<PAGE>
As filed with the Securities and Exchange Commission on February 8, 2000
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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DSL.net, Inc.
(Exact name of registrant as specified in its charter)
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Delaware 4813 06-1510312
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
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)
----------------
Stephen Zamansky, Esq.
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. Ellen B. Corenswet, Esq.
Testa, Hurwitz & Thibeault, LLP Brobeck, Phleger & Harrison LLP
125 High Street 1633 Broadway, 47th Floor
Boston, Massachusetts 02110 New York, NY 10019
(617) 248-7000 (212) 581-1600
----------------
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]
CALCULATION OF REGISTRATION FEE
<TABLE>
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<CAPTION>
Proposed
Proposed maximum
Amount maximum aggregate Amount of
Title of each class of to be offering price offering registration
securities to be registered registered per share (1) price (1) fee (2)
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<S> <C> <C> <C> <C>
Common Stock, $.0005 par
value.................... 5,750,000 $21.219 $122,009,250 $32,211
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</TABLE>
(1) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, on the basis of the high and low sales prices of the
Registrant's common stock on February 1, 2000, as reported on the Nasdaq
National Market.
(2) Calculated pursuant to Rule 457(c) based on an estimate of the maximum
offering price.
----------------
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>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this preliminary prospectus is not complete and may be +
+changed. We may not sell these securities until the registration statement +
+filed with the Securities and Exchange Commission is effective. This +
+preliminary prospectus is not an offer to sell these securities and it is +
+not soliciting an offer to buy these securities in any state where the offer +
+or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated February 8, 2000
[LOGO OF DSL.net APPEARS HERE]
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5,000,000 Shares
Common Stock
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This is a public offering of DSL.net, Inc. We are offering 5,000,000 shares
of our common stock.
Our common stock is traded on the Nasdaq National Market under the symbol
"DSLN." On February 7, 2000, the last reported sale price of our common stock
was $26.0625 per share.
Investing in our common stock involves risks which are described in the "Risk
Factors" section beginning on page 5 of this prospectus.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Per
Share Total
-------- ---------
<S> <C> <C>
Public offering price $ $
Underwriting discounts and commissions $ $
Proceeds, before expenses, to DSL.net, Inc. $ $
</TABLE>
The underwriters may also purchase up to an additional 750,000 shares of our
common stock within 30 days from the date of this prospectus to cover over-
allotments.
Deutsche Banc Alex. Brown
Donaldson, Lufkin & Jenrette
Lehman Brothers
CIBC World Markets
The date of this prospectus is , 2000.
<PAGE>
[Map of United States indicating those cities where DSL.net offered service as
of February 1, 2000 and where it expects to offer service by March 31, 2000.]
Service Available as of February 1, 2000. Service Expected To Be Available By
End of First Quarter 2000.
<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. Other than in the financial statements, all share
information reflects all stock splits effected prior to the date of this
prospectus, the sale of 8,226,000 shares of our common stock in our initial
public offering and the conversion of all outstanding shares of preferred stock
into common stock on October 12, 1999. Except as otherwise indicated, the
information in this prospectus assumes the underwriters will not exercise their
over-allotment option.
DSL.net
Our Business
We provide high-speed data communications and Internet access services using
digital subscriber line, or DSL, technology to small and medium sized
businesses. We primarily target select second and third tier cities, generally
with populations of less than 900,000. Our networks enable data transport over
existing copper telephone lines at speeds of up to 1.5 megabits per second. Our
services, marketed under the NETgain brand name, offer customers high-speed
digital connections at prices that are attractive compared to the cost and
performance of alternative data communications services.
We offer our customers a single point of contact for a complete business
solution that includes all of the necessary equipment and services for high-
speed data communications. As of February 1, 2000, we provided service or had
installed equipment in more than 140 cities. We intend to continue our
expansion into a total of more than 300 cities by the end of 2000.
Our Strategy
Our objective is to become the leading provider of DSL-based services to
small and medium sized businesses in second and third tier cities throughout
the United States. Several DSL service providers have taken advantage of the
opportunity created by the rapidly growing data communications industry by
providing DSL-based services in large metropolitan areas. However, second and
third tier cities remain a significant underserved market. Key elements of our
strategy are to:
. be the first DSL-based service provider in select second and third tier
cities throughout the United States;
. utilize our rapid deployment model and leverage our centralized network
management to implement our rollout plan quickly and cost effectively;
. develop direct relationships with customers in order to better understand
and serve their needs;
. establish relationships in each local market with select local and
regional integrators of computer networks and systems and consultants who
can help market our services and provide us with customer referrals;
. leverage our systems and network design to capitalize on the cost
efficiencies of DSL technology; and
. develop relationships with companies that provide complementary products
and services or that can assist us in attracting our target customers.
1
<PAGE>
Recent Developments
As of February 1, 2000, we provided service or had installed equipment in
more than 140 cities.
On December 1, 1999, we acquired Tycho Networks, Inc., which provides
Internet access, web hosting and related services throughout central coastal
California. The total purchase price approximated $3.1 million, excluding
transaction costs. Our results of operations include the results of Tycho
Networks from December 1, 1999.
Revenue for the quarter ended December 31, 1999 was approximately $811,000.
Operating loss, net loss and net loss per common share for the quarter ended
December 31, 1999 were approximately $10,930,000, $9,870,000 and $0.21,
respectively. EBITDA was approximately negative $9,115,000, and capital
expenditures were approximately $17,226,000.
Revenue for the year ended December 31, 1999 was approximately $1,313,000.
Operating loss, net loss and net loss per common share for the year ended
December 31, 1999 were approximately $23,871,000, $21,988,000 and $2.05,
respectively. EBITDA was approximately negative $17,918,000, and capital
expenditures were approximately $33,811,000.
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.
The Offering
<TABLE>
<C> <S>
Common stock offered................ 5,000,000 shares
Common stock to be outstanding after
the offering....................... 63,382,196 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.
Nasdaq National Market symbol....... DSLN
</TABLE>
The shares of common stock to be outstanding after the offering exclude, as
of December 31, 1999:
. 12,364,200 shares of common stock reserved for issuance under our stock
option plan, of which 5,871,414 shares with a weighted average exercise
price of $2.32 per share were subject to outstanding options;
. 300,000 shares of common stock reserved for issuance under our employee
stock purchase plan; and
. 194,556 shares of common stock issuable upon exercise of outstanding
warrants with a weighted average exercise price of $0.68 per share.
2
<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 the financial statements of DSL.net and Tycho Networks, and the
related notes, and the pro forma condensed combined financial information and
related notes, which are included elsewhere in this prospectus. We were
incorporated on March 3, 1998 and commenced operations on March 28, 1998.
The pro forma financial information below reflects each of the following
items, all of which occurred after September 30, 1999:
. the issuance of 8,226,000 shares of common stock, including the issuance
of shares as a result of the exercise by the underwriters of their over-
allotment option, for net proceeds of approximately $56,289,000 in
connection with our initial public offering;
. the exercise of warrants for 56,250 shares of Series A preferred stock on
October 6, 1999 for an aggregate of $56,250;
. the conversion of our redeemable convertible preferred stock into
35,909,761 shares of common stock on October 12, 1999; and
. our acquisition of Tycho Networks in December 1999 (which, for the pro
forma 1998 period, includes their results of operations for the period
from inception (December 22, 1997) through December 31, 1998).
The pro forma as adjusted financial information adjusts the pro forma
information to give effect to the sale of 5,000,000 shares of common stock
offered by us, after deducting estimated underwriting discounts and commissions
and estimated offering expenses. See "Use of Proceeds."
<TABLE>
<CAPTION>
Actual Pro Forma
--------------------------------------------- -----------------------------
Period from Period Period from
Inception from Inception Inception
(March 3, 1998) (March 3, 1998) Nine Months (March 3, 1998) Nine Months
through through Ended through Ended
December 31, September 30, September 30, December 31, September 30,
1998 1998 1999 1998 1999
--------------- --------------- ------------- --------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................ $ 31,533 $ 13,488 $ 501,665 $ 380,060 $ 1,771,127
Operating loss......... (2,785,026) (126,868) (12,941,531) (4,198,261) (15,392,138)
Net loss............... (2,789,637) (127,602) (12,118,731) (4,471,839) (14,691,811)
Net loss per common
share................. $ (0.55) $ (0.03) $ (3.87) $ (0.87) $ (0.89)
Other Data:
EBITDA................. $ (356,010) $(126,868) $ (8,802,335)
Capital expenditures... 290,082 32,583 16,584,906
Cash Flow Data:
Used in operating
activities............ $ (153,505) $(136,610) $ (5,378,393)
Used in investing
activities............ (290,082) (32,583) (27,112,961)
Provided by financing
activities............ 483,066 169,193 64,990,346
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
----------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities............................ $43,066,526 $ 97,856,267 $221,253,142
Total assets........................... 62,137,988 120,354,225 243,751,100
Long-term obligations (including
current portion)...................... 2,735,941 3,002,792 3,002,792
Redeemable convertible preferred
stock................................. 75,016,344 -- --
Total stockholders' equity (deficit)... (20,903,938) 110,037,511 233,434,386
</TABLE>
EBITDA, shown above under "Other Data," consists of net loss excluding net
interest, taxes, depreciation of capital assets and noncash stock compensation
expense. Other companies, however, may calculate it differently from us. We
have provided EBITDA because it is a measure of financial performance commonly
used for comparing companies in the telecommunications industry in terms of
operating performance, leverage, and ability to incur and service debt. EBITDA
is not a measure determined under generally accepted accounting principles.
EBITDA should not be considered in isolation from, and you should not construe
it as a substitute for:
. operating loss as an indicator of our operating performance,
. cash flows from operating activities as a measure of liquidity,
. other consolidated statement of operations or cash flows data presented
in accordance with generally accepted accounting principles, or
. as a measure of profitability or liquidity.
4
<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 limited operating history makes it difficult to evaluate our business and
prospects
We commenced operations in March 1998 and only recently began to market and
sell our services. We began offering commercial service in Stamford,
Connecticut in May 1998. Accordingly, you have limited information about our
company with which to evaluate our business, strategies and performance and an
investment in our common stock.
Because the high-speed data communications industry is new and rapidly
evolving, we cannot predict its future growth or ultimate size
The high-speed data communications industry is in the early stages of
development and is subject to rapid and significant technological change. Since
this industry is new and because the technologies available for high-speed data
communications services are rapidly evolving, we cannot accurately predict the
rate at which the market for our services will grow, if at all, or whether
emerging technologies will render our services less competitive or obsolete. If
the market for our services fails to develop or grows more slowly than
anticipated, our business, prospects, financial condition and results of
operations could be materially adversely affected. Many providers of high-speed
data communication services are testing products from numerous suppliers for
various applications, and these suppliers have not broadly adopted an industry
standard. In addition, certain industry groups are in the process of trying to
establish standards which could limit the types or speeds of the technologies
we could use. Certain critical issues concerning commercial use of DSL
technology for Internet access, including security, reliability, ease and cost
of access and quality of service, remain unresolved and may impact the growth
of these services.
We have incurred losses and have experienced negative operating cash flow to
date and expect our losses and negative operating cash flow to continue and to
increase
We have incurred significant losses and experienced negative operating cash
flow for each month since our formation. We expect to continue to incur
significant losses and negative operating cash flow for the foreseeable future.
If our revenue does not grow as expected or capital and operating expenditures
exceed our plans, our business, prospects, financial condition and results of
operations will be materially adversely affected. As of September 30, 1999, we
had an accumulated deficit of approximately $17,310,000. We cannot be certain
if or when we will be profitable or if or when we will generate positive
operating cash flow. We expect our operating expenses to increase significantly
as we expand our business. In addition, we expect to make significant
additional capital expenditures in 2000 and in subsequent years. We also expect
to substantially increase our operating expenditures, particularly network and
operations and sales and marketing expenditures, as we implement our business
plan. However, our revenue may not increase despite this increased spending.
5
<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 certain other DSL providers. We focus on selling directly to
small and medium sized businesses in second and third tier cities. In contrast,
certain other DSL providers sell services primarily to Internet service
providers and others who, in turn, resell these services to end users through
their sales forces. In addition, many other DSL providers are currently focused
primarily on offering their services in large metropolitan areas. Certain of
our target markets are within the larger metropolitan areas where other DSL
providers are focused on providing service. Our unproven business model makes
it difficult to predict the extent to which our services will achieve market
acceptance. To be successful, we must deploy our network in a significant
number of our selected markets and convince our target customers to utilize our
service. It is possible that we may never be able to deploy our network as
planned or achieve significant market acceptance, favorable operating results
or profitability.
Our failure to achieve or sustain market acceptance at desired pricing levels
could impair our ability to achieve profitability or positive cash flow
Prices for digital communication services have fallen historically, a trend
we expect will continue. Accordingly, we cannot predict to what extent we may
need to reduce our prices to remain competitive or whether we will be able to
sustain future pricing levels as our competitors introduce competing services
or similar services at lower prices. Our failure to achieve or sustain market
acceptance at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would have a material adverse effect
on our business, prospects, financial condition and results of operations.
If we fail to recruit qualified personnel in a timely manner and retain our
employees, we will not be able to execute our business plan and our business
will be harmed
To meet our business plan, we need to hire a substantial number of qualified
personnel, particularly sales and marketing, engineering and other technical
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.
In particular, if we are unable to recruit and retain a sufficient number of
qualified personnel, including many who must be recruited to work locally in
the new markets where we provide or intend to provide service, we may not be
able to commence service as quickly as we expect in those new markets and, as a
result, our revenue growth may be lower than we expect and our business may be
harmed. 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 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 located throughout the
United States. The loss of key managers or their failure to work
6
<PAGE>
effectively as a team could have a material adverse effect on our business and
prospects. We do not have employment agreements with any of our executive
officers, so any of these individuals may terminate employment at any time.
Our failure to establish the necessary infrastructure to support our business
and to manage our growth could strain our resources and adversely affect our
business and financial performance
Our business plan anticipates that we will provide service in a significant
number of new cities and add a significant number of new employees in
geographically-dispersed areas. This rapid growth will continue to place a
significant strain on our management, financial controls, operations, personnel
and other resources. Our failure to manage our rapid growth could have a
material adverse effect on our ability to integrate expanding operations, the
quality of our services and our ability to recruit, manage and retain key
personnel. If we do not institute adequate financial and reporting systems,
managerial controls, and procedures to manage and operate from multiple
geographically-dispersed locations, our operations will be materially and
adversely affected. We have deployed operations support systems to help manage
customer service, bill customers, process customer orders and coordinate with
vendors and contractors. The subsequent integration and enhancement of these
systems could be delayed or cause disruptions in service or billing. In
addition, we have recently implemented a new financial and reporting system
which will interact with our operations support systems. To manage our growth
effectively, we must continue to successfully implement these systems on a
timely basis, and continually expand and upgrade these systems as our
operations expand.
Disappointing quarterly revenue or operating results could cause the price of
our common stock to fall
Our quarterly revenue and operating results are difficult to predict and may
fluctuate significantly from quarter to quarter. If our quarterly revenue or
operating results fall below the expectations of investors or security
analysts, the price of our common stock could fall substantially. Our quarterly
revenue and operating results may fluctuate as a result of a variety of
factors, many of which are outside our control, including:
. amount and timing of expenditures relating to the rollout of our
infrastructure and services;
. ability to obtain and the timing of necessary regulatory approvals;
. rate at which we are able to attract customers within our target markets
and our ability to retain these customers at sufficient aggregate revenue
levels;
. ability to deploy our network on a timely basis;
. availability of financing to continue our expansion;
. technical difficulties or network service interruptions;
. availability of space in traditional telephone companies' central offices
and timing of the installation of our equipment in those spaces; and
. introduction of new services or technologies by our competitors and
resulting pressures on the pricing of our service.
The failure of our customers to pay their bills on a timely basis could
adversely affect our cash flow
Our target customers consist of small and medium sized businesses. We
anticipate having to bill and collect numerous relatively small customer
accounts. We may experience difficulty in
7
<PAGE>
collecting amounts due on a timely basis. Our failure to collect accounts
receivable owed to us by our customers on a timely basis could have a material
adverse effect on our business, financial condition and cash flow.
Our failure to develop and maintain good relationships with marketing partners
in a local service market could adversely affect our ability to obtain and
retain customers in that market
In addition to marketing through our direct sales force, we rely on
relationships with local marketing partners, such as integrators of computer
systems and networks and consultants. These partners recommend our services to
their clients, provide us with referrals and help us build a local presence in
each market. We may not be able to identify, and maintain good relationships
with, quality marketing partners or assure you that they will recommend our
services rather than our competitors' services to their customers. Our failure
to identify and maintain good relationships with quality marketing partners
could have a material adverse effect on our ability to obtain and retain
customers in a market and, as a result, our business would suffer.
Our success depends on negotiating and entering into interconnection agreements
with traditional telephone companies
We must enter into and renew interconnection agreements with traditional
telephone companies in each of our target markets in order to provide service
in that market. These agreements govern, among other things, the price and
other terms regarding our location of equipment in the offices of traditional
telephone companies which house telecommunications equipment and from which
local telephone service is provided, known as central offices, and our lease of
copper telephone lines that connect those central offices to our customers. To
date, we have entered into agreements with Ameritech, Bell Atlantic, BellSouth,
Cincinnati Bell, GTE, SBC Communications, Sprint and US West, which govern our
relationships in 48 states and the District of Columbia. Delays in obtaining
interconnection agreements would delay our entrance into target markets and
could have a material adverse effect on our business and prospects. Our
interconnection agreements generally have limited terms of one to two years and
we cannot assure you that new agreements will be negotiated or that existing
agreements will be extended on terms favorable to us. Interconnection
agreements must be approved by state regulators and are also subject to
oversight by the FCC and the courts. These governmental authorities may modify
the terms or prices of our interconnection agreements in ways that could
adversely affect our ability to deliver service and our business and results of
operations.
Failure to negotiate interconnection agreements with the traditional local
telephone companies could lead to costly and lengthy arbitration which may not
be resolved in our favor
Under federal law, traditional telephone companies have an obligation to
negotiate with us in good faith to enter into interconnection agreements. If no
agreement can be reached, either side may petition the applicable state
telecommunications regulators to arbitrate remaining disagreements. Arbitration
is a costly and lengthy process that could delay our entry into markets and
could harm our ability to compete. Interconnection agreements resulting from
arbitration must be approved by state regulators. We cannot assure you that a
state regulatory authority would resolve disputes in our favor.
Failure to obtain space for our DSL equipment in the local telephone companies'
central offices in our target markets could adversely affect our business
Our strategy requires us to obtain space for our DSL equipment in those
central offices of the traditional local telephone companies that already serve
a large number of our target customers.
8
<PAGE>
Failure to obtain required space to locate our equipment in those central
offices, known as 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 traditional telephone companies, we must obtain
collocation space in each central office in which we intend to locate
equipment. We may not be able to secure collocation space in the central
offices of our choice on a timely basis. We expect that central office space
will become increasingly scarce as demand increases. In addition, the terms of
our collocation agreements are generally one to two years and are subject to
certain renegotiation, renewal and termination provisions.
Our success depends on traditional telephone companies providing acceptable
transmission facilities and copper telephone lines
We interconnect with and use the networks of traditional telephone companies
to provide our services to our customers. We cannot assure you that these
networks will be able to meet the telecommunications needs of our customers or
maintain our service standards. We also depend on the traditional telephone
companies to provide and maintain their transmission facilities and the copper
telephone lines between our network and our customers' premises. Our dependence
on traditional telephone companies could cause delays in establishing our
network and providing our services. Any such delays could have a material
adverse effect on our business. We lease copper telephone lines running from
the central office of the traditional telephone companies to each customer's
location. In many cases, the copper telephone lines must be specially
conditioned by the telephone company to carry digital signals. We may not be
able to lease a sufficient number of acceptable telephone lines on acceptable
terms, if at all. Traditional telephone companies often rely on unionized labor
and labor-related issues have in the past, and may in the future, adversely
affect the services provided by the traditional telephone companies.
We compete with the traditional local telephone companies on whom we depend
Many of the traditional local telephone companies, including those created
by AT&T's divestiture of its local telephone service business, have begun
deploying DSL-based services. In addition, these companies also currently offer
high-speed data communications services that use other technologies.
Consequently, these companies have certain incentives to delay:
. Our entry into, and renewals of, interconnection agreements with them,
. Our access to their central offices to install our equipment and provide
our services,
. providing acceptable transmission facilities and copper telephone lines,
and
. our introduction and expansion of our services.
Any such delays would negatively impact our ability to implement our
business plan and harm our competitive position, business and prospects.
We depend on two long distance carriers to connect our network
Data is transmitted across our network via transmission facilities that we
lease from MCI WorldCom and AT&T. Failure of these carriers to provide service
or to provide quality service may interrupt the use of our services by our
customers. In August 1999, the service provided by MCI WorldCom was interrupted
for several days by a failure of their communications network. Several of our
customers were without service or had poor service during this period. As a
result, we issued approximately $21,000 in credits toward services to our
customers. We cannot be sure that the MCI WorldCom and AT&T service will not be
interrupted in the future.
9
<PAGE>
Our success depends on contractors who install the equipment and wiring
necessary to utilize our service in the central offices of traditional
telephone companies and at our customers' premises
We primarily utilize contractors to install necessary equipment and wiring
in the central offices of traditional telephone companies and at our customers'
premises. These installations must be completed on a timely basis and in a
cost-efficient manner. Failure to retain experienced contractors to install the
equipment and wiring or failure to complete these installations on a timely,
cost-efficient basis could materially delay our growth or damage our
reputation, our business and prospects and results of operations. If we are
unable to retain contractors to provide these services, we will have to
complete these installations ourselves, probably at a greater cost and with
delay. We may be required to utilize numerous contractors as we expand our
operations, which may divert management attention and result in delays in
installations, cancellations, increased costs and lower quality.
Intense competition in the high-speed data communication services market may
negatively affect the number of our customers and the pricing of our services
The high-speed data communication services market is intensely competitive.
If we are unable to compete effectively, our business, prospects, financial
condition and results of operations would be adversely affected. We expect the
level of competition to intensify in the future, due, in part, to increasing
consolidation in our industry. Our competitors use various high speed
communications technologies for local access connections such as integrated
services digital network, or ISDN, frame relay, T1, DSL services and wireless,
satellite-based and cable networks. We expect significant competition from:
. Other providers of DSL-based services like us, including Covad, Network
Access Solutions, NorthPoint and Rhythms NetConnections;
. Internet service providers, such as PSINet, Concentric Network and
Flashcom, which offer high-speed access capabilities to complement their
existing products and services;
. Traditional local telephone companies, including the traditional
telephone companies created by AT&T's divestiture of its local telephone
service business, some of which have begun deploying DSL-based services
and which provide other high-speed data communications services;
. National long distance carriers, such as AT&T and MCI WorldCom, which
are beginning to offer competitive DSL-based services;
. Cable modem service providers, such as At Home, which are offering high-
speed Internet access over cable networks and have positioned themselves
to do the same for businesses; and
. Providers utilizing alternative technologies, such as wireless and
satellite-based data service providers.
Many of our current and potential competitors have longer operating
histories, greater brand name recognition, larger customer bases and
substantially greater financial, technical, marketing, management, service
support and other resources than we do. Therefore, they may be able to respond
more quickly than we can to new or changing opportunities, technologies,
standards or customer requirements. See "Business--Competition."
10
<PAGE>
We may not be able to continue to grow our business if we do not obtain
significant additional funds on acceptable terms during 2001
The actual amount and timing of our future capital requirements will depend
on the demand for our services and regulatory, technological and competitive
developments which could differ materially from our estimates. We may not be
able to raise sufficient debt or equity capital on terms that we consider
acceptable, if at all. If we are unable to obtain adequate funds on acceptable
terms, our ability to deploy and operate our network, fund our expansion or
respond to competitive pressures would be significantly impaired.
We may incur significant amounts of debt in the future to implement our
business plan and, if incurred, this indebtedness will create greater financial
and operating risk and limit our flexibility
We intend to seek additional debt financing in the future. We are not
generating sufficient revenue or operating cash flow to fund our operations or
to repay existing or expected debt. We may not be able to repay our current
debt or any future debt. In addition, the terms of any future debt would likely
contain additional restrictive covenants that would limit our ability to incur
additional indebtedness and place other operating restrictions on our business.
If we incur additional debt, we will be required to devote increased amounts of
our cash flow to service indebtedness. This could require us to modify, delay
or abandon the capital expenditures and other investments necessary to
implement our business plan.
We may be subject to risks associated with acquisitions
We acquired Tycho Networks in December 1999 and may acquire additional
businesses in the future, although we have no definitive agreements to do so at
this time. An acquisition, including the recently-completed Tycho Networks
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 future 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. We will probably have to devote
a significant amount of management resources to integrating any acquired
business, including the business of Tycho Networks, with our existing
operations, and that integration may not be successful.
Our services are subject to federal, state and local regulation and changes in
laws or regulations could adversely affect the way we operate our business
The facilities we use and the services we offer are subject to varying
degrees of regulation at the federal, state and/or local levels. Changes in
applicable laws or regulations could, among other things, increase our costs,
restrict our access to the central offices of the traditional telephone
companies, or restrict our ability to provide our services. For example, the
1996 Telecommunications Act, which, among other things, requires traditional
telephone companies to unbundle network elements and to allow competitors to
locate their equipment in the telephone companies' central offices, is the
subject of ongoing proceedings at the federal and state levels, litigation in
federal and state courts, and legislation in federal and state legislatures. On
remand from a decision of the U.S. Supreme Court that invalidated certain FCC
regulations, the FCC recently re-established a list of unbundled network
elements that must be provided to competitive companies such as us; however,
this decision is still subject to petitions for reconsideration and to appeal.
Also, FCC rules governing pricing standards for access to the networks of the
traditional telephone companies are currently being challenged in federal
court. In addition, an FCC order that found that advanced services, such as
DSL, are subject to the market opening requirements of the 1996
Telecommunications Act was remanded by a federal appellate court to the FCC for
further consideration. Another recent FCC order expanding collocation rights
for DSL and other advanced service providers is also under review
11
<PAGE>
on appeal. We cannot predict the outcome of the various proceedings, litigation
and legislation or whether or to what extent these proceedings, litigation and
legislation may adversely affect our business and operations. In addition,
decisions by the FCC and state telecommunications regulators will determine
some of the terms of our relationships with traditional telecommunications
carriers, including the terms and prices of interconnection agreements, and
access fees and surcharges on gross revenue from interstate and intrastate
services. State telecommunications regulators determine whether and on what
terms we will be authorized to operate as a competitive local exchange carrier
in their state. In addition, local municipalities may require us to obtain
various permits which could increase the cost of services or delay development
of our network. Future federal, state and local regulations and legislation may
be less favorable to us than current regulations and legislation and may
adversely affect our businesses and operations. See "Business--Governmental
Regulations."
An FCC proposal to permit the traditional local telephone companies to offer
DSL services through a less-regulated subsidiary could, if adopted, adversely
affect our business plan by altering our relationship with the local telephone
companies upon whose equipment we depend for access to customers
In August 1998, the FCC proposed that the traditional local telephone
companies should be permitted to create separate affiliates to provide DSL
services that would operate under the relaxed regulatory treatment available to
competitive DSL carriers. Under the separate affiliate proposal, traditional
local telephone companies would be required to provide wholesale service to
competitor DSL carriers at the same rates, terms and conditions that it
provided to its separate affiliate. Though the outcome of this proceeding
remains uncertain, the FCC adopted a condition to the merger of two traditional
local telephone companies, SBC Communications and Ameritech, that will permit
these companies to create separate affiliates to provide DSL services. In
December 1999, the FCC accepted Bell Atlantic's commitment to create an
advanced services affiliate as a condition to the Commission's decision to
approve Bell Atlantic's application to offer interexchange long-distance
services in New York state. Any final decision in this proceeding that alters
our relationship with the traditional local telephone companies could adversely
affect our ability to provide DSL services at a competitive price.
Uncertain tax and other surcharges on our services may increase our payment
obligations to federal and state governments
Telecommunications providers are subject to a variety of federal and state
surcharges and fees on their gross revenues from interstate and intrastate
services. These surcharges and fees may be increased and other surcharges and
fees not currently applicable to our services could be imposed on us. In either
case, the cost of our services would increase and that could have a material
adverse effect on our business, prospects, financial condition and results of
operations.
A breach of our network security could result in liability to us and deter
customers from using our services
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Any of the foregoing problems could result in
liability to us and deter customers from using our service. Unauthorized access
could jeopardize the security of confidential information stored in the
computer systems of our customers. Eliminating computer viruses and alleviating
other security problems may require interruptions, delays or cessation of
service to our customers, cause us to incur significant costs to remedy the
problem, and divert management attention. We can provide no assurance that the
security measures we have implemented will not be circumvented or that any
failure of these measures will not have a material adverse effect on our
ability to obtain and retain customers. Any of these factors could have a
material adverse effect on our business and prospects.
12
<PAGE>
Our failure to adequately protect our proprietary rights may adversely affect
our business
We rely on unpatented trade secrets and know-how to maintain our competitive
position. Our inability to protect these secrets and know-how could have a
material adverse effect on our business and prospects. We protect our
proprietary information by entering into confidentiality agreements with
employees and consultants and potential business partners. These agreements may
be breached or terminated. In addition, third parties, including our
competitors, may assert infringement claims against us. Any such claims, could
result in costly litigation, divert management's attention and resources, and
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 exposed to liability for information carried over our network or
displayed on web sites that we host
Because we provide connections to the Internet and host web sites for our
customers, we may be perceived as being associated with the content carried
over our network or displayed on web sites that we host. We do not and cannot
screen all of this content. As a result, we may face potential liability for
defamation, negligence, copyright, patent or trademark infringement and other
claims based on the content carried over our network or displayed on web sites
that we host. These types of claims have been brought against providers of
online services in the past and can be costly to defend regardless of the merit
of the lawsuit. The protection offered by recent federal legislation that
protects online services from some claims when the material is written by third
parties is limited. Further, the law in this area remains in flux and varies
from state to state. We may also suffer a loss of customers or reputational
harm based on this content or resulting from our involvement in these legal
proceedings.
Our failure and the failure of third parties to be Year 2000 compliant could
negatively impact our business
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. The use of software and
computer systems that are not Year 2000 compliant could result in system
failures or miscalculations and may result in disruptions of operations
including, among other things, a temporary inability to process transactions,
send invoices or engage in normal business activities. We are subject to
potential Year 2000 problems affecting our services and our business systems,
the systems of the traditional local telephone companies and other vendors, and
our customers' systems. Any of these Year 2000 problems could have a material
adverse effect on our business, financial condition and results of operations.
Year 2000 errors or defects may be discovered in our internal software or other
systems and, if such errors or defects are discovered, the costs of making
those systems Year 2000 compliant may be material. Year 2000 errors or defects
in the internal systems maintained by the traditional local telephone companies
and other vendors, could require us to incur significant unanticipated expenses
to remedy any problems or, if possible, replace affected vendors. Furthermore,
Year 2000 problems of our target customers could negatively impact their
decision to buy our services. See "Management's Discussion and Analysis and
Results of Operations--Impact of Year 2000."
