms of this Warrant, but will at all times in good faith assist in the
carrying out of all terms and in the taking of all such actions as may be
necessary or appropriate in order to protect the rights of the Subscriber
hereunder against impairment.
(f) The covenants of the Company contained herein shall survive the
execution and delivery of this Warrant.
(g) In the event that any one or more of the provisions of this
Warrant shall for any reason be held invalid, illegal or unenforceable, the
remaining provisions of this Warrant shall be unimpaired, and the invalid,
illegal or unenforceable provision shall be replaced by a mutually
acceptable valid, legal and enforceable provision, which comes closest to
the intention of the parties underlying the invalid, illegal or
unenforceable provision.
(h) Any provision of this Warrant may be amended by a written
instrument signed by the Company and by the Subscriber.
(i) This Warrant and any provision hereof may be changed, waived,
discharged or terminated only by an instrument in writing signed by the
party (or any predecessor in interest thereof) against which enforcement of
the same is sought. The headings in this Warrant are for purposes of
reference only and shall not affect the meaning or construction of any of
the provisions hereof.
(j) Any provision of this Warrant which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
9
<PAGE>
IN WITNESS WHEREOF, DSL.NET, INC. has caused this Warrant to be executed by
its duly authorized officer, and this Warrant to be dated March 4, 1999.
DSL.NET, INC.
By: /s/ David F. Struwas
--------------------
Name: David F. Struwas
------------------
Title: President & CEO
----------------
ATTEST:
/s/ Paul K. Sun
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Name: Paul K. Sun
10
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EXHIBIT 10.01
dsl.net, inc.
1999 STOCK PLAN
March 30, 1999
SECTION 1. Purpose.
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The purpose of the 1999 Stock Plan (the "Plan") is to secure for dsl.net,
inc., (the "Company"), its parent (if any) and any subsidiaries of the Company
(collectively the "Related Corporations") the benefits arising from capital
stock ownership by those employees, directors, officers and consultants of the
Company and any Related Corporations who will be responsible for the Company's
future growth and continued success.
The Plan will provide a means whereby (a) employees of the Company and any
Related Corporations may purchase stock in the Company pursuant to options which
qualify as "incentive stock options" ("Incentive Stock Options") under Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"), (b)
directors, employees and consultants of the Company and any Related Corporations
may purchase stock in the Company pursuant to options granted hereunder which do
not qualify as Incentive Stock Options ("Non-Qualified Options"); (c) directors,
employees and consultants of the Company and any Related Corporations may be
awarded stock in the Company ("Awards"); (d) directors, employees and
consultants of the Company and any Related Corporations may receive stock
appreciation rights ("SARs"); and (e) directors, employees and consultants of
the Company and any Related Corporations may make direct purchases of stock in
the Company ("Purchases"). Both Incentive Stock Options and Non-Qualified
Options are referred to hereafter individually as an "Option" and collectively
as "Options." As used herein, the terms "parent" and "subsidiary" mean "parent
corporation" and "subsidiary corporation" as those terms are defined in Section
424 of the Code. Options, Awards, SARs and Purchases are referred to hereafter
individually as a "Plan Benefit" and collectively as "Plan Benefits."
Directors, employees and consultants of the Company and any Related Corporations
are referred to herein as "Participants."
SECTION 2. Administration.
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2.1 Board of Directors and the Committee. The Plan will be administered
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by the Board of Directors of the Company whose construction and interpretation
of the terms and provisions hereof shall be final and conclusive. Any director
to whom a Plan Benefit is awarded shall be ineligible to vote upon his or her
Plan Benefit, but Plan Benefits may be granted any such director by a vote of
the remainder of the directors, except as limited below. The Board of Directors
may in its sole discretion grant Options, issue shares upon exercise of such
Options, grant Awards, grant SARs and approve Purchases, all as provided in the
Plan. The Board of Directors shall have authority, subject to the express
provisions of the Plan, to construe the Plan and its related agreements, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of the respective Option, Award, SAR and
Purchase
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agreements, which need not be identical, and to make all other
determinations in the judgment of the Board of Directors necessary or desirable
for the administration of the Plan. The Board of Directors may correct any
defect or supply any omission or reconcile any inconsistency in the Plan or in
any related agreement in the manner and to the extent it shall deem expedient to
carry the Plan into effect and it shall be the sole and final judge of such
expediency. No director shall be liable for any action or determination made in
good faith. The Board of Directors may delegate any or all of its powers under
the Plan to a Compensation Committee or other Committee (the "Committee")
appointed by the Board of Directors consisting of at least two members of the
Board of Directors. If the Company has a class of stock registered pursuant to
Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), then members of the Committee shall at all times be: (i) "outside
directors" as such term is defined in Treas. Reg. (S) 1.162-27(e)(3) (or any
successor regulation); and (ii) "non-employee directors" within the meaning of
Rule 16b-3 (or any successor rule) under the Exchange Act, as such terms are
interpreted from time to time. If the Committee is so appointed, all references
to the Board of Directors herein shall mean and relate to such Committee, unless
the context otherwise requires.
2.2 Compliance with Section 162(m) of the Code. Section 162(m) of the
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Code, added by the Omnibus Budget Reconciliation Act of 1993, generally limits
the tax deductibility to publicly held companies of compensation in excess of
$1,000,000 paid to certain "covered employees" ("Covered Employees"). If the
Company is subject to Section 162(m) of the Code, it is the Company's intention
to preserve the deductibility of such compensation to the extent it is
reasonably practicable and to the extent it is consistent with the Company's
compensation objectives. For purposes of this Plan, Covered Employees of the
Company shall be those employees of the Company described in Section 162(m)(3)
of the Code.
SECTION 3. Eligibility.
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3.1 Incentive Stock Options. Participants who are employees shall be
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eligible to receive Incentive Stock Options pursuant to the Plan; provided that
no person shall be granted any Incentive Stock Option under the Plan who, at the
time such Option is granted, owns, directly or indirectly, Common Stock of the
Company possessing more than 10% of the total combined voting power of all
classes of stock of the Company or of its Related Corporations, unless the
requirements of Section 6.6(b) hereof are satisfied. In determining whether
this 10% threshold has been reached, the stock attribution rules of Section
424(d) of the Code shall apply. Directors who are not regular employees are not
eligible to receive Incentive Stock Options.
3.2 Non-Qualified Options, Awards, SARs and Purchases. Non-Qualified
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Options, Awards, SARs and authorizations to make Purchases may be granted to any
Participant.
3.3 Generally. The Board of Directors may take into consideration a
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Participant's individual circumstances in determining whether to grant an
Incentive Stock Option, a Non-Qualified Option, an Award or an SAR or to approve
a Purchase. Granting of any Option, Award or SAR or approval of any Purchase
for any individual shall neither entitle that individual to, nor disqualify that
individual from, participation in any other grant of Plan Benefits.
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SECTION 4. Stock Subject to Plan.
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Subject to adjustment as provided in Sections 10 and 11 hereof, the stock
to be offered under the Plan shall consist of shares of the Company's Common
Stock, par value $.001 per share, and the maximum number of shares of stock
which will be reserved for issuance, and in respect of which Plan Benefits may
be granted pursuant to the provisions of the Plan, shall not exceed in the
aggregate 3,700,000 shares. Such shares may be authorized and unissued shares
or may be treasury shares. If an Option or SAR granted hereunder shall expire
or terminate for any reason without having been exercised in full, or if the
Company shall reacquire any unvested shares issued pursuant to Awards or
Purchases, the unpurchased shares subject thereto and any unvested shares so
reacquired shall again be available for subsequent grants of Plan Benefits under
the Plan. Stock issued pursuant to the Plan may be subject to such restrictions
on transfer, repurchase rights or other restrictions as shall be determined by
the Board of Directors.
SECTION 5. Granting of Options, Awards and SARs and Approvals of Purchases.
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Options, Awards and SARs may be granted and Purchases may be approved under
the Plan at any time after February __, 1999 and prior to March 30, 2009. The
date of grant of an Option, Award or SAR or approval of a Purchase under the
Plan will be the date specified by the Board of Directors at the time the Board
of Directors grants such Option, Award or SAR or approves such Purchase;
provided, however, that such date shall not be prior to the date on which the
Board of Directors takes such action. The Board of Directors shall have the
right, with the consent of a Participant, to convert an Incentive Stock Option
granted under the Plan to a Non-Qualified Option pursuant to Section 6.7. Plan
Benefits may be granted alone or in addition to other grants under the Plan.
SECTION 6. Special Provisions Applicable to Options and SARs.
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6.1 Purchase Price and Shares Subject to Options and SARs.
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(a) The purchase price per share of stock deliverable upon the
exercise of an Option shall be determined by the Board of Directors,
provided, however, that (i) in the case of an Incentive Stock Option, the
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exercise price shall not be less than 100% of the fair market value of such
stock on the day the option is granted (except as modified in Section
6.6(b) hereof), and (ii) in the case of a Non-Qualified Option, the
exercise price shall not be less than 50% of the fair market value of such
stock on the day such Option is granted.
(b) Options granted under the Plan may provide for the payment of the
exercise price by delivery of (i) cash or a check payable to the order of
the Company in an amount equal to the exercise price of such Options, (ii)
shares of Common Stock of the Company owned by the Participant having a
fair market value equal in amount to the exercise price of the Options
being exercised, or (iii) any combination of (i) and (ii). The
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fair market value of any shares of the Company's Common Stock which may be
delivered upon exercise of an Option shall be determined by the Board of
Directors. The Board of Directors may also permit Participants, either on a
selective or aggregate basis, to simultaneously exercise Options and sell
the shares of Common Stock thereby acquired, either to the Company or
pursuant to a brokerage or similar arrangement, approved in advance by the
Board of Directors, and to use the proceeds from such sale as payment of
the purchase price of such shares.
(c) If, at the time an Option is granted under the Plan, the
Company's Common Stock is publicly traded, "fair market value" shall be
determined as of the last business day for which the prices or quotes
discussed in this sentence are available prior to the date such Option is
granted (the "Determination Date") and shall mean (i) the average (on the
Determination Date) of the high and low prices of the Common Stock on the
principal national securities exchange on which the Common Stock is traded,
if such Common Stock is then traded on a national securities exchange; (ii)
the last reported sale price (on the Determination Date) of the Common
Stock on the Nasdaq Stock Market if the Common Stock is not then traded on
a national securities exchange; or (iii) the closing bid price (or average
of bid prices) last quoted (on the Determination Date) by an established
quotation service for over-the-counter securities, if the Common Stock is
not reported on the Nasdaq Stock Market. However, if the Common Stock is
not publicly traded at the time an Option is granted under the Plan, "fair
market value" shall be deemed to be the fair value of the Common Stock as
determined by the Board of Directors after taking into consideration all
factors which it deems appropriate, including, without limitation, recent
sale and offer prices of the Common Stock in private transactions
negotiated at arm's length.
(d) If the Company is subject to Section 162(m) of the Code, the
maximum number of shares with respect to which Options or SARs may be
granted to any employee, including any cancellations or repricings which
may occur, shall be limited to 250,000 shares in any calendar year.
6.2 Duration of Options and SARs. Subject to Section 6.6(b) hereof, each
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Option and SAR and all rights thereunder shall be expressed to expire on such
date as the Board of Directors may determine, but in no event later than ten
years from the day on which the Option or SAR is granted and shall be subject to
earlier termination as provided herein.
6.3 Exercise of Options and SARs.
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(a) Subject to Section 6.6(b) hereof, each Option and SAR granted
under the Plan shall be exercisable at such time or times and during such
period as shall be set forth in the instrument evidencing such Option or
SAR. To the extent that an Option or SAR is not exercised by a Participant
when it becomes initially exercisable, it shall not expire but shall be
carried forward and shall be exercisable, on a cumulative basis, until the
expiration of the exercise period. No partial exercise may be for less than
ten (10) full shares of Common Stock (or its equivalent).
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(b) The Board of Directors shall have the right to accelerate the
date of exercise of any installments of any Option or SAR; provided that
the Board of Directors shall not accelerate the exercise date of any
installment of any Option granted to a Participant as an Incentive Stock
Option (and not previously converted into a Non-Qualified Option pursuant
to Section 6.7) if such acceleration would violate the annual vesting
limitation contained in Section 422(d)(1) of the Code, which provides
generally that the aggregate fair market value (determined at the time the
Option is granted) of the stock with respect to which Incentive Stock
Options granted to any Participant are exercisable for the first time by
such Participant during any calendar year (under all plans of the Company
and any Related Corporations) shall not exceed $100,000.
6.4 Nontransferability of Options and SARs.
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No Option or SAR granted under the Plan shall be assignable or transferable
by the Participant, either voluntarily or by operation of law, except by will or
the laws of descent and distribution or, with respect to Non-Qualified Options
and SARs, pursuant to a qualified domestic relations order as defined by the
Code or Title I of the Employee Retirement Income Security Act ("ERISA") or the
rules promulgated thereunder or unless the Participant's non-qualified stock
option agreement granting such options (the "Non-Qualified Stock Option
Agreement") or the Participant's SAR agreement granting such SARs (the "SAR
Agreement") provides otherwise. Unless otherwise provided by the Non-Qualified
Stock Option Agreement or the SAR Agreement, during the life of the Participant,
the Option or SAR shall be exercisable only by him or her. If any Participant
should attempt to dispose of or encumber his or her Options or SARs, other than
in accordance with the applicable terms of a Non-Qualified Stock Option
Agreement or SAR Agreement, his or her interest in such Options or SARs shall
terminate.
6.5 Effect of Termination of Employment or Death.
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(a) If a Participant ceases to be employed by the Company or a
Related Corporation for any reason, including retirement but other than
death, any Option or SAR granted to such Participant under the Plan shall
immediately terminate; provided, however, that any portion of such Option
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or SAR which was otherwise exercisable on the date of termination of the
Participant's employment may be exercised within the three-month period
following the date on which the Participant ceased to be so employed, but
in no event after the expiration of the exercise period. Any such exercise
may be made only to the extent of the number of shares subject to the
Option or SAR which were purchasable on the date of such termination of
employment. If the Participant dies during such three-month period, the
Option or SAR shall be exercisable by the Participant's personal
representatives, heirs or legatees to the same extent and during the same
period that the Participant could have exercised the Option or SAR on the
date of his or her death.
(b) If the Participant dies while an employee of the Company or any
Related Corporation, any Option or SAR granted to such Participant under
the Plan shall be exercisable by the Participant's personal
representatives, heirs or legatees, for the
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purchase of that number of shares and to the same extent that the
Participant could have exercised the Option or SAR on the date of his or
her death. The Option or SAR or any unexercised portion thereof shall
terminate unless so exercised prior to the earlier of the expiration of six
months from the date of such death or the expiration of the exercise
period.