13
<PAGE>
Risks relating to ownership of our common stock
Our stock price could fluctuate widely in response to various factors, many of
which are beyond our control
The trading price of our common stock has been and is likely to continue to
be highly volatile. Our stock price could fluctuate widely in response to
factors such as the following:
. actual or anticipated variations in quarterly operating results;
. announcements of new products or services by us or our competitors or
new competing technologies;
. the addition or loss of customers;
. changes in financial estimates or recommendations by securities
analysts;
. conditions or trends in the telecommunications industry, including
regulatory developments;
. growth of the Internet and on-line commerce industries;
. announcements by us of significant acquisitions, strategic partnerships,
joint ventures or capital commitments;
. additions or departures of our key personnel;
. future equity or debt offerings by us or our announcements of such
offerings; and
. general market and general economic conditions.
In addition, in recent years the stock market in general, and the Nasdaq
National Market and the market for Internet and technology companies in
particular, have experienced large price and volume fluctuations. These
fluctuations have often been unrelated or disproportionate to the operating
performance of these companies. These market and industry factors may
materially and adversely affect our stock price, regardless of our operating
performance.
Our executive officers, directors and principal stockholders own a significant
percentage of our company and will be able to exercise significant influence
over our company, which could have a material and adverse effect on the market
price of our common stock.
After this offering, our executive officers, directors and principal
stockholders and their affiliates will together control approximately 54.7% of
our outstanding common stock. As a result, these stockholders, if they act
together, will be able to control all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions, and will continue to have significant influence over our affairs.
This concentration of ownership may have the effect of delaying, preventing or
deterring a change in control, could deprive our stockholders of an opportunity
to receive a premium for their common stock as part of a sale and might affect
the market price of our common stock.
Certain provisions of our charter, by-laws and Delaware law make a takeover
difficult
Our corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These provisions include a
staggered board of directors, limitations 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.
14
<PAGE>
The market price of our common stock may drop significantly when the
restrictions on resale by our existing securityholders lapse
Following this offering, we will have approximately 63,382,196 shares of
common stock outstanding. Approximately 50,156,196 shares, or 79%, of our
outstanding common stock will be subject to restrictions on resale under U.S.
securities laws. Holders of 2,371,144 shares have agreed not to sell these
shares until April 4, 2000, and holders of 37,380,293 shares have agreed not to
sell these shares for at least 90 days following the date of this prospectus,
in each case without the consent of Deutsche Bank Securities Inc. As these
restrictions on resale end beginning in April 2000, the market price of our
common stock could drop significantly if holders of these shares sell them or
are perceived by the market as intending to sell them. These sales also may
make it difficult for us to sell equity securities in the future at a time and
price that we deem appropriate. See "Shares Eligible for Future Sale."
We will have discretion as to the use of the proceeds of this offering, which
we may not use effectively
We have not committed the net proceeds of this offering to any particular
purpose. As a result, our management will have significant flexibility in
applying the net proceeds of this offering and could apply them in ways with
which stockholders may disagree. If we do not apply the funds we receive
effectively, our accumulated deficit will increase and we may lose significant
business opportunities. See "Use of Proceeds."
Investors will experience immediate and substantial dilution in the book value
of their investment
If you purchase shares of our common stock in this offering, you will
experience immediate and substantial dilution because the price you pay will be
substantially greater than the net tangible book value per share of the shares
you acquire. This dilution is due, in large part, to the fact that certain of
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
AND CERTAIN OTHER INFORMATION
Some of the statements under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and "Business," on the inside front cover and elsewhere in this
prospectus constitute forward-looking statements. These statements relate to
future events or our future financial or business 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. Actual events or results may differ materially. In evaluating
these statements, you should specifically consider various factors, including
the risks outlined under "Risk Factors." These factors, among others, may cause
our actual results to differ materially from any forward-looking statement.
Although we believe that the expectations reflected in the forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
We use market data and industry forecasts throughout this prospectus, which
we have obtained from internal surveys, market research, publicly available
information and industry publications. We believe that the surveys and market
research we or others have performed is reliable, but we have not independently
verified this information. Such information may not be accurate.
15
<PAGE>
USE OF PROCEEDS
The net proceeds from the sale of the 5,000,000 shares of common stock being
offered by us, at an assumed public offering price of $26.0625 per share based
on the last reported sales price of our common stock on the Nasdaq National
Market on February 7, 2000, less estimated underwriting discounts and
commissions and estimated offering expenses, are estimated to be approximately
$123,397,000, or $141,966,000 if the underwriters' overallotment option is
exercised in full. See "Underwriting."
We intend to use the net proceeds from this offering to continue building
our network and for working capital and other general corporate purposes. We
may also use a portion of the net proceeds to acquire complementary businesses,
although we have no definitive agreements to do so at this time. The amounts
actually expended for these purposes will vary significantly depending on a
number of factors, including revenue growth, if any, and the extent and timing
of our entry into target markets and capital expenditures.
Prior to the application of the net proceeds from the offering as described
above, these proceeds will be invested in marketable, investment-grade
securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "DSLN" since October 6, 1999. The following table sets forth the high
and low sales prices per share of the common stock as reported on the Nasdaq
National Market for the periods indicated.
<TABLE>
<CAPTION>
High Low
------- -------
<S> <C> <C>
Year Ended December 31, 1999
Fourth Quarter 1999 (from October 6, 1999).................. $25.625 $ 7.469
Year Ended December 31, 2000
First Quarter 2000 (through February 7, 2000)............... $26.500 $14.000
</TABLE>
On February 7, 2000, the last reported sale price of our common stock was
$26.0625. As of January 31, 2000, there were approximately 62 stockholders of
record of our common stock.
DIVIDEND POLICY
We have never declared or paid cash dividends. We do not anticipate
declaring or paying cash dividends for the foreseeable future. Instead, for the
foreseeable future, we will retain our earnings, if any, for the future
operation and expansion of our business. In addition, our credit agreement with
our bank prohibits the payment of cash dividends.
16
<PAGE>
CAPITALIZATION
The following table shows our capitalization at September 30, 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 September 30, 1999:
. the issuance of 8,226,000 shares of common stock, including the issuance
of shares as a result of the exercise by the underwriters of their over-
allotment option, for net proceeds of approximately $56,289,000 in
connection with our initial public offering;
. the exercise of warrants to purchase 56,250 shares of Series A preferred
stock on October 6, 1999 for an aggregate of $56,250;
. the conversion of our redeemable convertible preferred stock into
35,909,761 shares of common stock on October 12, 1999; and
. our acquisition of Tycho Networks in December 1999, which includes its
consolidated financial position as of September 30, 1999.
The pro forma as adjusted information adjusts the pro forma information to
give effect to the sale of 5,000,000 shares of common stock offered by us at an
assumed public offering price of $26.0625 (which was the last reported sales
price of our common stock on the Nasdaq National Market on February 7, 2000),
after deducting estimated underwriting discounts and commissions and estimated
offering expenses. See "Use of Proceeds."
<TABLE>
<CAPTION>
September 30, 1999
----------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------------ ------------ ------------
<S> <C> <C> <C>
Cash, cash equivalents and marketable
securities.......................... $ 43,066,526 $ 97,856,267 $221,253,142
============ ============ ============
Long-term debt, including current
portion............................. 2,735,941 3,002,792 3,002,792
------------ ------------ ------------
Redeemable convertible preferred
stock:
Convertible preferred stock, $.001
par value; 18,962,500 shares
authorized; 20,000,000 shares
authorized pro forma and pro forma
as adjusted;
Series A -- 225,000 shares issued
and outstanding; none issued
outstanding pro forma and pro
forma as adjusted................. 225,000 -- --
Series B -- 6,500,000 shares issued
and outstanding; none issued and
outstanding pro forma and pro
forma as adjusted................. 15,424,999 -- --
Series C -- 2,785,516 shares issued
and outstanding; none issued and
outstanding pro forma and pro
forma as adjusted................. 9,940,391 -- --
Series D -- 2,963,672 shares issued
and outstanding; none issued and
outstanding pro forma and pro
forma as adjusted................. 30,967,786 -- --
Series E -- 939,086 shares issued
and outstanding; none issued and
outstanding pro forma and pro
forma as adjusted ................ 18,458,168 --
------------ ------------ ------------
Total redeemable convertible
preferred stock................. 75,016,344 -- --
------------ ------------ ------------
Stockholders' (deficit) equity:
Common stock, $.0005 par value;
55,925,000 shares authorized;
200,000,000 shares authorized pro
forma and pro forma as adjusted;
14,223,110 shares issued and
outstanding; 58,358,871 shares
issued and outstanding pro forma
and 63,358,871 shares issued and
outstanding pro forma as
adjusted.......................... 7,112 29,180 31,680
Additional paid-in capital......... 8,775,192 139,694,573 263,088,948
Deferred compensation.............. (12,375,876) (12,375,876) (12,375,876)
Accumulated deficit................ (17,310,366) (17,310,366) (17,310,366)
------------ ------------ ------------
Total stockholders' (deficit)
equity.......................... $(20,903,938) $110,037,511 $233,434,386
------------ ------------ ------------
Total capitalization............. $ 56,848,347 $113,040,303 $236,437,178
============ ============ ============
</TABLE>
17
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock at September 30,
1999 was $106,651,901, or $1.83 per share. Pro forma net tangible book value
per share represents the amount of total tangible assets less total liabilities
divided by the number of shares of our common stock outstanding, after giving
effect to the issuance of 8,226,000 shares of our common stock in connection
with our initial public offering, the exercise of warrants to purchase 56,250
shares of Series A preferred stock, the conversion of all outstanding shares of
our preferred stock into common stock and our acquisition of Tycho Networks,
each of which occurred after such date.
After giving effect to the receipt by us of the net proceeds from the sale
of 5,000,000 shares of common stock in this offering (assuming an offering
price of $26.0625 per share, which was the last reported sales price of our
common stock on the Nasdaq National Market on February 7, 2000), the pro forma
net tangible book value of our common stock as of September 30, 1999 would have
been $3.63 per share of common stock. This represents an immediate increase in
net tangible book value of $1.80 per share to existing stockholders and an
immediate dilution of $22.43 per share to new investors. The following table
illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed public offering price per common share................ $26.06
------
Pro forma net tangible book value per share at September 30,
1999....................................................... $1.83
Increase in pro forma net tangible book value per share
attributable to this offering.............................. 1.80
-----
Pro forma net tangible book value per share after this
offering..................................................... 3.63
------
Dilution per share to new investors........................... $22.43
======
</TABLE>
The above calculations do not take into account the exercise of outstanding
stock options or warrants as of September 30, 1999 or the exercise of the
underwriters' over-allotment option. To the extent any of these stock options
or warrants, or the underwriters' over-allotment option, are exercised, new
investors will experience further dilution.
18
<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 historical 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. Our 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 3,
1998) to December 31, 1998 and notes thereto appear elsewhere in this
prospectus. The balance sheet data as of September 30, 1999 and the statement
of operations and other data for the period from inception (March 3, 1998)
through September 30, 1998 and the nine months ended September 30, 1999 have
been derived from our unaudited financial statements that are included
elsewhere in this prospectus. The unaudited financial statements include, in
the opinion of our management, all adjustments, consisting only of normal,
recurring adjustments, necessary for a fair presentation of the information set
forth.
The pro forma information below reflects each of the following items, all of
which occurred after September 30, 1999:
. the issuance of 8,226,000 shares of common stock, including the issuance
of shares as a result of the exercise by the underwriters of their over-
allotment option, for net proceeds of approximately $56,289,000 in
connection with our initial public offering;
. the exercise of warrants for 56,250 shares of Series A preferred stock on
October 6, 1999 for an aggregate of $56,250;
. the conversion of our redeemable convertible preferred stock into
35,909,761 shares of common stock on October 12, 1999; and
. our acquisition of Tycho Networks in December 1999 (which, for the pro
forma 1998 period, includes their results of operations for the period
from inception (December 22, 1997) through December 31, 1998).
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 nine
months ended September 30, 1999 are not necessarily indicative of the results
that may be expected for the full year.
19
<PAGE>
<TABLE>
<CAPTION>
Actual Pro Forma
--------------------------------------------- -----------------------------
Period Period Period from
from Inception from Inception Inception
(March 3, 1998) (March 3, 1998) Nine Months (March 3, 1998) Nine Months
through through Ended through Ended
December 31, September 30, September 30, December 31, September 30,
1998 1998 1999 1998 1999
--------------- --------------- ------------- --------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue................. $ 31,533 $ 13,488 $ 501,665 $ 380,060 $ 1,771,127
Operating expenses:
Network and
operations........... 127,054 31,476 3,757,233 563,869 4,992,653
General and
administrative....... 230,272 93,660 2,945,077 912,839 4,947,941
Sales and marketing... 35,961 15,220 3,327,972 35,961 3,327,972
Stock compensation.... 2,423,272 -- 3,412,914 3,065,652 3,894,699
Total operating
expenses........... 2,816,559 140,356 13,443,196 4,578,321 17,163,265
Operating loss.......... (2,785,026) (126,868) (12,941,531) (4,198,261) (15,392,138)
Interest expense
(income)............... 4,611 734 (827,956) 286,203 (705,483)
Other expense (income).. -- -- 5,156 (12,625) 5,156
Net loss................ $(2,789,637) $ (127,602) $(12,118,731) $(4,471,839) $(14,691,811)
Net Loss per Common
Share Data:
Net loss per common
share.................. $ (0.55) $ (0.03) $ (3.87) $ (0.87) $ (0.89)
Shares used in computing
net loss per share..... 5,118,342 5,089,634 6,230,836 5,118,342 29,913,454
Pro forma net loss per
common share........... $ (0.55) $ (0.03) $ (0.41)
Shares used in computing
pro forma net loss per
share.................. 5,118,342 5,089,634 29,913,454
Other Data:
EBITDA.................. $ (356,010) $ (126,868) $ (8,802,335)
Capital expenditures.... 290,082 32,583 16,584,906
Cash Flow Data:
Used in operating
activities............. $ (153,505) $ (136,610) $ (5,378,393)
Used in investing
activities............. (290,082) (32,583) (27,112,961)
Provided by financing
activities............. 483,066 169,193 64,990,346
</TABLE>
<TABLE>
<CAPTION>
September 30, 1999
--------------------------
December 31,
1998 Actual Pro Forma
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash, cash equivalents and marketable
securities........................... $ 39,479 $ 43,066,526 $ 97,856,267
Total assets.......................... 369,980 62,137,988 120,354,225
Long-term obligations (including
current portion)..................... 433,161 2,735,941 3,002,792
Redeemable convertible preferred
stock................................ -- 75,016,344 --
Total stockholders' equity (deficit).. (315,865) (20,903,938) 110,037,511
</TABLE>
EBITDA, shown above under "Other Data," consists of net loss excluding net
interest, taxes, depreciation of capital assets and noncash stock compensation
expense. Other companies, however, may calculate it differently from us. We
have provided EBITDA because it is a measure of financial performance commonly
used for comparing companies in the telecommunications industry in terms of
operating performance, leverage, and ability to incur and service debt. EBITDA
is not a measure determined under generally accepted accounting principles.
EBITDA should not be considered in isolation from, and you should not construe
it as a substitute for:
. operating loss as an indicator of our operating performance,
. cash flows from operating activities as a measure of liquidity,
. other consolidated statement of operations or cash flows data presented
in accordance with generally accepted accounting principles, or
. as a measure of profitability or liquidity.
20
<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 the financial statements of DSL.net and Tycho Networks, and the
related notes, and the pro forma condensed combined financial information and
related notes appearing elsewhere in this prospectus.
Overview
We provide high-speed data communications services and Internet access to
small and medium sized businesses, primarily in second and third tier cities.
We began providing service in May 1998 and as of February 1, 2000 we provided
service or had installed equipment in more than 140 cities. We intend to
continue our network expansion into a total of more than 300 cities by the end
of 2000.
We have incurred operating losses and net losses for each month since our
formation. For the periods ended December 31, 1998 and September 30, 1999, we
have experienced net cash outflows for operating and investment activities. As
of December 31, 1998 and September 30, 1999, we had accumulated deficits of
approximately $2,790,000 and $17,310,000, respectively. We intend to
substantially increase our operating expenses and capital expenditures in an
effort to rapidly expand our network infrastructure and service areas. We
expect to incur substantial operating losses, net losses and net operating cash
outflows during our network build-out and during the initial penetration of
each new market we enter. Our losses and net operating cash outflows are
expected to continue and to increase as we expand our operations.
We incur network and operations expenses, sales and marketing expenses and
capital expenditures when we enter a new market. After selecting a target
market, we apply for space in the traditional telephone company's central
office from which we intend to provide service. The availability of space in
these central offices and the timing and cost of our obtaining that space
varies by location and by telephone company. Based on our experience to date,
if space is available in a desired central office, the time for us to obtain
the required local approvals and deploy our equipment in that space has
typically ranged from five to ten months. To date, our initial cost for
obtaining space in each central office and interconnection to the telephone
company's network has typically averaged less than $50,000. In addition to this
initial cost, we pay monthly fees for maintenance, utilities and continued
access to the telephone company's network, which vary by location and are
substantially lower than the initial cost for obtaining space. Once we have
deployed our network in a market, the majority of our additional capital
expenditures depend on orders to connect new end users. These additional
capital expenditures include the costs of additional DSL equipment that is
installed in the central offices and additional modems that are installed in
customers' sites. In addition to the capital expenditures required to enter a
market, we are required to fund each market's cash flow deficit as we build our
customer base.
Our financial performance will vary, and whether and when we achieve
profitability will depend on a number of factors, including:
. development of the high-speed data communications industry and our
ability to compete effectively;
. amount, timing and pricing of customer revenue;
. cost and timing of the deployment of our network, including installation
of equipment in traditional telephone companies' central offices;
21
<PAGE>
. commercial acceptance of our service and attaining expected penetration
within our target markets;
. timely recruitment of qualified personnel, particularly sales and
marketing, engineering and other technical personnel;
. upfront sales and marketing expenses;
. our ability to retain contractors to install equipment and wiring at
customer premises on a timely and cost-effective basis;
. cost and utilization of our network components which we lease from other
telecommunications providers;
. our ability to establish and maintain relationships with marketing
partners;
. successful implementation of financial, information management and
operations support systems to efficiently and cost-effectively manage our
growth; and
. outcome of federal and state regulatory proceedings and related judicial
proceedings, including proceedings relating to the 1996
Telecommunications Act.
Factors Affecting Future Operations
Revenues. We derive our revenues from installation charges and monthly fees
paid by customers for our services, which vary based on the speed of the
connection and the services ordered. The current monthly fee includes all phone
line charges, Internet access charges, the cost of the modem installed at the
customer's site and the other services we provide. During the nine months ended
September 30, 1999, monthly fees represented more than 80% of our revenue.
During the same period, installation charges, including activation fees,
represented less than 20% of our revenue.
We seek to price our services competitively. The market for high-speed data
communications services and Internet access is rapidly evolving and intensely
competitive. While many of our competitors and potential competitors enjoy
competitive advantages over us, we are pursuing a significant market that, we
believe, is currently underserved. Although pricing will be an important part
of our strategy, we believe that direct relationships with our customers and
consistent, high quality service and customer support will be key to generating
customer loyalty. During the past several years, market prices for many
telecommunications services and equipment have been declining, a trend that we
believe will likely continue.
Network and Operations. Our network and operations expenses include costs
related to personnel, monthly rental for telecommunications lines between
customers, central offices and network service providers, customer line
installation, Internet access, certain depreciation and amortization expenses
and other costs. The costs of providing a customer's copper telephone line and
the related monthly leased line costs, which average approximately $20 per
month, are expensed as incurred. Our total costs for leasing lines will
increase as we lease additional lines to service additional customers. Further,
we lease high-speed fiber-optic lines and other network capacity to connect our
central office equipment with our network and the Internet and incur costs to
connect to the Internet. We expect these costs to increase as the volume of
data communications traffic generated by our customers increases.
The majority of our capital expenditures relate to building our network and
delivering service to customers. Accordingly, the majority of our depreciation
and amortization expense, excluding deferred compensation expense, is included
in our network and operations expenses. This expense includes:
22
<PAGE>
. Depreciation of network and operations equipment and DSL modems installed
at customer sites;
. Depreciation of information systems, and computer hardware and software;
and
. Amortization and depreciation of the costs of obtaining, designing and
building our collocation space and corporate facilities.
We expect depreciation and amortization expense to increase significantly as
more of our network becomes operational and as we increase capital expenditures
to expand.
General and Administrative. Our general and administrative expenses consist
primarily of costs relating to personnel, customer service, finance, billing,
administrative services, recruiting, insurance, bad debts, legal services and
depreciation expense. We have hired and expect to continue to hire additional
employees. As a result, we expect these expenses to increase as the number of
employees increases.
Sales and Marketing. Our sales and marketing expenses consist primarily of
expenses for personnel, the development of our NETgain brand name, promotional
materials, advertising and sales commissions and incentives. Sales and
marketing expenses are expected to increase significantly as we continue to
expand our business into new markets.
We have entered into strategic business relationships with Staples and
Microsoft. The Staples marketing agreement designates us as their exclusive
supplier of the types of DSL services we provide in each of our markets. The
Microsoft arrangement allows us to jointly market a co-branded version of the
Microsoft Network (MSN) service to our customers and Microsoft intends to use
its existing channels and sales force to augment our own marketing efforts.
Stock compensation. We have incurred noncash stock compensation expenses as
a result of the granting of stock and stock options to employees and others
with exercise prices per share subsequently determined to be below the fair
values per share of our common stock for financial reporting purposes at the
dates of grant. The stock compensation is being charged immediately or is being
amortized over the vesting period of the applicable options, which is generally
48 months.
Taxation. We have not generated any taxable income to date and, therefore,
have not paid any federal income taxes since inception. Use of our net
operating loss carryforwards, which will begin to expire in 2003, may be
subject to limitations. We have recorded a full valuation allowance on a
deferred tax asset, consisting primarily of net operating loss carryforwards,
because of uncertainty regarding their recoverability.
Results of Operations
Revenue. We first introduced services in May 1998. Revenue in 1998 was
approximately $32,000. Revenue increased to approximately $502,000 for the nine
months ended September 30, 1999 from approximately $13,000 for the period from
March 3, 1998 (inception) to September 30, 1998. The increase in revenue was
primarily due to the increased number of customers subscribing for our
services, resulting from our increased sales and marketing efforts and the
expansion of our network. We expect revenue to increase in future periods as we
expand our network within our existing regions, deploy our network into new
regions and increase our sales and marketing efforts in all of our regions.
Network and operations. Network and operations expenses in 1998 were
approximately $127,000. Network and operations expenses increased to
approximately $3,757,000 for the nine months ended September 30, 1999 from
approximately $31,000 for the period from March 3, 1998
23
<PAGE>
(inception) to September 30, 1998. The increase in these expenses between the
1998 and 1999 interim periods was primarily due to the increased number of
customers subscribing for our services and other increased costs resulting from
the addition of personnel, the expansion of our network and legal costs
incurred in connection with our applications for regulatory approvals in
various states. We expect network and operations costs to increase
significantly in future periods as we increase our markets and customer base.
Depreciation and amortization expense, excluding amortization of deferred
compensation, in 1998 was approximately $6,000. Depreciation and amortization
expense, excluding amortization of deferred compensation, increased to
approximately $723,000 for the nine months ended September 30, 1999 from a
negligible amount for the period from March 3, 1998 (inception) to September
30, 1998. This expense increased as more of our network became operational and
we increased capital expenditures to expand.
General and administrative. General and administrative expenses in 1998 were
approximately $230,000. General and administrative expenses increased to
approximately $2,945,000 for the nine months ended September 30, 1999 from
approximately $94,000 for the period from March 3, 1998 (inception) to
September 30, 1998. The increases in general and administrative expenses were
principally the result of increases in the number of employees.
Sales and marketing. Sales and marketing expenses in 1998 were approximately
$36,000. Sales and marketing expenses increased to approximately $3,328,000 for
the nine months ended September 30, 1999 from approximately $15,000 for the
period from March 3, 1998 (inception) to September 30, 1998. These expenses
increased primarily as a result of the increase in marketing and promotional
activities and increases in sales and marketing personnel. Sales and marketing
expenses are expected to increase significantly as we continue to expand our
business into new markets.
Stock compensation. We incurred noncash stock compensation expenses of
approximately $2,423,000 in 1998. Noncash stock compensation expenses were
approximately $3,413,000 for the nine months ended September 30, 1999 compared
to $0 for the period from March 3, 1998 (inception) to September 30, 1998.
Expenses incurred in 1998 consisted of current period charges related to common
stock issued to certain officers. The expenses incurred in the nine months
ended September 30, 1999 consisted of charges and amortization related to stock
options and restricted stock granted to our employees, directors and advisors
during the first nine months of 1999.
The unamortized balance of approximately $12,376,000 as of September 30,
1999 will be amortized over the remaining vesting period of each grant. As of
September 30, 1999, options to purchase 5,656,240 shares of common stock were
outstanding, which were exercisable at a weighted average exercise price of
$1.42 per share.
Interest expense (income), net. Net interest income was approximately
$828,000 for the nine months ended September 30, 1999 compared to interest
expense of approximately $700 for the period from March 3, 1998 (inception) to
September 30, 1998. This increase was primarily due to an increase in our cash
balances as a result of the issuance of preferred stock in 1999 and, to a
lesser extent, the repayment of debt with the proceeds therefrom. Interest
expense in 1998 was approximately $5,000, and related primarily to a note
payable which was paid in full in January 1999.
Net loss. Net loss for 1998 totaled approximately $2,790,000. Net loss
increased to approximately $12,119,000 for the nine months ended September 30,
1999 from approximately $128,000 for the period from March 3, 1998 (inception)
to September 30, 1998.
24
<PAGE>
Liquidity and Capital Resources
We have financed our capital expenditures and operations primarily with the
proceeds from stock issuances and borrowings. As of September 30, 1999, on a
pro forma basis giving effect to the sale of 8,226,000 shares of common stock
in our initial public offering in October and November 1999, the exercise of
warrants for 56,250 shares of preferred stock in October 1999, the conversion
of all of our outstanding preferred stock into 35,909,761 shares of common
stock in October 1999 and our acquisition of Tycho Networks in December 1999,
we had cash, cash equivalents and marketable securities of approximately
$97,856,000 and working capital of approximately $91,416,000.
Net cash provided by financing activities in 1998 and for the nine months
ended September 30, 1999 was approximately $483,000 and $64,990,000,
respectively. This cash primarily resulted from the sale of preferred stock,
amounts borrowed under our lease facilities and our credit line. We have used,
and intend to continue using, the proceeds from these financings primarily to
implement our business plan and for working capital.
In August 1998, we issued a $100,000 demand note which bore interest at the
annual rate of 5.56%. As of December 31, 1998, $66,667 of principal of this
note remained outstanding. This note was repaid in full in January 1999.
In November 1998, we received $350,000 from a short-term bridge note and
warrant financing. These notes had an aggregate principal amount of $350,000
and bore interest at annual rates of 5.56% or 6%. These notes were exchanged
into shares of our Series A preferred stock in January 1999.
During 1998, we also received $50,500 from the sale of capital stock to our
founders.
In January 1999 we received net proceeds of approximately $3,302,000 from
the sale of shares of Series A preferred stock and certain warrants. In April
1999, we received net proceeds of approximately $9,940,000 from the sale of
shares of Series C preferred stock to our principal stockholders and others. In
May 1999, we received net proceeds of approximately $29,961,000 from the sale
of shares of Series D preferred stock to our principal stockholders and others.
In addition, we received approximately $1,007,000 in connection with repayment
of a note, including interest at 6.0%, from an officer in connection with the
purchase of Series D preferred stock in June 1999. In July 1999, we received
net proceeds of approximately $18,458,000 from the sale of shares of Series E
preferred stock to two strategic marketing partners. In October and November
1999, we received net proceeds of approximately $56,289,000 from the sale of
shares of common stock in our initial public offering. Upon the closing of the
initial public offering of our common stock on October 12, 1999, all
outstanding shares of our preferred stock converted automatically into shares
of common stock.
In March 1999, we entered into a 36-month lease facility to finance the
purchase of up to an aggregate of $2,000,000 of equipment. Amounts financed
under this lease facility bear an interest rate of 8% or 9%, depending on the
type of equipment, and are secured by the financed equipment. There was
approximately $1,004,000 outstanding on this lease facility at September 30,
1999. In addition, during the nine months ended September 30, 1999, we
purchased certain software and equipment under other capital leases, which are
being repaid over periods ranging from 24 months to 36 months. There was
approximately $370,000 outstanding on these capital leases at September 30,
1999.
In May 1999, we established a line of credit which allows us to borrow up to
an aggregate of $5.0 million. This line of credit expires in May 2000, at which
time amounts outstanding will convert
25
<PAGE>
into a term loan, which will be repayable over 36 months. Amounts borrowed
under this line of credit generally bear interest at the sum of 1% plus the
higher of the bank's prime rate of interest and the federal funds rate plus
.5%. As of September 30, 1999, amounts outstanding under this line of credit
bore interest at the annual rate of 9.25% and are secured by a lien on certain
of our equipment. Borrowings under the line of credit are restricted based on
the value of the equipment securing the line of credit. In addition, the line
of credit also contains certain covenants, including covenants requiring us to
maintain certain financial ratios and limitations relating to, among other
things, new indebtedness, the creation of liens, types of investments, mergers,
consolidations and the transfer of all or substantially all of our assets. As
of September 30, 1999, there was approximately $1,447,000 outstanding, and
approximately $3,553,000 was available, under this line of credit.
We have received commitments for a credit facility that will, if executed,
replace our existing line of credit. This new credit facility would provide an
estimated $45,000,000 revolving line of credit to be used for general corporate
purposes and for the issuance of letters of credit. Borrowing availability and
rate of interest under the proposed line of credit would vary depending upon
specified financial ratios. This revolving line of credit would contain certain
covenants, including covenants requiring us to maintain certain financial
ratios and limitations or prohibitions relating to, among other things, new
indebtedness, the payment of dividends, the creation of certain liens, types of
investments, mergers, consolidations and the transfer of certain assets. The
interest rate would be prime or LIBOR-based.
In 1998 and for the nine months ended September 30, 1999, the net cash used
in our operating activities was approximately $154,000 and $5,378,000,
respectively. This cash was used for a variety of operating expenses, including
salaries, consulting and legal expenses, network operations and overhead
expenses. Our net operating cash outflows are expected to continue and to
increase as we expand our operations.
Net cash used in investing activities in 1998 and for the nine months ended
September 30, 1999 was approximately $290,000 and $27,113,000, respectively. Of
this amount, approximately $16,585,000 was used primarily for the purchase of
equipment and payment of collocation costs and approximately $10,528,000 was
used for the purchase of marketable securities.
In February 1999, we leased office space and subsequently have leased
additional space in New Haven, Connecticut. Annual minimum lease payments under
these leases are approximately $1,125,000 for each of the years 2000 through
2002, and approximately $900,000, $745,000 and $279,000 for 2003, 2004 and
2005, respectively.
On December 1, 1999, we acquired Tycho Networks, which is based in Santa
Cruz, California. Tycho Networks provides Internet access, web hosting and
related services throughout central coastal California. The approximate net
purchase price of $3.1 million, excluding transactions costs associated with
the acquisition, consists of cash payments at closing of $1.6 million
(including notes paid at closing of approximately $0.8 million), amounts due to
the selling stockholders and others after the closing of approximately $0.8
million, net liabilities assumed of approximately $0.3 million and other costs
of approximately $0.4 million.
The development and expansion of our business requires significant capital
expenditures. The principal capital expenditures incurred to enter each market
include the procurement, design and construction of the space in traditional
telephone companies' central offices where we deploy our equipment, and the
purchase and installation of all necessary equipment. Capital expenditures,
including collocation fees, were approximately $290,000 and $16,585,000 in 1998
and for the nine months ended September 30, 1999, respectively. We currently
anticipate spending approximately $60,000,000 for capital expenditures for the
balance of 2000. The planned capital expenditures are primarily for the
procurement, design and construction of central office spaces and the purchase
and
26
<PAGE>
installation of the equipment necessary for us to provide our services, as well
as for the continued development of our information and management systems,
including our operations support systems. The actual amounts and timing of our
capital expenditures will vary depending on the speed at which we are able to
expand and implement our network and could differ materially both in amount and
timing from our current plans.
We believe that the net proceeds from this offering, together with our
existing cash and short-term investments, amounts available under our equipment
lease and credit facilities, and cash generated from operations, will be
sufficient to fund our operating losses, capital expenditures, lease payments
and working capital requirements through the first half of 2001. We estimate
that the net proceeds from the sale of common stock in this offering will be
approximately $123,397,000, after deducting estimated underwriting discounts
and commissions and estimated offering expenses. We currently anticipate that
our cash and short-term investments will exceed $190,000,000 after completion
of this offering. We intend to use these cash resources, including the net
proceeds from this offering, to continue building our network and for working
capital and other general corporate purposes. We may also use a portion of the
net proceeds to acquire complementary businesses, although we have no
definitive commitments or agreements to do so at this time. The amounts
actually expended for these purposes will vary significantly depending on a
number of factors, including revenue growth, if any, planned capital
expenditures, and the extent and timing of our entry into target markets.
We expect our operating losses, net operating cash outflows and capital
expenditures to increase substantially as we expand our network. We expect that
additional financing will be required in the 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 acquisitions; or
. we accelerate deployment of our network or otherwise alter the schedule
or targets of our business plan implementation.
We cannot assure you that we will be able to raise sufficient debt or equity
capital on terms that we consider acceptable, if at all. If we are unable to
obtain adequate funds on acceptable terms, our ability to deploy and operate
our network, fund our expansion or respond to competitive pressures would be
significantly impaired.
Qualitative Disclosures about Market Risks
We have no derivative financial instruments in our cash and cash
equivalents. We invest our cash and cash equivalents in investment-grade,
highly liquid investments, consisting of commercial paper, bank certificates of
deposit and corporate bonds. We anticipate investing our net proceeds from this
offering in similar investment-grade and highly liquid investments pending
their use as described in this prospectus.
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
27
<PAGE>
and computer systems may need to be upgraded or replaced in order to comply
with these Year 2000 requirements. The use of software and computer systems
that are not Year 2000 compliant could result in system failures or
miscalculations resulting in disruptions of operations, including among other
things, a temporary inability to process transactions, send invoices, or engage
in normal business activities.
Since we have been recently organized, we have been able to build our
internal business systems with Year 2000 compliance in mind. 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.
We have experienced no material adverse effect on our products, including
any problems relating to the traditional local telephone companies, other
vendors or our target customers. Nevertheless, there can be no assurances that
we will not experience problems resulting from any of the foregoing which could
have a material adverse impact on our business, operating results and financial
condition.
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
future.
Recently Issued Accounting Pronouncements
In 1998, we adopted Statement of Financial Accounting Standards, or SFAS,
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 Company has applied the guidance
set forth in SoP 98-1, which was effective for the Company's year ended
December 31, 1999.
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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." DSL.net is required to adopt SFAS No. 133,
as amended by SFAS No. 137, in fiscal 2001. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
entered into any derivative financial instruments or hedging activities. As a
result, management believes adoption of SFAS No. 133 will not have a material
impact on the financial statements.
28
<PAGE>
BUSINESS
Overview
We provide high-speed data communications and Internet access services using
digital subscriber line, or DSL, technology to small and medium sized
businesses. We primarily target select second and third tier cities, which
generally have populations of less than 900,000. Our networks enable data
transport over existing copper telephone lines at speeds of up to 1.5 megabits
per second. Our services, marketed under the NETgain brand name, offer
customers high-speed digital connections at prices that are attractive compared
to the cost and performance of alternative data communications services.
Industry Background
We believe that a substantial business opportunity has been created by the
convergence of several factors:
. growth in demand for high-speed data communications;
. increased demand for Internet access by small and medium sized
businesses;
. limitations of existing telecommunications services to meet these
demands; and
. emergence of low-cost, DSL-based solutions.
Growth in High-Speed Data Communications. Data communications is the fastest
growing segment of the telecommunications industry. Forrester Research, Inc.
projects that the total market for data networking services and Internet access
will grow from $6.2 billion in 1997 to approximately $49.7 billion by 2002,
with approximately $27.9 billion to come from services to businesses. To remain
competitive, companies require high-speed connections to maintain complex
Internet sites, to access critical information and business applications, and
to communicate more efficiently with employees, customers and suppliers. In
addition, businesses are increasingly using the Internet to market and sell
their products and services.
Increased Demand for High-Speed Internet Access by Small and Medium Sized
Businesses. Small and medium sized businesses are increasingly using the
Internet to enable them to compete more effectively with larger organizations.
According to International Data Corporation/LINK, Internet access among small
businesses--those with under 100 employees--grew from 19.7% in 1996 to 38.8% in
1997. The following table illustrates the historical and estimated growth in
Internet use by these small businesses:
<TABLE>
<CAPTION>
1996 1997 1998E 1999E 2000E 2001E
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Total small businesses (000s).... 7,065 7,240 7,382 7,531 7,684 7,842
Percentage of small businesses
with Internet access............ 19.7% 38.8% 43.9% 47.8% 51.3% 54.5%
Percentage of small businesses
with home pages................. 2.1% 7.1% 9.1% 11.7% 15.0% 16.6%
</TABLE>
Source: International Data Corporation/LINK
Currently, many small and medium sized businesses use the Internet to
exchange e-mails and files with customers, suppliers and other business
partners and to disseminate and obtain industry, product and market
information. Many of these businesses also have begun to use the Internet to
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
29
<PAGE>
the Internet, these businesses would benefit from high-speed, secure and
affordable digital data communications connections.
Limitations of Existing Telecommunications Network. The growing demand for
high-speed Internet access and data communications services is straining the
capacity of the existing telecommunications network, particularly the local
access portion. The long distance portion of the network typically consists of
fiber-optic cables and other equipment that enable high-speed connections
between the offices of the traditional telephone companies from which local
telephone service is provided, known as central offices. In contrast, the local
access portion of the network, also known as the last mile, typically consists
of copper telephone wire that connects end users' locations to the nearest
central office. This last mile of copper telephone wire was not originally
designed for the transmission of high-speed digital signals, but has been
historically used for the transmission of low-speed, analog voice signals. Most
data transmission solutions to the last mile problem, including dial-up modems,
frame relay, integrated services digital network (ISDN) and T1 lines, are
relatively slow, hard to obtain or expensive.
Emergence of DSL-based Solutions. As a result of technological developments
and regulatory changes, DSL technology has emerged as a commercially available,
cost-effective means of providing high-speed data transmission using existing
copper telephone lines. DSL technology enables the transmission of digital
signals over existing copper telephone wires. DSL technology enables the
transmission of packets of data over a telecommunications network, which allows
multiple users to simultaneously transmit and receive data over a single
connection. DSL equipment, when deployed at each end of a standard copper
telephone line, increases the data carrying capacity of the line to speeds to
and from the user of up to 1.5 megabits per second, depending on the distance
between the user and the central office and the quality of the copper telephone
line.
The deployment of DSL-based solutions by competitive telecommunications
companies has been facilitated by changes in the regulatory framework in recent
years. Under the 1996 Telecommunications Act, traditional telephone companies
are generally required to lease telephone lines to competitive
telecommunications companies on a wholesale basis through resale or unbundling
and to allow these competitive telecommunications companies to locate certain
of their equipment in the traditional telephone companies' central offices. By
using existing facilities and copper lines, DSL providers avoid the
considerable up-front fixed costs necessary to deploy alternative high-speed
digital communications technologies, such as cable, wireless and satellite
networks. As a result, a significant portion of the investment in a DSL network
is incurred only as customers order the service. In addition, we anticipate
that continued advances in DSL technologies and transmission speeds, as well as
advances in DSL equipment manufacturing efficiencies, will further reduce the
cost of deploying a DSL-based network.
Market Opportunity
We believe that the demand for affordable high-speed Internet access and
data communications services and the limited availability of these services
outside of large metropolitan areas have created an opportunity to provide DSL-
based services to a significant, underserved market--small and medium sized
businesses located in second and third tier cities. These businesses
increasingly require high-speed data communications capabilities to compete
effectively. Traditional telephone companies have generally offered ISDN, frame
relay or T1 lines as high-speed alternatives in these markets, but these
services are typically at a higher cost or lower speeds than DSL-based
services.
The DSL.net Solution
Our services, marketed under the NETgain brand name, provide small and
medium sized businesses, primarily in second and third tier cities, with high-
speed Internet access and data services using DSL technology. Key elements of
our solution are:
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High-Speed, Symmetric Connections. We offer Internet access at speeds of up
to 1.5 megabits per second. Our network is designed to provide data
transmission at the same speed to and from the customer, known as symmetric
data transmission. We believe that symmetric data transmission is best suited
for business applications, because business users require fast connections both
to send and receive information. This compares to other DSL services which use
asymmetric data transmission, which permits users to send information at speeds
much slower than that at which they can receive information. We may offer
asymmetric services in the future to employees of our small business customers
or to home office workers.
Complete Business Solution. We offer our customers a single point of contact
for a complete solution that includes all of the necessary equipment and
services to establish and maintain digital data communications. Our primary
services include Internet access, e-mail, assisting our customers in obtaining
Internet addresses, and hosting our customers' Web sites and support networks
that connect customers' various offices and connect our customers to their
suppliers, customers and others. Through independent suppliers, we also provide
Web site design and development and applications enabling electronic commerce.
Our network is designed to enable us to individually configure each customer's
service remotely. As a result, our customers are able to upgrade to higher
speeds without adding networking equipment and without an on-site visit from
technical personnel.
Always-On Connections. With our service, customers can access the Internet
continuously without having to dial into the network for each use. These
"always-on" connections provide customers with the ability to readily access
the Internet and transfer information. Despite the always-on connection, we
charge our customers a flat fee per month rather than billing them based on
usage.
Attractive Value Proposition. Our NETgain services offer customers high-
speed digital connections at prices that are attractive compared to the cost
and performance of alternative data communications services, such as dial-up,
T1, ISDN or frame relay lines. We believe that our services also increase the
productivity of network users by decreasing the time they spend connecting to
the Internet and waiting for information downloads and transfers.
Secure Connections. Our network is designed to reduce the possibility of
unauthorized access to our customers' internal applications and information and
to allow them to safely transmit sensitive information and applications.
Customer Support. We provide customer service 24 hours a day, seven days a
week. This support is important to many of our small and medium sized business
customers because they do not typically have dedicated internal support staff.
With our remote monitoring and troubleshooting capabilities, we continuously
monitor our network and our customers' connections. This enables us 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. As of February 1, 2000, we provided service or
had installed equipment in more than 140 cities. We intend to continue our
expansion into more than 300 cities by the end of 2000. Before entering a
market,
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we carefully analyze the competitive environment, the composition of the small
and medium sized businesses located in the market, the location, cost and
availability of collocation space in the local telephone company's central
offices, and the proximity of our target customers to those central offices.
Our goal is to locate our equipment in central offices with a high density of
small and medium sized businesses that we believe will use our services. We are
currently authorized to operate as a competitive local exchange carrier, which
is an entity authorized to provide local and long-distance telecommunications
services and is subject to federal and state regulation, in 47 states and the
District of Columbia, and we are seeking to have regulatory approval in the
remaining three states by the end of the first quarter of 2000. We have entered
into interconnection agreements with the major traditional local telephone
companies.
Utilize Our Rapid Deployment Model. Once we have selected a market to enter,
we deploy our network using an operating and strategic model that we believe is
replicable across the country and leverages our centralized network management
capabilities. We deploy a standard package of pre-configured equipment at each
central office. We utilize third-party field service organizations, who have
the required authorizations from traditional telephone companies, as well as
our own internal personnel to install this equipment in central offices.
Through centralized network management, standardized configuration of our
equipment, the assistance of third-party service providers and on-site
inspection of central office installations, we believe we can implement our
rollout plan quickly and cost effectively.
Develop Relationships Directly with Customers. Our strategy emphasizes
direct relationships with our customers. These relationships enable us to learn
about our customers' needs and preferences, help us expand our service
offerings to include additional value-added services based on customer demand
and market higher-speed Internet connections and other services to our
customers. We believe that these relationships increase customer loyalty and
reduce customer turnover. In addition, our existing customers have provided
customer referrals and we believe strong customer relationships will result in
customer referrals in the future.
Establish Local Referral Networks. We seek to establish relationships in
each local market with select local and regional technology-related
professionals, such as integrators of computer networks and systems and
consultants, who market our services and provide customer referrals. These
local marketing partners typically understand their clients' technology
requirements and capabilities and can provide valuable insights into customers'
needs. We also work with other local organizations which serve the business
community and refer customers to us. We use these relationships to leverage our
general advertising, direct mail and telesales efforts, which are directed at
decision makers in local businesses.
Leverage our Systems and Network. Our network and operations support systems
have been designed to leverage the economies of DSL technology and to grow with
our business. Because DSL technology uses existing copper telephone lines,
implementing a DSL-based network generally requires a lower initial capital
investment than that needed for alternative technologies. Once we install our
pre-configured equipment in a central office, our subsequent capital
investments to expand service from that location are directly related to the
number of customers who order our service, thereby reducing our overall capital
expenditures until additional paying customers have ordered our service. In
addition, the design of our network and our operations support systems is
intended to allow us to expand capacity as it is needed to support additional
customers and markets.
Our NETgain Services
We utilize DSL technology to provide reliable and cost-effective service to
our customers under the NETgain brand. As part of our service offerings, we
function as our customer's Internet service provider and deliver a broad range
of Internet-based, value-added solutions. As of February 1, 2000, we provided
service or had installed equipment in more than 140 cities.
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Our goal is to deliver services which:
. provide reliable, always-on, secure, high-speed Internet connections with
transmission speeds up to 1.5 megabits per second;
. are easily upgradable to higher speeds with simple software changes that
can be affected remotely from our offices;
. are more reliable and enable greater productivity than dial-up modems;
and
. are easier to provide, install and support than existing high-speed data
communications alternatives.
Our NETgain services currently include all necessary equipment, software and
lines required to establish and maintain a digital Internet connection. Our
primary services include Internet access, e-mail, assisting our customers in
obtaining Internet addresses and hosting our customers' Web sites. We also
support networks that connect customers' various offices and connect our
customers to their suppliers, customers and others. In addition, through
independent suppliers, we offer Web site design and development, as well as
applications enabling electronic commerce.
The following table lists our primary Internet access service offerings:
<TABLE>
<CAPTION>
Maximum Speed*
----------------- Maximum
To From Distance from
Customer Customer Central Office
-------- -------- --------------
<S> <C> <C> <C>
Services
NETgain 200.................................. 208 kb/s 208 kb/s 22,000 feet
NETgain 400.................................. 416 kb/s 416 kb/s 18,000 feet
NETgain 800.................................. 784 kb/s 784 kb/s 14,000 feet
NETgain 1200................................. 1.2 mb/s 1.2 mb/s 12,000 feet
NETgain 1500................................. 1.5 mb/s 1.5 mb/s 9,000 feet
</TABLE>
- --------
* The speed and effectiveness of the DSL connection varies based on a number of
factors, including the distance of the customer from the central office and
the condition of the copper line that connects the customer to the central
office. Speed is measured in kilobits per second, or kb/s, or megabits per
second, or mb/s.
Currently, customers typically pay an installation charge and a monthly fee
for the NETgain service. The monthly fee does not vary by number of users or
usage, although it does vary based on the speed of the connection. The fee
includes the cost of the modem installed at the customer's site, all phone line
charges, and general Internet access services, including e-mail, assistance in
obtaining Internet addresses and services related to the registration of these
addresses with various administrative bodies. Generally, customers subscribe to
our NETgain services for at least one year and are billed for our services on a
monthly basis. We also offer customers the ability to have their monthly
service fees charged directly to their credit cards.
We plan to continue expanding our network features and applications to meet
customer demand by working closely with leading hardware, software and
networking companies. We expect to focus on many applications, including
combining voice and data communications, increasing our directory and security
capabilities, and providing businesses with the ability to access their
important applications from remote locations. Using these network-enabled
features and applications, we are able to provide a complete solution to meet
our business customers' needs.
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Customers
Our target customers are small and medium sized businesses in second and
third tier cities in which we offer our services. In particular, we believe the
following are especially attractive customers:
. businesses currently using other high-speed data communications services,
such as T1, ISDN and frame relay services, or low-speed dial-up Internet
access;
. professional or service-based firms that have multiple Internet service
provider accounts and phone lines;
. branch offices located in second and third tier cities that require
transmission of large files between locations; and
. businesses that use data-intensive applications, such as financial
services, technology, and publishing.
None of our customers accounted for more than 5% of our total revenues
during the first nine months of 1999.
Sales and Marketing
Our marketing professionals have developed a methodology to identify the
businesses that would benefit from our services. Once we identify businesses in
a target market, we employ a targeted local marketing strategy utilizing a
variety of mediums, including direct mail, print and radio. In addition, we
sponsor local promotional events, such as information technology or
telecommunications seminars, to assist our local sales professionals.
Direct Sales Channels. Our direct sales efforts are centered around
telesales personnel and outside account managers, who are assigned to one or
more local areas. Our telesales personnel follow up on our direct mail
marketing campaigns. Unlike large corporations, decision-makers in small and
medium sized businesses generally decide over the phone and in a relatively
short time whether to initiate data communications service with us. We believe
our telesales personnel are effective in following up with those businesses
that have received direct mailings from us.
The outside account managers are responsible for selling our NETgain
services, assessing business opportunities and identifying marketing partners
to assist us in the sale of our NETgain services. In addition, outside account
managers work with local business associations to identify potential customers
and build brand awareness.
Marketing Partners. Our outside account managers also identify local
information technology professionals, such as integrators of computer networks
and systems and consultants, to assist in the sale of our NETgain services. We
select marketing partners based on several factors, including brand name, local
market presence, complementary technology or product lines, and a strong
distribution channel. Our local marketing partners understand the technology
needs and capabilities of their clients and are in position to recommend us to
their clients and provide us with referrals. We compensate our marketing
partners for each referral of a customer who purchases our services. We believe
that relationships with marketing partners are important in establishing a
long-term presence in the local community and leveraging our direct sales
force.
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Strategic Relationships
We entered into strategic relationships that we believe are valuable because
they provide additional marketing capabilities and distribution channels, in
addition to capital investment. We anticipate that we will enter into
additional strategic relationships with others in the future.
Our current strategic relationships include:
Staples. In July 1999, we entered into a strategic relationship with Staples
pursuant to which, among other things:
. Staples Investment. Staples invested $3,500,000 in return for shares of
our Series E preferred stock which converted into 473,655 shares of our
common stock upon the closing of our initial public offering on October
12, 1999. In addition, Staples purchased 360,000 shares of our common
stock in connection with our initial public offering.
. Marketing Services through Staples. Staples has agreed to market our
services to their small and medium sized business customers. Staples
refers potential customers to us through their retail stores, catalog and
web site. We have agreed to compensate Staples for each sale of our
services generated through these channels. We intend to offer our
customers the ability to connect over the Internet directly to Staples
for their business supply purchases.
. Mutual Exclusivity. During the term of our agreement, which is initially
for one year with the potential for annual renewals, we have agreed not
to offer our services through another national office supply company. In
turn, Staples has agreed to offer our services exclusively to its
customers in all of the markets we serve.
Microsoft. In July 1999, we entered into a strategic relationship with
Microsoft pursuant to which, among other things:
. Microsoft Investment. Microsoft invested $15,000,000 in us in return for
shares of our Series E preferred stock which converted into 2,029,949
shares of common stock upon the closing of our initial public offering on
October 12, 1999.
. Co-branding for Our Customers. During the term of our agreement, which is
initially for two years with the potential for annual renewals, Microsoft
has agreed to jointly market with us a co-branded version of the
Microsoft Network service (MSN). We have agreed to provide and market the
co-branded MSN service to our new and existing customers. We will receive
a portion of any advertising revenue generated through the co-branded MSN
service.
. Joint Marketing of Our Services. We have agreed to cooperate in joint
marketing activities utilizing our respective sales forces to promote and
sell the combined DSL.net services with the co-branded MSN services.
Customer Support and Operations
Our customer support professionals work to minimize the complexity and
inconvenience of data communications and Internet access for our customers.
They provide our customers with a single point of contact for implementation,
maintenance and operations support.
Implementation. We manage the implementation of our service for each
customer. We lease the copper telephone lines from the local telephone company.
These lines run from our equipment located in the telephone company's central
office to our customer. We test these lines to determine whether they meet our
specifications and work with the local telephone company to correct any
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problems identified by our testing. Field service technicians, typically
outside contractors, install the modem and any necessary wiring inside our
customers' offices and test the modem and connection over our network.
Maintenance. Our network operations center provides network surveillance for
all equipment in our network. We are able to detect and correct many of our
customers' maintenance problems remotely, often before our customer is aware of
the problem. Customer-initiated maintenance and repair requests are managed and
resolved primarily through our help desk. Our information management system,
which generates reports for tracking maintenance problems, allows us to
communicate maintenance problems from the customer service center to our
network operations center 24 hours a day, seven days a week.
Operations Support Systems. Our operations support systems are intended to
improve many of our business processes, including customer billing, service
activation, inventory control, customer care reports and maintenance reports.
They have been designed to provide us with accurate, up-to-date information in
these areas. Additional enhancements and integration of these systems will be
implemented in 2000. We believe that our operations support systems will
provide us with the flexibility to add additional services for our customers as
well as to meet our expansion goals.
Our Network
Our network delivers high-speed Internet access and data communication
services. It offers scaleability, reliability, security and high performance.
Network Design. The key design principles of our network are:
. Intelligent End-to-End Network Management. Our network is designed to
allow us to monitor network components and customer traffic from a
central location. Because we control the lines to the customer, we can
perform network diagnostics and equipment surveillance continuously. From
our network operations center, we have visibility across our entire
network, allowing us to identify and address network problems quickly and
to provide quality service and performance.
. Consistent Performance with the Ability to Expand. We believe that
networks that use technology that transmits packets of information, such
as ours, will eventually replace networks that use conventional telephone
transmission technology. We have designed our network to leverage the
economics of DSL technology, to grow with our business and to provide
consistent performance. We also use asynchronous transfer mode equipment
in our network, which implements high-speed, high volume transmission of
data.
. Security. Our network is designed to reduce the possibility of
unauthorized access and to allow our customers to safely transmit and
receive sensitive information and applications. The modems we install on
our customers' premises are designed with enhanced security features and
work in conjunction with installed security systems and network servers
in an effort to provide safe connections to the Internet and a secure
operating environment.
Network Components. The primary components of our network are:
. DSL Modems and On-Site Connections. We purchase DSL modems and provide
them to our customers as part of the service contract. We configure the
DSL modem and arrange for the installation of the modem and on-site
wiring needed to connect the modem to the copper telephone line that we
lease. We contract with independent field service organizations to
perform these services, in addition to using a small internal staff.
. Copper Telephone Lines. We lease a copper telephone line running to each
customer from our equipment in the local telephone company's central
office under terms specified in our
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interconnection agreements with these companies. Each copper line must be
specifically conditioned by the local telephone company to carry digital
signals, typically for an additional charge. If we are unable to lease, or
experience delays in leasing, a sufficient number of acceptable telephone
lines on acceptable terms, our business will be harmed.
. Central Office Collocation. Through our interconnection agreements, we
seek to secure space to locate our equipment in the central offices of
traditional local telephone companies and offer our services from these
locations. These collocation spaces are designed to offer the same high
reliability and availability standards as the telephone companies' other
central office spaces. We install the equipment necessary to provide
high-speed DSL signals to our customers in these spaces. We have
continuous access to these spaces to install and maintain our equipment.
We expect that space in central offices will become increasingly scarce
as competitive telecommunications companies vie for this space. We may
not be able to secure space to install our equipment on a timely basis,
which could delay our roll-out plan and adversely affect our business and
prospects.
. Connection to the Internet. Network traffic gathered at each central
office is routed to one of our regional hubs and then to the Internet. In
certain areas where we offer service from more than one central office,
network traffic is routed from each central office in that area to a
local hub which aggregates its traffic and the traffic from the other
central offices located in that area and routes this traffic to a
regional hub. Our hubs contain extra equipment and backup power to
provide backup facilities in the event of an equipment failure and are
actively monitored from our network operations center. We lease space for
our hubs in facilities designed to host network equipment. Our hubs are
connected to one another via fiber-optic cables and other high speed data
communications technologies. Until recently, this service was provided
solely by MCI WorldCom. In August 1999, the service provided by MCI
WorldCom was interrupted for several days by a failure of their network.
As a result, we issued approximately $21,000 in credits toward services
to our customers. We now have agreements with MCI WorldCom and AT&T to
provide this service, which enables us to have duplicate independent
connections for our network links. Our network connects to the Internet
through multiple Internet access providers.
. Network Operations Center. Our network is managed from our network
operations center located in New Haven, Connecticut. We provide end-to-
end network management 24 hours a day, seven days a week. This enhances
our ability to address performance and service issues before they affect
the customer. From the network operations center, we can monitor
individual customer lines and the equipment and circuits in each regional
network and central office.
. Private Regional Network. We anticipate that, at some point in the
future, we will operate our own private regional networks in certain
geographic areas. We believe our regional networks will consist of high-
speed telecommunications equipment that will connect our hubs to our
equipment in individual central offices. Private networks of this type
typically operate at speeds of 45 to 155 megabits per second.
Competition
We face competition from many companies with significantly greater financial
resources, well-established brand names and large installed customer bases.
Although we believe competition in many second and third tier cities is less
intense than competition in larger cities, we expect the level of competition
in our markets to intensify in the future. We expect significant competition
from:
Other DSL Providers. Certain competitive carriers, including Covad, Network
Access Solutions, NorthPoint and Rhythms NetConnections, offer DSL-based
services. The 1996 Telecommunications
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Act specifically grants competitive telecommunications companies, including
other DSL providers, the right to negotiate interconnection agreements with
traditional telephone companies, including interconnection agreements which may
be identical in all respects to, or more favorable than, our agreements.
Several of the large telecommunications companies and computer companies, such
as Microsoft and Qwest, have made investments in DSL service providers.
Internet Service Providers. Several national and regional Internet service
providers, including America Online, Concentric Network, Flashcom, PSINet and
Verio, offer high-speed access capabilities to complement their existing
products and services. These companies generally provide Internet access to
residential and business customers over the traditional telephone companies'
networks. However, some Internet service providers offer DSL-based access using
another carrier's DSL service or, in some cases, building their own DSL
networks. Some Internet service providers combine their significant and even
nationwide marketing presence with strategic or commercial alliances with DSL-
based competitive telecommunications companies and traditional local telephone
companies.
Traditional Local Telephone Companies. Many of the traditional local
telephone companies, including Bell Atlantic, BellSouth, SBC Communications,
and U S West have begun deploying DSL-based services. These companies have
established brand names and reputations for high quality in their service
areas, possess sufficient capital to deploy DSL equipment rapidly, have their
own copper telephone lines and can bundle digital data services with their
existing voice services to achieve a competitive advantage in serving
customers. We believe that the traditional telephone companies have the
potential to quickly deploy DSL services. In addition, these companies also
offer high-speed data communications services that use other technologies. We
depend on these traditional local telephone companies to enter into agreements
for interconnection and to provide us access to individual elements of their
networks. Although the traditional local telephone companies are required to
negotiate in good faith in connection with these agreements, future
interconnection agreements may contain less favorable terms and result in a
competitive advantage to the traditional local telephone companies.
National Long Distance Carriers. National long distance carriers, such as
AT&T, MCI WorldCom, Nextlink, Qwest, Sprint and Williams have deployed large-
scale data networks, sell connectivity to businesses and residential customers,
and have high brand recognition. They also have interconnection agreements with
many of the traditional telephone companies, and many offer competitive DSL
services.
Other Fiber-Based Carriers. Companies such as Allegiance, Choice One,
e.spire and Intermedia have extensive fiber networks in many metropolitan
areas, primarily providing high-speed data and voice circuits to small and
large corporations. They also have interconnection agreements with the
traditional telephone companies under which they have acquired collocation
space in many large markets, which could position them to offer DSL service in
those markets.
Cable Modem Service Providers. Cable modem service providers, such as At
Home and its cable partners, RoadRunner and High Speed Access, offer high-speed
Internet access over cable networks to consumers. @Work, a division of At Home,
has positioned itself to do the same for businesses. Where deployed, these
networks provide high-speed local access services, in some cases at speeds
higher than DSL service. They typically offer these services at lower prices
than our services, in part by sharing the capacity available on their cable
networks among multiple end users.
Wireless and Satellite Data Service Providers. Several new companies,
including 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
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satellite-based data service providers. These companies use a variety of new
and emerging technologies to provide high-speed data services.
We may be unable to compete successfully against these competitors. The most
significant competitive factors include: transmission speed, service
reliability, breadth of product offerings, price/performance, network security,
ease of access and use, content bundling, customer support, brand recognition,
operating experience, capital availability and exclusive contracts with
customers, including Internet service providers and businesses with multiple
offices. We believe our services compete favorably within our service markets
with respect to transmission speed, price/performance, ease of access and use
and customer support. Many of our competitors enjoy competitive advantages over
us based on their brand recognition, breadth of product offerings, operating
experience and exclusive contracts with customers.
Interconnection Agreements with Traditional Local Telephone Companies
We are required to enter into and implement interconnection agreements
covering each of our target markets with the traditional local telephone
company in that market in order to provide service. These agreements govern,
among other things:
. the price and other terms under which we locate our equipment in the
telephone company's central offices,
. the price we pay to lease copper telephone lines,
. the special conditioning of these copper lines that the traditional
telephone company provides to enable the transmission of DSL signals,
. the price we pay to access the telephone company's transmission
facilities, and
. certain other terms and conditions of our relationship with the telephone
company.