6.6 Designation of Incentive Stock Options; Limitations.
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Options granted under the Plan which are intended to be Incentive Stock
Options qualifying under Section 422 of the Code shall be designated as
Incentive Stock Options and shall be subject to the following additional terms
and conditions:
(a) Dollar Limitation. The aggregate fair market value (determined
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at the time the option is granted) of the Common Stock for which Incentive
Stock Options are exercisable for the first time during any calendar year
by any person under the Plan (and all other incentive stock option plans of
the Company and any Related Corporations) shall not exceed $100,000. In the
event that Section 422(d)(1) of the Code is amended to alter the limitation
set forth therein so that following such amendment such limitation shall
differ from the limitation set forth in this Section 6.6(a), the limitation
of this Section 6.6(a) shall be automatically adjusted accordingly.
(b) 10% Stockholder. If any employee to whom an Incentive Stock
---------------
Option is to granted pursuant to the provisions of the Plan is on the date
of grant the owner of stock possessing more than 10% of the total combined
voting power of all classes of stock of the Company or any Related
Corporations, then the following special provisions shall be applicable to
the Incentive Stock Option granted to such individual:
(i) The option price per share of the Common Stock subject to
such Incentive Stock Option shall not be less than 110% of the fair
market value of one share of Common Stock on the date of grant; and
(ii) The option exercise period shall not exceed five years
from the date of grant.
In determining whether the 10% threshold has been reached, the stock
attribution rules of Section 424(d) of the Code shall apply.
(c) Except as modified by the preceding provisions of this Section
6.6, all of the provisions of the Plan shall be applicable to Incentive
Stock Options granted hereunder.
6.7 Conversion of Incentive Stock Options into Non-Qualified Options;
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Termination of Incentive Stock Options. The Board of Directors, at the written
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request of any Participant, may in its discretion take such actions as may be
necessary to convert such Participant's Incentive Stock Options (or any
installments or portions of installments thereof) that have not been exercised
on the date of conversion into Non-Qualified Options at any time prior
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to the expiration of such Incentive Stock Options, regardless of whether the
Participant is an employee of the Company or a Related Corporation at the time
of such conversion. Such actions may include, but not be limited to, extending
the exercise period or reducing the exercise price of the appropriate
installments of such Options. At the time of such conversion, the Board of
Directors (with the consent of the Participant) may impose such conditions on
the exercise of the resulting Non-Qualified Options as the Board of Directors in
its discretion may determine, provided that such conditions shall not be
inconsistent with the Plan. Nothing in the Plan shall be deemed to give any
Participant the right to have such Participant's Incentive Stock Options
converted into Non-Qualified Options, and no such conversion shall occur until
and unless the Board of Directors takes appropriate action. The Board of
Directors, with the consent of the Participant, may also terminate any portion
of any Incentive Stock Option that has not been exercised at the time of such
termination.
6.8 Stock Appreciation Rights. An SAR is the right to receive, without
-------------------------
payment, an amount equal to the excess, if any, of the fair market value of a
share of Common Stock on the date of exercise over the grant price, which amount
will be multiplied by the number of shares with respect to which the SARs shall
have been exercised. The grant of SARs under the Plan shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the express terms of the Plan, as the Board of
Directors shall deem desirable:
(a) Grant. SARs may be granted in tandem with, in addition to or
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completely independent of any Plan Benefit.
(b) Grant Price. The grant price of an SAR may be the fair market
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value of a share of Common Stock on the date of grant or such other price
as the Board of Directors may determine.
(c) Exercise. An SAR may be exercised by a Participant in
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accordance with procedures established by the Board of Directors or as
otherwise provided in any agreement evidencing any SARs. The Board of
Directors may provide that an SAR shall be automatically exercised on one
or more specified dates.
(d) Form of Payment. Payment upon exercise of an SAR may be made
---------------
in cash, in shares of Common Stock or any combination thereof, as the Board
of Directors shall determine.
(e) Fair Market Value. Fair market value shall be determined in
-----------------
accordance with Section 6.1(c) with the "Determination Date" being
determined by reference to the date of grant or the date of exercise of an
SAR, as applicable.
6.9 Rights as a Stockholder.
-----------------------
The holder of an Option or SAR shall have no rights as a stockholder with
respect to any shares covered by the Option or SAR until the date of issue of a
stock certificate to him or her for such shares. Except as otherwise expressly
provided in the Plan, no adjustment shall be made for
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dividends or other rights for which the record date is prior to the date such
stock certificate is issued.
6.10 Special Provisions Applicable to Non-Qualified Options and SARs
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Granted to Covered Employees.
----------------------------
If the Company is subject to Section 162(m) of the Code, in order for the
full value of Non- Qualified Options or SARs granted to Covered Employees to be
deductible by the Company for federal income tax purposes, the Company may
intend for such Non-Qualified Options or SARs to be treated as "qualified
performance-based compensation" as described in Treas. Reg. (S)1.162-27(e) (or
any successor regulation). In such case, Non-Qualified Options or SARs granted
to Covered Employees shall be subject to the following additional requirements:
(a) such options and rights shall be granted only by the Committee;
and
(b) the exercise price of such Options and the grant price of such
SARs granted shall in no event be less than the fair market value of the
Common Stock as of the date of grant of such Options or SARs.
SECTION 7. Special Provisions Applicable to Awards
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7.1 Grants of Awards. The Board of Directors may grant a Participant an
----------------
Award subject to such terms and conditions as the Board of Directors deems
appropriate, including, without limitation, restrictions on the pledging, sale,
assignment, transfer or other disposition of such shares and the requirement
that the Participant forfeit all or a portion of such shares back to the Company
upon termination of employment.
7.2 Conditions. Approvals of Awards may be subject to the following
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conditions:
(a) Each Participant receiving an Award shall enter into an agreement
(a "Stock Restriction Agreement") with the Company, if required by the
Board of Directors, in a form specified by the Board of Directors agreeing
to such terms and conditions of the Award as the Board of Directors deems
appropriate.
(b) Shares issued and transferred to a Participant pursuant to an
Award may, if required by the Board of Directors, be deposited with the
Treasurer or other officer of the Company designated by the Board of
Directors to be held until the lapse of the restrictions upon such shares,
and each Participant shall execute and deliver to the Company stock powers
enabling the Company to exercise its rights hereunder.
(c) Certificates for shares issued pursuant to an Award shall, if the
Company shall deem it advisable, bear a legend to the effect that they are
issued subject to specified restrictions.
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(d) Certificates representing the shares issued pursuant to an Award
shall be registered in the name of the Participant and shall be owned by
such Participant. Such Participant shall be the holder of record of such
shares for all purposes, including voting and receipt of dividends paid
with respect to such shares.
7.3 Nontransferability. Shares issued pursuant to an Award may not be
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sold, assigned, transferred, alienated, commuted, anticipated, or otherwise
disposed of (except, subject to the provisions of such Participant's Stock
Restriction Agreement, by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of ERISA or the rules promulgated thereunder), or pledged or hypothecated as
collateral for a loan or as security for the performance of any obligation, or
be otherwise encumbered, and are not subject to attachment, garnishment,
execution or other legal or equitable process, prior to the lapse of
restrictions on such shares, and any attempt at action in contravention of this
Section shall be null and void. If any Participant should attempt to dispose of
or encumber his or her shares issued pursuant to an Award prior to the lapse of
the restrictions imposed on such shares, his or her interest in such shares
shall terminate.
7.4 Effect of Termination of Employment or Death on Awards. If, prior to
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the lapse of restrictions applicable to Awards, the Participant ceases to be an
employee of the Company or the Related Companies for any reason, Awards to such
Participant, as to which restrictions have not lapsed, shall be forfeited to the
Company, effective on the date of the Participant's termination of employment.
The Board of Directors shall have the sole power to decide in each case to what
extent leaves of absence shall be deemed a termination of employment.
SECTION 8. Special Provisions Applicable to Purchases.
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All approvals of Purchases which provide that the Company has a right to
repurchase the shares subject to such Purchase (the "Restricted Shares") shall
be subject to the terms and conditions set forth in the related agreement (the
"Stock Purchase Restriction Agreement") approved by the Board of Directors, and
shall be subject to the other terms and conditions of this Section 8.
8.1 Conditions. All approvals of Purchases shall be subject to the
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following conditions:
(a) Prior to the issuance and transfer of Restricted Shares, the
Participant shall pay to the Company the purchase price (the "Purchase
Price") of the Restricted Shares in cash or in such other manner as shall
be as approved by the Board of Directors.
(b) Restricted Shares issued and transferred to a Participant may, if
required by the Board of Directors, be deposited with the Treasurer or
other officer of the Company designated by the Board of Directors to be
held until the lapse of the
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restrictions upon such Restricted Shares, and each Participant shall
execute and deliver to the Company stock powers enabling the Company to
exercise its rights hereunder.
(c) Certificates for Restricted Shares shall, if the Company shall
deem it advisable, bear a legend to the effect that they are issued subject
to specified restrictions.
(d) Certificates representing the Restricted Shares shall be
registered in the name of the Participant and shall be owned by such
Participant. Such Participant shall be the holder of record of such
Restricted Shares for all purposes, including voting and receipt of
dividends paid with respect to such Restricted Shares.
8.2 Nontransferability. A Participant's Restricted Shares may not be
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sold, assigned, transferred, alienated, commuted, or otherwise disposed of
(except, subject to the provisions of such Participant's Stock Purchase
Restriction Agreement, by will or the laws of descent and distribution or
pursuant to a qualified domestic relations order as defined by the Code or Title
I of ERISA or the rules promulgated thereunder), or pledged or hypothecated as
collateral for a loan or as security for the performance of any obligation, or
be otherwise encumbered, and are not subject to attachment, garnishment,
execution or other legal or equitable process, prior to the lapse of
restrictions on such Restricted Shares, and any attempt at action in
contravention of this Section shall be null and void. If any Participant should
attempt to dispose of or encumber his or her Restricted Shares prior to the
lapse of the restrictions imposed on such Restricted Shares, his or her interest
in the Restricted Shares awarded to him or her shall terminate.
SECTION 9. Requirements of Law.
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9.1 Violations of Law. No shares shall be issued and delivered upon
-----------------
exercise of any Option or the making of any Award or Purchase or the payment of
any SAR unless and until, in the opinion of counsel for the Company, any
applicable registration requirements of the Securities Act of l933, as amended,
any applicable listing requirements of any national securities exchange on which
stock of the same class is then listed, and any other requirements of law or of
any regulatory bodies having jurisdiction over such issuance and delivery, shall
have been fully complied with. Each Participant may, by accepting Plan Benefits,
be required to represent and agree in writing, for himself or herself and for
his or her transferees by will or the laws of descent and distribution, that the
stock acquired by him, her or them is being acquired for investment. The
requirement for any such representation may be waived at any time by the Board
of Directors.
9.2 Compliance with Rule 16b-3. If the Company has a class of stock
--------------------------
registered pursuant to Section 12 of the Exchange Act, the intent of this Plan
is to qualify for the exemption provided by Rule 16b-3 under the Exchange Act.
To the extent any provision of the Plan does not comply with the requirements of
Rule 16b-3, it shall be deemed inoperative to the extent permitted by law and
deemed advisable by the Board of Directors and shall not affect the validity of
the Plan. In the event Rule 16b-3 is revised or replaced, the Board of
Directors may exercise discretion to modify this Plan in any respect necessary
to satisfy the requirements of the revised exemption or its replacement.
<PAGE>
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SECTION 10. Recapitalization.
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In the event that dividends are payable in Common Stock of the Company or
in the event there are splits, sub-divisions or combinations of shares of Common
Stock of the Company, the number of shares available under the Plan shall be
increased or decreased proportionately, as the case may be, and the number of
shares deliverable upon the exercise thereafter of any Option previously granted
shall be increased or decreased proportionately, as the case may be, without
change in the aggregate purchase price, and the number of shares to which
granted SARs relate shall be increased or decreased proportionately, as the case
may be, and the grant price of such SARs shall be decreased or increased
proportionately, as the case may be.
SECTION 11. Reorganization.
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(a) In case the Company is merged or consolidated with another
corporation and the Company is not the surviving corporation, or, in case
the property or stock of the Company is acquired by any other corporation,
or in case of a reorganization or liquidation of the Company, the Board of
Directors of the Company, or the board of directors of any corporation
assuming the obligations of the Company hereunder, shall, as to outstanding
Plan Benefits, either (i) make appropriate provision for the protection of
any such outstanding Plan Benefits by the substitution on an equitable
basis of appropriate stock of the Company or of the merged, consolidated or
otherwise reorganized corporation which will be issuable in respect of the
shares of Common Stock of the Company, provided only that the excess of the
aggregate fair market value of the shares subject to the Plan Benefits
immediately after such substitution over the purchase price thereof is not
more than the excess of the aggregate fair market value of the shares
subject to such Plan Benefits immediately before such substitution over the
purchase price thereof, (ii) upon written notice to the Participants,
provide that all unexercised Plan Benefits must be exercised within a
specified number of days of the date of such notice or such Plan Benefits
will be terminated, or (iii) upon written notice to the Participants,
provide that the Company or the merged, consolidated or otherwise
reorganized corporation shall have the right, upon the effective date of
any such merger, consolidation, sale of assets or reorganization, to
purchase all Plan Benefits held by each Participant and unexercised as of
that date at an amount equal to the aggregate fair market value on such
date of the shares subject to the Plan Benefits held by such Participant
over the aggregate purchase price therefor, such amount to be paid in cash
or, if stock of the merged, consolidated or otherwise reorganized
corporation is issuable in respect of the shares of the Common Stock of the
Company, then, in the discretion of the Board of Directors, in stock of
such merged, consolidated or otherwise reorganized corporation equal in
fair market value to the aforesaid amount. In any such case the Board of
Directors shall, in good faith, determine fair market value and may, in its
discretion, advance the lapse of any waiting or installment periods and
exercise dates.
(b) Notwithstanding anything herein to the contrary, in the event
that following or in connection with a Change-in-Control (as defined
below), a Participant's employment with, or service as a director or
consultant of, the Company is (i) terminated by the Company for any reason
other than Cause (as defined below), or (ii) terminated by the Participant
for Good Reason
<PAGE>
-12-
(as defined below), any portion of a Participant's Plan Benefit which would
otherwise vest or become exercisable solely with the passage of time and
the Participant's continued employment with or service as a director or
consultant of the Company, shall immediately vest and become fully
exercisable and all rights relevant to such Plan Benefit shall accrue
immediately to such Participant, unless otherwise explicitly provided in
the applicable Award agreement. The term "Cause" shall mean (i) habitual
intoxication, (ii) illegal drug use or addiction, (iii) conviction of a
felony (or plea of guilty or nolo contendere), (iv) material failure or
inability to perform one's agreements, duties or obligations as an
employee, director or consultant, other than from illness or injury, and
(v) willful misconduct or negligence in the performance of one's
agreements, duties or obligations as an employee, director or consultant.