Under the 1996 Telecommunications Act, the traditional local telephone
companies have a statutory duty to negotiate in good faith with us for
agreements for interconnection and access to certain individual elements of
their networks. This interconnection process is subject to review and approval
by the state regulatory commissions. We have signed interconnection agreements
with Ameritech, Bell Atlantic, BellSouth, Cincinnati Bell, GTE, SBC
Communications, Sprint and U S West, which govern our relationships in 48
states and the District of Columbia. Certain of our interconnection agreements
govern our relationship with the traditional telephone company throughout its
service areas and others relate only to individual states. In addition, we are
currently negotiating additional agreements with additional carriers as well as
amendments and replacements of existing agreements. 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 telephone company or
we may submit disputes to the state regulatory commissions for mediation and,
after the expiration of the statutory negotiation period set forth in the 1996
Telecommunications Act, we may submit outstanding disputes to the states for
arbitration, as well as ask the state regulatory commissions to arbitrate a new
agreement or particulars thereof.
Under the 1996 Telecommunications Act, states have begun and, in a number of
cases, completed regulatory proceedings to determine the pricing of individual
elements of their networks and services, and the results of these proceedings
will determine the price we pay for, and whether it is economically attractive
for us to use, these elements and services.
Our interconnection agreements generally have terms of one or two years.
Therefore, we will have to renegotiate our existing agreements when they
expire. Although we expect to renew our
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interconnection agreements and believe the 1996 Telecommunications Act limits
the ability of traditional telephone companies not to renew these agreements,
we may not succeed in extending or renegotiating our interconnection agreements
on favorable terms. Additionally, disputes have arisen and will likely arise in
the future as a result of differences in interpretations of the interconnection
agreements. These disputes have delayed our deployment of our networks. They
have also adversely affected our service to our customers and our ability to
enter into additional interconnection agreements with the traditional telephone
companies in other states. Finally, the interconnection agreements are subject
to state regulatory commission, FCC and judicial oversight. These government
authorities may modify the terms of the interconnection agreements in a way
that hurts our business.
Government Regulations
A significant portion of the services that we offer will be subject to
regulation at the federal and/or state levels. The Federal Communications
Commission, or FCC, and state public utility commissions regulate
telecommunications common carriers, which are companies that offer
telecommunications services to the public or to all prospective users on
standardized rates and terms. Our data transport services are common carrier
services.
The FCC exercises jurisdiction over common carriers, and their facilities
and services, to the extent they are providing interstate or international
communications. The various state utility commissions retain jurisdiction over
telecommunications carriers, and their facilities and services, to the extent
they are used to provide communications that originate and terminate within the
same state. The degree of regulation varies from state to state.
In recent years, the regulation of the telecommunications industry has been
in a state of flux as the United States Congress and various state legislatures
have passed laws seeking to foster greater competition in telecommunications
markets. The FCC and state commissions have adopted many new rules to implement
those new laws and to encourage competition. These changes, which are still
incomplete, have created new opportunities and challenges for us and our
competitors. Certain of these and other existing federal and state regulations
are currently the subject of judicial proceedings, legislative hearings and
administrative proposals which could change, in varying degrees, the manner in
which this industry operates. Neither the outcome of these proceedings nor
their impact upon the telecommunications industry or us can be predicted at
this time. Indeed, future federal or state regulations and legislation may be
less favorable to us than current regulations and legislation and therefore
have a material and adverse impact on our business and financial prospects by
undermining our ability to provide DSL services at competitive prices. In
addition, we may expend significant financial and managerial resources to
participate in proceedings setting rules at either the federal or state level,
without achieving a favorable result.
Federal Regulation and Legislation
We must comply with the requirements of a common carrier under the
Communications Act of 1934, as amended, to the extent we provide regulated
interstate services. These requirements include an obligation that our charges,
terms and conditions for communications services must be "just and reasonable"
and that we may not make any "unjust or unreasonable discrimination" in our
charges or terms and conditions. The FCC also has jurisdiction to act upon
complaints against common carriers for failure to comply with their statutory
obligations. We are not currently subject to price cap or rate of return
regulation at the federal level and are not currently required to obtain FCC
authorization for the installation, acquisition or operation of our facilities.
The FCC has established different levels of regulation for dominant and non-
dominant carriers. Of domestic carriers, only the traditional local telephone
companies are classified as dominant
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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 October 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
telecommunications services via our network. This decision allows us to provide
our DSL services in a manner that potentially reduces state regulatory
obligations. This decision is currently subject to reconsideration and appeal.
Comprehensive changes to the Communications Act were made by the 1996
Telecommunications Act, enacted on February 8, 1996. It represents a
significant milestone in telecommunications policy by establishing competition
in local telephone service markets as a national policy. The 1996
Telecommunications Act removes many state regulatory barriers to competition
and forecloses state and local governments from creating laws preempting or
effectively preempting competition in the local telephone service market.
The 1996 Telecommunications Act places substantial interconnection
requirements on the traditional local telephone companies.
. Traditional local telephone companies are required to provide physical
collocation, which allows companies such as us and other interconnectors
to install and maintain their own network termination equipment in the
central offices of traditional local telephone companies, and virtual
collocation only if requested or if physical collocation is demonstrated
to be technically infeasible. This requirement is intended to enable us
and other competitive carriers to deploy our equipment on a relatively
convenient and economical basis.
. Traditional local telephone companies are required to unbundle components
of their local service networks so that other providers of local service
can compete for a wide range of local service customers. This requirement
is designed to provide us flexibility to purchase only the equipment we
require to deliver our services.
. Traditional local telephone companies are required to establish
"wholesale" rates for their services to promote resale by competitive
local exchange carriers and other competitors.
. Traditional local telephone companies are required to establish number
portability, which allows a customer to retain its existing phone number
if it switches from the traditional local telephone companies to a
competitive local service provider.
. Traditional local telephone companies are required to establish dialing
parity, which ensures that customers will not detect a quality difference
in dialing telephone numbers or accessing operators or emergency services
of local competitive service providers.
. Traditional local telephone companies are required to provide
nondiscriminatory access to telephone poles, ducts, conduits and rights-
of-way. In addition, the 1996 Telecommunications Act requires traditional
local telephone companies to compensate competitive carriers for traffic
originated by them and terminated on the competitive carrier's network.
The 1996 Telecommunications Act in some sections is self-executing. The FCC
issues regulations interpreting the 1996 Telecommunications Act that impose
specific requirements upon which we and our competitors rely. The outcome of
various ongoing FCC rulemaking proceedings or judicial appeals of such
proceedings could materially affect our business and financial prospects by
increasing the cost or decreasing our flexibility in providing DSL services.
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The FCC prescribes rules applicable to interstate communications, including
rules implementing the 1996 Telecommunications Act, a responsibility it shares
in certain respects with the state regulatory commissions. As part of its
effort to implement the 1996 Telecommunications Act, the FCC issued an order
governing interconnection in August 1996. A federal appeals court for the
Eighth Circuit, however, reviewed the initial rules and overruled some of their
provisions, including some rules on pricing and nondiscrimination. In January
1999, the United States Supreme Court reversed elements of the Eighth Circuit's
ruling, finding that the FCC has broad authority to interpret the 1996
Telecommunications Act and issue rules for its implementation, specifically
including authority over pricing methodology. The Supreme Court upheld the
FCC's directive to the traditional local telephone companies to combine
individual elements for competitors, and to allow competitors to pick and
choose among provisions in existing interconnection agreements. The Supreme
Court also found that the FCC's interpretation of the rules for establishing
individual elements of a network system was not consistent with standards
prescribed in the 1996 Telecommunications Act, and required the FCC to
reconsider and better justify its delineation of individual elements. The pick
and choose rule permits a competitive carrier to select individual provisions
of existing interconnection agreements yet still tailor its interconnection
agreement to its individual needs by negotiating the remaining provisions. In
November, 1999, the FCC issued a modified list of the network elements that
must be offered on an unbundled basis by traditional local telephone companies,
including the local copper telephone lines leased by DSL.net. This decision is
still subject to petitions for reconsideration and to appeal.
In March 1998, several traditional local telephone companies petitioned the
FCC for relief from certain regulations applicable to the DSL and other
advanced data services that they provide, including their obligations to
provide copper telephone lines and resold DSL services to competitive carriers.
In August 1998, the FCC concluded that DSL services are telecommunications
services and, therefore, the traditional local telephone companies are required
to allow interconnection of their facilities and equipment used to provide data
transport functionality, unbundle local telecommunications lines and offer for
resale DSL services. After some of the traditional local telephone companies
appealed this decision, the U.S. Court of Appeals for the District of Columbia
remanded the proceeding to the FCC for further consideration. In December 1999,
the FCC reaffirmed its conclusion on remand that traditional telephone
companies are required to offer to competitive data transmission companies the
ability to interconnect and the necessary unbundled network elements to provide
advanced data transmission services. This remand order is now pending on appeal
before the U.S. Court of Appeals. Any change in the August 1998 and December
1999 orders that would affect our ability to interconnect with and obtain
facilities from the traditional local telephone companies could affect our
ability to provide DSL services to the public.
In the same August 1998 order, the FCC issued a notice of proposed
rulemaking seeking comments on its tentative conclusion that traditional local
telephone companies should be permitted to create separate affiliates to
provide DSL services. Under the separate affiliate proposal, traditional local
telephone companies would be required to provide wholesale service to other DSL
carriers at the same rates, terms and conditions that it provided to its
separate affiliate. The outcome of this proceeding remains uncertain. However,
in October 1999 the FCC adopted a condition to the merger of two traditional
local telephone companies, SBC Communications and Ameritech, that will permit
the subsidiaries of these companies to create separate affiliates to provide
DSL services consistent with the regulations established in a final order. In
December 1999, the FCC listed Bell Atlantic's commitment to create an advanced
services affiliate as support for the Commission's decision to approve Bell
Atlantic's application to offer interexchange long-distance services in New
York state. Any final decision in this proceeding that alters our relationship
with the traditional local telephone companies could adversely affect our
ability to provide DSL services at a competitive price.
In March 1999, the FCC strengthened its regulations that require the
traditional local telephone companies to permit other carriers to collocate all
equipment necessary for interconnection. This
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requirement includes equipment that we use to provide DSL data services. The
FCC adopted limits on the construction standards and other conditions for
collocation that may be imposed by traditional local telephone companies. These
new rules should reduce our collocation costs and expedite our ability to
provide service to new areas. There is no guarantee that these new rules will
be implemented fully by the traditional local telephone companies. Therefore,
the benefits of these rules may be delayed pending interpretation and
enforcement by state and federal regulators. These rules are currently subject
to appeal by several traditional local telephone companies.
In November 1999, the FCC issued an order reaffirming its prior conclusion
that DSL services must be offered for resale at a discount by traditional local
telephone companies to the extent such services are offered at retail to
residential and business customers. The FCC clarified, however, that advanced
services provided to Internet service providers would not be subject to resale
at a discount. Accordingly, traditional telephone companies may enter into
volume and term discounts for the provisioning of DSL services with internet
service providers without having to make such arrangements available to other
requesting CLECs at discounted rates.
In December 1999, the FCC issued an order that requires the traditional
local telephone companies to provide "line sharing" of unbundled copper
telephone lines to DSL companies. Line sharing allows a DSL company to lease
the high frequency portion of a loop over which some types of DSL data traffic
is transmitted without having to lease the low frequency portion of the loop
which carries voice traffic. Line sharing is not currently available using
symmetric DSL technology, which transmits data at the same speed to and from
the customer and is the same technology that we principally use in providing
our service. We have requested each of the traditional local telephone
companies to offer amendments to our interconnection agreements that would
establish rates and terms for line sharing and are participating in several
line sharing pilot programs. If the traditional local telephone companies do
not offer acceptable rates and/or terms, we may request state arbitration of
these issues. If we require arbitration in some states, we would not be able to
implement line sharing arrangements in those states until at least the second
half of 2000. While the rates for line sharing have not been determined, it is
expected that by late 2000 DSL carriers will be able to obtain copper telephone
lines for at least some types of DSL services at lower costs than are available
today. However, the traditional local telephone companies may seek judicial
review of this decision. There is no guarantee that we will be able to benefit
from the FCC's line sharing decision.
Also in December 1999, the FCC granted Bell Atlantic authority to provide
long distance interexchange service in New York, a service it and other
traditional local telephone companies that had been part of Bell Telephone
prior to the break-up of AT&T had previously been barred from offering. In
January 2000, Southwestern Bell filed an application for authority to provide
long distance interexchange service in Texas, and additional applications are
expected over the next one to two years. While we do not presently provide long
distance interexchange service, this ruling and any future similar rulings
could negatively impact our business. First, Bell Atlantic will now be able to
offer potentially attractive packages of local, long distance and data
services. Second, the prospect of long distance authority has served as a
powerful incentive for the traditional Bell telephone companies to comply with
their obligations under the 1996 Telecommunications Act, including the
provision of unbundled network elements and collocation services to competitors
such as us. There is no guarantee that the traditional Bell telephone companies
will extend to us the same level of cooperation once they receive approval to
provide long distance interexchange service.
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 that live in rural,
insular, and 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
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<PAGE>
fund. The FCC's implementation of universal service requirements remains
subject to judicial and additional FCC review. Additional changes to the
universal service regime, which could increase our costs, could have an adverse
affect on us.
Although not required for our existing DSL data service offering, on August
6, 1999 we obtained authority from the FCC to provide international
telecommunications services originating from the United States.
State Regulation
In October 1998, the FCC deemed data transmission to the Internet as
interstate services subject only to federal jurisdiction. However, this
decision is currently subject to reconsideration and appeal. Also, some of our
services that are not limited to interstate access potentially may be
classified as intrastate services subject to state regulation. All of the
states where we operate, or intend to operate, require some degree of state
regulatory commission approval to provide certain intrastate services and
maintain ongoing regulatory supervision. In most states, intrastate tariffs are
also required for various intrastate services, although our services are not
subject to price or rate of return regulation. Actions by state public utility
commissions could cause us to incur substantial legal and administrative
expenses and adversely affect our business.
To date, we have been able to obtain authorizations to operate as a
competitive local exchange carrier in 47 states and the District of Columbia,
and we have filed for competitive local exchange carrier status in the
remaining states. Although we expect to obtain certifications in all states,
there is no guarantee that these certifications will be granted or obtained in
a timely manner.
Local Government Regulation
In certain instances, we may be required to obtain various permits and
authorizations from municipalities, such as for use of rights-of-way, in which
we operate our own local distribution facilities. Whether various actions of
local governments over the activities of telecommunications carriers such as
ours, including requiring payment of franchise fees or other surcharges, pose
barriers to entry for competitive local exchange carriers which violate the
1996 Telecommunications Act or may be preempted by the FCC is the subject of
litigation. While we are not a party to this litigation, we may be affected by
the outcome. If municipal governments impose conditions on granting permits or
other authorizations or if they fail to act in granting such permits or other
authorizations, the cost of providing DSL services may increase or it may
negatively impact our ability to expand our network on a timely basis and
adversely affect our business.
Intellectual Property
We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. For example, we own a federal supplemental
registration and claim rights in the name DSL.NET. There can be no assurance
these methods will be sufficient to protect our technology and intellectual
property. We also generally enter into confidentiality agreements with our
employees and consultants, and generally control access to and distribution of
our documentation and other proprietary information. Despite these precautions,
it may be possible for a third party to copy or otherwise obtain and use our
products, services or technology without authorization, or to develop similar
technology independently. Effective patent, copyright, trademark and trade
secret protection may be unavailable or limited in certain foreign countries,
and the global nature of the Internet makes it virtually impossible to control
the ultimate destination of our proprietary information. There can be no
assurance that the steps we have taken will prevent misappropriation or
infringement of our technology. In addition, litigation may be necessary in the
future to enforce our intellectual
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<PAGE>
property rights, to protect our trade secrets or to determine the validity and
scope of the proprietary rights of others. Such litigation could result in
substantial costs and diversion of resources and could have a material adverse
effect on our business, operating results and financial condition. In addition,
some of our information, including our competitive carrier status in individual
states and our interconnection agreements, is a matter of public record and can
be readily obtained by our competitors and potential competitors, possibly to
our detriment.
Employees
As of December 31, 1999, we had 267 employees. We believe that our future
success will depend in part on our continued ability to attract, hire and
retain qualified personnel. Competition for such personnel is intense, and we
may be unable to identify, attract and retain such personnel in the future.
None of our employees are represented by a labor union or are the subject of a
collective bargaining agreement. We have never experienced a work stoppage and
believe that our employee relations are good.
Properties
Our headquarters consists of approximately 55,700 square feet in an office
building complex in New Haven, Connecticut. We also lease offices in Santa
Cruz, California. This space is occupied under various leases. In addition, we
lease office space for local sales personnel and space for network equipment
installations in a number of other locations. With respect to our arrangements
to use space in traditional telephone companies' central offices, please see
"Interconnection Agreements with Traditional Local Telephone Companies."
Legal Proceedings
A lawsuit for wrongful termination of employment was filed against us in the
Superior Court in New Haven, Connecticut on July 29, 1999 by Frank W. Pereira,
a former officer who was employed by us for less than two months. Plaintiff's
claims are based chiefly on his allegation that we terminated his employment
because he allegedly voiced concerns to senior management about the feasibility
of our second and third tier city business strategy. He further alleges that
our senior management knew of these alleged flaws in the strategy. The
plaintiff is principally seeking compensatory damages for wages and unvested
stock options. We deny these allegations and believe that the plaintiff's
claims are without merit. We plan to defend the case vigorously.
We are also a party to legal proceedings related to regulatory approvals. We
are subject to state commission, FCC and court decisions as they relate to the
interpretation and implementation of the 1996 Telecommunications Act, the
interpretation of competitive carrier interconnection agreements in general and
our interconnection agreements in particular. In some cases, we may be deemed
to be bound by the results of ongoing proceedings of these bodies. We therefore
may participate in proceedings before these regulatory agencies or judicial
bodies that affect, and allow us to advance, our business plans.
From time to time, we are involved in other litigation concerning claims
arising in the ordinary course of our business. We do not believe any of the
legal claims or proceedings will result in a material adverse effect on our
business, financial position, results of operations or cash flows.
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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............. 40 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........ 34 Chief Financial Officer and Vice President, Strategic Planning
Alan A. Bolduc.......... 45 Vice President, Operations
John M. Jaser........... 40 Vice President, Technology
Stephen Zamansky........ 29 Vice President and General Counsel
Robert
Gilbertson(1)(2)....... 58 Director
William J. Marshall(1).. 44 Director
James D. Marver......... 49 Director
William Seifert(1)(2)... 50 Director
</TABLE>
- --------
(1) Member of the audit committee
(2) Member of the compensation committee
Our directors were initially elected in accordance with an amended and
restated voting agreement which terminated upon the closing of our initial
public offering on October 12, 1999. Each of these directors will hold office
until the next annual meeting of our stockholders. Commencing at the next
annual meeting of our stockholders, our board of directors will be divided into
three classes. The members of each class will be determined by the board of
directors prior to that meeting. At that meeting, our stockholders will elect
one class of directors for a term expiring in one year, a second class of
directors for a term expiring in two years, and a third class of directors for
a term expiring in three years. Thereafter, each director will be elected for a
three-year term, with one class of directors being elected at each annual
meeting. Each director holds office until that director's successor is elected
and qualified.
Paul K. Sun has served as a director since January 1999 and Chairman of the
board of directors since February 1999. In addition, he has also served as
Chief Technology Officer since December 1998. 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 Chief Financial Officer and Vice President,
Strategic Planning since July 1999, as Vice President, Strategic Planning since
May 1999 and as Executive Director,
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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.
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.
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 at Network Computing Devices, Inc. since May 1997, serving
as Chairman of the Board of Directors since August 31, 1999 and as President
and Chief Executive Officer from May 1997 to August 30, 1999. 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 was appointed in September 1999 and consists of
Messrs. Gilbertson and Seifert. The compensation committee reviews and
evaluates the salaries and
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incentive compensation of our management and key employees and administers our
1999 stock plan and 1999 employee stock purchase plan. All decisions of the
compensation committee are currently subject to the review and approval of our
board of directors.
Our audit committee consists of Messrs. Gilbertson, Marshall and Seifert. It
is responsible for reviewing the scope of annual audits, considering specific
problems and questions that arise during the course of audits, monitoring the
adequacy of accounting and audit controls, and such other functions as the
board of directors may from time to time delegate to it. Our audit committee
must report to the board of directors when asked to do so.
Director Compensation
We currently do not provide cash compensation, other than reimbursement of
expenses, to any member of our board of directors. In February 1999, our board
of directors approved the grant of non-qualified stock options to purchase
333,250 shares of our common stock to each of Mr. Gilbertson and Mr. Marshall
for their services as directors and 79,980 shares to Mr. Marver for his service
as our advisor, in each case at an exercise price of $0.0375 per share. In July
1999, our board approved additional grants of non-qualified stock options to
purchase 53,320 and 133,300 shares of our common stock to Messrs. Marver and
Seifert, respectively, for their service as directors at an exercise price of
$7.3893 per share. Mr. Seifert has executed an agreement whereby the proceeds
of a sale of shares of common stock issued to him upon exercise of these
options will be transferred to Prism Venture Partners II, L.P. and he therefore
disclaims beneficial ownership of such shares. Each of the options granted to
our directors provides that all shares subject to the option are immediately
exercisable subject to our right to repurchase all of the shares up until one
year following the date of grant, at which time our right to repurchase
terminates with respect to 25% of the shares originally granted. Thereafter,
our right to repurchase terminates monthly over the next 36 months with respect
to 2.08% of the shares originally granted under the option. The board of
directors has also provided that our right to repurchase shares relating to an
option granted under the 1999 stock plan to a member of our board of directors
or certain of our advisors will terminate immediately upon a change of control.
In addition, the option granted to Mr. Gilbertson provides that the Company's
right to repurchase shares issued upon exercise of his option will terminate in
full in the event he is removed as a director for any reason other than in
connection with a change of control of DSL.net. See "Management--Stock Plans."
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<PAGE>
Executive Compensation
The following summary compensation table sets forth the total compensation
paid or accrued for the 1999 fiscal year for our named executive officers,
including our Chief Executive Officer and the three most highly compensated
executive officers who were serving as of December 31, 1999. No other executive
officer had compensation in excess of $100,000 during the years ended December
31, 1998 or 1999.
Summary Compensation Table
Annual Compensation
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------
Securities
Restricted Under- All Other
Name and Principal Salary Bonus Stock Lying Compensation
Position Year ($) ($) Award(s) Options ($)
- ------------------ ---- -------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
David F. Struwas........ 1999 $123,244 -- -- -- $29,455(1)
President and Chief 1998 $ 29,867 $35,000 -- -- $ 6,682(2)
Executive Officer
Raymond C. Allieri...... 1999 $ 87,500 $45,000 -- 933,100 --
Senior Vice President,
Sales and Marketing
Robert Q. Berlin........ 1999 $102,559 -- -- 679,880 --
Chief Financial Officer
and Vice President,
Strategic Planning
Alan A. Bolduc.......... 1999 $116,042 -- -- 506,540 --
Vice President, 1998 $ 15,833 -- -- -- --
Operations
</TABLE>
- --------
(1) Consists of an amount equal to the fair market value of common stock, as
determined by our board of directors, awarded in March, 1999. Based upon
subsequent events such as the issuance of our Series C preferred stock we
have recorded noncash stock compensation expense of $587,239 relating to
these shares of common stock. See "Certain Transactions."
(2) Consists of an amount equal to the fair market value of common stock, as
determined by our board of directors, purchased in December 1998 in
exchange for a promissory note. The note was subsequently cancelled in full
satisfaction of our obligation to pay additional compensation under an
agreement entered into in December 1998. Based on subsequent events, we
have recorded noncash stock compensation expenses of $895,363 relating to
these shares of common stock. See "Certain Transactions."
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<PAGE>
Option Grants
The following table provides information concerning grants of options to
purchase common stock made during the period January 1, 1999 through December
31, 1999 to the named executive officers.
Individual Grants
<TABLE>
<CAPTION>
Potential
Number of Net
Securities Options Exercise Realizable
Underlying Granted to Price or Value (2)
Options Employees in Base Expiration ---------------------
Name Granted (1) Fiscal Year Price ($) Date 5% 10%
- ---- ----------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
David F. Struwas........ -- -- -- -- -- --
Raymond C. Allieri...... 933,100 19.95% $0.5251 6/01/09 $ 308,140 $ 780,887
Robert Q. Berlin........ 319,920 6.8% 0.0675 3/30/09 $ 13,581 $ 34,416
Robert Q. Berlin........ 159,960 3.4% 0.3938 4/29/09 $ 39,615 $ 100,393
Robert Q. Berlin........ 200,000 4.3% 8.3750 10/12/09 $1,053,399 $2,669,519
Alan A. Bolduc.......... 346,580 7.4% 0.0375 2/19/09 $ 8,174 $ 20,713
Alan A. Bolduc.......... 159,960 3.4% 0.3938 4/29/09 $ 39,615 $ 100,393
</TABLE>
- --------
(1) Except with respect to options to purchase 687,956 and 47,760 shares of our
common stock granted to Mr. Allieri and Mr. Berlin, respectively, these
options are currently exercisable subject to our right to repurchase 100%
of the shares until one year following either the date of grant or the one
year employment anniversary of the person, at which time our right to
repurchase terminates with respect to 25% of the shares originally granted.
Thereafter, our right to repurchase terminates monthly over each of the
next thirty-six months with respect to approximately 2.08% of the shares
originally granted under the option. Options to purchase 687,956 and 47,760
shares of our common stock granted to Mr. Allieri and Mr. Berlin,
respectively, become exercisable at various times over a four-period.
(2) We recommend caution in interpreting the financial significance of the
figures representing the potential realizable value of the stock options.
Amounts reported in these columns represent amounts that may be realized
upon exercise of the options immediately prior to the expiration of their
term assuming the specified compounded rates of appreciation (5% and 10%)
on our common stock over the term of the options. These numbers are
calculated based on rules promulgated by the SEC and do no reflect our
estimate of future stock price growth. Actual gains, if any, on stock
option exercises and common stock holdings are dependent on the timing of
such exercise and the future performance of our common stock. There can be
no guarantee that the market value of the common stock will reflect the
rates of appreciation assumed in this table at the time that the options
are exercisable and no longer subject to our right to repurchase.
Aggregate Options Exercised in Last Fiscal Year and Fiscal Year-End Option
Values
The following table sets forth information regarding option exercises, and
the fiscal year end values of stock options held by each of the named executive
officers during the fiscal year ended December 31, 1999 and exercisable and
unexercisable options held as of December 31, 1999:
<TABLE>
<CAPTION>
Number of Securities
Underlying Value of Unexercised
Underlying Unexercised Options at In-the-Money Options at
Shares December 31, 1999 December 31, 1999(1)
Acquired on Value ------------------------- -------------------------
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
David F. Struwas........ -- -- -- -- -- --
Raymond C. Allieri...... -- -- 245,144 687,956 $3,410,664 $9,571,463
Robert Q. Berlin........ -- -- 632,120 47,760 $7,766,951 $ 289,569
Alan A. Bolduc.......... -- -- 506,540 -- $7,237,435 --
</TABLE>
- --------
(1) Value is based on the difference between the option exercise price and
$14.438, the fair market value of our common stock on December 31, 1999,
the last trading day for the fiscal year ended 1999, multiplied by the
number of shares of common stock underlying the options.
50
<PAGE>
Stock Plans
1999 Stock Plan. Our stock plan was adopted by the board of directors in
February 1999 and approved by the stockholders in March 1999. A total of
12,364,200 shares of common stock have been authorized and reserved for
issuance under the stock plan. As of December 31, 1999, there were outstanding
options for the purchase of a total of 5,871,414 shares of common stock at a
weighted average exercise price of $2.32. As of December 31, 1999, 118,856
shares of common stock had been issued pursuant to the exercise of options.
Under the terms of the stock plan, we are authorized to grant incentive stock
options as defined under the Internal Revenue Code, non-qualified options,
stock appreciation rights, stock awards or opportunities to make direct
purchases of common stock to officers, directors, consultants and other
employees of ours and our subsidiaries.
The stock plan is currently administered by our compensation committee
subject to the approval of our board of directors. Prior to September 1999, the
stock plan was administered by our board of directors. The 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 stock plan. The President and Chief Executive
Officer may approve options to non-officers in accordance with guidelines
approved by our board of directors. Options generally provide that 25% of the
shares exercisable under each option will vest one year following either the
date of grant or the optionee's date of employment and thereafter vest in equal
monthly installments over the next 36 months. However, certain options granted
under our stock plan to directors, members of our advisory board, and certain
officers and consultants are immediately exercisable subject to our right to
repurchase 100% of the shares until one year following the date of grant or the
one year employment anniversary of the person, at which time our right to
repurchase terminates with respect to 25% of the shares originally granted.
Thereafter, our right to repurchase terminates monthly over each of the next
thirty-six months with respect to approximately 2.08% of the shares originally
granted under the option. In addition, upon termination of employment without
cause of certain officers, our right to repurchase shares granted under an
option to that person will terminate with respect to all shares for which our
right to repurchase would have terminated within one year following the date of
termination. The option exercise price may be paid in cash or in shares of
common stock valued at fair market value on the exercise date. We may also
allow the option to be exercised through a same-day sale program without any
cash outlay by the optionee. The stock plan also provides that, if at any time
following a change in control we terminate an optionee's business relationship
with DSL.net or any of our subsidiaries without cause or the optionee
terminates his or her business relationship with us for good reason, all
options and other awards held by that optionee will immediately vest and become
exercisable. In addition, the board of directors has provided that our right to
repurchase certain shares subject to an option granted under the stock plan to
any person serving as president, chief executive officer, senior vice
president, chief financial officer, chief technology officer, chairman of our
board of directors, a member of our board of directors, a member of our
advisory board and certain vice presidents and consultants will terminate
immediately upon a change in control. In addition, options to purchase certain
shares granted under the stock plan to certain vice presidents shall accelerate
upon a change of control. An option is not transferable by the recipient except
by will or by the laws of descent and distribution, or, in the case of non-
qualified stock options, is only transferable to the extent set forth in the
agreement relating to the non-qualified stock option or pursuant to a valid
domestic relations order. The term of the stock plan is ten years, unless
sooner terminated by vote of our board of directors.
1999 Employee Stock Purchase Plan. The purchase plan was adopted by the
board of directors and received stockholder approval in September 1999. The
purchase plan provides for the issuance of up to an aggregate of 300,000 shares
of common stock to participating employees.
51
<PAGE>
The purchase plan is currently administered by our compensation committee
subject to the approval of our board of directors. Generally, all employees who
have completed three months of employment and whose customary employment is
more than 20 hours per week and for more than five months in any calendar year
are eligible to participate in the purchase plan. The right to purchase common
stock under the purchase plan will be made available through a series of
offerings. On the first day of an offering period, we will grant to each
eligible employee who has elected in writing to participate in the purchase
plan an option to purchase shares of common stock. The employee will be
required to authorize an amount, between 1% and 10% of the employee's
compensation, to be deducted from the employee's pay during the offering
period. On the last day of the offering period, the employee will be deemed to
have exercised the option, at the option exercise price, to the extent of
accumulated payroll deductions. Under the terms of the purchase plan, the
option exercise price is an amount equal to 85% of the fair market value of one
share of common stock on either the first or last day of the offering period,
whichever is lower. No employee may be granted an option that would permit the
employee's rights to purchase common stock to accrue in excess of $25,000 in
any calendar year. The first offering period under the purchase plan commenced
on October 12, 1999 and continues through February 2000. Thereafter, the
offering periods will begin on each March 1 and September 1. Options granted
under the purchase plan terminate upon an employee's voluntary withdrawal from
the plan at any time or upon termination of employment.
Compensation Committee Interlocks and Insider Participation
Our board of directors reviewed salaries and incentive compensation for our
employees and consultants during 1999 until our compensation committee was
formed in September 1999. Each of John Jaser, a founder and our Vice President,
Technology, Paul Sun, our Chairman and Chief Technology Officer and Mr.
Struwas, our President and Chief Executive Officer, participated in
deliberations of our board of directors concerning executive compensation in
1999. Other than Mr. 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 a director for a portion of
1999 and also a director and executive officer of FutureComm, Inc.
In September 1999, we formed a compensation committee consisting of Messrs.
Gilbertson and Seifert. All decisions of the compensation committee are
currently subject to the review and approval of our board of directors.
We are party to an agreement, dated as of April 1, 1999, with DMW Worldwide,
Inc. under which we license software for use in connection with our operations
support systems. In addition, DMW will install and modify the software, and
provide training, maintenance and support services in connection with the
software. We have made payments of approximately $563,000 in connection with
this agreement. We are currently renegotiating the terms of this agreement and
future payments, if any, will be subject to the results of our negotiations.
Two of our stockholders, VantagePoint Venture Partners 1996, L.P. and
VantagePoint Communications Partners, L.P., in the aggregate, own in excess of
5% of the capital stock of DMW. Messrs. Marshall and 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. For certain other information regarding
transactions we have entered into with members of our board of directors and
their affiliates, see "Certain Transactions."
52
<PAGE>
CERTAIN TRANSACTIONS
Organization of DSL.net
In connection with our formation in 1998, we issued and sold 2,544,817
shares of common stock for a purchase price of $250 to John Jaser, a founder
and currently our Vice President, Technology. In addition, we issued and sold
2,544,817 shares of common stock for a purchase price of $250 to Felix Tang, a
founder and currently our Director of Network Engineering.
In addition, we issued 20,000 shares of a prior series A preferred stock for
an aggregate of $50,000 to another founder, Paul Sun, who currently is the
Chairman of the board of directors and Chief Technology Officer.
In anticipation of the Series A preferred financing, in December 1998 Mr.
Sun exchanged 20,000 shares of a prior series A preferred stock for 7,634,451
shares of our common stock, 5,598,597 shares more than he was entitled to under
the terms of the prior series A preferred stock. As a result, we incurred a
compensation charge equal to $1,400,000. In January 1999, Mr. Tang purchased 8
shares of common stock for an aggregate purchase price of $0.02.
Issuance of Notes and Warrants
In November 1998, we issued a convertible promissory note in the aggregate
principal amount of $41,667 and a warrant to purchase 10,416 shares of Series A
preferred stock at an exercise price of $1.00 per share to VantagePoint Venture
Partners, 1996, L.P. In addition, we issued a convertible promissory note in
the aggregate principal amount of $83,333 and a warrant to purchase 20,834
shares of Series A preferred stock at an exercise price of $1.00 per share to
VantagePoint Communications Partners, L.P., an affiliate of VantagePoint
Venture Partners. Messrs. Marver and Marshall, two of our directors, are
members of the general partners of each of these VantagePoint entities.
Each of the notes issued to the VantagePoint entities provided for interest
at 6.0% and was repayable on demand beginning on January 8, 1999. Each of these
notes was cancelled in January 1999 in connection with the Series A preferred
stock financing described below.
Upon completion of our initial public offering on October 12, 1999, the
warrants became exercisable in whole or in part, at any time or from time to
time, until November 18, 2003, for an aggregate of 83,314 shares of common
stock at an exercise price of $0.375 per share.
Issuance of Notes and Rights to Warrants
Concurrently with the issuance of the convertible promissory notes and
warrants to the VantagePoint entities, we issued three convertible promissory
notes in the aggregate principal amount of $225,000 and contractual rights to
warrants to purchase an aggregate of 56,250 shares of Series A preferred stock
at an exercise price for $1.00 per share. Of that amount, one convertible
demand promissory note in the principal amount of $100,000 and a contractual
right to a warrant to purchase 25,000 shares of Series A preferred stock was
issued to Robert Gilbertson, one of our directors.
In January 1999, convertible promissory notes issued in November 1998 were
automatically converted into an aggregate of 225,000 shares of Series A
preferred stock in January 1999, of which Mr. Gilbertson, one of our directors,
was issued 100,000 shares. Upon completion of our initial public offering on
October 12, 1999, the 225,000 shares of Series A preferred stock converted into
599,850 shares of common stock.
53
<PAGE>
In addition, as a result of the exercise of the contractual rights we
granted in November 1998, we issued warrants to purchase an aggregate of 56,250
shares of Series A preferred stock at an exercise price of $1.00 per share were
issued. Of this amount, a warrant to purchase 25,000 shares of Series A
preferred stock at an exercise price of $1.00 per share was issued to Mr.
Gilbertson. The warrant issued to Mr. Gilbertson has been exercised.
Issuance of Stock
In December 1998, we issued 508,963 shares of common stock to Mr. Jaser in
exchange for his promissory note dated December 29, 1998 in the principal
amount of $955, and 3,562,744 shares of common stock to David Struwas in
exchange for his promissory note dated December 29, 1998 in the principal
amount of $6,682. Each promissory note bore interest at 5.56% per annum. We
incurred compensation expense in an aggregate amount of $1,015,635, the deemed
fair market value of the stock issued to Messrs. Jaser and Struwas less the
aggregate principal amount(s) of the notes. Simultaneously with the issuance of
this common stock, we entered into agreements with each of Mr. Jaser and Mr.
Struwas that provided for additional compensation, after taxes, in the amount
of $955 and $6,682, respectively, plus interest of 5.56% per annum from the
date of the agreement until the date of payment. The promissory notes of each
of Mr. Jaser and Mr. Struwas were cancelled in January 1999 in full
satisfaction of our obligations for additional compensation and the related
interest under each of these agreements. We incurred compensation expense in an
aggregate amount of $7,637 at the time these promissory notes were forgiven.
In January 1999, we issued 1,166,667 shares of Series A preferred stock and
a warrant to purchase 1,166,667 shares of a prior series B preferred stock to
VantagePoint Venture Partners 1996, L.P. for aggregate consideration of
$1,166,667. These shares and warrants were subsequently exchanged in April
1999, for 2,166,667 shares of Series B preferred stock. In addition, we issued
2,333,333 shares of Series A preferred stock and a warrant to purchase
2,333,333 shares of a prior series B preferred stock to VantagePoint
Communications Partners, L.P. for aggregate consideration of $2,333,333. These
shares and warrants were subsequently exchanged in April 1999 for 4,333,333
shares of Series B preferred stock. A portion of the aggregate consideration
paid by VantagePoint Venture Partners 1996, L.P. and VantagePoint
Communications Partners, L.P. was in the form of the cancellation of each of
the convertible promissory notes issued by DSL.net in November 1998. At the
time of the exchange, the exchange rate was below the deemed fair market value
of the stock. In addition, in January 1999, certain shares of common stock
owned by Messrs. Jaser, Struwas, Tang and Sun were made subject to vesting
based on tenure and certain performance criteria under a stockholders'
agreement described below.
In March 1999, we issued 436,256 shares of common stock to Mr. Struwas
having a fair market value as determined by our board of directors at the time
of issuance of approximately $29,455. Based on subsequent events, we recorded
compensation expense of $587,457 related to this issuance.
In April 1999, in connection with a recapitalization to adjust the share
ownership of each stockholder and the removal of certain vesting restrictions
based on performance criteria contained in the stockholders' agreement
described below, Mr. Jaser surrendered 867,660 shares of common stock, Mr. Tang
surrendered 731,945 shares of common stock and Mr. Sun surrendered 1,502,651
shares of common stock to DSL.net.
In April 1999, we issued an aggregate of 2,785,516 shares of Series C
preferred stock at a price of $3.59 per share, for aggregate consideration of
$10,000,002. Of that amount, we issued 185,701 shares to VantagePoint Venture
Partners 1996, L.P., 371,402 shares to VantagePoint Communications Partners,
L.P. and 1,392,758 shares to Prism Venture Partners II, L.P. Mr. Seifert, one
of our directors, is a managing director of the general partner of Prism
Venture Partners II, L.P.
54
<PAGE>
We also issued 819,778 shares to Oak Investment Partners VIII, L.P. and 15,877
shares to Oak VIII Affiliates Fund L.P.
In May 1999, we issued an aggregate of 2,868,069 shares of Series D
preferred stock at a purchase price of $10.46 per share, for aggregate
consideration of $30,000,002, including a secured promissory note of
VantagePoint Venture Partners III(Q), L.P., an affiliate of VantagePoint
Venture Partners 1996, L.P. and VantagePoint Communications Partners, L.P., in
an aggregate principal amount of $5,999,429. Messrs. Marver and Marshall are
members of the general partner of this VantagePoint entity. Of that amount, we
issued 191,204 shares to VantagePoint Venture Partners, 1996, L.P., 382,410
shares to VantagePoint Communications Partners, L.P., 573,614 shares to
VantagePoint Venture Partners III(Q), 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(Q), 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 aggregate principal
amount of $999,911. The promissory note provided for interest at 6.00% per
annum and was paid in full on July 16, 1999.
Upon the completion of our initial public offering on October 12, 1999, our
outstanding convertible preferred stock automatically converted into 35,909,761
shares of common stock.
In January 1999, Messrs. Jaser, Tang, Sun and Struwas entered into a
shareholders' agreement which subjected 1,266,350, 1,055,291, 3,060,347 and
1,477,410 shares, respectively, to vesting pro-rata over 38 months. In
addition, 1,454,181, 1,211,825, 3,635,451 and 1,696,544 shares of common stock,
respectively, became subject to vesting over 84 months, or earlier if certain
gross revenue and EBITDA targets were achieved. In April 1999, the vesting
provisions relating to the shares vesting over 84 months were removed in
connection with an amended and restated shareholders' agreement and the
recapitalization discussed above. In addition, the shareholders' agreement
provides that all unvested shares will vest and the right to repurchase will
terminate upon a change in control.
In connection with the preferred stock financings, we entered into an
investors' rights agreement in which we granted registration rights to certain
holders of preferred stock and common stock and which contained certain other
covenants which terminated upon the completion of our initial public offering
on October 12, 1999. See "Description of Capital Stock--Registration Rights."
We also entered into a voting agreement under which the parties agreed to
elect nominees of certain holders to the board of directors. In addition, we
entered into a right of first refusal and co-sale agreement which gave us and
certain stockholders a right of first refusal and a right to sell shares in
connection with any sale of shares held by Messrs. Jaser, Struwas, Sun and
Tang. Each of these agreements terminated upon the completion of our initial
public offering on October 12, 1999.
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.
55
<PAGE>
We are party to an agreement, dated as of April 1, 1999, with DMW Worldwide,
Inc. under which we license software for use in connection with our operations
support systems. In addition, DMW will install and modify the software, and
provide training, maintenance and support services in connection with the
software. We have made payments of approximately $563,000 in connection with
this agreement. We are currently renegotiating the terms of this agreement and
future payments, if any, will be subject to the results of our negotiations.
Two of our stockholders, VantagePoint Venture Partners 1996, L.P. and
VantagePoint Communications Partners, L.P., in the aggregate, own in excess of
5% of the capital stock of DMW. Mr. Marshall and Mr. Marver, affiliates of
VantagePoint Venture Partners 1996, L.P. and VantagePoint Communications
Partners, L.P., are also members of our board of directors. In addition, Mr.
Marver is a director of DMW.
We have adopted a policy whereby all future transactions between us and our
officers, directors and affiliates will be on terms no less favorable to us
than could be obtained from unaffiliated third parties and will be approved by
a majority of the disinterested members of our board of directors.
56
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of our common stock as of December 31, 1999, and as adjusted to
reflect the sale of the shares of common stock offered hereby, by:
. each person known by us to be the beneficial owner of more than 5% of
our common stock;
. each named executive officer;
. each of our directors; and
. all executive officers and directors as a group.
Unless otherwise noted below, the address of each person listed on the table
is c/o DSL.net, Inc., 545 Long Wharf Drive, New Haven, CT 06511, and each
person has sole voting and investment power over the shares shown as
beneficially owned except to the extent authority is shared by spouses under
applicable law.
Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. Shares of common stock issuable by us to a
person pursuant to options or warrants which may be exercised within 60 days
after December 31, 1999 are deemed to be beneficially owned and outstanding for
purposes of calculating the number of shares and the percentage beneficially
owned by that person. However, these shares are not deemed to be beneficially
owned and outstanding for purposes of computing the percentage beneficially
owned by any other person.
For purposes of calculating the percentage beneficially owned by any person,
the number of shares deemed outstanding before the offering includes:
. shares of common stock outstanding as of December 31, 1999; and
. shares of common stock issuable upon the exercise of options and warrants
which may be exercised by that person within 60 days of December 31,
1999.
For purposes of calculating the percentage beneficially owned by any person,
the number of shares deemed outstanding after the offering includes:
. all shares deemed to be outstanding before the offering; and
. shares being sold in this offering, assuming no exercise of the
underwriters' over-allotment option.
57
<PAGE>
<TABLE>
<CAPTION>
Percent of Common
Stock Outstanding
Shares -----------------
Beneficially Before After
Owned Offering Offering
------------ -------- --------
<S> <C> <C> <C>
David F. Struwas............................... 3,999,000 6.85% 6.31%
Raymond C. Allieri(1).......................... 690,461 1.17 1.08
Robert Q. Berlin(2)............................ 644,060 1.09 1.01
Alan A. Bolduc(3).............................. 506,540 * *
Robert Gilbertson(4)........................... 666,500 1.14 1.05
James D. Marver(5)............................. 22,089,363 37.75 34.78
William J. Marshall(6)......................... 22,289,313 37.96 34.98
William Seifert(7)............................. 4,101,268 7.01 6.46
Paul K. Sun.................................... 3,097,892 5.31 4.89
The VantagePoint Entities(8)................... 21,956,063 37.55 34.60
1001 Bayhill Drive
Suite 1001
San Bruno, CA 94066
Prism Venture Partners II, L.P.(9)............. 4,101,268 7.01 6.46
100 Lowder Brook Drive
Suite 2500
Westwood, MA 02090
The Oak Entities(10)........................... 3,629,677 6.22 5.73
One Gorham Island
Westport, CT 06830
Stephen K. Gellman(11)(12)..................... 3,178,352 5.44 5.01
Shipman & Goodwin L.L.P.
One American Row
T 06103
Cecilia S. Wu (11)............................. 3,033,908 5.20 4.79
All executive officers and directors as a group
(11 persons)(13).............................. 38,374,150 62.7% 57.98%
</TABLE>
- --------
* Indicates less than 1%.
(1) Includes 435,583 shares held by Mr. Allieri issuable in connection with
options that are exercisable within 60 days after December 31, 1999.
(2) Includes 644,060 shares held by Mr. Berlin issuable in connection with
options that are exercisable within 60 days after December 31, 1999.
(3) Includes 506,540 shares held by Mr. Bolduc issuable in connection with
options that are exercisable within 60 days after December 31, 1999.
(4) Includes 333,250 shares held by Mr. Gilbertson issuable in connection with
options that are exercisable within 60 days after December 31, 1999.
(5) Includes 133,300 shares issuable to Mr. Marver in connection with options
that are exercisable within 60 days after December 31, 1999. Also includes
shares beneficially owned by the VantagePoint entities as set forth in
footnote 8. Mr. Marver is a member of the general partner of each of the
VantagePoint entities. Mr. Marver may be deemed to share voting and
investment power with respect to such shares and disclaims beneficial
ownership of such shares.
58
<PAGE>
(6) Includes 333,250 shares issuable to Mr. Marshall in connection with options
that are exercisable within 60 days after December 31, 1999. Also includes
shares beneficially owned by the VantagePoint entities as set forth in
footnote 8. Mr. Marshall is a member of the general partner of each of the
VantagePoint entities. Mr. Marshall may be deemed to share voting and
investment power with respect to such shares and disclaims beneficial
ownership of such shares.
(7) Includes 133,300 shares issuable to Mr. Seifert in connection with options
that are exercisable within 60 days after December 31, 1999. Mr. Seifert
has executed an agreement whereby the proceeds of a sale of shares of
common stock issued to him upon exercise of these options will be
transferred to Prism Venture Partners II, L.P. and he therefore disclaims
beneficial ownership of such shares. Includes 3,967,968 shares held by
Prism Venture Partners II, L.P., of which Prism Investment Partners II,
L.P. is the general partner, of which Prism Venture Partners II, L.L.C. is
the general partner. Mr. Seifert is a managing director of Prism Venture
Partners II, L.L.C. Mr. Seifert may be deemed to share voting and
investment power with respect to such shares and disclaims beneficial
ownership of such shares.
(8) Includes 6,781,164 shares and warrants to purchase 27,770 shares held by
VantagePoint Venture Partners 1996, L.P., of which VantagePoint Associates,
L.L.C. is the general partner. Also includes 13,562,330 shares and warrants
to purchase 55,544 shares held by VantagePoint Communications Partners,
L.P., of which VantagePoint Communications Associates, LLC is the general
partner, and 1,529,255 shares held by VantagePoint Venture Partners III(Q),
L.P., of which VantagePoint Venture Associates III, L.L.C. is the general
partner.
(9) Includes 133,000 shares issuable to Mr. Seifert in connection with options
that are exercisable within 60 days after December 31, 1999. Mr. Seifert
has executed an agreement whereby the proceeds of all options to purchase
shares of common stock held by him will be transferred to Prism Venture
Partners II, L.P. and he therefore disclaims beneficial ownership of such
shares.
(10) Includes 3,560,713 shares held by Oak Investment Partners VIII, L.P., of
which Oak Associates VIII, LLC is the general partner. Also includes
68,962 shares held by Oak VIII Affiliates Fund, L.P., of which Oak VIII
Affiliates Fund, LLC is the general partner.
(11) Includes an aggregate of 101,308 shares held in trust for Paul Sun's
children, of which Mr. Gellman and Ms. Wu are co-trustees, and 2,932,600
shares held in trust for Mr. Sun, of which Mr. Gellman and Ms. Wu are co-
trustees. Each of Mr. Gellman and Ms. Wu may be deemed to share voting and
investment power with respect to such shares and each disclaims beneficial
ownership of such shares.
(12) Includes an aggregate of 144,444 shares held in trust for John Jaser, of
which Mr. Gellman is the sole trustee. Mr. Gellman may be deemed to share
voting and investment power with respect to such shares and disclaims
beneficial ownership of such shares.
(13) See Notes 1 through 7. Also includes shares owned by executive officers
and shares issuable to executive officers in connection with options which
are exercisable within 60 days after December 31, 1999.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 200,000,000 shares of common stock,
with a par value of $.0005 per share, and 20,000,000 shares of preferred stock,
with a par value of $.001 per share.
Common Stock
As of December 31, 1999, there were 58,382,196 shares of common stock
outstanding and held of record by 62 stockholders.
Based upon the number of shares outstanding as of December 31, 1999 and
giving effect to the issuance of the shares of common stock offered by us
hereby, there will be 63,382,196 shares of common stock outstanding upon the
closing of this offering. In addition, as of December 31, 1999, there were
outstanding stock options for the purchase of a total of 5,871,414 shares of
common stock at a weighted average exercise price of $2.32, and outstanding
warrants for the purchase of a total of 194,556 shares of common stock at a
weighted average exercise price of $0.68.
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
As of December 31, 1999, there were no shares of preferred stock
outstanding.
Our board of directors is authorized, subject to any limitations prescribed
by Delaware law, without further stockholder approval, to issue from time to
time up to 20,000,000 shares of preferred stock, in one or more series. Our
board of directors is 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 is
authorized to issue preferred stock with voting, conversion and other rights
and preferences that could adversely affect the voting power or other rights of
the holders of common stock.
We have no current plans to issue any preferred stock following this
offering. However, the issuance of preferred stock or of rights to purchase
preferred stock could have the effect of making it more difficult for a third
party to acquire, or of discouraging a third party from attempting to acquire,
a majority of our outstanding voting stock.
Warrants
As of December 31, 1999, we had outstanding three warrants to purchase an
aggregate of 194,556 shares of common stock:
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<PAGE>
. Two warrants provide for the purchase of an aggregate of 83,314 shares of
common stock at an exercise price of $0.375 per share, and are
exercisable, in whole or in part, at any time or from time to time, until
November 18, 2003.
. The third warrant is to purchase an aggregate of 111,242 shares of common
stock at an exercise price of $0.90 per share and is exercisable, in
whole or in part, at any time or from time to time until October 12,
2002.
All of the outstanding warrants contain certain protections against dilution
resulting from stock splits, stock dividends and our consolidation or merger
with or into another person or sale of all or substantially all of our assets.
Registration Rights
Under the terms of the amended and restated investors' rights agreement
dated as of July 16, 1999, holders of an aggregate of 49,289,748 shares of
common stock 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
that were issued upon the conversion of Series B, C, D and E preferred stock
are entitled, at any time following April 3, 1999, 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 best 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 the then-outstanding shares of common stock
issued upon the conversion of Series B, C, D and E preferred stock will 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.
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Certificate of Incorporation and By-Laws
Our certificate of incorporation provides that beginning on the date of the
next annual meeting of stockholders, the board will be divided into three
classes as nearly equal in size as possible with staggered three year terms. In
addition, our certificate of incorporation provides that at any time prior to
the date on which we have a classified board of directors, any director may be
removed without cause only by the vote of at least 75% of the shares entitled
to vote for the election of directors or with cause by the vote of at least a
majority of such shares. On or after the date on which we have a classified
board, our certificate of incorporation will provide that any director may be
removed, but only for cause, by the vote of at least 75% of the shares entitled
to vote for the election of directors. These provisions could have the effect
of making it more difficult for a third party to acquire, or of discouraging a
third party from acquiring, control of DSL.net.
Our by-laws provide that, except as otherwise provided by law or our
certificate of incorporation, newly created directorships resulting from an
increase in the authorized number of directors or vacancies on our board of
directors may be filled only by:
. a majority of the directors then in office, even if less than a quorum is
then in office; or
. the sole remaining director.
These provisions prevent a stockholder from enlarging our board of directors
and filling the new directorships with such stockholder's own nominees without
the 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
120 days prior to the first anniversary of the preceding year's annual meeting,
then notice must be received not later than the 10th day following the day such
public disclosure was made. The notice will be timely only with respect to any
director nominees for any position caused by the increase in our board of
directors. Notice of stockholder nominations or proposals to be made at a
special meeting called by our board of directors for the purpose of electing
one or more directors (other than a special meeting in lieu of an annual
meeting), must be received not earlier than the 90th day prior to such special
meeting nor later than the close of business on the 60th day prior to such
special meeting or, if later, the 10th day following the day such public
disclosure was made. These notices must contain certain prescribed information.
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<PAGE>
The notice procedure affords our board of directors an opportunity to
consider the qualifications of proposed director nominees or the merit of
stockholder proposals, and, to the extent deemed appropriate by our board of
directors, to inform stockholders about such matters. The notice 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
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. at or subsequent to such time, the business combination is approved by
the board of directors and authorized at an annual or special meeting of
stockholders, and not by written consent, by the affirmative vote of at
least two-thirds of the outstanding voting stock which is not owned by
the interested stockholder.
The application of Section 203 may limit the ability of stockholders to
approve a transaction that they may deem to be in their best interests.
Section 203 defines "business combination" to include:
. any merger or consolidation involving the corporation and the interested
stockholder;
. any sale, transfer, pledge or other disposition of 10% or more of the
assets of the corporation to or with the interested stockholder;
. subject to certain exceptions, any transaction which results in the
issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder;
. any transaction involving the corporation which has the effect of
increasing the proportionate share of the stock of any class or series of
the corporation beneficially owned by the interested stockholder; or
. the receipt by the interested stockholder of the benefit of any loans,
advances, guarantees, pledges or other financial benefits provided by or
through the corporation.
In general, Section 203 defines an "interested stockholder" as any entity or
person who beneficially owns 15% or more of the outstanding voting stock of the
corporation or is an affiliate or associate of the corporation and was the
owner of 15% or more of the outstanding voting stock of the corporation at any
time within the past three years, and any entity or person associated with,
affiliated with or controlling or controlled by such entity or person.
Limitation of Liability
Our certificate of incorporation provides that no director or officer of
DSL.net shall be personally liable to us or to our stockholders for monetary
damages for breach of fiduciary duty as a director or officer, except for
liability:
. for any breach of the director's duty of loyalty to us or our
stockholders;
. for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. under Section 174 of the Delaware General Corporation Law, relating to
unlawful payment of dividends or unlawful stock purchase or redemption of
stock; or
. for any transaction from which the director derives an improper personal
benefit.
Our certificate of incorporation further provides for the indemnification
of, and advancement of expenses to, our directors and officers to the fullest
extent permitted by Section 145 of the Delaware General Corporation Law,
including circumstances in which indemnification is otherwise discretionary. A
principal effect of these provisions is to limit or eliminate the potential
liability of our directors and officers for monetary damages arising from
breaches of their duty of care, subject to certain exceptions. These provisions
may also shield directors and officers from liability under federal and state
securities laws.
Stock Transfer Agent
The transfer agent and registrar for the common stock is American Stock
Transfer & Trust Company, Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 63,382,196 shares
of common stock, including the 5,000,000 shares sold by us in this offering
(assuming no exercise of the underwriters' over-allotment option). A total of
13,226,000 of the shares will be freely tradeable without restriction under the
Securities Act unless purchased by our "affiliates," which generally includes
officers, directors or 10% stockholders as that term is defined in Rule 144
under the Securities Act.
The remaining 50,156,196 shares outstanding are "restricted securities"
within the meaning of Rule 144 under the Securities Act. These shares may be
sold in the public market only if registered or if they qualify for an
exemption from registration under Securities Act, including under Rules 144,
144(k) or 701 promulgated under the Securities Act which are summarized below.
Sales of restricted shares in the public market, or the availability of these
shares for sale, could adversely affect the market price of our common stock.
In connection with our initial public offering, all of our directors and
officers and certain of our stockholders entered into lock-up agreements
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them until April
4, 2000, without the prior written consent of Deutsche Bank Securities Inc.
In connection with this offering, all of our directors and officers and
certain of our stockholders have entered into lock-up agreements generally
providing that they will not offer, sell, contract to sell or grant any option
to purchase or otherwise dispose of our common stock or any securities
exercisable for or convertible into our common stock owned by them for a period
of 90 days after the date of this prospectus without the prior written consent
of Deutsche Bank Securities Inc. This consent may be given at any time without
public notice. We have entered into a similar lock-up agreement with Deutsche
Bank Securities Inc. As a result of these contractual restrictions,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, shares subject to lock-up agreements will not be
salable until these agreements expire or are waived by Deutsche Bank Securities
Inc. Taking into account the lock-up agreements, and assuming Deutsche Bank
Securities Inc. does not release stockholders from these agreements, the
following shares will be eligible for sale in the public market at the
following times:
. After the date of this prospectus, a total of 13,226,000 of the shares
will be freely tradeable without restriction under the Securities Act,
unless purchased by our "affiliates," which generally includes officers,
directors or 10% stockholders as that term is defined in Rule 144 under
the Securities Act.
. Beginning on April 4, 2000, approximately 2,371,144 additional shares
will become eligible for sale pursuant to Rules 144, 144(k) and 701.
. Beginning 90 days after the date of this prospectus, approximately
37,380,293 additional shares will become eligible for sale pursuant to
Rules 144, 144(k) and 701.
. An additional 10,404,759 shares will become eligible for sale pursuant
to Rule 144 at various times after 90 days from the date of this
prospectus. Shares eligible to be sold pursuant to Rule 144 are subject
to volume restrictions as described below.
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In general, under Rule 144 as currently in effect, and beginning after the
expiration of the applicable lock-up agreements, a person, or persons whose
shares are aggregated, who has beneficially owned restricted securities 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:
. one percent of the number of shares of common stock then outstanding,
which will equal approximately 633,821 shares immediately after this
offering; or
. the average weekly trading volume of the common stock during the four
calendar weeks preceding the 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
DSL.net. Under Rule 144(k), a person who is not deemed to have been an
affiliate of DSL.net 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, is entitled to sell those share without complying with the manner of
sale, public information, volume limitation or notice provisions of Rule 144.
As of December 31, 1999, there were outstanding warrants to purchase an
aggregate of 194,556 shares of common stock at a weighted average exercise
price of $0.68, all of which are presently exercisable. In addition, as of
December 31, 1999, there were outstanding stock options to purchase an
aggregate of 5,871,414 shares of common stock at a weighted average exercise
price of $2.32.
On October 6, 1999, we filed a registration statement under the Securities
Act to register 300,000 shares of common stock issuable in connection with our
employee stock purchase plan and 12,364,200 shares of common stock issued upon
the exercise of stock options or reserved for issuance under the stock plan.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 provisions applicable to affiliates, be available for sale in the
open market, except to the extent that such shares are subject to vesting
restrictions or the contractual restrictions described above. See "Management--
Stock Plans."
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UNDERWRITING
Subject to the terms and conditions of the underwriting agreement, the
underwriters named below, through their representatives, Deutsche Bank
Securities Inc., Donaldson, Lufkin & Jenrette Securities Corporation, Lehman
Brothers Inc. and CIBC World Markets Corp., have severally agreed to purchase
from us the following respective number of shares of common stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this prospectus:
<TABLE>
<CAPTION>
Number
Underwriter of Shares
- ----------- ---------
<S> <C>
Deutsche Bank Securities Inc.......................................... --
Donaldson, Lufkin & Jenrette Securities Corporation................... --
Lehman Brothers Inc................................................... --
CIBC World Markets Corp............................................... --
---------
Total............................................................... 5,000,000
=========
</TABLE>
In the underwriting agreement, the several underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all of the shares of
common stock being sold pursuant to the underwriting agreement if any of the
shares of common stock being sold pursuant to the underwriting agreement are
purchased. In the event of a default by an underwriter, the underwriting
agreement provides that, in certain circumstances, the commitments of non-
defaulting underwriters may be increased or the underwriting agreement may be
terminated.
We have been advised by the representatives of the underwriters that the
underwriters propose to offer the shares of common stock to the public at the
public offering price set forth on the cover page of this prospectus and to
dealers at a price that represents a concession not in excess of $ per share
under the public offering price. The underwriters may allow, and these dealers
may re-allow, a concession not in excess of $ per share to other dealers.
The expenses of this offering, all of which are being paid by us, are
estimated to be approximately $400,000.