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 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 was a beneficial owner of forty percent (40%) or more of the
total voting power of the Company's outstanding voting securities on April
29, 1999; 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. The term
"Good Reason" shall mean that (i) the Participant's compensation has been
materially reduced, (ii) the Participant's position, duties or
responsibilities have been materially changed, (iii) the Participant, if an
employee of the Company, has been required to move his or her principal
residence because his primary place of employment is moved to a location
greater than thirty (30) miles away from its then current location, (iv)
the Company has not paid to the Participant when due any salary, bonus or
other material benefit due to him or her, or (v) there exists a breach by
the Company of any material term or provision of any employment agreement
between it and the Participant, provided, however, that, in any such event,
the Participant shall notify the Company of such event and give it fifteen
(15) days to remedy the situation before terminating his or her employment.
<PAGE>
-13-
SECTION 12. No Special Employment Rights.
- ---------- ----------------------------
Nothing contained in the Plan or in any Plan Benefit documentation shall
confer upon any Participant receiving a grant of any Plan Benefit any right with
respect to the continuation of his or her employment by the Company (or any
Related Corporation) or interfere in any way with the right of the Company (or
any Related Corporation), subject to the terms of any separate employment
agreement to the contrary, at any time to terminate such employment or to
increase or decrease the compensation of the Participant from the rate in
existence at the time of the grant of any Plan Benefit. Whether an authorized
leave of absence, or absence in military or government service, shall constitute
termination of employment shall be determined by the Board of Directors.
SECTION 13. Amendment of the Plan.
- ---------- ---------------------
The Board of Directors may at any time and from time to time modify or
amend the Plan in any respect. The termination or any modification or amendment
of the Plan shall not, without the consent of a recipient of any Plan Benefit,
affect his or her rights under any Plan Benefit previously granted. With the
consent of the affected Participant, the Board of Directors may amend
outstanding agreements relating to any Plan Benefit, in a manner not
inconsistent with the Plan. The Board of Directors hereby reserves the right to
amend or modify the terms and provisions of the Plan and of any outstanding
Options to the extent necessary to qualify any or all Options under the Plan for
such favorable federal income tax treatment (including deferral of taxation upon
exercise) as may be afforded incentive stock options under Section 422 of the
Code, provided, however, that the consent of an optionee is required if such
amendment or modification would cause unfavorable income tax treatment for such
optionee.
SECTION 14. Withholding.
- ---------- -----------
The Company's obligation to deliver shares of stock upon the exercise of
any Option or the granting of an Award or to make payment upon any exercise of
any SAR or making of a Purchase shall be subject to the satisfaction by the
Participant of all applicable federal, state and local income and employment tax
withholding requirements.
SECTION 15. Effective Date and Duration of the Plan.
- ---------- ---------------------------------------
15.1 Effective Date. The Plan shall become effective when adopted by the
--------------
Board of Directors, but no Incentive Stock Option granted under the Plan shall
become exercisable unless and until the Plan shall have been approved by the
Company's stockholders. If such stockholder approval is not obtained within l2
months after the date of the Board's adoption of the Plan, then any Incentive
Stock Options previously granted under the Plan shall terminate and no further
Incentive Stock Options shall be granted. Subject to such limitation, Options
may be granted under the Plan at any time after the effective date and before
the date fixed herein for termination of the Plan.
<PAGE>
-14-
15.2 Duration. Unless sooner terminated in accordance with Section l1
--------
hereof, the Plan shall terminate upon the earlier of (i) the tenth anniversary
of the date of its adoption by the Board of Directors or (ii) the date on which
all shares available for issuance under the Plan shall have been issued pursuant
to any Awards or Purchases or the exercise or cancellation of Options and SARs
granted hereunder. If the date of termination is determined under (i) above,
then Plan Benefits outstanding on such date shall continue to have force and
effect in accordance with the provisions of the instruments evidencing such Plan
Benefits.
SECTION 16. Governing Law.
- ---------- -------------
The Plan and all actions taken thereunder shall be governed by the laws of the
State of Connecticut.
<PAGE>
EXHIBIT 10.02
dsl.net, inc.
REGISTRATION RIGHTS PROVISION OF THE
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C>
1. Registration Rights................................. 1
1.1 Definitions......................................... 1
1.2 Request for Registration............................ 3
1.3 Company Registration................................ 4
1.4 Form S-3 Registration............................... 5
1.5 Obligations of the Company.......................... 7
1.6 Information from Holder............................. 9
1.7 Expenses of Registration............................ 9
1.8 Indemnification..................................... 9
1.9 Reports Under Securities Exchange Act of 1934....... 11
1.10 Assignment of Registration Rights................... 12
1.11 Limitations on Subsequent Registration Rights....... 12
1.12 "Market Stand-Off" Agreement........................ 13
1.13 Termination of Registration Rights.................. 13
</TABLE>
<PAGE>
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT is made as of the
12th day of May, 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 Series B Investors, Series C Investors and Series D 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 and the Series C
Investors entered into an Amended and Restated Investors' Rights Agreement
dated as of April 20, 1999 (the "Rights Agreement");
WHEREAS, the Company and the Series D Investors are parties to the Series D
Preferred Stock Purchase Agreement of even date herewith (the "Series D
Agreement"); and
WHEREAS, in order to induce the Series D Investors to invest funds in the
Company pursuant to the Series D Agreement, the Series B Investors, the Series C
Investors, the Series D Investors, the Founders and the Company hereby agree
that the Rights Agreement should be amended and restated to grant the Series D
Investors rights to cause the Company to register shares of Common Stock issued
or issuable to them.
NOW, THEREFORE, THE PARTIES HEREBY AGREE TO AMEND AND RESTATE THE RIGHTS
AGREEMENT 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.
(b) The term "Common Stock" refers to the shares of the Common Stock,
par value $.001 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
1
<PAGE>
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, and (c) the Series D Preferred Stock issued pursuant to the Series D
Agreement 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.
(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.
2
<PAGE>
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 forty percent (40%) 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:
(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 registration has been declared or ordered
effective; or
3
<PAGE>
(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
4.5, 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 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
4
<PAGE>
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.
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
5
<PAGE>
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.
6
<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
7
<PAGE>
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
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;
8
<PAGE>
(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
(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
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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
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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 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 l.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 l.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
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withheld), provided that in no event shall any indemnity under this subsection
l.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 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
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making available to the Holders and Founders the benefits of Rule 144
promulgated under the
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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
(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 250,000
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.
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1.11 Limitations on Subsequent Registration Rights. From and after the
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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 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, 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. 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.
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EXHIBIT 10.03
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
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(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
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<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
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<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
----------------- -----------
-12-
<PAGE>
EXHIBIT 10.03
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 10.04
CREDIT AGREEMENT
----------------
Dated as of May 12, 1999
between
DSL.net, Inc.
and
Fleet National Bank
<PAGE>
TABLE OF CONTENTS
-----------------
1. DEFINITIONS:............................................................ 3
-----------
2. EQUIPMENT LOAN FACILITY................................................. 8
-----------------------
2.1. Making of Loans................................................... 8
---------------
2.2. Repayment of Loans................................................ 9
------------------
3. INTEREST, OVERDUE PAYMENTS............................................. 10
--------------------------
3.1. Interest on Loans................................................ 10
-----------------
3.2. Interest after Default........................................... 10
----------------------
3.3. Overdue Payments................................................. 10
----------------
4. FEES AND PAYMENTS...................................................... 11
-----------------
5. REPRESENTATIONS AND WARRANTIES......................................... 11
------------------------------
6. CONDITIONS PRECEDENT................................................... 13
--------------------
7. COVENANTS.............................................................. 13
---------
7.1. Affirmative Covenants............................................ 13
---------------------
7.2. Negative Covenants............................................... 15
------------------
7.3. Financial Covenants.............................................. 16
-------------------
8. EVENTS OF DEFAULT: ACCELERATION........................................ 17
-------------------------------
9. SETOFF................................................................. 18
------
10. MISCELLANEOUS.......................................................... 19
-------------
11. CONFIDENTIALITY........................................................ 19
---------------
12. PREJUDGMENT REMEDY WAIVER.............................................. 20
-------------------------
<PAGE>
CREDIT AGREEMENT
----------------
This CREDIT AGREEMENT (this "Agreement") is made as of May 12, 1999, by and
between DSL.net, Inc. (the "Borrower"), a Delaware corporation, having its
principal place of business at 545 Long Wharf Drive, 5th Floor, New Haven,
Connecticut 06511, and Fleet National Bank (the "Bank"), a national banking
association, with its head office at One Federal Street, Boston, Massachusetts
02110.
1. DEFINITIONS:
------------
Certain capitalized terms are defined below:
Accounts: All rights of the Borrower to any payment of money for goods
-----------
sold, leased or otherwise marketed in the ordinary course of business and all
rights of the Borrower to payment for services rendered in the ordinary course
of business, whether evidenced by or under or in respect of a contract or
instrument, and to all proceeds in respect thereof.
Agreement: See preamble, which term shall include this Agreement and the
------------
Schedules hereto, all as amended and in effect from time to time.
Bank: See preamble.
----
Base Accounts: Those Accounts (net of any finance charges, late charges,
-------------
credits, commissions, contras or other offsets or counterclaims) (i) which the
Borrower reasonably determines to be collectible, (ii) the account debtors in
respect of which are deemed creditworthy by the Bank, in its sole but reasonable
judgment, are solvent, are not affiliated with the Borrower, and purchased the
goods at arms' length, (iii) which are not outstanding for more than ninety (90)
days past the earlier to occur of (A) the date of invoice and (B) the date of
shipment (as to goods) or of provision (as to services), (iv) that are not due
from an account debtor located in Minnesota unless the Borrower (A) has received
a certificate of authority to do business and is in good standing in such state
or (B) has filed a notice of business activities report with the appropriate
office or agency of such state for the current year, (v) over which there is no
Lien, (vi) which are in payment of fully performed and undisputed obligations,
and (vii) which are payable in U.S. currency from an office within the United
States, unless the payment of any such Account is backed by a letter of credit
in form and substance satisfactory to the Bank and is issued by a financial
institution acceptable to the Bank having an office in the United States.
Base Rate: The higher of (i) the annual rate of interest announced from
---------
time to time by the Bank at its head office as the Bank's "prime rate" and (ii)
one-half of one percent (1/2%) above the Federal Funds Effective Rate.
Borrower: See preamble.
--------
Borrowing Base: An amount determined by the Bank to be equal to the lesser
--------------
(i) $5,000,000 and (ii) eighty percent (80%) of the lower of the initial book
value or cost (excluding freight, taxes, set-up and other installation costs) of
all Equipment Collateral as evidenced by invoices or purchase orders (dated no
more than thirty (30) days from the date such invoice or
<PAGE>
-4-
purchase order is provided to the Bank with respect to Equipment Collateral
purchased on or after the Closing Date) and evidence of payment (solely with
respect to any Equipment Collateral purchased prior to the Closing Date to be
refinanced with the proceeds of Loans on the Closing Date) from the sellers
thereof.
Borrowing Base Report: A report, in form and with supporting details
---------------------
reasonably satisfactory to the Bank, setting forth the Borrower's computation of
the Borrowing Base.
Business Day: Any day on which banks in Boston, Massachusetts, are open
------------
for business generally.
Capital Lease Obligation: Indebtedness represented by obligations of the
------------------------
lessee under a lease which has been or should be capitalized on the books of the
lessee in accordance with GAAP.
Charter Documents: In respect of any entity, the certificate or articles
-----------------
of incorporation or organization and the by-laws of such entity, or other
constitutive documents of such entity.
Closing Date: May 12, 1999.
------------
Collateral: All of the property, rights and assets of the Borrower that
----------
are or are intended to be subject to the security interest created by the
Security Documents.
Commitment: The obligation of the Bank to make Loans to the Borrower up to
----------
an aggregate outstanding principal amount not to exceed $5,000,000, as such
amount may be reduced from time to time or terminated hereunder.
Communications Act: The Communications Act of 1934, as amended (including,
------------------
without limitation the Telecommunications Act of 1996, as amended), and the
rules and regulations issued thereunder, as from time to time in effect.
Consent: In respect of any person or entity, any permit, license or
-------
exemption from, approval, consent of, registration or filing with any local,
state or federal governmental or regulatory agency or authority, required under
applicable law.
Consolidated Current Assets: The sum of (i) cash on hand of the Borrower
---------------------------
and its Subsidiaries, (ii) Investments permitted under (S)(S)7.2(c)(i), (ii) and
(iv) hereof, and (iii) Base Accounts, that in accordance with GAAP are properly
classified as current assets.
Consolidated Current Liabilities: The result of (i) all liabilities of the
--------------------------------
Borrower and its Subsidiaries payable on demand or maturing within one (1) year
from the date as of which current liabilities are to be determined, including,
without limitation, any Loans, and such other liabilities that in accordance
with GAAP are properly classified as current liabilities, plus (ii) the amount
----
of all Loans outstanding (to the extent not already included in clause (i)
above), minus (iii) Deferred Revenue.
-----
<PAGE>
-5-
Consolidated Total Liabilities: All liabilities of the Borrower and its
------------------------------
Subsidiaries determined in accordance with GAAP and classified as such on the
consolidated balance sheet of the Borrower, and all other Indebtedness of the
Borrower and its Subsidiaries, whether or not so classified.
Conversion Date: The first anniversary of the Closing Date.
---------------
Default: An event or act which with the giving of notice and/or the lapse
-------
of time, would become an Event of Default.
Deferred Revenue: Product or service revenue of the Borrower beyond the
----------------
current period as recorded in accordance with GAAP.
DPUC: The Connecticut Department of Public Utility Control and similar
----
governmental authorities of the various states of the United States of America
and any governmental authority succeeding to any of their respective functions.
DPUC Licenses: Any license, authorization, certificate of compliance,
-------------
franchise, approval or permit now or hereafter granted or issued by any DPUC and
now or hereafter held by Borrower or any of its Subsidiaries and permitting the
Borrower or its Subsidiaries to conduct business in the applicable jurisdiction
as a competitive local exchange carrier.
Drawdown Date: In respect of any Loan, the date on which such Loan is made
-------------
to the Borrower.
Environmental Laws: All laws pertaining to environmental matters,
------------------
including without limitation, the Resource Conservation and Recovery Act, the
Comprehensive Environmental Response Compensation and Liability Act of 1980, the
Superfund Amendments and Reauthorization Act of 1986, the Federal Clean Water
Act, the Federal Clean Air Act, the Toxic Substances Control Act, in each ease
as amended, and all rules, regulations, judgments, decrees, orders and licenses
arising under all such laws.
Equipment Collateral: The telecommunications equipment, office equipment,
--------------------
furniture, motor vehicles and fixtures purchased or refinanced by the Borrower
with the proceeds of the Loans on or after the Closing Date and which
telecommunications equipment, office equipment, furniture, motor vehicles and
fixtures (i) are owned, possessed and held by the Borrower within the United
States and not subject to any claim of ownership by any third party, (ii) other
than with respect to motor vehicles, are held on premises leased by the Borrower
located at 545 Long Wharf Drive, New Haven, Connecticut, and (iii) as to which a
valid and perfected first-priority security interest in favor of the Bank has
been created and as to which there is no other Lien.
ERISA: The Employee Retirement Income Security Act of 1974, as amended,
-----
and all rules, regulations, judgments, decrees, and orders arising thereunder.
Event of Default: Any of the events listed in (S)8 hereof.
----------------
<PAGE>
-6-
FCC: The Federal Communications Commission or any governmental authority
---
succeeding to any of its functions.
FCC Licenses: Any license, authorization, certificate of compliance,
------------
franchise, approval or permit granted or issued by the FCC and held by the
Borrower, each of which is listed on Schedule 7.3 attached hereto.
------------
Federal Funds Effective Rate: For any day, the rate per annum equal to the
----------------------------
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System arranged by federal funds brokers, as
published for such day (or, if such day is not a Business Day, for the next
preceding Business Day) by the Federal Reserve Bank of New York, or, if such
rate is not so published for any day that is a Business Day, the average of the
quotations for such day on such transactions received by the Bank from three
funds brokers of recognized standing selected by the Bank.
Financials: In respect of any period, the balance sheet of any person or
----------
entity as at the end of such period, and the related statement of income and
statement of cash flow for such period, each setting forth in comparative form
the figures for the previous comparable fiscal period, all in reasonable detail
and prepared in accordance with GAAP.
GAAP: Generally accepted accounting principles consistent with those
----
adopted by the Financial Accounting Standards Board and its predecessor, (i)
generally, as in effect from time to time, and (ii) for purposes of determining
compliance by the Borrower and its Subsidiaries with the financial covenants set
forth herein, as in effect for the fiscal year therein reported in the most
recent Financials submitted to the Bank prior to execution of this Agreement.
Indebtedness: In respect of any Person, all (a) indebtedness for borrowed
------------
money; (b) indebtedness for the deferred purchase price of property or services
(except trade payables and accrued expenses incurred in the ordinary course of
business); (c) every reimbursement obligation with respect to any outstanding
letters of credit issued for the account of such Person or any of its
Subsidiaries; (d) every reimbursement obligation with respect to acceptance
facilities; (e) guaranties, endorsements (other than for collection in the
ordinary course of business) and other contingent obligations to purchase or to
provide funds for payment of the obligations of another Person, to supply funds
to invest in any Person, to cause such Person, to maintain a minimum working
capital or net worth or otherwise assure the creditors of such Person against
loss; (f) Capital Lease Obligations; (g) every obligation of such Person or any
of its Subsidiaries evidenced by bonds, debentures or similar instruments; and
(h) any other obligation for borrowed money or other financial accommodation
which in accordance with GAAP would be shown as a liability on the consolidated
balance sheet of such Person.
Investments: All expenditures made and all liabilities incurred
-----------
(contingently or otherwise) for the acquisition of equity interests or
indebtedness of, or for loans, advances, capital contributions or transfers of
property to, or in respect of any guaranties, or obligations of, any entity. In
determining the aggregate amount of Investments outstanding at any particular
time: (i) the amount of any Investment represented by a guaranty shall be taken
at not less than the principal amount of the obligations guaranteed and still
outstanding; (ii) there shall be included as an Investment all interest accrued
with respect to indebtedness constituting an
<PAGE>
-7-
Investment unless and until such interest is paid; (iii) there shall be deducted
in respect of each such Investment any amount received as a return of capital
(but only by repurchase, redemption, retirement, repayment, liquidating dividend
or liquidating distribution); (iv) there shall not be deducted in respect of any
Investment any amounts received as earnings on such Investment, whether as
dividends, interest or otherwise, except that accrued interest included as
provided in the foregoing clause (ii) may be deducted when paid; and (v) there
shall not be deducted from the aggregate amount of Investments any decrease in
the value thereof.
Liens: Any encumbrance, mortgage, pledge, hypothecation, charge,
-----
restriction or other security interest of any kind securing any obligation of
any entity or person.
Loan Documents: This Agreement, the Note and the Security Documents and
--------------
any document, agreement and/or instrument executed and/or delivered in
connection therewith, in each case as from time to time amended or supplemented.
Loans. Any loan made by the Bank to the Borrower pursuant to(S)2.1.
-----
Materially Adverse Effect: Any materially adverse effect on the financial
-------------------------
condition or business operations of the Borrower or any of its Subsidiaries or
material impairment of the ability of the Borrower or any of its Subsidiaries to
perform their obligations hereunder or under any of the other Loan Documents.
Maturity Date: May 1, 2003.
-------------
Net Cash Proceeds: The cash proceeds received from a sale of equity
-----------------
interests of the Borrower, net of all costs of sale, including legal costs,
underwriting or brokerage costs, Indebtedness (other than Loans) paid off with
such cash proceeds and taxes paid or payable as a result thereof by the
Borrower.
Note: See (S)2.1.
----
Obligations: All indebtedness, obligations and liabilities of the Borrower
-----------
and its Subsidiaries to the Bank, existing on the date of this Agreement or
arising thereafter, direct or indirect, joint or several, absolute or
contingent, matured or unmatured, liquidated or unliquidated, secured or
unsecured, arising by contract, operation of law or otherwise, arising or
incurred under this Agreement or any other Loan Document or in respect of any of
the Loans or the Note or other instruments at any time evidencing any thereof.
Offering: The issuance after the Closing Date of any equity securities of
--------
the Borrower or the receipt by the Borrower of any cash proceeds from any equity
contributions, the Net Cash Proceeds of which is not less than $29,500,000.
Person: An individual, partnership, corporation, limited liability
------
company, business trust, joint stock company, trust, unincorporated association,
joint venture, governmental authority or other entity of whatever nature.
<PAGE>
-8-
Requirement of Law: In respect of any person or entity, any law, treaty,
------------------
rule, regulation or determination of an arbitrator, court, or other governmental
authority, in each case applicable to or binding upon such person or entity or
affecting any of its property.
Security Documents: The Security Agreement between the Borrower and the
------------------
Bank, together with any UCC-1 financing statements executed and/or delivered in
connection therewith, each as the same may be amended, reaffirmed or modified
from time to time and in form and substance satisfactory to the Bank.
Shareholders' Equity: An amount determined in accordance with GAAP that is
--------------------
equal to the sum of (a) the capital stock (including common stock and preferred
stock, but excluding treasury stock) and additional paid in capital (to the
extent paid in cash) of the Borrower and its Subsidiaries, plus (b) the earned
----
surplus and capital surplus of the Borrower and its Subsidiaries, plus (c)
----
Subordinated Debt, minus (d) the book value of all assets of the Borrower and
-----
its Subsidiaries which, under GAAP, would be treated as intangible assets.
Subordinated Debt: Unsecured Indebtedness of the Borrower or any of its
-----------------
Subsidiaries that is expressly subordinated and made junior to the payment and
performance in full of the Obligations, and evidenced as such by a subordination
agreement containing subordination provisions in form and substance approved by
the Bank in writing, such approval not to be unreasonably withheld.
Subsidiary: Any corporation, association, trust, limited liability
----------
company, or other business entity of which the designated parent shall at any
time own directly or indirectly through a Subsidiary or Subsidiaries at least a
majority (by number of votes) of the outstanding Voting Stock.
System: The competitive local exchange carrier system constructed and
------
operated by the Borrower and its Subsidiaries.
Voting Stock: Stock or similar interests, of any class or classes (however
------------
designated), the holders of which are at the time entitled, as such holders, to
vote for the election of a majority of the directors (or persons performing
similar functions) of the corporation, limited liability company, association,
trust or other business entity involved, whether or not the right so to vote
exists by reason of the happening of a contingency.
2. EQUIPMENT LOAN FACILITY.
-----------------------
2.1. Making of Loans. Upon the terms and subject to the conditions of
---------------
this Agreement, the Bank agrees to lend to the Borrower such sums that the
Borrower may request, from the date hereof until but not including the
Conversion Date; provided that the sum of the outstanding principal amount of
--------
all Loans (after giving effect to all amounts requested) shall not exceed the
lesser of (a) the Commitment and (b) the Borrowing Base. In addition, in no
event shall the Bank be obligated to make any Loan in excess of eighty percent
(80%) of the purchase price (excluding freight, taxes, setup and other
installation costs) of the piece or pieces of Equipment Collateral to be
purchased by the Borrower with the proceeds of such Loan. Loans shall be in the
minimum aggregate amount of $25,000 or an integral multiple thereof. The
<PAGE>
-9-
Borrower shall notify the Bank in writing or telephonically, not later than 2:00
p.m. Boston, Massachusetts time at least one Business Day prior to the date of
the Loan being requested, of the Drawdown Date (which must be a Business Day),
the principal amount of such Loan and the type and description of Equipment
Collateral being purchased (including, without limitation, serial or vehicle
identification numbers where applicable) and the purchase price thereof. In the
case of any telephonic notification, the Borrower shall provide to the Bank
written confirmation of all of such information within three Business Days after
such telephonic notification. Subject to the foregoing, so long as the
Commitment is then in effect and the conditions set forth in (S)6 hereof have
been met, the Bank shall advance the amount requested to the Borrower's bank
account at the Bank in immediately available funds not later than the close of
business on such Drawdown Date. The obligation of the Borrower to repay to the
Bank the principal of the Loans and interest accrued thereon shall be evidenced
by a promissory note in the aggregate principal amount of $5,000,000 executed
and delivered by the Borrower and payable to the order of the Bank, in form and
substance satisfactory to the Bank (the "Note").
2.2. Repayment of Loans. (a) If at any time the outstanding principal
------------------
amount of the Loans exceeds the lesser of (i) the Commitment and (ii) the
Borrowing Base, the Borrower hereby agrees to pay immediately the amount of such
excess to the Bank for application to the Loans. The Borrower may elect to
terminate, or from time to time, reduce the Commitment by a minimum principal
amount of $25,000 or an integral multiple thereof, upon one (1) Business Day's
prior written notice to the Bank of the proposed date of such reduction or
termination. The Borrower shall not be entitled to reinstate the Commitment
following such reduction or termination.
(b) As long as no Default or Event of Default shall have occurred and
be continuing, the outstanding amount of all Loans on the Conversion Date
shall be converted into a term loan. The Borrower hereby absolutely and
unconditionally promises to pay to the Bank the principal amount of the
Loans outstanding on the Conversion Date in thirty-five (35) consecutive
equal installments, each in the amount of two and seventy-eight one
hundredths of one percent (2.78%) of the aggregate principal amount of the
Loans outstanding on the Conversion Date. Such installments shall be due
and payable on the first day of each calendar month, commencing on June 1,
2000; provided, that the outstanding principal amount of the Loans,
--------
together with all interest accrued thereon and all fees and expenses
incurred by the Bank in connection therewith, shall be due and payable on
the Maturity Date.
(c) The Borrower shall have the right at any time, subject to the
indemnity provisions of (S)3.1(b), to prepay voluntarily the Loans on or
before the Maturity Date, as a whole, or in part; provided that each
partial prepayment shall be in the principal amount of $25,000 or an
integral multiple thereof. The Borrower shall give the Bank, no later than
2:00 p.m. Boston, Massachusetts time on the date of such prepayment,
written notice of any proposed prepayment pursuant to this (S)2.2(c) and
the principal amount to be prepaid. Any partial prepayment of the Loans
shall be applied (i) prior to the Conversion Date, to the aggregate
principal amount of the Loans outstanding on the date of such prepayment
and, (ii) on and after the Conversion Date, to the scheduled installments
of the principal due on the Loans (including the final installment due and
payable on the
<PAGE>
-10-
Maturity Date) in inverse order of maturity. No amount repaid may be
reborrowed. Any voluntary prepayment of principal of the Loans shall also
include all interest accrued to the date of prepayment.
3. INTEREST, OVERDUE PAYMENTS.
--------------------------
3.1. Interest on Loans. Except as otherwise provided in (S)3.2, each
-----------------
Loan shall bear interest as follows:
(a) Except as set forth in (S)3.1(b) hereof, the Borrower agrees to
pay interest on the Loans at a rate per annum which is equal to the Base
Rate in effect from time to time, plus one percent (1.0%), such interest to
----
be payable in arrears on the first day of each calendar month for the
immediately preceding calendar month, commencing the first such day
following the date hereof.
(b) To the extent that the Borrower has requested, by written notice
provided to the Bank not more than thirty (30) days but not less than seven
(7) days prior to the Conversion Date, a fixed rate option as quoted by the
Bank (not more than five (5) and not less than two (2) Business Days prior
to the Conversion Date) applicable on and after the Conversion Date for the
Loan. Such fixed rate of interest shall be determined and quoted by the
Bank, in its sole and absolute discretion. The Borrower may elect, by
written notice provided to the Bank on or before the Conversion Date, that
interest applicable to the Loan accrue on and after the Conversion Date at
such fixed rate of interest. Interest on the Loan at such fixed rate shall
be payable in arrears on the first day of each calendar month for the
immediately preceding calendar month, commencing with the first such day
following the Conversion Date. The Borrower shall have no right to convert
the rate of interest on the Loans on any date other than the Conversion
Date. If the Borrower elects the fixed rate of interest under this
(S)3.1(b), the Borrower agrees to indemnify the Bank and hold the Bank
harmless from and against any loss, cost or expense (including loss of
anticipated profits) that the Bank may sustain or incur as a consequence of
any prepayment, in full or in part, of the Loans.
3.2. Interest after Default. While an Event of Default is continuing,
----------------------
amounts payable under any of the Loan Documents shall bear interest (compounded
monthly and payable on demand in respect of overdue amounts) at a rate per annum
which is equal to (i) to rate of interest in effect on such amounts immediately
preceding such Event of Default and (ii) two percent (2.0%) until such amount is
paid in full or (as the case may be) such Event of Default has been cured or
waived in writing by the Bank (after as well as before judgment).