We have granted to the underwriters an option, exercisable not later than 30
days after the date of this prospectus, to purchase up to 750,000 additional
shares of common stock at the public offering price less the underwriting
discounts and commissions set forth on the cover page of this prospectus. The
underwriters may exercise this option only to cover over-allotments made in
connection with the sale of the common stock offered hereby. To the extent that
the underwriters exercise the option, each of the underwriters will become
obligated, subject to conditions, to purchase approximately the same percentage
of additional shares of common stock as the number of shares of common stock to
be purchased by it in the above table bears to 5,000,000. We will be obligated,
pursuant to the option, to sell these shares to the underwriters to the extent
the option is exercised. If any additional shares of common stock are
purchased, the underwriters will offer additional shares on the same terms as
those on which the 5,000,000 shares are being offered.
We have agreed to indemnify the underwriters against some specified types of
liabilities, including liabilities under the Securities Act.
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Our officers, directors and certain of our stockholders have agreed not to
offer, sell, contract to sell or otherwise dispose of, or enter into any
transaction that is designed to, or could be expected to, result in the
disposition of any portion of, any common stock for a period of 90 days after
the date of this prospectus without the prior written consent of Deutsche Bank
Securities Inc. This consent may be given at any time without public notice. We
have entered into a similar agreement with Deutsche Bank Securities Inc.
Deutsche Bank Securities Inc., Donaldson, Lufkin & Jenrette Securities
Corporation and Lehman Brothers Inc., each a representative, and certain of
their affiliates acted as representatives of the underwriters in connection
with our initial public offering.
In connection with this offering, certain underwriters may engage in passive
market making transactions in the common stock on the Nasdaq National Market
immediately prior to the commencement of sales in this offering in accordance
with Rule 103 of Regulation M. Passive market making consists of displaying
bids on the Nasdaq National Market limited by the bid prices of independent
market makers and making purchases limited by such prices and effected in
response to order flow. Net purchases by a passive market maker on each day are
limited to a specified percentage of the passive market maker's average daily
trading volume in the common stock during a specified period and must be
discontinued when such limit is reached. Passive market making may stabilize
the market price of the common stock at a level above that which might
otherwise prevail and, if commenced, may be discontinued at any time.
In order to facilitate the offering of the common stock, the underwriters
may engage in transactions that stabilize, maintain or otherwise affect the
market price of the common stock. Specifically, the underwriters may over-allot
shares of the common stock in connection with this offering, thus creating a
short position in the common stock for their own account. Additionally, to
cover these over-allotments or to stabilize the market price of the common
stock, the underwriters may bid for, and purchase, shares of the common stock
in the open market. Finally, the representatives, on behalf of the
underwriters, also may reclaim selling concessions allowed to an underwriter or
dealer if the underwriting syndicate repurchases shares distributed by that
underwriter or dealer. Any of these activities may maintain the market price of
the common stock at a level above that which might otherwise prevail in the
open market. The underwriters are not required to engage in these activities
and, if commenced, may end any of these activities at any time.
The underwriters and their respective affiliates may be lenders to, engage
in transactions with, and perform services for us in the ordinary course of
business.
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.
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EXPERTS
The financial statements of DSL.net, Inc. 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.
The consolidated financial statements of Tycho Networks, Inc. as of December
31, 1998 and for the period from December 22, 1997 (inception) to December 31,
1998 included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given upon their authority
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. We are 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.
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INDEX TO FINANCIAL STATEMENTS
DSL.net, Inc. Historical Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Accountants......................................... F-2
Balance Sheets as of December 31, 1998 and September 30, 1999
(unaudited).............................................................. F-3
Statements of Operations for the period from inception (March 3, 1998)
through December 31, 1998, for the period from inception (March 3, 1998)
through September 30, 1998 (unaudited) and for the nine months ended
September 30, 1999 (unaudited)........................................... F-4
Statements of Changes in Stockholders' Equity (Deficit) for the period
from inception (March 3, 1998) through December 31, 1998 and for the nine
months ended September 30, 1999 (unaudited).............................. F-5
Statements of Cash Flows for the period from inception (March 3, 1998)
through December 31, 1998, for the period from inception (March 3, 1998)
through September 30, 1998 (unaudited) and for the nine months ended
September 30, 1999 (unaudited)........................................... F-6
Notes to Financial Statements............................................. F-7
Tycho Networks, Inc.
Independent Auditors' Report.............................................. F-20
Consolidated Balance Sheet as of December 31, 1998........................ F-21
Consolidated Statement of Operations for the period from December 22, 1997
(inception) to December 31, 1998 ........................................ F-22
Consolidated Statement of Stockholders' Equity for the period from
December 22, 1997 (inception) to December 31, 1998....................... F-23
Consolidated Statement of Cash Flows for the period from December 22, 1997
(inception) to December 31, 1998......................................... F-24
Notes to Consolidated Financial Statements................................ F-25
Tycho Networks, Inc.--unaudited
Condensed Consolidated Balance Sheets as of September 30, 1999 and
December 31, 1998........................................................ F-31
Condensed Consolidated Statements of Operations for the nine months ended
September 30, 1999 and the period from December 22, 1997 (inception) to
September 30, 1998....................................................... F-32
Condensed Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and the period from December 22, 1997 (inception) to
September 30, 1998....................................................... F-33
Notes to Unaudited Condensed Consolidated Financial Statements............ F-34
Unaudited Pro Forma Condensed Combined Financial Information
Basis of Presentation..................................................... F-36
Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30,
1999..................................................................... F-37
Unaudited Pro Forma Condensed Combined Statement of Operations for the
nine months ended September 30, 1999..................................... F-38
Unaudited Pro Forma Condensed Combined Statement of Operations for the
period from inception (March 3, 1998) to December 31, 1998............... F-39
Notes to Unaudited Pro Forma Condensed Combined Financial Information..... F-40
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
DSL.net, Inc.
In our opinion, the accompanying balance sheet and the related statements of
operations, of changes in stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of DSL.net, Inc. (a
development stage company) at December 31, 1998 and the results of its
operations and its cash flows for the period from inception (March 3, 1998)
through December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for the opinion expressed above.
PricewaterhouseCoopers LLP
Hartford, Connecticut
May 26, 1999, except for the July 1999
stock dividend described in Note 8 which
is as of July 21, 1999
F-2
<PAGE>
DSL.NET, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, 1999
--------------------------
December 31, Pro Forma
1998 Actual (Note 2)
------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............ $ 39,479 $ 32,538,471 $ 32,538,471
Marketable securities................ -- 10,528,055 10,528,055
Accounts receivable (net of allowance
of $36,000 at September 30, 1999)... 30,597 97,457 97,457
Prepaid expenses and other current
assets.............................. -- 1,896,360 1,896,360
----------- ------------ ------------
Total current assets................. 70,076 45,060,343 45,060,343
Fixed assets, net (Note 3)............ 284,338 16,146,456 16,146,456
Other assets.......................... 15,566 931,189 931,189
----------- ------------ ------------
Total assets......................... $ 369,980 $ 62,137,988 $ 62,137,988
=========== ============ ============
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable..................... $ 231,073 $ 754,257 $ 754,257
Accrued liabilities.................. 16,219 4,473,852 4,473,852
Deferred revenue..................... 5,392 61,532 61,532
Current portion of capital lease
payable (Note 5).................... 16,494 527,385 527,385
Current portion of notes payable
(Note 4)............................ 66,667 160,752 160,752
----------- ------------ ------------
Total current liabilities............ 335,845 5,977,778 5,977,778
Long-term portion of capital lease
payable (Note 5)..................... -- 761,790 761,790
Notes payable (Note 4)................ 350,000 1,286,014 1,286,014
----------- ------------ ------------
Total liabilities.................... 685,845 8,025,582 8,025,582
----------- ------------ ------------
Commitments and contingencies (Note 5)
Redeemable convertible preferred stock
(Note 7):
Convertible preferred stock, $0.001
par value; 18,962,500 shares
authorized -- 225,000 --
Series A convertible preferred stock;
0, 225,000 and 0 shares issued and
outstanding, respectively...........
Series B convertible preferred stock;
0, 6,500,000 and 0 shares issued and
outstanding, respectively........... -- 15,424,999 --
Series C convertible preferred stock;
0, 2,785,516, and 0 issued and
outstanding, respectively........... -- 9,940,391 --
Series D convertible preferred stock;
0, 2,963,672 and 0 issued and
outstanding, respectively........... -- 30,967,786 --
Series E convertible preferred stock;
0, 939,086 and 0 shares issued and
outstanding, respectively........... -- 18,458,168 --
----------- ------------ ------------
Total redeemable convertible
preferred stock..................... -- 75,016,344 --
----------- ------------ ------------
Stockholders' equity (deficit) (Note
8):
Common stock, $0.0005 par value;
508,963,394, 55,925,000 and
55,925,000 shares authorized;
16,795,800, 14,223,110 and
49,982,898 shares issued and
outstanding......................... 8,398 7,112 24,992
Additional paid-in capital............ 2,465,374 8,775,192 83,773,656
Deferred compensation................. -- (12,375,876) (12,375,876)
Accumulated deficit................... (2,789,637) (17,310,366) (17,310,366)
----------- ------------ ------------
Total stockholders' equity (deficit)
.................................... (315,865) (20,903,938) 54,112,406
----------- ------------ ------------
Total liabilities, redeemable
convertible preferred stock and
stockholders' equity (deficit)...... $ 369,980 $ 62,137,988 $ 62,137,988
=========== ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
DSL.NET, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period For the Period
From Inception From Inception
(March 3, 1998) (March 3, 1998) Nine Months
through through Ended
December 31, September 30, September 30,
1998 1998 1999
--------------- --------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenue......................... $ 31,533 $ 13,488 $ 501,665
----------- ---------- ------------
Operating expenses:
Network and operations........ 127,054 31,476 3,757,233
General and administrative.... 230,272 93,660 2,945,077
Sales and marketing........... 35,961 15,220 3,327,972
Stock compensation............ 2,423,272 -- 3,412,914
----------- ---------- ------------
Total operating expenses.... $ 2,816,559 $ 140,356 $ 13,443,196
----------- ---------- ------------
Operating loss.................. $(2,785,026) $ (126,868) $(12,941,531)
----------- ---------- ------------
Interest expense (income), net.. 4,611 734 (827,956)
Other expense, net.............. -- -- 5,156
----------- ---------- ------------
Net loss.................... $(2,789,637) $ (127,602) $(12,118,731)
=========== ========== ============
Exchange of preferred stock
(Note 7)....................... -- -- 11,998,000
----------- ---------- ------------
Loss applicable to common
stock.......................... $(2,789,637) $ (127,602) $(24,116,731)
=========== ========== ============
Net loss per share-basic and
diluted........................ $ (0.55) $ (0.03) $ (3.87)
=========== ========== ============
Shares used in computing net
loss per share................. 5,118,342 5,089,634 6,230,836
=========== ========== ============
Pro forma net loss per common
share (unaudited).............. $ (0.55) $ (0.03) $ (0.41)
=========== ========== ============
Pro forma shares used in
computing net loss per common
share (unaudited).............. 5,118,342 5,089,634 29,913,454
=========== ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
DSL.net, Inc.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Note
Preferred Stock Common Stock Additional Receivable
----------------- -------------------- Paid-in from Deferred Accumulated
Shares Amount Shares Amount Capital Officer Compensation Deficit Total
------- -------- ----------- ------- ------------ ---------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Initial
capitalization,
including
retroactive
effect of stock
splits.......... 20,000 $ 50,000 5,089,634 $ 500 $ -- $(500) $ -- $ -- $ 50,000
Exchange of
preferred stock
for common
stock........... (20,000) (50,000) 7,634,451 5,862 1,444,138 -- -- -- 1,400,000
Issuance of
common stock.... -- -- 4,071,715 2,036 1,021,236 -- -- -- 1,023,272
Repayment of
note receivable
from officer.... -- -- -- -- -- 500 -- -- 500
Net loss........ -- -- -- -- -- -- -- $ (2,789,637) (2,789,637)
------- -------- ----------- ------- ------------ ------ ------------ ------------ ------------
Balance at
December 31,
1998............ -- $ -- 16,795,800 8,398 $ 2,465,374 $ -- $ -- $ (2,789,637) $ (315,865)
Issuance of
warrants........ -- -- -- -- 1,155,000 -- -- -- 1,155,000
Deferred
compensation--
restricted
stock........... -- -- -- -- 3,733,854 -- (3,733,854) -- --
Stock
compensation.... -- -- 436,256 218 587,239 -- -- -- 587,457
Deferred
compensation--
stock options... -- -- -- -- 12,247,117 -- (12,247,117) -- --
Amortization of
deferred
compensation.... -- -- -- -- -- -- 1,654,915 -- 1,654,915
Issuance of
warrants........ -- -- -- -- 112,000 -- -- -- 112,000
Surrender of
common stock.... -- -- (3,102,256) (1,551) (778,087) -- 779,638 -- --
Acceleration
associated with
surrender....... -- -- -- -- -- -- 1,170,542 -- 1,170,542
Exchange of
redeemable
preferred
stock........... -- -- -- -- (10,750,757) -- -- (2,401,998) (13,152,755)
Common stock
issued pursuant
to option
exercises....... -- -- 93,310 47 3,452 -- -- -- 3,499
Net loss........ -- -- -- -- -- -- -- (12,118,731) (12,118,731)
------- -------- ----------- ------- ------------ ------ ------------ ------------ ------------
Balance at
September 30,
1999
(unaudited)..... -- $ -- 14,223,110 $ 7,112 $ 8,775,192 $ -- $(12,375,876) $(17,310,366) $(20,903,938)
======= ======== =========== ======= ============ ====== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
DSL.net, Inc.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period For the Period
From Inception From Inception
(March 3, 1998) (March 3, 1998) For the Nine
through through Months Ended
December 31, September 30, September 30,
1998 1998 1999
--------------- --------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $ (2,789,637) $ (127,602) $(12,118,731)
Adjustments to reconcile net
loss to net cash used
by operating activities:
Depreciation and amortization.. 5,744 -- 722,788
Noncash compensation expense... 2,423,272 -- 3,412,914
Changes in operating assets and
liabilities:
Increase in accounts
receivable.................. (30,597) (3,857) (66,860)
Increase in prepaid expenses
and other current assets.... -- -- (296,360)
Increase in other assets..... (15,566) (30,566) (919,117)
Increase in accounts
payable..................... 231,073 25,415 523,200
Increase in accrued
liabilities................. 16,814 -- 3,307,633
Increase in deferred
revenue..................... 5,392 -- 56,140
------------ ---------- ------------
Net cash used in operating
activities................ (153,505) (136,610) (5,378,393)
------------ ---------- ------------
Cash flows from investing
activities:
Purchases of fixed assets...... (290,082) (32,583) (16,584,906)
Purchases of marketable
securities.................... -- -- (10,528,055)
------------ ---------- ------------
Net cash used in investing
activities................ (290,082) (32,583) (27,112,961)
------------ ---------- ------------
Cash flows from financing activi-
ties:
Initial capitalization......... 50,500 -- --
Proceeds from bridge
financing..................... 350,000 -- --
Proceeds from equipment credit
facility...................... -- -- 1,446,766
Proceeds from stock option
exercises..................... -- -- 3,499
Proceeds from equipment notes
payable....................... 124,000 122,699 1,559,878
Proceeds from preferred stock
issuance...................... -- 50,000 62,668,573
Payments on equipment notes
payable....................... (41,434) -- (66,667)
Amortization of deferred debt
issue costs................... -- -- 22,160
Principal payments under
capital lease obligation...... -- (3,506) (193,863)
Payment of stock offering
costs......................... -- -- (450,000)
------------ ---------- ------------
Net cash provided by
financing activities...... 483,066 169,193 64,990,346
------------ ---------- ------------
Net increase in cash and cash
equivalents..................... 39,479 -- 32,498,992
Cash and cash equivalents at
beginning of period............. -- -- 39,479
------------ ---------- ------------
Cash and cash equivalents at end
of period....................... $ 39,479 $ -- $ 32,538,471
============ ========== ============
Supplemental disclosure:
Cash paid (received):
Interest..................... $ 2,524 $ 734 $ (827,956)
============ ========== ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS
1. Formation and Operations of the Company
DSL.net, Inc. (the "Company") was incorporated in Delaware on March 3, 1998
and operations commenced March 28, 1998. The Company was formed to provide
dedicated high-speed digital communications services using digital subscriber
line (DSL) technology. During the period ended December 31, 1998, the Company
was considered a development stage company in accordance with Statement of
Financial Accounting Standard No. 7. As of June 30, 1999, the Company was no
longer considered a development stage enterprise.
2. Summary of Significant Accounting Policies
Significant accounting policies followed in the preparation of these
financial statements are as follows:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The markets
for the Company's services are characterized by intense competition, rapid
technological development, regulatory changes, and frequent new product
introductions, all of which could impact the future value of the Company's
assets.
Unaudited interim financial statements
The unaudited balance sheet as of September 30, 1999, the unaudited
statements of operations and cash flows for the nine months ended September 30,
1999 and for the period from inception (March 3, 1998) through September 30,
1998, and the unaudited statement of changes in stockholders equity for the
nine months ended September 30, 1999, have been prepared in accordance with
generally accepted accounting principles for interim financial information and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles.
In the opinion of management, all adjustments (consisting of only normal
recurring accruals) considered necessary for a fair presentation have been
included. Operating results for the nine months ended September 30, 1999 are
not necessarily indicative of results that may be expected for the year ending
December 31, 1999.
Unaudited pro forma balance sheet
Upon the closing of the Company's initial public offering, each outstanding
share of preferred stock was automatically converted into 2.666 shares of
common stock, with the aggregate number of shares of common stock issued to
each stockholder rounded up to the nearest whole share. This conversion has
been reflected in the unaudited pro forma balance sheet as of September 30,
1999. The Company completed its initial public offering on October 12, 1999.
The unaudited pro forma balance sheet does not reflect the net proceeds of the
initial public offering (see Note 12).
Cash equivalents and marketable securities
The Company considers all highly liquid investments purchased with an
initial maturity of three months or less to be cash equivalents. The carrying
value of cash equivalents at September 30, 1999 was approximately $28,419,000
(unaudited).
F-7
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
The Company considers its investment portfolio to be available-for-sale
securities as defined in Statement of Financial Accounting Standards ("SFAS")
No. 115. Marketable securities as of September 30, 1999 consist of debt
securities and certificates of deposit with maturities of three months to a
year. Securities are available for sale and are carried at fair value. The
unrealized or realized gains/losses earned on the securities as of September
30, 1999 were approximately $5,000 (unaudited).
Fixed assets
Fixed assets are stated at cost and are depreciated using the straight-line
method over the estimated useful lives of the assets, which are between 3 and 5
years. Leasehold improvements are amortized over the shorter of the term of the
related lease or the useful life of the asset. Maintenance and repairs are
charged to expense as incurred. Collocation space improvements represent
payments to carriers for infrastructure improvements within their central
offices to allow the Company to install its equipment, which allows the Company
to interconnect with the carrier's network. These payments are being amortized
over their estimated useful lives of five years.
Income taxes
The Company uses the liability method of accounting for income taxes, as set
forth in Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes." Under this method, deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary differences
between the carrying amounts and the tax basis of assets and liabilities and
net operating loss carryforwards, all calculated using presently enacted tax
rates.
Revenue recognition
Revenue is recognized pursuant to the terms of each contract on a monthly
service fee basis. Deferred revenue represents payments received in advance of
the services provided. Revenue related to installation and activation fees are
recognized to the extent of direct costs incurred. Any excess installation and
activation fees over direct costs are deferred and amortized to revenue over
the service contract. Such revenue is not expected to significantly exceed the
direct costs. In certain situations, the Company will waive non-recurring
installation and activation fees in order to obtain a sale. The Company will
expense the related direct costs as incurred.
Long-lived assets
Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,
requires that long-lived assets and certain intangible assets be reviewed for
impairment whenever events or changes in circumstances indicate 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
F-8
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
designates the internal organization that is used by management for making
operating decisions and assessing performance as the source of the Company's
reportable segments. The Company operates in one segment: high-speed Internet
access and data communications services. SFAS No. 131 also requires disclosures
about products and services, geographic areas, and major customers. The
adoption of SFAS No. 131 had no impact on the Company's financial statements
for the periods presented.
Stock compensation
The Company applies Accounting Principles Board Opinion No. 25 (APB 25) and
related interpretations in accounting for its stock option plan and stock
awards with the disclosure provisions of Statement of Financial Accounting
Standards No. 123 (SFAS 123). Under APB 25, compensation expense is computed to
the extent that the fair market value of the underlying stock on the date of
grant exceeds the exercise price of the employee stock option or stock award.
Compensation so computed is then recognized over the vesting period. The
Company accounts for equity instruments issued to nonemployees in accordance
with SFAS 123 and Emerging Issues Task Force ("EITF") 96-18.
Stock compensation expense includes amortization of deferred compensation
and charges related to stock grants which are not subject to vesting
requirements. Stock compensation expense for the period from inception (March
3, 1998) to December 31, 1998 and for the nine months ended September 30, 1999
totaled approximately $2,423,000 and $3,413,000 (unaudited), 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.
During the year ended December 31, 1998 and the nine month period ended
September 30, 1999, options to purchase no shares and 5,656,240 shares
(unaudited) of common stock, respectively, preferred stock convertible into no
shares and 35,759,788 shares of common stock, respectively, and warrants to
purchase 233,277, and 344,519 shares of common stock, respectively, were
excluded from the calculation of earnings per share since their inclusion would
be antidilutive for all periods presented.
Pro forma basic and diluted earnings per share have been calculated assuming
the conversion of all outstanding shares of preferred stock, as if the shares
had converted immediately upon their issuance. All outstanding shares of
preferred stock converted into common stock in conjunction with the closing of
the Company's initial public offering on October 12, 1999.
Comprehensive Income
The Company has adopted the accounting treatment prescribed by Statement of
Financial Accounting Standards No. 130, Comprehensive Income. The adoption of
this statement had no material impact on the Company's financial statements for
the periods presented.
F-9
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
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
applied the guidance set forth in 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.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." DSL.net is required to adopt SFAS No. 133,
as amended by SFAS No. 137, in fiscal 2001. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. The Company has not
entered into any derivative financial instruments or hedging activities. As a
result, management believes adoption of SFAS No. 133 will not have a material
impact on the financial statements.
3. Fixed Assets
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Network equipment................................ $161,814 $ 8,884,289
Furniture, fixtures, office equipment and
software........................................ 61,535 2,884,044
Vehicles......................................... -- 99,189
Collocation costs................................ 66,733 5,007,466
-------- -----------
290,082 16,874,988
Less: accumulated depreciation and
amortization.................................. 5,744 728,532
-------- -----------
$284,338 $16,146,456
======== ===========
</TABLE>
As of December 31, 1998 and September 30, 1999, the recorded cost of the
equipment under capital lease was $22,699 and $1,581,983 (unaudited),
respectively. Accumulated amortization for this equipment under capital lease
was $1,265 and $108,916 (unaudited) as of December 31, 1998 and September 30,
1999, respectively.
Depreciation and amortization expense related to fixed assets was $5,744 and
$722,788 (unaudited) for the period from inception March 3, 1998 to December
31, 1998 and for the nine months ended September 30, 1999, respectively.
F-10
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Debt
Notes payable
In August 1998, the Company issued a $100,000 demand note payable for
funding capital expenditures and operating expenses. The note was originally
payable October 1, 1998, and bore interest at 5.56% per annum. At December 31,
1998, $66,667 remained unpaid. The amount was paid in January 1999.
In November 1998, the Company entered into a series of Note and Warrant
Purchase Agreements pursuant to which the Company received $350,000 and issued
$350,000 principal amount of secured convertible promissory notes (the "Bridge
Notes") and warrants (the "Bridge Warrants") to acquire 87,500 shares of Series
A Preferred Stock. The Notes, which originally expired in January 1999 or
September 2000, bore interest at 5.56% or 6.0% per annum, depending upon the
holder, and were convertible into preferred shares at a rate equal to the
Company's next qualified equity financing. A total of $225,000 of the Bridge
Notes converted into 225,000 shares of Series A Preferred Stock in January
1999. The remaining $125,000 was deducted from proceeds received by the Company
in the January 1999 issuance of Series A Preferred Stock. The Bridge Warrants,
valued at approximately $18,000, are exercisable at $0.375 per share of common
stock ($1.00 per share on a pre-split basis) for a period of five years or, in
the case of certain of the warrants, until the initial public offering of the
Company's common stock. Such warrants were exercised immediately prior to their
expiration upon the initial public offering of the Company's common stock.
Credit Facility
In May 1999, the Company entered into a secured credit facility (the "Credit
Facility") with a bank which will provide up to $5.0 million for the purchase
of telecommunications and office equipment and vehicles. The Credit Facility
expires in May 2000, at which time amounts outstanding will convert to a term
loan payable over 36 months. The Credit Facility bears interest on outstanding
borrowings at 1% over the higher of the bank's prime rate or the federal funds
rate plus 0.5%. The Credit Facility is secured by a lien on certain equipment
and vehicles owned by the Company located at its principal office, and imposes
certain financial and other covenants requiring us to maintain certain
financial ratios and limits new indebtedness, the creation of liens, types of
investments, mergers, consolidations and the transfer of all or substantially
all of our assets. The amount outstanding was $1,446,766 (unaudited) as of
September 30, 1999. Financing costs associated with the Credit Facility of
$83,868 were deferred over the four year life of the facility and term loan
payable. Amortization expense recorded on the deferred costs was $8,736
(unaudited) for the nine months ended September 30, 1999.
F-11
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. Commitment and Contingencies
Leases
Rent expense under operating leases was approximately $14,275 and $400,753
(unaudited), for the period from inception (March 3, 1998) through December
31, 1998 and for the nine months ended September 30, 1999, respectively.
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 September 30, 1999 was $1,003,568
(unaudited).
Litigation
The Company is involved in litigation with a former officer who claims
wrongful termination of employment. The plaintiff is principally seeking
compensatory damages for wages and unvested stock options. The Company
believes that the plaintiff's claims are without merit, and plans to defend
the case vigorously.
From time to time, the Company is involved in other litigation concerning
claims arising in the ordinary course of its business. The Company does not
believe any of the legal claims or proceedings will result in a material
adverse effect on its business, financial position, results of operations or
cash flows.
F-12
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Other Matters
As part of the master lease agreement, the Company issued 41,726 warrants
(the "Lease Warrants") to the lessor to purchase Series A Preferred Stock at a
formula-based price equal to approximately $2.40 per share. The warrants are
exercisable until October 2002, three years after the initial public offering
of the Company's common stock. The value of these warrants is approximately
$112,000 and is being amortized to interest expense over the life of the
capital lease obligation. Interest expense related to the warrants was $18,667
(unaudited) for the nine months ended September 30, 1999.
The Company has entered into interconnection agreements. The agreements have
terms of one to two years and are subject to certain renewal and termination
provisions by either party generally upon 30 days notification. The table above
includes the Company's obligation under its interconnection agreements over
their initial terms. The Company anticipates that it will renew such agreements
beyond their initial terms.
6. Related Party Transactions
In January 1999, the Company entered an Asset Transfer Agreement with
FutureComm, Inc. whose sole shareholder is an officer and founder of the
Company. The amount paid by the Company in exchange for certain equipment,
agreements, licenses and intellectual property was approximately $28,000.
In May 1999, the Company entered into an agreement to license and implement
components of an operations support system from a software vendor. Two
stockholders of the Company, in the aggregate, own 16% of the outstanding
capital stock of the software vendor.
7. Redeemable Convertible Preferred Stock
In January 1999, the Company issued 3,500,000 shares of convertible voting
preferred stock designated as Series A Preferred Stock, together with warrants
to purchase 3,500,000 shares of a prior Series B Preferred Stock (the
"Warrants"), at an exercise price of $1.00 per share, for an aggregate of
$3,500,000. A total of $1,155,000 of the related proceeds has been allocated to
the Warrants.
The Warrants, which were exercisable for a period of 5 years, were subject
to a repurchase right by the Company contingent upon a specified rate of return
upon an initial public offering or acquisition of the Company. If the Company
had exercised its repurchase right, it would have been obligated to pay the
holder the original exercise price plus interest from the date of exercise at
8% per annum.
In January 1999, the holders of $225,000 of Bridge Notes (Note 4) converted
$225,000 of the Bridge Notes into 225,000 shares of Series A Preferred Stock.
The remaining $125,000 of Bridge Notes reduced the proceeds paid to the Company
for the Series A Preferred Stock.
In April 1999, certain holders of the Series A Preferred Stock exchanged
3,500,000 shares of Series A Preferred Stock and the Warrants for 6,500,000
shares of Series B Preferred Stock. Cashless warrant exercises accounted for
2,525,070 of these 6,500,000 shares of Series B Preferred Stock. The exchange
into the remaining 3,974,930 shares of Series B Preferred Stock, which was not
contemplated in the original Series A Preferred Stock purchase agreement,
afforded the holders
F-13
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
an exchange rate of $0.57 per share which was lower than the deemed fair market
value of the preferred stock at the time of exchange of $3.59 per share and
therefore has been treated as a beneficial nonmonetary exchange under APB
Opinion No. 29, "Accounting for Nonmonetary Transactions." The difference
between the carrying value of the Series A Preferred Stock, $2,272,000, and the
deemed fair market value of the Series B Preferred Stock, $14,270,000, has been
included in the calculation of net loss per common share, although no assets of
the Company were expended. The exchange reduces additional paid-in capital and
increases the carrying value of the Series B Preferred Stock by approximately
$11,998,000 (unaudited) for the nine month period ended September 30, 1999. The
exchange will be given no other accounting treatment in the 1999 financial
statements of the Company.
In April 1999, the Company issued 2,785,516 shares of convertible voting
preferred stock designated as Series C Preferred Stock at $3.59 per share for
net proceeds of $9,940,000 (unaudited). These shares were subsequently
converted into 7,426,186 shares of common stock, representing a per share price
of $1.35.
In May and June 1999, the Company issued 2,963,672 shares of convertible
voting preferred stock designated as Series D Preferred Stock at $10.46 per
share for net proceeds of $29,961,000 (unaudited). In July 1999, we received
approximately $1,007,000 (unaudited) in connection with repayment of a note,
including interest at 6.0% from an officer in connection with the purchase of
Series D preferred stock in June 1999. These shares were subsequently converted
into 7,901,150 shares of common stock, representing a per share price of $3.92.
In July 1999, the Company issued 939,086 shares of convertible voting
preferred stock designated as Series E Preferred Stock at $19.70 per share for
net proceeds of approximately $18,458,000 (unaudited). These shares were
subsequently converted into 2,503,603 shares of common stock, representing a
per share price of $7.39.