3.3. Overdue Payments. If a payment of principal and/or interest due
----------------
hereunder or.under the Note is not made within ten (10) days of when due, the
Borrower shall pay a late payment charge to the Bank equal to five percent
(5.0%) of the amount then due and owing. Nothing contained herein shall affect
Bank's right to demand the Obligations upon the occurrence of an Event of
Default.
<PAGE>
-11-
4. FEES AND PAYMENTS.
------------------
Contemporaneously with execution and delivery of this Agreement, the
Borrower shall pay to the Bank a facility fee in the amount of $50,000;
provided, that if, within one year of the Closing Date, the Bank makes an
additional loan to the Borrower and the principal amount of such loan is not
less than $10,000,000, the Bank agrees to reduce any fee charged on such loan by
$25,000. Nothing contained herein shall be construed by the Bank as a
commitment by the Bank to make any additional loan to the Borrower. All
payments to be made by the Borrower; hereunder or under any of the other Loan
Documents shall be made in U.S. dollars in immediately available funds at the
Bank's head office at One Federal Street, Boston, Massachusetts 02110, without
setoff or counterclaim and without any withholding or deduction whatsoever. The
Bank shall be entitled to charge any account of the Borrower with the Bank for
any sum due and payable by the Borrower to the Bank hereunder or under any of
the other Loan Documents. If any payment hereunder is required to be made on a
day which is not a Business Day, it shall be paid on the immediately succeeding
Business Day, with interest and any applicable fees adjusted accordingly. All
computations of interest payable hereunder shall be made by the Bank on the
basis of actual days elapsed and on a 360-day year.
5. REPRESENTATIONS AND WARRANTIES.
------------------------------
The Borrower represents and warrants to the Bank on the date hereof, on the
date of any request for any Loan and on each Drawdown Date that:
(a) the Borrower and each of its Subsidiaries is duly organized,
validly existing, and in good standing under the laws of its jurisdiction
of incorporation and is duly qualified and in good standing in every other
jurisdiction in which such qualification is required, except where the
failure to be so qualified would not have a Materially Adverse Effect, and
the execution, delivery and performance by the Borrower of the Loan
Documents (i) are within its corporate authority, (ii) have been duly
authorized, (iii) do not conflict with or contravene its Charter Documents;
(b) upon execution and delivery thereof, each Loan Document shall.
constitute the legal, valid and binding obligation of the Borrower,
enforceable in accordance with its terms, except to the extent that such
enforcement may be limited by applicable bankruptcy, insolvency and other
similar laws affecting creditors' rights generally and by general
principles of equity;
(c) except as described on Schedule 5(c)(i) attached hereto, each ,of
the Borrower and each of its Subsidiaries has good and marketable title to
all its material properties, subject only to Liens permitted hereunder, and
possesses all assets, including intellectual properties, franchises,
licenses (including, without limitation, all FCC Licenses and DPUC
Licenses) and Consents, adequate for the conduct of its business as now
conducted. Neither the Borrower nor any of its Subsidiaries has or
requires any FCC Licenses to own or operate its businesses. All DPUC
Licenses held by the Borrower and its Subsidiaries are described on
Schedule 5(c)(ii) attached hereto or as otherwise provided by the Borrower
-----------------
to the Bank in writing after the Closing Date. With respect to the System,
the Borrower serves as the internet service provider. The Borrower and its
<PAGE>
-12-
Subsidiaries are in compliance in all material respects with all applicable
state and Federal filing and operating requirements and all applicable
rules and regulations of the FCC and each DPUC, including all regulations
governing equal employment opportunity and all filing requirements under
the Communications Act, the noncompliance with which would have a
Materially Adverse Effect. Borrower has not received any written notice of
any threat of any investigation, notice of violation, order, complaint or
proceeding before the FCC and/or any DPUC against the Borrower other than
routine proceedings relating to the issuance or renewal of DPUC licenses of
the Borrower or any of its Subsidiaries and the Borrower has no reason to
believe that any of such licenses will not be renewed in the ordinary
course or, if not renewed, would have a Materially Adverse Effect. The
Borrower and each of its Subsidiaries maintain insurance with financially
responsible insurers, copies of the policies for which have been previously
delivered to the Bank, covering such risks, and in such amounts and with
such deductibles as are customary in the Borrower's and its Subsidiaries'
business and are adequate;
(d) the Borrower has provided to the Bank its consolidated compiled
Financials as at December 31, 1998 and for February, 1999, and such
Financials are complete and correct and fairly present the position of the
Borrower and its Subsidiaries as at such date and for such period in
accordance with GAAP consistently applied;
(e) since December 31, 1998, there has been no materially adverse
change of any kind in the Borrower or any of its Subsidiaries which would
have a Materially Adverse Effect;
(f) there are no legal or other proceedings or investigations pending
or, to Borrower's knowledge, threatened against the Borrower or any of its
Subsidiaries before any court, tribunal or regulatory authority, which
would, if adversely determined, alone or together, have a Materially
Adverse Effect;
(g) the execution, delivery, performance of its obligations, and
exercise of its rights under the Loan Documents by the Borrower or any of
its Subsidiaries , including borrowing under this Agreement (i) do not
require any Consents; and (ii) are not and will not be in conflict with or
prohibited or prevented by (A) any Requirement of Law, or (B) any Charter
Document, corporate minute or resolution, instrument, agreement or
provision thereof, in each case binding on it or affecting its property;
(h) neither the Borrower nor any of its Subsidiaries is in violation
of (i) any Charter Document, corporate minute or resolution, (ii) any
instrument or agreement, in each case binding on it or affecting its
property in a manner which could have a Materially Adverse Effect, or (iii)
any Requirement of Law, in a manner which could have a Materially Adverse
Effect, including, without limitation, all applicable federal and state tax
laws, ERISA and Environmental Laws;
(i) upon execution and delivery of the Security Documents and the
filing of documents thereby required, the Bank shall have first-priority
perfected Liens on the Collateral, subject only to Liens permitted
hereunder and entitled to priority under
<PAGE>
-13-
applicable law, with no financing statements, chattel mortgages, real
estate mortgages or similar filings on record anywhere which conflict with
such first-priority Liens of the Bank;
(j) the Borrower and its Subsidiaries have reviewed the areas within
their businesses and operations which could be adversely affected by, and
have developed or is developing a program to address on a timely basis, the
"Year 2000 Problem" (i.e. the risk that computer applications used by the
Borrower or any of its Subsidiaries may be unable to recognize and perform
properly date-sensitive functions involving certain dates prior to and any
date after December 31, 1999). Based upon such review, the Borrower
reasonably believes that the "Year 2000 Problem" will not have any
Materially Adverse Effect on the Borrower or any of its Subsidiaries; and
(k) except as set forth on, Schedule 5(k) hereto, as of the Closing
Date the Borrower has no subsidiaries and is not a party to any
partnership.
6. CONDITIONS PRECEDENT.
--------------------
In addition to the making of the foregoing representations and warranties
and the delivery of the Loan Documents and such other documents and the taking
of such actions as the Bank may require at or prior to the time of executing,
this Agreement, the obligation of the Bank to make any Loan hereunder is subject
to the satisfaction of the following further conditions precedent:
(a) each of the representations and warranties of the Borrower to the
Bank herein, in any of the other Loan Documents or any documents,
certificate or other paper or notice in connection herewith shall be true
and correct in all material respects as of the time made or claimed to have
been made
(b) no Default or Event of Default shall be continuing;
(c) all proceedings in connection with the transactions contemplated
hereby shall be in form and substance satisfactory to the Bank, and the
Bank shall have received all information and documents as it may have
reasonably requested; and
(d) no change shall have occurred in any law or regulation or in the
interpretation thereof, that in the reasonable opinion of the Bank would
make it unlawful for the Bank to make such Loan.
7. COVENANTS.
---------
7.1. Affirmative Covenants. The Borrower agrees that so long as there
---------------------
are any Loans outstanding and until the termination of the Commitment and the
payment and satisfaction in full of all the Obligations, the Borrower will, and
will cause each of its Subsidiaries to, comply with their obligations as set
forth throughout this Agreement and to:
<PAGE>
-14-
(a) furnish the Bank: (i) as soon as available but in any event within
ninety (90) days after the close of each fiscal year, its consolidated and
consolidating audited Financials for such fiscal year, certified by
PricewaterhouseCoopers LLP or by other independent certified public
accountants reasonably satisfactory to the Bank; (ii) as soon as available
but in any event within forty-five (45) days after the end of each fiscal
quarter of the Borrower occurring after the initial public offering by the
Borrower, its consolidated and consolidating audited Financials for such
fiscal quarter, certified by its president, chief financial officer or
director of finance; (iii) as soon as available but in any event within
thirty (30) days after the end of each calendar month occurring on or
before the initial public offering by the Borrower, its consolidated and
consolidating unaudited Financials for such month, certified by its
president, chief financial officer or director of finance; (iv) together
with the monthly, quarterly and annual Financials, a certificate of the
Borrower setting forth computations demonstrating compliance with the
Borrower's financial covenants set forth herein, and certifying that no
Default or Event of Default has occurred, or if it has, the actions taken
by the Borrower with respect thereto; and (v) within twenty (20) days after
the end of each calendar month, or at such other time or times as the Bank
may request, a Borrowing Base report, in form and detail reasonably
satisfactory to the Bank, demonstrating the Borrowing Base as at the end of
such month or other applicable date requested;
(b) keep true and accurate books of account in accordance with GAAP,
maintain its current fiscal year and upon reasonable prior notice (unless a
Default or Event of Default has occurred and is continuing, whereupon no
notice shall be required) permit the Bank or its designated representatives
to inspect the Borrower's premises during normal business hours, to examine
and be advised as to such or other business records upon the request of the
Bank, and to permit the Bank's commercial finance examiners to conduct
periodic commercial finance examinations;
(c) (i) maintain its corporate existence and business, and keep its
assets in good repair, ordinary wear and tear excepted, (ii) keep its
business and assets adequately insured, (iii) maintain its chief executive
office in the United States, (iv) continue to engage in the same lines of
business, (v) continue to hold and comply in all material aspects with all
permits and licenses required for the operation of its business, including
without limitation, the DPUC Licenses, to the extent the failure to do so
would have a Materially Adverse Effect and (vi) comply in all material
respects with all Requirements of Law, including ERISA, the Communications
Act and Environmental Laws, to the extent the failure to do so would have a
Materially Adverse Effect;
(d) notify the Bank promptly in writing of (i) the occurrence of any
Default or Event of Default, (ii) any noncompliance with ERISA, the
Communications Act, any DPUC rule or regulation or any Environmental Law or
proceeding in respect thereof which could have a Materially Adverse Effect,
(iii) any change of address, (iv) any threatened or pending litigation or
similar proceeding affecting the Borrower or any of its Subsidiaries (other
than routine proceedings related to issuance or renewal of DPUC Licenses
and FCC Licenses), and of which the Borrower has received notice or any
material change in any such litigation or proceeding previously reported,
(v) claims
<PAGE>
-15-
against any assets or properties of the Borrower or any of its
Subsidiaries, (vi) any proceedings instituted by or against the Borrower or
any of its Subsidiaries in any Federal or state court or any other
commission or other regulatory body (including, without limitation, the FCC
or any DPUC), whether Federal, state or local, which, if adversely
determined, would have a Materially Adverse Effect and (vii) within thirty
(30) days of the formation thereof, any new Subsidiaries of the Borrower or
any of its Subsidiaries;
(e) use the proceeds of the Loans solely to acquire the Equipment
Collateral to be used now or in the future in the ordinary course of the
Borrower's business, and not for the carrying of "margin security" or
"margin stock" within the meaning of Regulations U and X of the Board of
Governors of the Federal Reserve System, 12 C.F.R. Parts 221 and 224;
(f) maintain all of its primary bank operating accounts with the Bank;
and
(g) cooperate with the Bank, take such action, execute such documents,
and provide such information as the Bank may from time to time reasonably
request in order further to effect the transactions contemplated by and the
purposes of the Loan Documents.
7.2. Negative Covenants. The Borrower agrees that so long as there are
------------------
any Loans outstanding and until the termination of the Commitment and the
payment and satisfaction in full of all the Obligations, the Borrower will not
and will not permit any of its Subsidiaries to:
(a) create, incur or assume any Indebtedness other than (i)
Indebtedness to the Bank, (ii) Indebtedness in respect of the acquisition
of property or under any Capitalized Lease Obligation which does not exceed
(A) on or prior to the Offering, $1,000,000 in the aggregate and (B) after
the Offering, $5,000,000 in the aggregate, (iii) current liabilities of the
Borrower or any of its Subsidiaries not incurred through the borrowing of
money or the obtaining of credit except credit on an open account
customarily extended, (iv) Indebtedness in respect of taxes or other
governmental charges contested in good faith and by appropriate proceedings
and for which adequate reserves have been taken, and (v) Indebtedness not
included above and listed on Schedule 7.2(a) hereto;
---------------
(b) create or incur any Liens on any of the property or assets of the
Borrower or any of its Subsidiaries or enter into or permit to exist any
arrangement or agreement which directly or indirectly prohibits Borrower or
any of its Subsidiaries from creating or incurring any lien, encumbrance,
mortgage, pledge, charge, restriction or other security interest of any
kind other than pursuant to the Security Agreement except (i) Liens
securing the Obligations; (ii) Liens securing taxes or other governmental
charges not yet due or if due, they are being contested in good faith by
appropriate proceedings and for which appropriate reserves are maintained;
(iii) deposits or pledges made in connection with social security
obligations; (iv) Liens of carriers, warehousemen, mechanics and
materialmen, less than 120 days old as to obligations net yet due, or which
are being contested in good faith by appropriate proceedings and for which
appropriate reserves have been established; (v) easements, rights-of-way,
zoning restrictions and similar minor Liens which individually and in the
aggregate do not have a Materially Adverse Effect
<PAGE>
-16-
(vi) purchase money security interests in or purchase money mortgages on
real or personal property securing purchase money Indebtedness permitted by
(S)7.2(a)(ii), covering only the property so acquired; and (vii) other
Liens existing on the date hereof and listed on Schedule 7.2(b) hereto;
---------------
(c) make any Investments other than Investments in (i) marketable
obligations of the United States maturing within one (1) year, (ii)
certificates of deposit, bankers' acceptances and time and demand deposits
of United States banks having total assets in excess of $1,000,000,000,
(iii) Subsidiaries, (iv) other Investments existing on the date hereof and
listed on Schedule 7.2(c) hereto or similar investments maintained with the
---------------
Bank, or (v) such other Investments as the Bank may from time to time
approve in writing;
(d) make any distributions on or in respect of its capital of any
nature whatsoever, other than dividends payable solely in shares of common
stock;
(e) become party to a sale-leaseback transaction, or to effect any
disposition of assets other than in the ordinary course, or to purchase,
lease or otherwise acquire assets other than in the ordinary course; or
(f) merge or consolidate with any Person (whether or not Borrower or
any Subsidiary is the surviving entity), or acquire all or substantially
all of the assets or any of the capital stock of any person; provided that
--------
(i) any Subsidiary may merge into the Borrower or any other Subsidiary, and
(ii) the Borrower may merge with or acquire the assets of another Person
if, after giving effect to such transaction, (i) the Borrower is the
corporation which survives such merger or acquisition, and (ii) no Default
of Event of Default would exist (or result therefrom).
7.3. Financial Covenants. The Borrower agrees that so long as there are
-------------------
any Loans outstanding and until the termination of the Commitment and the
payment and satisfaction in full of all the Obligations, the Borrower will not:
(a) permit the ratio of Consolidated Current Assets to Consolidated
Current Liabilities to be less than 1.5 to 1 at any time;
(b) permit, at any time, Shareholders' Equity to be less than
$6,000,000 plus 50% of the Net Cash Proceeds from any issuance of capital
stock, options, rights or warrants to buy capital stock or other equity
issuances received by the Borrower on or after the Closing Date; or
(c) permit the ratio of Consolidated Total Liabilities to
Shareholders' Equity to exceed 1.0 to 1 at any time.
<PAGE>
-17-
8. EVENTS OF DEFAULT: ACCELERATION.
-------------------------------
If any of the following events ("Events of Default") shall occur:
(a) the Borrower shall fail to pay when due and payable any principal
of the Loans when the same becomes due;
(b) the Borrower shall fail to pay interest on the Loans or any other
sum due under any of the Loan Documents on the date which the same shall
have first become due and payable;
(c) the Borrower or any of its Subsidiaries shall fail to perform any
term, covenant or agreement contained in (S)(S)7.1(a), 7.1(d) through (f),
7.2 and 7.3;
(d) the Borrower or any of its Subsidiaries shall fail to perform any
other term, covenant or agreement contained in the Loan Documents within
fifteen (15) days after the Bank has given written notice of such failure
to the Borrower;
(e) any representation or warranty of the Borrower or any of its
Subsidiaries in the Loan Documents or in any certificate or notice given in
connection therewith shall have been false or misleading in any material
respect at the time made or deemed to have been made;
(f) the Borrower or any of its Subsidiaries shall be in default (after
any applicable period of grace or cure period) under any agreement or
agreements evidencing Indebtedness owing to the Bank or any affiliates of
the Bank or in excess of $25,000 in aggregate principal amount, or shall
fail to pay such Indebtedness when due, or within any applicable period of
grace;
(g) any of the Loan Documents shall cease to be in full force and
effect,
(h) the Borrower or any of its Subsidiaries (i) shall make an
assignment for the benefit of creditors, (ii) shall be adjudicated bankrupt
or insolvent, (iii) shall seek the appointment of, or be the subject of an
order appointing, a trustee, liquidator or receiver as to all or part of
its assets, (iv) shall commence, approve or consent to, any case or
proceeding under any bankruptcy, reorganization or similar law and, in the
case of an involuntary case or proceeding, such case or proceeding is not
dismissed within forty-five (45) days following the commencement thereof,
or (v) shall be the subject of an order for relief in an involuntary case
under federal bankruptcy law;
(i) the Borrower or any of its Subsidiaries shall be unable to pay its
debts as they mature;
(j) the Borrower or any of its Subsidiaries shall fail to comply in
any material respect with any applicable provision of the Communications
Act or any FCC or DPUC rule or regulation, the non-compliance with which
would have a Materially Adverse Effect, or if any DPUC License or (FCC
License, if any) held by the Borrower or any of
<PAGE>
-18-
its Subsidiaries shall be terminated, cancelled or not renewed, or if the
Borrower or any of its Subsidiaries shall be enjoined, restrained,
prevented in any way by the order of any court or any administrative or
regulatory agency or otherwise lose the ability to conduct its entire
business for any period of seventy-two (72) or more consecutive hours, if
any such non-compliance, termination, cancellation, non-renewal,
injunction, restraint or prevention would have a Materially Adverse Effect
on the Borrower; or
(k) there shall remain undischarged for more than thirty (30) days any
final judgment or execution action against the Borrower or any of its
Subsidiaries from which no appeal may be taken that, together with other
outstanding claims and execution actions against the Borrower or such
Subsidiary exceeds $25,000 in the aggregate;
THEN, or at any time thereafter:
(1) In the case of any Event of Default under clause (g), (h) or (i),
the Commitment shall automatically terminate and the Bank shall be relieved
of all further obligations to make Loans, and the entire unpaid principal
amount of the Loans, all interest accrued and unpaid thereon, and all other
amounts payable thereunder and under the other Loan Documents shall
automatically become forthwith due and payable, without presentment,
demand, protest or notice of any kind, all of which are hereby expressly
waived by the Borrower; and
(2) In the case of any Event of Default other than (g), (h) and (i),
the Bank may, by written notice to the Borrower, terminate the Commitment
and/or declare the unpaid principal amount of the Loans, all interest
accrued and unpaid thereon, and all other amounts payable hereunder and
under the other Loan Documents to be forthwith due and payable, without
presentment, demand, protest or further notice of any kind, all of which
are hereby expressly waived by the Borrower.
No remedy herein conferred upon the Bank is intended to be exclusive of any
other remedy and each and every remedy shall be cumulative and in addition to
every other remedy hereunder, now or hereafter existing at law or in equity or
otherwise.
9. SETOFF.
------
Borrower and any guarantor hereby grant to Bank a lien, security interest
and right of setoff as security for all liabilities and obligations to Bank,
whether now existing or hereafter arising, upon and against all deposits,
credits, collateral and property, now or hereafter in the possession, custody,
safekeeping or control of Bank or any entity under the control of Fleet
Financial Group, Inc. or in transit to any of them. At any time during the
existence of a Default or Event of Default, without demand or notice, Bank may
set off the same or any part thereof and apply the same to any liability or
obligation of Borrower and any guarantor even though unmatured and regardless of
the adequacy of any other collateral securing the Loan. ANY AND ALL RIGHTS TO
REQUIRE BANK TO EXERCISE ITS RIGHTS OR REMEDIES WITH RESPECT TO ANY OTHER
COLLATERAL WHICH SECURES THE LOAN, PRIOR TO EXERCISING ITS RIGHT OF SETOFF WITH
RESPECT TO SUCH DEPOSITS, CREDITS
<PAGE>
-19-
OR OTHER PROPERTY OF THE BORROWER OR ANY GUARANTOR, ARE HEREBY KNOWINGLY,
VOLUNTARILY AND IRREVOCABLY WAIVED.
10. MISCELLANEOUS.
--------------
The Borrower agrees to indemnify and hold harmless the Bank and its
officers, employees, affiliates, agents, and controlling persons from and
against all claims, damages, liabilities and losses of every kind arising out of
the Loan Documents, including without limitation, against those in respect of
the application of Environmental Laws to the Borrower absent the gross
negligence or willful misconduct of the Bank. The Borrower shall pay to the
Bank promptly on demand all costs and expenses (including any taxes and
reasonable legal and other professional fees and fees of its commercial finance
examiner) incurred by the Bank in connection with the preparation, negotiation,
execution, amendment, administration or enforcement of any of the Loan
Documents. Any communication to be made hereunder shall (i) be made in writing,
but unless otherwise stated, may be made by telex, facsimile transmission or
letter, and (ii) be made or delivered to the address of the party receiving
notice which is identified with its signature below (unless such party has by
five (5) days written notice specified another address), and shall be deemed
made or delivered, when dispatched, left at that address, or five (5) days after
being mailed, postage prepaid, to such address. This Agreement shall be binding
upon and inure to the benefit of each party hereto and its successors and
assigns, but the Borrower may not assign its rights or obligations hereunder.
This Agreement may not be amended or waived except by a written instrument
signed by the Borrower and the Bank, and any such amendment or waiver shall be
effective only for the specific purpose given. No failure or delay by the Bank
to exercise any right hereunder shall operate as a waiver thereof, nor shall any
single or partial exercise of any right, power or privilege preclude any other
right, power or privilege. The provisions of this Agreement are severable and
if any one provision hereof shall be held invalid or unenforceable in whole or
in part in any jurisdiction, such invalidity or unenforceability shall affect
only such provision in such jurisdiction. This Agreement, together with all
Schedules hereto, expresses the entire understanding of the parties with respect
to the transactions contemplated hereby. This Agreement and any amendment
hereto may be executed in several counterparts, each of which shall be an
original, and all of which shall constitute one agreement. In proving this
Agreement, it shall not be necessary to produce more than one such counterpart
executed by the charged. THIS AGREEMENT AND THE NOTE ARE CONTRACTS UNDER THE
LAWS OF THE COMMONWEALTH OF MASSACHUSETTS AND SHALL BE CONSTRUED IN ACCORDANCE
THEREWITH AND GOVERNED THEREBY. THE BORROWER AGREES THAT ANY SUIT FOR THE
ENFORCEMENT OF ANY OF THE LOAN DOCUMENTS MAY BE BROUGHT IN THE COURTS OF THE
COMMONWEALTH OF MASSACHUSETTS OR ANY FEDERAL COURT SITTING THEREIN. The
Borrower, as an inducement to the Bank to enter into this Agreement, hereby
waives its right to a jury trial with respect to any action arising in,
connection with any Loan Document.
11. CONFIDENTIALITY.
---------------
The Bank agrees, on behalf of itself and each of its affiliates, directors,
officers, employees and representatives to use reasonable precautions to keep
confidential, in accordance
<PAGE>
-20-
with its customary procedures for handling confidential information of the same
nature and in accordance with safe and sound banking practices, any non-public
information supplied to it by the Borrower or any of its Subsidiaries pursuant
to this Agreement, provided that nothing herein shall limit the disclosure of
--------
any such information (a) after such information shall have become public other
than through a violation of this (S)11, (b) to the extent required by statute,
rule, regulation or judicial process, (c) to counsel for the Bank, (d) to bank
examiners or any other regulatory authority having jurisdiction over the Bank,
or to auditors or accountants, (e) to the Bank, (f) in connection with any
litigation to which the Bank is a party, or in connection with the enforcement
of rights or remedies hereunder or under any other Loan Document, (g) to a
Subsidiary or affiliate of the Bank subject to the confidentiality provisions
contained herein or (h) to any assignee or participant (or prospective assignee
or participant) so long as such assignee or participant agrees to be bound by
the provisions hereof.
12. PREJUDGMENT REMEDY WAIVER
-------------------------
THE BORROWER ACKNOWLEDGES THAT THE FINANCING EVIDENCED HEREBY IS A
COMMERCIAL TRANSACTION WITHIN THE MEANING OF CHAPTER 903a OF THE CONNECTICUT
GENERAL STATUTES. THE BORROWER HEREBY WAIVES ITS RIGHT TO NOTICE AND PRIOR
COURT HEARING OR COURT ORDER UNDER CONNECTICUT GENERAL STATUTES SECTIONS 52-278a
ET. SEQ. AS AMENDED OR UNDER ANY OTHER STATE OR FEDERAL LAW WITH RESPECT TO
ANY AND ALL PREJUDGMENT REMEDIES THE BANK MAY EMPLOY TO ENFORCE ITS RIGHTS AND
REMEDIES HEREUNDER. MORE SPECIFICALLY, THE BORROWER ACKNOWLEDGES THAT THE
BANK'S ATTORNEY MAY, PURSUANT TO CONN. GEN. STAT. (S)52-278F, ISSUE A WRIT FOR
A PREJUDGMENT REMEDY WITHOUT SECURING A COURT ORDER. THE BORROWER ACKNOWLEDGES
AND RESERVES ITS RIGHT TO NOTICE AND A HEARING SUBSEQUENT TO THE ISSUANCE OF A
WRIT FOR PREJUDGMENT REMEDY AS AFORESAID AND THE BANK ACKNOWLEDGES THE
BORROWER'S RIGHT TO SAID HEARING SUBSEQUENT TO THE ISSUANCE OF SAID WRIT. THE
BORROWER FURTHER WAIVES ITS RIGHTS TO REQUEST THAT THE BANK POST A BOND, WITH OR
WITHOUT SURETY, TO PROTECT BORROWER AGAINST DAMAGES THAT MAY BE CAUSED BY ANY
PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY BANK.
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first above written.
DSL.NET, INC.
/s/ George S. Smith
- --------------------------
/s/ Andrea S. Harrington By: /s/ Robert Berlin
- -------------------------- --------------------------
Name: Robert Berlin
Title: Vice President
<PAGE>
-21-
Address:
545 Long Wharf Drive
5th Floor
New Haven, CT 06511
Tel:
Fax:
FLEET NATIONAL BANK
By:
--------------------------
Name: Daniel G. Head, Jr.
Title: Senior Vice President
Address:
One Federal Street
Mail Stop MAOFD07A
Boston, MA 02109
Tel: (617) 346-0164
Fax: (617) 346-0151
WRIT FOR A PREJUDGMENT REMEDY WITHOUT SECURING A COURT ORDER. THE BORROWER
ACKNOWLEDGES AND RESERVES ITS RIGHT TO NOTICE AND A HEARING SUBSEQUENT TO THE
ISSUANCE OF A WRIT FOR PREJUDGMENT REMEDY AS AFORESAID AND THE BANK ACKNOWLEDGES
THE BORROWER'S RIGHT TO SAID HEARING SUBSEQUENT TO THE ISSUANCE OF SAID WRIT.
THE BORROWER, FURTHER WAIVES ITS RIGHTS TO REQUEST THAT THE BANK POST A BOND,
WITH OR WITHOUT SURETY, TO PROTECT BORROWER AGAINST DAMAGES THAT MAY BE CAUSED
BY ANY PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY BANK.
IN WITNESS WHEREOF, the undersigned have duly executed this Credit
Agreement as a sealed instrument as of the date first above written.
DSL.NET, INC.
/s/ George S. Smith
- --------------------------
By: /s/ Robert Berlin
--------------------------
/s/ Andrea S. Harrington Name: Robert Berlin
- --------------------------
Title: Vice President
<PAGE>
-22-
Address:
545 Long Wharf Drive
5th Floor
New Haven, CT 06511
Tel:
Fax:
FLEET NATIONAL BANK
By: /s/ Daniel G. Head, Jr.
--------------------------
Name: Daniel G. Head, Jr.