The following represents the Company's issuance of shares of preferred stock
for the periods ended December 31, 1998 and September 30, 1999:
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
Preferred Preferred Preferred Preferred Preferred
Stock Stock Stock Stock Stock
---------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Beginning Balance......... -- -- -- -- --
Issuance................ 20,000 -- -- -- --
Exchange................ (20,000) -- -- -- --
---------- --------- --------- --------- -------
Balance, 12/31/98......... -- -- -- -- --
Issuance (unaudited).... 3,725,000 -- 2,785,516 2,963,672 939,086
Exchange (unaudited).... (3,500,000) 6,500,000 -- -- --
---------- --------- --------- --------- -------
Balance, 9/30/99
(unaudited).............. 225,000 6,500,000 2,785,516 2,963,672 939,086
========== ========= ========= ========= =======
</TABLE>
Rights and preferences
The preferred stock automatically converted into shares of common stock upon
the Company's initial public offering. While such shares of preferred stock
were outstanding, the Series A, Series B, Series C, Series D and Series E
Preferred stockholders were entitled to receive noncumulative cash dividends of
approximately $0.08 per share, $0.04 per share, $0.29 per share, $0.84 per
share and $1.58 per share, respectively, per annum when and as declared by the
Board of Directors. In the
F-14
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
event of any voluntary or involuntary liquidation of the Company, the Preferred
stockholders were entitled to the original per share issuance price, plus any
declared but unpaid dividends. Remaining assets, would be distributed to the
Preferred and Common stockholders on a pro rata basis assuming full conversion
of all such Preferred Stock. Any acquisition, merger or consolidation which
would result in a majority ownership change would have been deemed to be a
liquidation of the Company, resulting in the redemption of the remaining
preferred shareholder interest.
The shares were converted to common stock at the rate of 2.666 shares of
common stock for one share of Preferred Stock, which had been adjusted for
certain subsequent dilutive issuances and stock splits. The Preferred Stock
automatically converted 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 were not less than approximately $7.50 per share
of common stock, and the aggregate net proceeds were not less than $30 million.
The Series A, Series B, Series C, Series D and Series E Preferred
stockholders had voting rights similar to common stockholders and other rights
(on an as-converted basis), including the power to elect directors to the seven
member board as follows: Series A and B (as a class) elected two directors,
Series C elected one director, and Series A, B, C, D and E together with common
stockholders elected two directors. In addition, the holders of common stock
elected two directors.
8. Stockholders' Equity
Capital stock transactions
In March 1998, the Company's founding stockholders were issued 5,089,634
shares of common stock and 20,000 shares of a prior series A preferred stock
for $50,500.
In December 1998, the Company's Board of Directors declared a 50:1 reverse
stock split. The accompanying financial statements have been restated to
reflect this stock split. Concurrently, the preferred shareholder exchanged all
the then outstanding Series A Preferred Stock for 7,634,451 shares of common
stock, adjusted for stock splits. The value attributed to this exchange, which
provided 3.75 shares of common stock for every split-effected share of
preferred stock, was approximately $1.4 million which has been charged to
compensation expense.
In December 1998, the Company issued 4,071,715 shares of common stock to two
officers in exchange for promissory notes totaling $7,637. Such notes were
subsequently forgiven by the Company. Compensation expense of $1,023,272, or
$0.25 per share, has been recognized related to this issuance.
The following table indicates the issuance of shares of capital stock
through December 31, 1998:
<TABLE>
<CAPTION>
Preferred Common
Date Issued to : Stock Stock
---- ----------- --------- ----------
<S> <C> <C> <C>
March 1998.................................. Founders 20,000 5,089,634
December 1998............................... Founders (20,000) 7,634,451
December 1998............................... Founders -- 508,971
December 1998............................... Officers -- 3,562,744
------- ----------
Total..................................... -- 16,795,800
======= ==========
</TABLE>
F-15
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
In January 1999, the Company's Board of Directors declared a stock split of
1,909.09 shares for every outstanding common share. The accompanying financial
statements have been restated to reflect this stock split. In conjunction with
this split and sale of Series A Preferred Stock described above, certain
employment tenure and performance criteria were required of management in order
to fully vest in a portion of their original founders' shares. The value
attributed to these 14,857,397 nonvested shares is reflected in deferred
compensation of approximately $3,734,000, or $0.25 per share, and is being
amortized over the related employment term, which may be accelerated based upon
the likelihood of attaining certain performance measures.
In March 1999, the Company issued 436,256 shares of common stock to an
executive officer of the Company, adjusted for stock splits. Compensation
expense of $587,457 has been recognized related to this issuance.
In April 1999, the Company's founding shareholders surrendered 3,102,256
shares of common stock. Such stock was previously made subject to certain
employment tenure and performance vesting criteria. In exchange, the vesting
criteria on other restricted common stock owned by the founders was removed.
This share surrender and acceleration of vesting resulted in a compensation
charge of approximately $1.2 million in the second quarter of 1999 and
eliminated approximately $780,000, or $0.25 per share, from deferred
compensation.
In May 1999, the Company declared a 2:1 stock split of its common stock. The
accompanying financial statements have been restated to reflect this stock
split.
In July 1999, the Company declared a 0.333:1 stock dividend on its common
stock. The accompanying financial statements have been restated to reflect this
stock dividend.
In August 1999, 93,310 shares of common stock were issued in exchange for
aggregate proceeds of approximately $3,500 (unaudited) pursuant to the exercise
of options granted under the 1999 Stock Plan (Note 10).
Common stock reserved
The Company has reserved shares of common stock as follows:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Conversion of Preferred stock..................... -- 35,759,798
1999 Stock Plan................................... -- 12,364,200
1999 Stock Purchase Plan.......................... -- 300,000
Conversion of promissory notes.................... 933,100 --
Stock warrants.................................... 233,277 344,519
--------- ----------
1,166,377 48,768,517
========= ==========
</TABLE>
F-16
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Stock warrants
At December 31, 1998 and September 30, 1999, the Company had outstanding
stock purchase warrants to purchase shares of Series A preferred stock which
were convertible into 233,277 and 344,519 (unaudited) shares of common stock,
respectively:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(unaudited)
<S> <C> <C>
Lease Warrants.................................... -- 111,242
Bridge Warrants................................... 233,277 233,277
------- -------
233,277 344,519
======= =======
</TABLE>
9. Income Taxes
The Company's gross deferred tax assets and liabilities were comprised of
the following:
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
Gross deferred tax asset:
Net operating loss carryforwards............................. $ 1,076,382
Other........................................................ 53,599
-----------
1,129,981
Gross deferred tax liability:
Depreciation................................................. 8,054
-----------
1,121,927
Valuation allowance............................................ (1,121,927)
-----------
Net deferred taxes............................................. $ --
===========
</TABLE>
The Company has provided a valuation allowance for the full amount of the
net deferred tax asset, since management has not determined that these future
benefits will more likely than not be realized as of December 31, 1998.
At December 31, 1998, the Company had approximately $2.7 million of federal
net operating loss carryforwards that begin to expire in 2018, and $2.7 million
of state net operating loss carryforwards that expire in 2003.
The amount of the net operating carryforwards that may be utilized annually
to offset future taxable income and tax liability will be limited as a result
of certain ownership changes pursuant to Section 382 of the Internal Revenue
Code.
10. Incentive Stock Award Plan (unaudited)
In February 1999, the Company's Board of Directors adopted the 1999 Stock
Plan (the "Stock 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 12,364,200 shares of common
stock have been authorized under the Stock 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-17
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
A summary of activity under the Plan as of September 30, 1999 (unaudited) is
as follows:
<TABLE>
<CAPTION>
Weighted Average
------------------
Number of Fair Exercise
Shares Value Price
----------- -------- ---------
<S> <C> <C> <C>
Outstanding at Inception................... -- $ -- $ --
Granted.................................... 6,815,950 2.75 1.19
Exercised.................................. (93,310) 0.25 0.04
Canceled................................... (1,066,400) 1.35 0.07
-----------
Outstanding at September 30, 1999
(unaudited)............................... $ 5,656,240
===========
</TABLE>
The following summarizes the outstanding and exercisable options under the
Plan as of September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------- --------------------------
Exercise Number Weighted Avg Weighted Avg Number Weighted Avg
Price Outstanding Remaining Life Exercise Price Exercisable Exercise Price
-------- ----------- -------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$0.04-
0.07 2,436,724 9.30 $0.05 7,775 $0.04
$0.39-
0.53 2,294,109 9.62 $0.46 -- --
$7.39 925,407 9.84 $7.39 -- --
</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 nine months ended
September 30, 1999 (unaudited) would have been as follows:
<TABLE>
<S> <C>
Net loss:
As reported................................................. $(12,118,731)
Pro forma under FAS 123..................................... $(12,255,077)
Basic and diluted net loss per common share:
As reported................................................. $ (3.87)
Pro forma under FAS 123..................................... $ (3.89)
</TABLE>
The estimated fair value at date of grant for options granted for the nine
months ended September 30, 1999 (unaudited) ranged from $0.23 to $3.69. The
minimum value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions (unaudited):
<TABLE>
<S> <C>
Risk free interest rate.......................................... 4.88%-5.77%
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 $12,247,000 (unaudited) has been
attributed to those common stock options granted during the nine months ended
September 30, 1999, with an exercise price below estimated fair value. Stock
compensation expense is recognized over the four year vesting period and
totaled $3,412,914 (unaudited) for the nine months ended September 30, 1999.
F-18
<PAGE>
DSL.net, Inc.
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. Employee Stock Purchase Plan (unaudited)
The Company's 1999 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in September 1999. The Purchase Plan
authorized the issuance of up to a total of 300,000 shares of Common Stock to
participating employees.
All employees of the Company and all employees of any participating
subsidiaries whose customary employment is more than 20 hours per week and more
than three months in any calendar year are eligible to participate in the
Purchase Plan. Under the terms of the Purchase Plan, the price per share paid
by each participant on the last day of the Offering Period (as defined therein)
is an amount equal to 85% of the fair market value of the Common Stock on
either the first day or the last day of the Offering Period, whichever is
lower. The Purchase Plan terminates on December 31, 2009 or such earlier date
as the Board of Directors determines. The Purchase Plan will terminate in any
case when all or substantially all of the unissued shares of stock reserved for
the purposes of the Purchase Plan have been purchased. Upon termination of the
Purchase Plan all amounts in the accounts of participating employees will be
promptly refunded.
12. Subsequent Events (unaudited)
On October 6, 1999, warrants for 56,250 shares of Series A preferred stock
were exercised, for aggregate net proceeds of $56,250.
On October 12, 1999, the Company completed its initial public offering of
7,200,000 shares of common stock resulting in net proceeds to the Company of
approximately $49.1 million. In addition, the underwriters exercised their
over-allotment option for 1,026,000 shares, resulting in net proceeds to the
Company of approximately $7.2 million, on November 8, 1999.
In conjunction with the closing of the Company's initial public offering on
October 12, 1999, all outstanding preferred stock was converted, at a ratio of
2.666 to one, into 35,909,761 shares of common stock.
In the fourth quarter of 1999, the Company issued 653,000 options to
purchase shares of common stock at an exercise price ranging from $5.00 to
$18.75 per share to employees and advisors under the 1999 Stock Plan.
During the fourth quarter 1999, the Company entered into various operating
leases for additional office space in New Haven, Connecticut. Annual minimum
lease payments under these leases are approximately $27,000 (unaudited) in
1999, $379,000 (unaudited) in each of the years 2000, 2001, 2002 and $157,000
(unaudited) in 2003.
On December 1, 1999, the Company acquired Tycho Networks, Inc., a Santa
Cruz, California company, which provides Internet access, web hosting and
related services throughout central coastal California. The approximate net
purchase price of $3.1 million, excluding transaction costs associated with the
acquisition, consisted of cash payments at closing of $1.6 million (including
notes paid at closing of approximately $0.8 million), amounts due to selling
stockholders and others after the closing of approximately $0.8 million, net
liabilities assumed of approximately $0.3 million and other costs of
approximately $0.4 million. In addition, the Company incurred transaction costs
associated with the acquisition of approximately $0.1 million. The acquisition
was accounted for using the purchase method. Immediately prior to the
acquisition, Tycho Networks sold fixed assets with a net book value of
approximately $0.1 million to a related party and received notes that were
convertible into the preferred stock of the buyer. These notes were assigned an
estimated fair value of $0.1 million.
F-19
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Tycho Networks, Inc.:
We have audited the accompanying consolidated balance sheet of Tycho
Networks, Inc. and subsidiary (the "Company") as of December 31, 1998, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the period from December 22, 1997 (inception) to December 31, 1998.
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 in accordance with generally accepted auditing
standards. Those standards 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of the Company at December 31,
1998, and the results of its operations and its cash flows for the period from
December 22, 1997 (inception) to December 31, 1998 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company's losses from operations raise substantial
doubt about its ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ DELOITTE & TOUCHE LLP
San Jose, California
May 21, 1999
(October 13, 1999 as to the last
three paragraphs of Note 9)
F-20
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 216,105
Accounts receivable (net of allowance of $5,800)............... 48,752
Prepaids and other current assets.............................. 2,645
---------
Total current assets......................................... 267,502
PROPERTY AND EQUIPMENT, Net...................................... 126,044
OTHER ASSETS..................................................... 118,527
INTANGIBLE ASSETS................................................ 377,160
---------
TOTAL............................................................ $ 889,233
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................... $ 193,637
Accrued liabilities............................................ 36,100
---------
Total current liabilities.................................... 229,737
---------
SUBORDINATED CONVERTIBLE NOTES PAYABLE........................... 290,543
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $0.001 par value;
authorized--4,050,000 shares; issued and outstanding--
3,744,128 shares; liquidation preference: $1,170,040.......... 1,153,510
Common stock, $0.001 par value; authorized--10,000,000 shares;
outstanding--2,450,000 shares................................. 2,450
Accumulated deficit............................................ (787,007)
---------
Total stockholders' equity................................... 368,953
---------
TOTAL............................................................ $ 889,233
=========
</TABLE>
See notes to consolidated financial statements.
F-21
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
Period from December 22, 1997 (Inception) to December 31, 1998
<TABLE>
<S> <C>
NET REVENUES.................................................... $ 348,527
----------
COSTS AND EXPENSES:
Cost of revenues.............................................. 436,815
Selling, general and administrative........................... 613,148
Research and development...................................... 89,615
----------
Total costs and expenses.................................... 1,139,578
----------
LOSS FROM OPERATIONS............................................ (791,051)
OTHER INCOME (EXPENSE):
Interest income............................................... 4,181
Interest expense.............................................. (12,762)
Other......................................................... 12,625
----------
Total other income.......................................... 4,044
----------
NET LOSS........................................................ $ (787,007)
==========
</TABLE>
See notes to consolidated financial statements.
F-22
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Period from December 22, 1997 (Inception) to December 31, 1998
<TABLE>
<CAPTION>
Series A
Convertible Preferred
Stock Common Stock
--------------------- ----------------- Deficit
Shares Amount Shares Amount Accumulated Total
--------- ----------- --------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Issuance of common stock
to founders............ -- $ -- 2,450,000 $ 2,450 $ -- $ 2,450
Issuance of Series A
preferred stock (net of
issuance costs of
$16,350)............... 3,744,128 1,153,510 -- -- -- 1,153,510
Net loss................ -- -- -- -- (787,007) (787,007)
--------- ----------- --------- ------- ---------- ---------
BALANCES, December 31,
1998................... 3,744,128 $ 1,153,510 2,450,000 $ 2,450 $ (787,007) $ 368,953
========= =========== ========= ======= ========== =========
</TABLE>
See notes to consolidated financial statements.
F-23
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
Period from December 22, 1997 (Inception) to December 31, 1998
<TABLE>
<S> <C>
OPERATING ACTIVITIES:
Net loss.......................................................... $ (787,007)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 48,819
Gain on disposal of property.................................... (12,625)
Changes in operating assets and liabilities, net of effects of
acquisition:
Accounts receivable........................................... 73,676
Prepaids and other current assets............................. 67,205
Accounts payable.............................................. 268,938
Accrued liabilities........................................... (29,619)
----------
Net cash used in operating activities....................... (370,613)
----------
INVESTING ACTIVITIES:
Purchases of property and equipment............................. (267,442)
Proceeds from sale of property.................................. 112,599
Other assets.................................................... (118,527)
Acquisition of business......................................... (582,874)
----------
Net cash used in investing activities....................... (856,244)
----------
FINANCING ACTIVITIES:
Issuance of common stock........................................ 2,450
Sale of convertible preferred stock............................. 793,469
Proceeds from convertible notes payable......................... 656,500
Repayment of convertible notes payable.......................... (9,457)
----------
Net cash provided by financing activities................... 1,442,962
----------
NET INCREASE IN CASH AND CASH EQUIVALENTS......................... 216,105
CASH AND CASH EQUIVALENTS:
Beginning of period............................................. --
----------
End of period................................................... $ 216,105
==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION--Cash paid during
the period for interest.......................................... $ 12,762
==========
NONCASH FINANCING ACTIVITY--Conversion of convertible notes
payable and accrued interest into preferred stock................ $ 360,041
==========
</TABLE>
See notes to consolidated financial statements.
F-24
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Period from December 22, 1997 (Inception) to December 31, 1998
1. BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Organization--Tycho Networks, Inc. (the "Company") develops and implements a
new family of innovative data services, including high-speed internet access,
virtual private networks, and remote network access for small- and medium-sized
businesses throughout California. The Company was incorporated in Delaware on
December 22, 1997 ("inception"). With the exception of the issuance of common
stock to founders for $2,450 and convertible notes payable of $1,500 on
December 24, 1997, the Company had no activities prior to January 1, 1998
("commencement of operations").
Basis of Presentation--The consolidated financial statements have been
prepared on a going concern basis which contemplates the realization of assets
and satisfaction of liabilities in the ordinary course of business. As shown in
the consolidated financial statements, the Company incurred a net loss of
approximately $787,000 for the period from December 22, 1997 to December 31,
1998 and management expects substantial future losses. This factor, among
others, raises substantial doubt about the Company's ability to continue as a
going concern. The Company's continuation as a going concern is dependent upon
its ability to generate sufficient cash flows to meet it obligations on a
timely basis, to obtain additional financing as may be required and,
ultimately, to attain successful operations. Management intends to increase
marketing and sales efforts to sell the Company's services. However, due to
current development activities, management believes that additional equity or
debt financing will be necessary for the Company to implement its plans and
sustain operations through fiscal 1999. While management believes that the
Company will be able to obtain such financing, failure to do so would
significantly impact the Company's ability to sustain its operations. The
consolidated financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
Principles of Consolidation--The consolidated financial statements include
the accounts of the Company and its wholly-owned subsidiary. The subsidiary had
no operations for the period from December 22, 1997 to December 31, 1998.
Certain Significant Risks and Uncertainties--The Company operates in a
dynamic industry, and accordingly, can be affected by a variety of factors. For
example, management of the Company believes that changes in any of the
following areas could have a significant negative effect on the Company in
terms of its future financial position, results of operations and/or cash
flows: ability to obtain additional financing; regulatory changes; fundamental
changes in the technology underlying the Company's products or services; market
acceptance of the Company's products or services under development; litigation
or other claims against the Company; the hiring, training and retention of key
employees; successful and timely completion of product development efforts; and
new product introductions by competitors.
Cash Equivalents--The Company considers all highly liquid instruments
purchased with an original maturity of three months or less to be cash
equivalents.
Property and Equipment are stated at cost. Depreciation and amortization are
computed using the straight-line method over estimated useful lives of three to
four years. Leasehold improvements are amortized over the shorter of the lease
term or their useful life.
F-25
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets--Intangible assets of $377,160 (net of accumulated
amortization of $20,196) at December 31, 1998, consist of acquired trademarks,
copyrights and customer relationships (see Note 3). These intangible assets are
being amortized on a straight-line basis over a period of three to five years.
Long-Lived Assets--The Company evaluates its long-lived assets for
impairment whenever events or changes in circumstances indicate that the
carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to
be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
Revenue Recognition--The Company recognizes on-line service revenue during
the period services are provided.
Concentration of Credit Risk--Financial instruments that potentially expose
the Company to concentrations of credit risk consists primarily of accounts
receivable. The Company does not require collateral or other security to
support accounts receivable. To reduce credit risk, management performs ongoing
credit evaluations of its customers' financial condition. The Company maintains
allowances for potential credit losses. Two customers accounted for 14% and
11%, respectively, of the Company's total accounts receivable at December 31,
1998.
Significant 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,
liabilities, revenues and expenses. Actual results could differ from these
estimates.
Stock Compensation--The Company accounts for stock-based awards to employees
using the intrinsic value method in accordance with Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees."
Comprehensive Loss--The Company has adopted Statement of Financial
Accounting Standard (SFAS) No. 130, "Reporting Comprehensive Income," which
requires an enterprise to report, by major components and as a single total the
change in its net assets during the period from nonowner sources. For the year
ended December 31, 1998, net loss equaled comprehensive loss.
Recently Issued Accounting Standard--In June 1998, the Financial Accounting
Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This statement requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. SFAS No. 133 will be effective for the Company's fiscal
year ending December 31, 2001. Management believes that adoption of this
statement will not have a significant impact on the Company's financial
position, results of operations or cash flows.
F-26
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
2. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998 consists of:
<TABLE>
<S> <C>
Equipment and purchased software................................... $121,598
Furniture and fixtures............................................. 11,406
Leasehold improvements............................................. 9,038
--------
142,042
Accumulated depreciation and amortization.......................... (15,998)
--------
$126,044
========
</TABLE>
In November 1998, the Company sold and leased back certain equipment under
an operating lease with an initial term of eighteen months, resulting in a gain
of $12,625.
3. ACQUISITION
On September 15, 1998, the Company acquired certain assets from and assumed
certain liabilities of Scruz-Net, Inc. for a cash purchase price of $557,428
and incurred $25,446 in transaction costs. Scruz-Net was a full-service
Internet service provider, providing connectivity to the Internet from network
hubs in California's central coast region. The acquisition was accounted for as
a purchase and, accordingly, the results of operations of Scruz-Net have been
included in the Company's financial statements from the date of acquisition. In
connection with the acquisition, intangible assets of $397,356 were acquired,
consisting of trademarks, copyrights and customer relationships, which are
being amortized over their useful lives of three to five years.
In connection with the acquisition, net assets acquired were as follows (in
thousands):
<TABLE>
<S> <C>
Current assets..................................................... $192,278
Property and equipment, net........................................ 62,500
Intangible assets.................................................. 397,356
Current liabilities assumed........................................ (69,260)
--------
Net assets acquired................................................ $582,874
========
</TABLE>
4. NOTES PAYABLE
In December 1997 through August 1998, the Company issued convertible notes
payable to various investors for a total of $656,500 for working capital
purposes. In June 1998, notes payable of $206,500 and accrued interest of
$3,541 were converted into 672,131 shares of Series A preferred stock at a
conversion price of $0.3125 per share.
In October 1998, notes payable of $150,000 were converted into 480,000
shares of Series A preferred stock at a conversion price of $0.3125 per share.
The remaining principal of $300,000 was amended into a subordinated convertible
note agreement. The note accrues interest at an annual rate of 6% with the
principal and accrued interest due and payable in October 2003 if and to the
extent that the notes are not previously converted. The notes and related
accrued interest are convertible at the option of the noteholder into shares of
preferred Series A stock to the
F-27
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
extent that the additional shares of Series A preferred stock have been
authorized by the Company's stockholders. The notes are convertible at a
$0.3125 per share (subject to adjustment for events of dilution).
5. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
The significant terms of the Series A convertible preferred stock are as
follows:
. Each share of Series A preferred stock is convertible into one share of
common stock (subject to adjustment for events of dilution). Each share
will automatically convert upon an underwritten public offering of common
stock, in which the pre-public market capitalization of the Company is at
least $50,000,000 and the aggregate cash proceeds to the Company are at
least $7,500,000 (net of underwriting discounts and commissions).
. When and if declared by the Board of Directors, the holders of Series A
convertible preferred stock are entitled to receive noncumulative
dividends of $0.03125 per share per annum, respectively, prior to the
payment of any dividends on common stock.
. Holders of Series A convertible preferred stock have a liquidation
preference of $0.3125 per share, plus any declared but unpaid dividends.
A sale of substantially all of the Company's assets or a change in
control is treated as a deemed liquidation.
Common Stock
The Company issued 2,450,000 shares of common stock subject to repurchase
agreements whereby the Company has the option to repurchase the unvested shares
upon termination of employment at the original issue price. The number of
shares subject to repurchase is reduced at the rate of 10% upon issuance and
1/48 per month thereafter. At December 31, 1998, 1,653,750 shares were subject
to repurchase by the Company.
At December 31, 1998, the Company has reserved shares of common stock for
issuance as follows:
<TABLE>
<S> <C>
Conversion of notes payable and related preferred stock............ 929,737
Conversion of preferred stock...................................... 3,744,128
Issuances under the 1997 Stock Plan................................ 1,600,000
---------
6,273,865
=========
</TABLE>
Stock Option Plan
Under the 1997 Stock Plan (the "Plan"), the Company may grant options to
purchase up to 1,600,000 shares of common stock to employees, officers,
directors, and consultants at prices not less than the fair market value at the
date of grant for incentive and nonstatutory stock options. These options
generally expire ten years from the date of grant and vest at rate of 25% on
the first anniversary of the grant date and 1/48 per month thereafter. At
December 31, 1998, 1,425,000 were available for future grant under the Plan.
F-28
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Additional information with respect to options under the Plan is as follows:
<TABLE>
<CAPTION>
Outstanding Stock
Options
----------------------
Weighted
Average
Number of Option Price
Options Per Share
--------- ------------
<S> <C> <C>
Granted beginning in November 1998 (weighted
average fair value of $0.01)...................... 175,000 $0.05
-------
Outstanding, December 31, 1998..................... 175,000 $0.05
=======
</TABLE>
As of December 31, 1998, no options were exercisable and outstanding options
had a weighted-average remaining contractual life of 9.8 years.
SFAS No. 123, "Accounting for Stock-Based Compensation," requires the
disclosure of pro forma net loss as if the Company had adopted the fair value
method. Under SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradeable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including expected time to exercise, which greatly affect the
calculated values. The Company's calculations were made using the minimum value
method model with the following weighted average assumptions: expected life, 24
months following vesting; risk free interest rate, 5.9% in 1998; and no
dividends during the expected term. The Company's calculations are based on a
multiple option valuation approach and forfeitures are recognized as they
occur. If the computed minimum values of the awards had been amortized to
expense over the vesting period of the awards, pro forma net loss would not
have been materially different from net loss.
6. Income Taxes
Deferred income taxes reflect the tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. At December 31, 1998,
the Company's deferred income tax assets totaled approximately $342,000 and
consisted primarily of net operating loss (NOL) carryforwards and temporary
differences related to accruals and reserves not currently deductible. The
deferred tax assets have been fully reserved due to the uncertainty surrounding
the realization of such benefits.
At December 31, 1998, the Company has NOL carryforwards of approximately
$726,000 for federal and state income tax purposes, respectively. The federal
NOL carryforwards expire in 2018, while the state NOL carryforwards expire in
2006.
The extent to which the NOL carryforwards can be used to offset future
taxable income and tax liabilities, respectively, may be limited, depending on
the extent of ownership changes within any three-year period.
7. Lease Commitments
The Company leases its facilities and certain equipment under noncancelable
operating leases expiring through December 2004. Rent expense was approximately
$153,000 in 1998. Future
F-29
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
minimum rent payments are approximately $454,000, $398,000, $192,000, $160,000,
$160,000 and $160,000 in 1999, 2000, 2001, 2002, 2003 and thereafter,
respectively.
8. Employee Benefit Plan
In January 1998, the Company established a 401(k) tax-deferred savings plan,
whereby eligible employees may contribute up to 15% of their eligible
compensation. Company contributions are discretionary. No employer
contributions were made in 1998.
9. Subsequent Events
On March 1, 1999, the Board of Directors increased the authorized shares of
Series A convertible preferred stock to 6,450,000 shares and authorized shares
of common stock to 13,550,000 shares. In March 1999 through April 1999, the
Company issued 2,281,600 shares of Series A convertible preferred stock for
total gross proceeds of approximately $713,000.
In July and August 1999, the Company issued notes payable totaling $500,000
for working capital purposes. Borrowings bear interest at 12% per annum and are
payable in thirty-six monthly installments.
In addition, in July 1999, the Company entered into lease agreements for
equipment purchases. Under the agreements, the Company may borrow up to
$500,000 immediately and an additional $2,250,000 upon the closing of a
qualified Series B preferred stock financing with proceeds of at least
$10,000,000. In addition, the Company agreed to issue warrants to purchase
Series B preferred stock upon such closing. The number and per share price
thereof are to be determined by the per share closing price of the Series B
preferred stock financing.
In October 1999, the Company issued a note payable for $75,000 for working
capital purposes. Borrowings bear interest at 6% per annum. The entire
principal balance will automatically convert to shares of Series B preferred
stock upon completion of a Series B preferred stock financing with proceeds of
at least $5,000,000 consummated on or before January 31, 2000; otherwise, the
balance will become due on demand. The Company has the option to convert
accrued interest into shares of Series B preferred stock or pay the outstanding
balance.
F-30
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents......................... $ 20,585 $ 216,105
Accounts receivable, net.......................... 33,855 48,752
Prepaids and other current assets................. 20,095 2,645
----------- ----------
Total current assets............................ 74,535 267,502
PROPERTY AND EQUIPMENT, Net......................... 430,179 126,044
OTHER ASSETS........................................ 150,528 118,527
INTANGIBLE ASSETS................................... 274,553 377,160
----------- ----------
TOTAL............................................... $ 929,795 $ 889,233
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.................................. $ 779,721 $ 193,637
Accrued liabilities............................... 97,445 36,100
Unearned revenue.................................. 12,508 --
Current portion of capital lease payable.......... 66,279 --
Current portion of notes payable.................. 148,409 --
----------- ----------
Total current liabilities....................... 1,104,362 229,737
----------- ----------
Long-term portion of capital lease payable.......... 200,572 --
Notes Payable....................................... 339,964 --
Subordinated Convertible Notes Payable.............. 303,618 290,543
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock, $0.001 par
value; authorized--
6,450,000 and 4,050,000 shares, respectively; issued
and outstanding--
6,025,728 and 3,744,128 shares, respectively........ 1,851,337 1,153,510
Common stock, $0.001 par value; authorized--
13,550,000 and 10,000,000 shares, respectively;
outstanding--2,450,000 shares...................... 2,450 2,450
Accumulated deficit................................. (2,872,508) (787,007)
----------- ----------
Total stockholders' equity...................... (1,018,721) 368,953
----------- ----------
TOTAL............................................... $ 929,795 $ 889,233
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements.
F-31
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
For the period
from
Nine months December 22, 1997
ended (inception)
September 30, to September 30,
1999 1998
------------- -----------------
<S> <C> <C>
NET REVENUES.................................... $ 1,269,462 $ 60,000
----------- ---------
COSTS AND EXPENSES:
Cost of revenues.............................. 1,235,420 104,028
Selling, general and administrative........... 2,012,650 415,300
Research and development...................... 92,822 54,593
----------- ---------
Total costs and expenses.................... 3,340,892 573,921
----------- ---------
LOSS FROM OPERATIONS............................ (2,071,430) (513,921)
Interest expense, net......................... (14,071) (6,014)
----------- ---------
NET LOSS........................................ $(2,085,501) $(519,935)
=========== =========
</TABLE>
See notes to condensed consolidated financial statements.