Title: Senior Vice President
Address:
One Federal Street
Mail Stop MAOFD07A
Boston, MA 02109
Tel: (617) 346-0164
Fax: (617) 346-0151
<PAGE>
EXHIBIT 10.05
SECURITY AGREEMENT
------------------
Dated as of May 12, 1999
between
DSL.net, Inc.
and
Fleet National Bank
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<C> <S> <C>
1. Definitions................................................. 1
2. Grant of Security Interest.................................. 1
2.1. Collateral Granted.......................................... 1
3. Title to Collateral, etc.................................... 2
4. Continuous Perfection....................................... 2
5. No Liens.................................................... 2
6. No Transfers................................................ 2
7. Insurance................................................... 2
7.1. Maintenance of Insurance.................................... 2
7.2. Insurance Proceeds.......................................... 3
7.3. Notice of Cancellation, etc................................. 3
8. Maintenance of Collateral; Compliance with Law.............. 3
9. Collateral Protection Expenses; Preservation of Collateral.. 4
9.1. Expenses Incurred by Bank................................... 4
9.2. Bank's Obligations and Duties............................... 4
10. Deposits.................................................... 4
11. Intentionally Omitted....................................... 4
12. Further Assurances.......................................... 4
13. Power of Attorney........................................... 5
13.1 Appointment and Powers of Bank.............................. 5
13.2. Ratification by Company..................................... 5
13.3. No Duty on Bank............................................. 6
14. Remedies.................................................... 6
15. Regulatory Issues........................................... 6
16. No Waiver, etc.............................................. 6
17. Marshalling................................................. 7
18. Proceeds of Dispositions; Expenses.......................... 7
19. Overdue Amounts............................................. 7
20. Governing Law; Consent to Jurisdiction...................... 8
21. Waiver of Jury Trial........................................ 8
22. PREJUDGMENT REMEDY WAIVER................................... 8
23. Miscellaneous............................................... 9
24. Termination; Release of Collateral.......................... 9
</TABLE>
<PAGE>
SECURITY AGREEMENT
------------------
SECURITY AGREEMENT, dated as of May 12, 1999, between DSL.NET, INC., a
Delaware corporation (the "Company"), and FLEET NATIONAL BANK, a national
banking association (hereinafter, the "Bank").
WHEREAS, the Company has entered into a Credit Agreement of even date (as
amended and in effect from time to time, the "Credit Agreement"), with the Bank,
pursuant to which the Bank, subject to the terms and conditions contained
therein, is to make loans or otherwise extend credit to the Company; and
WHEREAS, it is a condition precedent to the Bank's making any loans or
otherwise extending credit to the Company under the Credit Agreement that the
Company execute and deliver to the Bank a security agreement in substantially
the form hereof; and
WHEREAS, the Company wishes to grant security interests in favor of the
Bank as herein provided;
NOW, THEREFORE, in consideration of the promises contained herein and for
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, the parties hereto agree as follows:
1. Definitions. All capitalized terms used herein without definitions
-----------
shall have the respective meanings provided therefor in the Credit Agreement.
2. Grant of Security Interest.
--------------------------
2.1. Collateral Granted. The Company hereby grants to the Bank, to
------------------
secure the payment and performance in full of all of the Obligations, a
security interest in and so pledges and assigns to the Bank the following
properties, assets and rights of the Company, wherever located, whether now
owned or hereafter acquired or arising, and all proceeds and products
thereof (all of the same being hereinafter called the "Collateral"):
All furniture, equipment (including, without limitation, all
distribution systems and all components thereof, including, without
limitation, hardware, cables, fiber optic or other cables, switches,
routers, computer equipment, amplifiers and associated devices), raw
materials, motor vehicles, including, without limitation, the motor
vehicles described on Schedule 1 attached hereto and made a part
----------
hereof and other goods, and all recorded data of any kind or nature
relating to the foregoing, regardless of the medium of recording
relating to the foregoing including, without limitation, all software,
writings, plans, specifications and schematics and all insurance refund
claims, other insurance claims and proceeds relating to or arising from
any of the foregoing, but specifically excluding any and all inventory,
raw materials, parts and/or
<PAGE>
-2-
equipment which is now owned or hereafter acquired and reconfigured or
processed and installed at any local exchange carrier, any customer
premises or any other location other than the Company's principal place
of business (whether such locations are located within or outside of
the State of Connecticut), intellectual property and intangibles, and
further excluding all insurance refund claims, other insurance claims,
tort claims and proceeds relating to or arising from any of such
excluded items.
3. Title to Collateral, etc. The Company is the owner of the Collateral
------------------------
free from any adverse lien, security interest or other encumbrance, except for
the security interest created by this Agreement and other liens permitted by the
Credit Agreement. None of the Collateral constitutes, or is the proceeds of,
"farm products" as defined in (S)9-109(3) of the Massachusetts UCC.
4. Continuous Perfection. The Company's place of business or, if more
---------------------
than one, chief executive office is indicated on the Perfection Certificate
delivered to the Bank herewith (the "Perfection Certificate"). The Company will
not change the same, or the name, identity or corporate structure of the Company
in any manner, without providing at least 30 days prior written notice to the
Bank except as permitted under the terms of the Credit Agreement. The
Collateral, to the extent not delivered to the Bank pursuant to (S)2.2, will be
kept at those locations listed on the Perfection Certificate and the Company
will not remove the Collateral from such locations, without providing at least
30 days prior written notice to the Bank.
5. No Liens. Except for the security interest herein granted and as
--------
permitted under the Credit Agreement, the Company shall be the owner of the
Collateral free from any lien, security interest or other encumbrance, and the
Company shall defend the same against all claims and demands of all persons at
any time claiming the same or any interests therein adverse to the Bank. The
Company shall not pledge, mortgage or create, or suffer to exist a security
interest in the Collateral in favor of any person other than the Bank or as
permitted under the Credit Agreement.
6. No Transfers. The Company will not sell or offer to sell or
------------
otherwise transfer the Collateral or any interest therein except for
(i) licenses of general intangibles in the ordinary course of business and
(ii) sales or other dispositions of obsolescent items of equipment in the
ordinary course of business consistent with past practices.
7. Insurance.
---------
7.1. Maintenance of Insurance. The Company will maintain with
------------------------
financially sound and reputable insurers insurance with respect to its
properties and business against such casualties and contingencies as shall be in
accordance with general practices of businesses engaged in similar activities in
similar geographic areas. Such insurance shall be in such minimum amounts that
the Company will not be deemed a coinsurer under applicable insurance laws,
regulations and policies and otherwise shall be in such amounts, contain such
terms, be in such forms and be for such periods as may be reasonably
satisfactory to the Bank. In addition, all such insurance shall be payable to
the
<PAGE>
-3-
Bank as loss payee under a "standard" or "New York" loss payee clause. Without
limiting the foregoing, the Company will (i) keep all of its physical property
insured with casualty or physical hazard insurance on an "all risks" basis, with
electronic data processing coverage, with a full replacement cost endorsement
and an "agreed amount" clause in an amount equal to 100% of the full replacement
cost of such property, (ii) maintain all such workers' compensation or similar
insurance as may be required by law and (iii) maintain, in amounts and with
deductibles equal to those generally maintained by businesses engaged in similar
activities in similar geographic areas, general public liability insurance
against claims of bodily injury, death or property damage occurring, on, in or
about the properties of the Company; business interruption insurance; and
product liability insurance.
7.2. Insurance Proceeds. The proceeds of any casualty insurance in
------------------
respect of any casualty loss of any of the Collateral shall, subject to the
rights, if any, of other parties with a prior interest in the property covered
thereby, (i) so long as no Default or Event of Default has occurred and is
continuing and to the extent that the amount of such proceeds is less than
$100,000.00, be disbursed to the Company for direct application by the Company
solely to the repair or replacement of the Company's property so damaged or
destroyed and (ii) in all other circumstances, be held by the Bank as cash
collateral for the Obligations. The Bank may, at its sole option, disburse from
time to time all or any part of such proceeds so held as cash collateral, upon
such terms and conditions as the Bank may reasonably prescribe, for direct
application by the Company solely to the repair or replacement of the Company's
property so damaged or destroyed, or the Bank may apply all or any part of such
proceeds to the Obligations with the Revolving Credit Commitment (if not then
terminated) being reduced by the amount so applied to the Obligations.
7.3. Notice of Cancellation, etc. All policies of insurance shall
---------------------------
promise provide for at least thirty (30) days prior written cancellation notice
to the Bank. In the event of failure by the Company to provide and maintain
insurance as herein provided, the Bank may, at its option, provide such
insurance and charge the amount thereof to the Company. The Company shall
furnish the Bank with certificates of insurance and policies evidencing
compliance with the foregoing insurance provision.
8. Maintenance of Collateral; Compliance with Law. The Company will
----------------------------------------------
keep the Collateral in good order and repair, ordinary wear and tear excepted,
and will not use the same in violation of law or any policy of insurance
thereon. The Bank, or its designee, may inspect the Collateral at any reasonable
time, wherever located in accordance with the terms of the Credit Agreement. The
Company will pay promptly when due all taxes, assessments, governmental charges
and levies upon the Collateral or incurred in connection with the use or
operation of such Collateral or incurred in connection with this Agreement. The
Company has at all times operated, and the Company will continue to operate, its
business in compliance in all material respects with all applicable provisions
of the federal Fair Labor Standards Act, as amended, and with all applicable
provisions of federal, state and local statutes and ordinances dealing with the
control, shipment, storage or disposal of hazardous materials or substances.
<PAGE>
-4-
9. Collateral Protection Expenses; Preservation of Collateral.
----------------------------------------------------------
9.1. Expenses Incurred by Bank. In its discretion, the Bank may
-------------------------
discharge taxes and other encumbrances at any time levied or placed on any of
the Collateral, make repairs thereto and pay any necessary filing fees. The
Company agrees to reimburse the Bank on demand for any and all expenditures so
made. The Bank shall have no obligation to the Company to make any such
expenditures, nor shall the making thereof relieve the Company of any default.
9.2. Bank's Obligations and Duties. Anything herein to the contrary
-----------------------------
notwithstanding, the Company shall remain liable under each contract or
agreement comprised in the Collateral to be observed or performed by the Company
thereunder. The Bank shall not have any obligation or liability under any such
contract or agreement by reason of or arising out of this Agreement or the
receipt by the Bank of any payment relating to any of the Collateral, nor shall
the Bank be obligated in any manner to perform any of the obligations of the
Company under or pursuant to any such contract or agreement, to make inquiry as
to the nature or sufficiency of any payment received by the Bank in respect of
the Collateral or as to the sufficiency of any performance by any party under
any such contract or agreement, to present or file any claim, to take any action
to enforce any performance or to collect the payment of any amounts which may
have been assigned to the Bank or to which the Bank may be entitled at any time
or times. The Bank's sole duty with respect to the custody, safe keeping and
physical preservation of the Collateral in its possession, under (S)9-207 of the
Massachusetts UCC or otherwise, shall be to deal with such Collateral in a
commercially reasonable manner.
10. Deposits. During the existence of an Event of Default, whether or
--------
not any Obligations are due, the Bank may demand, sue for, collect, or make any
settlement or compromise which it deems desirable with respect to the
Collateral. Regardless of the adequacy of Collateral or any other security for
the Obligations, any deposits or other sums at any time credited by or due from
the Bank to the Company may at any time be applied to or set off against any of
the Obligations.
11. Intentionally Omitted.
---------------------
12. Further Assurances. The Company, at its own expense, shall do, make,
------------------
execute and deliver all such additional and further acts, things, deeds,
assurances and instruments as the Bank may reasonably require more completely to
vest in and assure to the Bank its rights hereunder or in any of the Collateral,
including, without limitation, (i) executing, delivering and, where appropriate,
filing financing statements and continuation statements under the Uniform
Commercial Code, and (ii) obtaining governmental and other third party consents
and approvals.
13. Power of Attorney.
-----------------
13.1 Appointment and Powers of Bank. The Company hereby irrevocably
------------------------------
constitutes and appoints the Bank and any officer or agent thereof, with full
power of substitution, as its true and lawful attorneys-in-fact with full
irrevocable power and authority in the place and stead of the Company or in the
Bank's own name, for the
<PAGE>
-5-
purpose of carrying out the terms of this Agreement, to take any and all
appropriate action and to execute any and all documents and instruments that may
be necessary or desirable to accomplish the purposes of this Agreement and,
without limiting the generality of the foregoing, hereby gives said attorneys
the power and right, on behalf of the Company, without notice to or assent by
the Company, to do the following:
(a) upon the occurrence and during the continuance of an Event
of Default, generally to sell, transfer, pledge, make any agreement
with respect to or otherwise deal with any of the Collateral in such
manner as is consistent with the Massachusetts UCC and as fully and
completely as though the Bank were the absolute owner thereof for all
purposes, and to do at the Company's expense, at any time, or from time
to time, all acts and things which the Bank deems necessary to protect,
preserve or realize upon the Collateral and the Bank's security
interest therein, in order to effect the intent of this Agreement, all
as fully and effectively as the Company might do, including, without
limitation, (i) the filing and prosecuting of registration and transfer
applications with the appropriate federal or local agencies or
authorities with respect to trademarks, copyrights and patentable
inventions and processes, (ii) upon written notice to the Company, the
exercise of voting rights with respect to voting securities, which
rights may be exercised, if the Bank so elects, with a view to causing
the liquidation in a commercially reasonable manner of assets of the
issuer of any such securities and (iii) the execution, delivery and
recording, in connection with any sale or other disposition of any
Collateral, of the endorsements, assignments or other instruments of
conveyance or transfer with respect to such Collateral; and
(b) to file such financing statements with respect hereto, with
or without the Company's signature, or a photocopy of this Agreement in
substitution for a financing statement, as the Bank may deem
appropriate and to execute in the Company's name such financing
statements and amendments thereto and continuation statements which may
require the Company's signature.
13.2. Ratification by Company. To the extent permitted by law, the
-----------------------
Company hereby ratifies all that said attorneys shall lawfully do or cause
to be done by virtue hereof This power of attorney is a power coupled with
an interest and shall be irrevocable.
13.3. No Duty on Bank. The powers conferred on the Bank hereunder are
---------------
solely to protect its interests in the Collateral and shall not impose any
duty upon it to exercise any such powers. The Bank shall be accountable only
for the amounts that it actually receives as a result of the exercise of
such powers and neither it nor any of its officers, directors, employees or
agents shall be responsible to the Company for any act or failure to act,
except for the Bank's own gross negligence or willful misconduct.
14. Remedies. If an Event of Default shall have occurred and be
--------
continuing, the Bank may, without notice to or demand upon the Company, declare
this Agreement to be in default, and the Bank shall thereafter have in any
jurisdiction in which enforcement hereof is
<PAGE>
-6-
sought, in addition to all other rights and remedies, the rights and remedies of
a secured party under the Uniform Commercial Code, including, without
limitation, the right to take possession of the Collateral, and for that purpose
the Bank may, so far as the Company can give authority therefor, enter upon any
premises on which the Collateral may be situated and remove the same therefrom.
The Bank may in its discretion require the Company to assemble all or any part
of the Collateral at such location or locations within the state(s) of the
Company's principal office(s) or at such other locations as the Bank may
designate. Unless the Collateral is perishable or threatens to decline speedily
in value or is of a type customarily sold on a recognized market, the Bank shall
give to the Company at least ten (10) Business Days prior written notice of the
time and place of any public sale of Collateral or of the time after which any
private sale or any other intended disposition is to be made. The Company hereby
acknowledges that ten (10) Business Days prior written notice of such sale or
sales shall be reasonable notice. In addition, the Company waives any and all
rights that it may have to a judicial hearing in advance of the enforcement of
any of the Bank's rights hereunder, including, without limitation, its right
following an Event of Default to take immediate possession of the Collateral and
to exercise its rights with respect thereto.
15. Regulatory Issues. Upon the occurrence of an Event of Default, the
-----------------
Bank shall receive, to the fullest extent permitted by applicable law and
governmental policy (including, without limitation, the rules, regulations and
policies of the FCC), all rights necessary or desirable to obtain, use or sell
the Collateral, and to exercise all remedies available to it under the Loan
Documents, the UCC or other applicable law. The parties further acknowledge and
agree that, in the event of changes in law or governmental policy occurring
subsequent to the date hereof that affect in any manner the Bank's right of
access to, or use or sale of, any of the Collateral, or the procedures necessary
to enable the Bank to obtain such rights of access, use or sale, the Bank and
the Company shall amend the Loan Documents, in such manner as the Bank shall
request in order to provide the Bank such rights to the greatest extent possible
consistent with then applicable law and governmental policy. The Company agrees
to take any action that the Bank may request in order to obtain from the FCC
such approval as may be necessary to enable the Bank to exercise and enjoy the
full rights and benefits granted to the Bank by this Agreement and each other
agreement, instrument and document delivered to the Bank in connection herewith.
16. No Waiver, etc. The Company waives demand, notice, protest, notice of
--------------
acceptance of this Agreement, notice of loans made, credit extended, Collateral
received or delivered or other action taken in reliance hereon and all other
demands and notices of any description. With respect to both the Obligations and
the Collateral, the Company assents to any extension or postponement of the time
of payment or any other indulgence, to any substitution, exchange or release of
or failure to perfect any security interest in any Collateral, to the addition
or release of any party or person primarily or secondarily liable, to the
acceptance of partial payment thereon and the settlement, Compromising or
adjusting of any thereof, all in such manner and at such time or times as the
Bank may deem advisable. The Bank shall have no duty as to the collection or
protection of the Collateral or any income thereon, nor as to the preservation
of rights against prior parties, nor as to the preservation of any rights
pertaining thereto beyond the safe custody thereof as set forth in (S)9.2. The
Bank shall not be deemed to have waived any of its rights upon or under the
Obligations or the Collateral unless such waiver
<PAGE>
-7-
shall be in writing and signed by the Bank. No delay or omission on the part of
the Bank in exercising any right shall operate as a waiver of such right or any
other right. A waiver on any one occasion shall not be construed as a bar to or
waiver of any right on any future occasion. All rights and remedies of the Bank
with respect to the Obligations or the Collateral, whether evidenced hereby or
by any other instrument or papers, shall be cumulative and may be exercised
singularly, alternatively, successively or concurrently at such time or at such
times as the Bank deems expedient.
17. Marshalling. The Bank shall not be required to marshal any present
-----------
or future collateral security (including but not limited to this Agreement and
the Collateral) for, or other assurances of payment of, the Obligations or any
of them or to resort to such collateral security or other assurances of payment
in any particular order, and all of its rights hereunder and in respect of such
collateral security and other assurances of payment shall be cumulative and in
addition to all other rights, however existing or arising. To the extent that
it lawfully may, the Company hereby agrees that it will not invoke any law
relating to the marshalling of collateral which might cause delay in or impede
the enforcement of the Bank's rights under this Agreement or under any other
instrument creating or evidencing any of the Obligations or under which any of
the Obligations is outstanding or by which any of the Obligations is secured or
payment thereof is otherwise assured, and, to the extent that it lawfully may,
the Company hereby irrevocably waives the benefits of all such laws.
18. Proceeds of Dispositions; Expenses. The Company shall pay to the
----------------------------------
Bank on demand any and all expenses, including reasonable attorneys' fees and
disbursements, incurred or paid by the Bank in protecting, preserving or
enforcing the Bank's rights under or in respect of any of the Obligations or any
of the Collateral. After deducting all of said expenses, the residue of any
proceeds of collection or sale of the Obligations or Collateral shall, to the
extent actually received in cash, be applied to the payment of the Obligations
in such order or preference as the Bank may determine, proper allowance and
provision being made for any Obligations not then due. Upon the final payment
and satisfaction in full of all of the Obligations and after making any payments
required by Section 9-504(l)(c) of the Massachusetts UCC, any excess shall be
returned to the Company, and the Company shall remain liable for any deficiency
in the payment of the Obligations.
19. Overdue Amounts. Until paid, all amounts due and payable by the
---------------
Company hereunder shall be a debt secured by the Collateral and shall bear,
whether before or after judgment, interest at the rate of interest for overdue
principal set forth in the Credit Agreement.
20. Governing Law; Consent to Jurisdiction. THIS AGREEMENT IS INTENDED
--------------------------------------
TO TAKE EFFECT AS A SEALED INSTRUMENT AND SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS EXCEPT AS TO
MATTERS RELATING TO PERFECTION OF SECURITY INTERESTS, WHICH ARE GOVERNED BY
CONNECTICUT LAW. The Company agrees that any suit for the enforcement of this
Agreement may be brought in the courts of the Commonwealth of Massachusetts or
any federal court sitting therein and consents to the non-exclusive jurisdiction
of such court and to service of process in any such suit being made upon the
Company by mail at the address specified in (S)10 of
<PAGE>
-8-
the Credit Agreement. The Company hereby waives any objection that it may now or
hereafter have to the venue of any such suit or any such court or that such suit
is brought in an inconvenient court.
21. Waiver of Jury Trial. THE COMPANY WAIVES ITS RIGHT TO A JURY TRIAL
--------------------
WITH RESPECT TO ANY ACTION OR CLAIM ARISING OUT OF ANY DISPUTE IN CONNECTION
WITH THIS AGREEMENT, ANY RIGHTS OR OBLIGATIONS HEREUNDER OR THE PERFORMANCE OF
ANY SUCH RIGHTS OR OBLIGATIONS. Except as prohibited by law, the Company waives
any right which it may have to claim or recover in any litigation referred to in
the preceding sentence any special, exemplary, punitive or consequential damages
or any damages other than, or in addition to, actual damages. The Company (i)
certifies that neither the Bank nor any representative, agent or attorney of the
Bank has represented, expressly or otherwise, that the Bank would not, if the
event of litigation, seek to enforce the foregoing waivers and (ii) acknowledges
that, in entering into the Credit Agreement and the other Loan Documents to
which the Bank is a party, the Bank is relying upon, among other things, the
waivers and certifications contained in this (S)21.
22. PREJUDGMENT REMEDY WAIVER. THE COMPANY ACKNOWLEDGES THAT THE
-------------------------
FINANCING EVIDENCED HEREBY IS A COMMERCIAL TRANSACTION WITHIN THE MEANING OF
CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES. THE COMPANY HEREBY WAIVES ITS
RIGHT TO NOTICE AND PRIOR COURT HEARING OR COURT ORDER UNDER CONNECTICUT GENERAL
STATUTES SECTIONS 52-278a ET. SEQ. AS AMENDED OR UNDER ANY OTHER STATE OR
FEDERAL LAW WITH RESPECT TO ANY AND ALL PREJUDGMENT REMEDIES THE BANK MAY EMPLOY
TO ENFORCE ITS RIGHTS AND REMEDIES HEREUNDER. MORE SPECIFICALLY, THE COMPANY
ACKNOWLEDGES THAT THE BANK'S ATTORNEY MAY, PURSUANT TO CONN. GEN. STAT. (S)52-
278f, ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT SECURING A COURT ORDER. THE
COMPANY ACKNOWLEDGES AND RESERVES ITS RIGHT TO NOTICE AND A HEARING SUBSEQUENT
TO THE ISSUANCE OF A WRIT FOR PREJUDGMENT REMEDY AS AFORESAID AND THE BANK
ACKNOWLEDGES THE COMPANY'S RIGHT TO SAID HEARING SUBSEQUENT TO THE ISSUANCE OF
SAID WRIT. THE COMPANY FURTHER WAIVES ITS RIGHTS TO REQUEST THAT BANK POST A
BOND, WITH OR WITHOUT SURETY, TO PROTECT THE COMPANY AGAINST GES THAT MAY BE
CAUSED BY ANY PREJUDGMENT REMEDY SOUGHT OR OBTAINED BY BANK.
23. Miscellaneous. The headings of each section of this Agreement are
-------------
for convenience only and shall not define or limit the provisions thereof. This
Agreement and all rights and obligations hereunder shall be binding upon the
Company and its respective successors and assigns, and shall inure to the
benefit of the Bank and its successors and assigns. If any term of this
Agreement shall be held to be invalid, illegal or unenforceable, the validity of
all other terms hereof shall in no way be affected thereby, and this Agreement
shall be construed and be enforceable as if such invalid, illegal or
unenforceable term had not been included herein. The Company acknowledges
receipt of a copy of this Agreement. This Agreement and any
<PAGE>
-9-
amendment hereto may be executed in several counterparts, each of which shall be
an original, and all of which shall constitute one agreement.
24. Termination; Release of Collateral. This Agreement and the security
----------------------------------
interest granted hereunder shall terminate on the date on which all Obligations
have been indefeasibly and fully satisfied, and Company shall have no right to
request further Loans under the Credit Agreement. Bank shall thereupon reassign
and redeliver (or cause to be reassigned or redelivered) to Company or such
other person(s) as Company shall designate, against due execution and delivery
by Company or such person(s) of a receipt therefor reasonably satisfactory to
Bank in form and substance, such items of the Collateral (if any) as are then
held by Bank or its representatives, together with appropriate instruments of
reassignment and release.
IN WITNESS WHEREOF, intending to be legally bound, the Company has caused
this Agreement to be duly executed as a sealed instrument as of the date first
above written.
DSL.NET, INC.
/s/ George S. Smith
- -------------------
/s/ Andrea S. Harrington By: /s/ Robert Berlin
- ------------------------ -----------------
Title: Vice President
<PAGE>
-10-
Accepted:
FLEET NATIONAL BANK
By:
------------------------------
Title
STATE OF CONNECTICUT )
) ss: New Haven May __, 1999
COUNTY OF NEW HAVEN )
On this ____ day of May, 1999, before me, ________________, the undersigned
officer, personally appeared ___________________, who acknowledged ____self to
be the ____________ of _____________, a corporation, and that ___ as such
_____________, being authorized so to do, executed the foregoing instrument for
the purposes therein contained, by signing the name of the corporation by
____self as such _____________ and as ____ and its free act and deed.
In witness whereof I hereunto set my hand.
/s/ George S. Smith
-------------------
George S. Smith
Notary Public
My Commission Expires:
<PAGE>
-11-
Accepted:
FLEET NATIONAL BANK
By:
------------------------------
Title
STATE OF CONNECTICUT )
) ss: New Haven May __, 1999
COUNTY OF NEW HAVEN )
On this ____ day of May, 1999, before me, ________________, the undersigned
officer, personally appeared ___________________, who acknowledged ____self to
be the ____________ of _____________, a corporation, and that ___ as such
_____________, being authorized so to do, executed the foregoing instrument for
the purposes therein contained, by signing the name of the corporation by
____self as such _____________ and as ____ and its free act and deed.
In witness whereof I hereunto set my hand.
/s/ George S. Smith
-------------------
George S. Smith
Notary Public
My Commission Expires:
<PAGE>
SCHEDULE I
<TABLE>
<CAPTION>
Vehicle I.D. Number Make Year Model Model Name Color
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
IGCDL196WXB125623 Chevrolet 1999 Van Astro Van White
- -----------------------------------------------------------------------------------------------------
IGCDL19W6XB125461 Chevrolet 1999 Van Astro Van White
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
EXHIBIT 10.6
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
---------------
-2-
<PAGE>
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
-3-
<PAGE>
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.
-4-
<PAGE>
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%.
-5-
<PAGE>
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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<PAGE>
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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<PAGE>
(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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<PAGE>
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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<PAGE>
(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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<PAGE>
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.
-------
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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<PAGE>
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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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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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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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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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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(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
-39-
<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.
-40-
<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:
-41-
<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:
---------------
-42-
<PAGE>
Exhibit 23.02
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated May 26, 1999 relating to
the financial statements of DSL.net, Inc., which appear in this Prospectus. We
also consent to the references to us under the headings "Experts" and "Selected
Financial Data" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Hartford, Connecticut
June 7, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS FOR THE PERIOD FROM INCEPTION (MARCH 3, 1998) THROUGH
DECEMBER 31, 1998 AND THE THREE MONTHS ENDED MARCH 31, 1999 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 10-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1999
<PERIOD-START> MAR-03-1998 JAN-01-1999
<PERIOD-END> DEC-31-1998 MAR-31-1999
<CASH> 39,479 1,318,438
<SECURITIES> 0 0
<RECEIVABLES> 30,597 24,997
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 70,076 1,343,435
<PP&E> 290,082 1,799,908
<DEPRECIATION> (5,744) (53,909)
<TOTAL-ASSETS> 369,980 3,552,990
<CURRENT-LIABILITIES> 335,845 902,752
<BONDS> 0 0
0 0
0 2,497,244
<COMMON> 6,300 6,464
<OTHER-SE> (322,165) 86,564
<TOTAL-LIABILITY-AND-EQUITY> 369,980 3,552,990
<SALES> 31,533 48,188
<TOTAL-REVENUES> 31,533 48,188
<CGS> 0 0
<TOTAL-COSTS> 2,816,559 1,741,276
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 4,611 (6,474)
<INCOME-PRETAX> (2,789,637) (1,686,614)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (2,789,637) (1,686,614)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,789,637) (1,686,614)
<EPS-BASIC> (0.73) (0.24)
<EPS-DILUTED> 0 0
</TABLE>