F-32
<PAGE>
TYCHO NETWORKS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
For the period
Nine months from December 22, 1997
ended (inception)
September 30, to September 30,
1999 1998
------------- ----------------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss.................................. $(2,085,501) $ (519,935)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization........... 141,996 (1,885)
Changes in operating assets and
liabilities, net of effects of
acquisition:
Accounts receivable................... 14,897 78,228
Prepaids and other current assets..... (17,450) (4,700)
Accounts payable...................... 586,084 213,664
Accrued liabilities & other current
liabilities.......................... 74,420 14,774
Unearned revenue...................... 12,508 --
----------- ----------
Net cash used in operating
activities......................... (1,273,046) (219,854)
----------- ----------
INVESTING ACTIVITIES:
Purchases of property and equipment..... (76,673) (264,945)
Other assets............................ (32,001) (8,521)
Acquisition of business................. -- (582,874)
----------- ----------
Net cash used in investing
activities......................... (108,674) (856,340)
----------- ----------
FINANCING ACTIVITIES:
Issuance of common stock................ -- 2,450
Sale of convertible preferred stock..... 697,827 487,135
Proceeds from convertible notes
payable................................ 500,000 656,500
Repayment of notes payable.............. (11,627) (8,675)
----------- ----------
Net cash provided by financing
activities......................... 1,186,200 1,137,410
----------- ----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS.............................. (195,520) 61,216
CASH AND CASH EQUIVALENTS:
Beginning of period..................... 216,105 --
----------- ----------
End of period........................... 20,585 61,216
=========== ==========
NONCASH FINANCING ACTIVITY--Equipment
acquired under capital lease............. $ 266,851 --
=========== ==========
</TABLE>
See notes to condensed consolidated financial statements
F-33
<PAGE>
TYCHO NETWORKS, INC. & SUBSIDIARY
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The financial statements at September 30, 1999, for the nine months ended
September 30, 1999 and for the period from December 22, 1997 (inception) to
September 30, 1998 are unaudited, but include all adjustments (consisting only
of normal recurring adjustments) that the Company considers necessary for a
fair presentation of financial position and operating results. Operating
results for the nine month period ended September 30, 1999 and for the period
from December 22, 1997 (inception) to September 30, 1998 are not necessarily
indicative of results that may be expected for any future periods.
The accompanying unaudited interim financial statements have been prepared
with the assumption that users of the interim financial information have read
Tycho Networks, Inc. & Subsidiary's ("Tycho") audited financial statements for
the period from December 22, 1997 (inception) to December 31, 1998.
Accordingly, footnote disclosures which would substantially duplicate the
disclosures contained in these audited financial statements have been omitted
from these unaudited interim financial statements. While management believes
the disclosures presented are adequate to make these financial statements not
misleading, these financial statements should be read in conjunction with
Tycho's audited financial statements and related notes.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements.
Actual results may differ from those estimates.
2. Stockholders' Equity
On March 1, 1999, the Board of Directors increased the authorized shares of
Series A convertible preferred stock to 6,450,000 shares and authorized shares
of common stock to 13,550,000 shares. In March 1999 through April 1999, the
Company issued 2,281,600 shares of Series A convertible preferred stock for
total gross proceeds of approximately $713,000.
3. Notes Payable and Capital Leases
In July and August 1999, the Company issued notes payable totaling $500,000
for working capital purposes. Borrowings bear interest at 12% per annum and are
payable in thirty-six monthly installments.
In addition, in July 1999, the Company entered into lease agreements for
equipment purchases. Under the agreements, the Company may borrow up to
$500,000 immediately and an additional $2,250,000 upon the closing of a
qualified Series B preferred stock financing with proceeds of at least
$10,000,000. In addition, the Company agreed to issue warrants to purchase
Series B preferred stock upon such closing. The number and per share price
thereof are to be determined by the per share closing price of the Series B
preferred stock financing. At September 30, 1999, the Company had $266,851
outstanding under the lease agreements.
In October 1999, the Company issued a note payable for $75,000 for working
capital purposes. Borrowings bear interest at 6% per annum. The entire
principal balance will automatically convert to shares of Series B preferred
stock upon completion of a Series B preferred stock financing with proceeds of
at least $5,000,000 consummated on or before January 31, 2000; otherwise, the
balance will become due on demand. The Company has the option to convert
accrued interest into shares of Series B preferred stock or pay the outstanding
balance.
F-34
<PAGE>
4. Sale to DSL.net
On December 1, 1999, Tycho Networks, Inc. entered into an Agreement and Plan
of Merger with DSL.net, Inc. and a wholly owned subsidiary of DSL.net, Inc. The
transaction included cash consideration of approximately $1.6 million
(including amounts used to pay off existing notes of approximately $0.8
million), amounts due to selling stockholders and others after the closing of
approximately $0.8 million, net liabilities assumed of approximately $0.3
million and other costs of approximately $0.4 million. Immediately prior to the
acquisition, Tycho sold fixed assets with a net book value of approximately
$0.1 million to a related party and received notes that were convertible into
preferred stock of the buyer.
F-35
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
Basis of Presentation
The following unaudited pro forma condensed combined financial information
for DSL.net, Inc. ("DSL" or the "Company") gives effect (i) to the acquisition
of Tycho Networks, Inc. and subsidiary ("Tycho") under the purchase method of
accounting and (ii) to the Company's completion of its initial public offering.
The following unaudited pro forma combined financial information presents the
Unaudited Pro Forma Condensed Combined Balance Sheet as of September 30, 1999,
giving effect to the acquisition of Tycho as if it had been consummated on that
date. Also presented is the Unaudited Pro Forma Condensed Combined Statements
of Operations for the nine months ended September 30, 1999 and the period from
inception (March 3, 1998) through December 31, 1998, giving effect to the
acquisition of Tycho as if such acquisition had been consummated as of the
beginning of the earliest period presented. The Unaudited Pro Forma Condensed
Combined Balance Sheet combines the respective balance sheets of the Company
and Tycho as of September 30, 1999. The Unaudited Pro Forma Condensed Combined
Statement of Operations for the nine months ended September 30, 1999 combines
the results of the Company and Tycho for such period. The Unaudited Pro Forma
Condensed Combined Statement of Operations for the period from inception (March
3, 1998) through December 31, 1998 combines the results of the Company for such
period with the results of Tycho for the period from December 22, 1997
(inception ) to December 31, 1998. The historical financial information set
forth below has been derived from, and is qualified by reference to, the
financial statements of the Company and Tycho and should be read in conjunction
with those financial statements and the notes thereto included elsewhere
herein.
The pro forma data is based on the combined historical results of the
Company and Tycho after giving effect to the Tycho acquisition under the
purchase method of accounting, and to the assumptions and adjustments (which
the Company believes to be reasonable) described in the accompanying Notes to
Unaudited Pro Forma Condensed Combined Financial Information. Under the
purchase method of accounting, assets acquired and liabilities assumed will be
recorded at their estimated fair value at the date of acquisition. The pro
forma adjustments set forth in the following unaudited pro forma combined
financial information are estimated and may differ from the actual adjustments
when they become known; however, no material differences are anticipated by the
Company.
The unaudited pro forma condensed combined financial information set forth
below does not purport to represent what the combined results of operations or
financial condition of the Company would actually have been if the Tycho
acquisition and the Company's Initial Public Offering, both of which were
completed after September 30, 1999, had in fact occurred on such dates nor
should it be utilized to project the future combined results of operations or
financial condition of the Company.
F-36
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED
BALANCE SHEET AS OF SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Tycho Acquisition Initial Public Offering
--------------------------------- ------------------------------
Pro Forma
Effect of Tycho Pro Forma Pro Forma Pro Forma
DSL.net Tycho Acquisition Combined Effect of IPO As Adjusted
------------ ----------- --------------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets
Cash and cash
equivalents........... $ 32,538,471 $ 20,585 $(1,576,009)(1) $30,983,047 $ 56,345,165 (4) $ 87,328,212
Marketable securities.. 10,528,055 -- -- 10,528,055 -- 10,528,055
Accounts receivable,
net................... 97,457 33,855 -- 131,312 -- 131,312
Prepaid expenses and
other current assets.. 1,896,360 20,095 -- 1,916,455 (420,060)(4) 1,496,395
------------ ----------- ----------- ----------- ------------ ------------
Total current assets.. 45,060,343 74,535 (1,576,009) 43,558,869 55,925,105 99,483,974
------------ ----------- ----------- ----------- ------------ ------------
Fixed assets, net....... 16,146,456 430,179 (90,000)(3) 16,486,635 -- 16,486,635
Other assets............ 931,189 150,528 90,000 (3) 1,171,717 -- 1,171,717
Intangible assets, net.. -- 274,553 2,937,346 (1) 3,211,899 -- 3,211,899
------------ ----------- ----------- ----------- ------------ ------------
Total assets.......... $ 62,137,988 $ 929,795 $ 1,361,337 $64,429,120 $ 55,925,105 $120,354,225
============ =========== =========== =========== ============ ============
Current Liabilities:
Accounts payable....... $ 754,257 $ 779,721 $ (151,469)(1) $ 1,382,509 -- $ 1,382,509
Accrued liabilities.... 4,473,852 97,445 483,500 (1),(2) 5,054,797 -- 5,054,797
Deferred revenue....... 61,532 12,508 -- 74,040 -- 74,040
Due to sellers and
others................ -- -- 802,576(1) 802,576 -- 802,576
Current portion of
capital lease
payable............... 527,385 66,279 -- 593,664 -- 593,664
Current portion of
notes payable......... 160,752 148,409 (148,409)(1) 160,752 -- 160,752
------------ ----------- ----------- ----------- ------------ ------------
Total current
liabilities.......... 5,977,778 1,104,362 986,198 8,068,338 -- 8,068,338
------------ ----------- ----------- ----------- ------------ ------------
Long-term portion of
capital lease payable.. 761,790 200,572 -- 962,362 -- 962,362
Notes payable........... 1,286,014 643,582 (643,582)(1) 1,286,014 -- 1,286,014
------------ ----------- ----------- ----------- ------------ ------------
Total liabilities..... 8,025,582 1,948,516 342,616 10,316,714 -- 10,316,714
------------ ----------- ----------- ----------- ------------ ------------
Redeemable convertible
preferred stock:
Convertible preferred
stock
Series A convertible
preferred stock....... 225,000 -- -- 225,000 (225,000)(4) --
Series B convertible
preferred stock....... 15,424,999 -- -- 15,424,999 (15,424,999)(4) --
Series C convertible
preferred stock....... 9,940,391 -- -- 9,940,391 (9,940,391)(4) --
Series D convertible
preferred stock....... 30,967,786 -- -- 30,967,786 (30,967,786)(4) --
Series E convertible
preferred stock....... 18,458,168 -- -- 18,458,168 (18,458,168)(4) --
------------ ----------- ----------- ----------- ------------ ------------
Total redeemable
convertible preferred
stock................ 75,016,344 -- -- 75,016,344 (75,016,344) --
------------ ----------- ----------- ----------- ------------ ------------
Stockholders' equity
(deficit):
Series A convertible
preferred stock....... -- 1,851,337 (1,851,337)(1) -- -- --
Common stock........... 7,112 2,450 (2,450)(1) 7,112 22,068 (4) 29,180
Additional paid-in
capital............... 8,775,192 -- -- 8,775,192 130,919,381 (4) 139,694,573
Deferred compensation.. (12,375,876) -- -- (12,375,876) -- (12,375,876)
Accumulated deficit.... (17,310,366) (2,872,508) 2,872,508 (1) (17,310,366) -- (17,310,366)
------------ ----------- ----------- ----------- ------------ ------------
Total stockholders'
(deficit) equity..... (20,903,938) (1,018,721) 1,018,721 (20,903,938) 130,941,449 110,037,511
------------ ----------- ----------- ----------- ------------ ------------
Total liabilities,
redeemable
convertible preferred
stock and
stockholder's
equity............... $ 62,137,988 $ 929,795 $ 1,361,337 $64,429,120 $ 55,925,105 $120,354,225
============ =========== =========== =========== ============ ============
</TABLE>
See accompanying notes.
F-37
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
Pro Forma Pro Forma
DSL.net Tycho Adjustments Combined
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
Revenue................. $ 501,665 $ 1,269,462 $ -- $ 1,771,127
------------ ------------ ---------- ------------
Operating expenses:
Network and
operations........... 3,757,233 1,235,420 -- 4,992,653
Sales and marketing... 3,327,972 -- -- 3,327,972
General and
administrative....... 2,945,077 2,105,472 (102,608)(5) 4,947,941
Stock compensation and
amortization of
excess purchase
price................ 3,412,914 -- 481,785 (5) 3,894,699
------------ ------------ ---------- ------------
Total operating
expenses........... 13,443,196 3,340,892 379,177 17,163,265
------------ ------------ ---------- ------------
Operating loss.......... (12,941,531) (2,071,430) (379,177) (15,392,138)
------------ ------------ ---------- ------------
Interest expense
(income), net.......... (827,956) 14,071 108,402 (6) (705,483)
Other expense (income),
net.................... 5,156 -- -- 5,156
------------ ------------ ---------- ------------
Net loss.............. $(12,118,731) $ (2,085,501) $ (487,579) $(14,691,811)
============ ============ ========== ============
Exchange of preferred
stock.................. 11,998,000 -- -- 11,998,000
------------ ------------ ---------- ------------
Loss applicable to
common stock........... $(24,116,731) $ (2,085,501) $ (487,579) $(26,689,811)
============ ============ ========== ============
Net loss per share-basic
and diluted............ $ (3.87) $ (0.89)
============ ============
Shares used in computing
net loss per share..... 6,230,836 29,913,454(7)
============ ============
</TABLE>
See accompanying notes.
F-38
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
DSL.net
For the period from Tycho
inception For the period from
(March 3, 1998) December 22, 1997
to (inception) to Pro Forma Pro Forma
December 31, 1998 December 31, 1998 Adjustments Combined
------------------- ------------------- ----------- -----------
<S> <C> <C> <C> <C>
Revenue................. $ 31,533 $ 348,527 $ -- $ 380,060
----------- ---------- ---------- -----------
Operating expenses:
Network and
operations........... 127,054 436,815 -- 563,869
General and
administrative....... 230,272 702,763 (20,196)(5) 912,839
Sales and marketing... 35,961 -- -- 35,961
Stock compensation and
amortization of
excess purchase
price................ 2,423,272 -- 642,380 (5) 3,065,652
----------- ---------- ---------- -----------
Total operating
expenses........... 2,816,559 1,139,578 622,184 4,578,321
----------- ---------- ---------- -----------
Operating loss.......... (2,785,026) (791,051) (622,184) (4,198,261)
----------- ---------- ---------- -----------
Interest expense
(income), net.......... 4,611 8,581 273,011 (6) 286,203
Other expense (income),
net.................... -- (12,625) -- (12,625)
----------- ---------- ---------- -----------
Net loss.............. $(2,789,637) $ (787,007) $ (895,195) $(4,471,839)
=========== ========== ========== ===========
Net loss per share-basic
and diluted............ $ (0.55) $ (0.87)(7)
=========== ===========
Shares used in computing
net loss per share..... 5,118,342 5,118,342
=========== ===========
</TABLE>
See accompanying notes
F-39
<PAGE>
NOTES TO THE UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL INFORMATION
Pro Forma adjustments are as follows:
1) Adjustment to record the acquisition of Tycho Networks, Inc. under the
purchase method of accounting as if the acquisition occurred on September
30, 1999. The approximate net purchase price of $3.1 million, excluding
transaction costs associated with the acquisition, consists of the
following: (a) cash payments at closing of $1.6 million (including notes
paid at closing of approximately $0.8 million), amounts due to selling
stockholders and others after the closing of approximately $0.8 million, net
liabilities assumed of approximately $0.3 million and other costs of
approximately $0.4 million.
2) The Company incurred transaction costs associated with the acquisition of
approximately $0.1 million included in accrued liabilities.
3) Immediately prior to the acquisition, Tycho Networks sold fixed assets with
a net book value of approximately $0.1 million to a related party and
received notes that were convertible into the preferred stock of the buyer.
These notes were assigned an estimated fair value of $0.1 million.
4) Adjustment to record net proceeds of the Company's initial public offering
of 7,200,000 shares, which closed on October 12, 1999, of approximately
$49.1 million; exercise of warrants for 56,250 shares of Series A preferred
stock for aggregate net proceeds of approximately $0.06 million on October
6, 1999; conversion of all preferred stock into 35,909,761 shares of common
stock at a ratio of 2.666 for one on October 12, 1999; exercise of the
underwriter's over- allotment option for 1,026,000 shares, which closed on
November 8, 1999 and which resulted in net proceeds to the Company of
approximately $7.2 million.
5) Adjustment to record amortization of the excess of purchase price over the
fair value of the net assets acquired of approximately $3.2 million as
though the acquisition occurred on the first day of the period and assuming
a five year life of such asset.
6) Adjustment to record an increase in interest expense or decrease in interest
income to reflect cash used for the acquisition of Tycho. The increase in
interest expense is recorded assuming a rate of 8.5% per annum. The
reduction in interest income is recorded assuming a rate of 4.5% per annum.
7) Pro Forma net loss per share is computed using the weighted average number
of shares of common stock outstanding plus common equivalent shares from
convertible preferred stock (the "preferred shares"), that were converted
upon the Company's initial public offering (see (4) above), using the if-
converted method. The preferred shares have been included whether dilutive
or anti-dilutive pursuant to Securities and Exchange Commission Staff
Accounting Bulletin No. 98. Such pro forma net loss per share reflects the
impact of the adjustments above.
F-40
<PAGE>
[Picture of the DSL.net network design and the routing of network traffic from
the customer back to the network operations center and the Internet]
Text:
- -- DSL.net Network Design
- -- Internet
- -- DSL.net Network Operation Center
- -- Multiple Connections to Internet
- -- DSL.net New York Regional Center
- -- To San Jose DSL.net Regional Center
- -- To Chicago DSL.net Regional Center
- -- To Other Central Offices
- -- To Other Central Offices
- -- High-Speed Network Connections
- -- Local Center (Aggregates Local Network Traffic)
- -- Leased Fiber Optic Cable
- -- DSL Equipment (located at Central Office)
- -- DSL Equipment (located at Central Office)
- -- Leased Copper Telephone Lines
- -- Customer Branch Office
- -- Customer Sm/Med Business
- -- Customer Sm/Med Business
- -- Leased Copper Telephone Lines
- -- Customer Sm/Med Business
- -- Customer Sm/Med Business
- -- Customer Branch Office
- -- /1/Central Offices are offices of traditional telephone companies which house
their telecommunications equipment and from which local telephone service is
provided.
<PAGE>
You may rely only on the information contained in this prospectus. We have not
authorized anyone to provide information different from that contained in this
prospectus. Neither the delivery of this prospectus nor the sale of common
stock means that information contained in this prospectus is correct after the
date of this prospectus. This prospectus is not an offer to sell or
solicitation of an offer to buy these shares of common stock in any
circumstances under which the offer or solicitation is unlawful.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary....................................................... 1
Risk Factors............................................................. 5
Special Note Regarding Forward-looking Statements and Certain Other
Information............................................................. 15
Use of Proceeds.......................................................... 16
Price Range of Common Stock.............................................. 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 18
Selected Financial and Other Data ....................................... 19
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 29
Management............................................................... 46
Certain Transactions..................................................... 53
Principal Stockholders................................................... 57
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 65
Underwriting............................................................. 67
Legal Matters............................................................ 68
Experts.................................................................. 69
Additional Information................................................... 69
Index to Financial Statements............................................ F-1
</TABLE>
[LOGO OF DSL.net APPEARS HERE]
5,000,000 Shares
Common Stock
Deutsche Banc Alex. Brown
Donaldson, Lufkin & Jenrette
Lehman Brothers
CIBC World Markets
Prospectus
, 2000
- -------------------------------------------------------------------------------
<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............................................... $ 30,930
NASD filing fee.................................................... 12,216
Nasdaq National Market listing fee................................. 17,500
Printing and engraving expenses.................................... 90,000
Legal fees and expenses............................................ 125,000
Accounting fees and expenses....................................... 100,000
Transfer agent and registrar fees and expenses..................... 5,000
Miscellaneous...................................................... 19,354
--------
Total............................................................ $400,000
========
</TABLE>
DSL.net will bear all expenses shown above.
Item 14. Indemnification of Directors and Officers.
The Delaware General Corporation Law and the certificate of incorporation
and by-laws of DSL.net provide for indemnification of our directors and
officers for liabilities and expenses that they may incur in such capacities.
In general, directors and officers are 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 3.01 and 3.02
hereto, respectively.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of DSL.net against certain liabilities, including liabilities under the
Securities Act of 1933, as amended (the "Securities Act"). Reference is made to
the form of Underwriting Agreement filed as Exhibit 1.01 hereto.
In addition, we have an existing directors and officers liability insurance
policy.
Item 15. Recent Sales of Unregistered Securities.
In the three years preceding the filing of this registration statement, the
Company has issued the following securities that were not registered under the
Securities Act:
(a) Issuances of Capital Stock, Notes and Warrants
In March 1998, DSL.net issued and sold an aggregate of (i) 5,089,634 shares
of common stock for an aggregate of $500 and (ii) 20,000 shares of a prior
Series A preferred stock for an aggregate of $50,000.
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 Series A preferred stock at a
price of $1.00 per share.
In December 1998, DSL.net issued and sold an aggregate of (i) 7,634,451
shares of common stock in exchange for 20,000 shares of a prior series A
preferred stock and (ii) 4,071,707 shares of common stock in exchange for
promissory notes in an aggregate principal amount of $7,637.
In January 1999, DSL.net issued and sold 3,500,000 shares of Series A
preferred stock and warrants to purchase 3,500,000 shares of a prior series B
preferred stock for an aggregate of $3,500,000, a portion of which was paid by
the cancellation of two convertible promissory notes in the aggregate principal
amount of $125,000. In addition, DSL.net issued three warrants to purchase
56,250 shares of Series A preferred stock at a price of $1.00 per share in
exchange for the rights to warrants to purchase 56,250 warrants of Series A
preferred stock. DSL.net also issued an aggregate of 225,000 shares of Series A
preferred stock in conversion of three convertible promissory notes in the
aggregate principal amount of $225,000. Each outstanding share of Series A
preferred stock converted into 2.666 shares of common stock upon the closing of
our initial public offering on October 12, 1999. Finally, DSL.net issued 8
shares of common stock for aggregate consideration of $0.02.
In March 1999, DSL.net issued and sold an aggregate of 436,256 shares of
common stock for services valued at $29,455. Based on subsequent events,
DSL.net recognized compensation expense of $587,457 in connection with the
issuance of these shares. In addition, DSL.net issued one warrant to purchase
41,726 shares of Series A preferred stock at an exercise price of $2.40 per
share.
In April 1999, DSL.net issued and sold an aggregate of 6,500,000 shares of
Series B preferred stock in exchange for 3,500,000 shares of Series A preferred
stock and the cancellation of warrants to purchase 3,500,000 shares of a prior
Series B preferred stock. In addition, in April 1999, DSL.net issued and sold
an aggregate of 2,785,516 shares of Series C preferred stock for aggregate
consideration of $10,000,002. Each outstanding share of preferred stock
converted into 2.666 shares of common stock upon the closing of our initial
public offering on October 12, 1999.
In May 1999, DSL.net issued and sold an aggregate of 2,868,069 shares of
Series D preferred stock for aggregate consideration of $30,000,001, including
a secured promissory note in an aggregate principal amount of $5,999,429, which
note has since been paid in full. Each outstanding share of Series D preferred
stock converted into 2.666 shares of common stock upon the closing of our
initial public offering on October 12, 1999.
In June 1999, DSL.net issued an aggregate of 95,603 shares of Series D
preferred stock for aggregate consideration of $1,000,007, including a secured
promissory note in an aggregate principal amount of $999,912. The note, which
contained an interest rate of 6.00%, was paid in full on July 16, 1999. In
addition, in July 1999, DSL.net issued an aggregate of 939,086 shares of Series
E preferred stock for aggregate consideration of $18,499,994. Each outstanding
share of Series D and E preferred stock converted into 2.666 shares of common
stock upon the closing of our initial public offering on October 12, 1999.
(b) Grants and Exercises of Stock Options
From February 19, 1999 through October 5, 1999, DSL.net had granted options
to purchase an aggregate of 7,092,880 shares of common stock under the 1999
stock plan at exercise prices ranging from $.04 to $9.00 for an aggregate
purchase price of approximately $8,607,820, and 93,310 shares of common stock
had been issued in connection with the exercise of options.
II-2
<PAGE>
(c) Exercise of Warrants
On October 6, 1999, DSL.net issued 56,250 shares of Series A preferred stock
to three stockholders in connection with the exercise of their warrants. These
shares converted into 149,963 shares of common stock up on the closing of our
initial public offering or October 12, 1999.
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.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
1.01++ Form of Underwriting Agreement.
2.01 Agreement and Plan of Merger, dated as of November 30, 1999, by and
among DSL.net, Long Wharf Mergeco, Inc. and Tycho Networks, Inc.
(incorporated by reference to Exhibit 2 filed with our Form 8-K dated
as of December 1, 1999).
3.01 Amended and Restated Certificate of Incorporation of DSL.net, as
amended (incorporated by reference to Exhibit 3.02 filed with our
registration statement on Form S-1 (No. 333-80141)).
3.02 Amended and Restated By-laws of DSL.net (incorporated by reference to
Exhibit 3.03 filed with our registration statement on Form S-1 (No.
333-80141)).
4.01 Specimen Certificate for shares of DSL.net's Common Stock
(incorporated by reference to the exhibit of corresponding number
filed with our registration statement on Form S-1 (No. 333-80141)).
4.02 Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibit 3.02 with our registration statement on
Form S-1 (No. 333-80141)).
4.03* Form of Stock Purchase Warrant dated as of October 12, 1999 between
DSL.net and certain investors.
4.04* Form of Stock Subscription Warrant dated as of October 12, 1999 by and
between DSL.net and Comdisco, Inc.
5.01++ Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.01+ Amended and Restated 1999 Stock Plan (incorporated by reference to the
exhibit of corresponding number filed with our registration statement
on Form S-1 (No. 333-80141)).
10.02+ 1999 Employee Stock Purchase Plan (incorporated by reference to the
exhibit of corresponding number filed with our registration statement
on Form S-1 (No. 333-80141)).
10.03 Amended and Restated Investors' Rights Agreement dated as of July 16,
1999 between DSL.net and the purchasers named therein (incorporated by
reference to the exhibit of corresponding number filed with our
registration statement on Form S-1 (No.333-80141)).
10.04 Master Lease Agreement dated as of March 4, 1999 between Comdisco,
Inc. and DSL.net, as modified by the Addendum thereto (incorporated by
reference to the exhibit of corresponding number filed with our
registration statement on Form S-1 (No.333-80141)).
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
10.05 Credit Agreement dated as of May 12, 1999 by and between DSL.net and
Fleet National Bank (incorporated by reference to the exhibit of
corresponding number filed with our registration statement on Form S-1
(No. 333-80141)).
10.06 Security Agreement dated as of May 12, 1999 by and between DSL.net and
Fleet National Bank (incorporated by reference to the exhibit of
corresponding number filed with our registration statement on Form S-1
(No. 333-80141)).
10.07* Lease Agreement dated February 5, 1999 by and between DSL.net and Long
Wharf Drive, LLC, as amended.
10.08* Amendment No. 1 dated June 9, 1999 to Lease Agreement by and between
DSL.net and Long Wharf Drive, LLC.
10.09* Amendment No. 2 dated November 9, 1999 to Lease Agreement by and
between DSL.net and Long Wharf Drive, LLC.
10.10* Amendment No. 3 dated January 20, 2000 to Lease Agreement by and
between DSL.net and Long Wharf Drive, LLC.
10.11 Amended and Restated Shareholders' Agreement, as amended, by and among
DSL.net and certain investors (incorporated by reference to Exhibit
10.08 filed with our registration statement on Form S-1 (No. 333-
80141)).
10.12 Form of Subscription Agreement dated as of October 28, 1998 by and
among DSL.net and certain stockholders (incorporated by reference to
Exhibit 10.10 filed with our registration statement on Form S-1 (No.
333-80141)).
10.13 Series A Preferred Stock and Warrant Purchase Agreement dated January
8, 1999 by and among DSL.net and the investors named therein
(incorporated by reference to Exhibit 10.11 filed with our
registration statement on Form S-1 (No. 333-80141)).
10.14 Securities Exchange and Subscription Agreement dated April 15, 1999 by
and between DSL.net, VantagePoint Venture Partners 1996, L.P. and
VantagePoint Communications Partners, L.P. (incorporated by reference
to Exhibit 10.12 filed with our registration statement on Form S-1
(No. 333-80141)).
10.15 Series C Preferred Stock Purchase Agreement dated March 31, 1999 by
and among DSL.net and the investors named therein (incorporated by
reference to Exhibit 10.13 filed with our registration statement on
Form S-1 (No. 333-80141)).
10.16 Series D Preferred Stock Purchase Agreement dated May 12, 1999 by and
among DSL.net and the investors named therein (incorporated by
reference to Exhibit 10.14 filed with our registration statement on
Form S-1 (No. 333-80141)).
10.17 Preferred Stock Purchase Agreement dated June 2, 1999 by and between
DSL.net and Raymond C. Allieri (incorporated by reference to Exhibit
10.15 filed with our registration statement on Form S-1 (No. 333-
80141)).
10.18 Series E Preferred Stock Purchase Agreement dated July 6, 1999 by and
between DSL.net and Microsoft Corporation (incorporated by reference
to Exhibit 10.16 filed with our registration statement on Form S-1
(No. 333-80141)).
10.19 Series E Preferred Stock Purchase Agreement dated July 16, 1999 by and
between DSL.net and Staples, Inc. (incorporated by reference to
Exhibit 10.17 filed with our registration statement on Form S-1 (No.
333-80141)).
10.20+ Additional Compensation Agreement dated as of December 29, 1998
between DSL.net and David Struwas (incorporated by reference to
Exhibit 10.18 of corresponding number filed with our registration
statement on Form S-1 (No. 333-80141)).
10.21+ Additional Compensation Agreement dated as of December 29, 1998
between DSL.net and John Jaser (incorporated by reference to Exhibit
10.19 filed with our registration statement on Form S-1 (No. 333-
80141)).
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
10.22* On-Net Service Agreement dated February 2, 1999 by and between DSL.net
and MCI Worldcom Technologies, Inc., as amended.
10.23 Amendment No. 1 to Amended and Restated Investors' Rights Agreement
(incorporated by reference to Exhibit 10.21 filed with our
registration statement on Form S-1 (No. 333-80141)).
23.01++ Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.01).
23.02* Consent of PricewaterhouseCoopers LLP.
23.03* Consent of Deloitte & Touche LLP.
24.01* Power of Attorney (contained on pages II-6 and II-7).
</TABLE>
- --------
* Filed herewith.
+ Indicates a management contract or any compensatory plan, contract or
arrangement.
++ To be filed by amendment.
(b) Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
Item 17. Undertakings.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes (1) to provide to the
underwriters at the closing specified in the underwriting agreement,
certificates in such denominations and registered in such names as required by
the underwriters to permit prompt delivery to each purchaser; (2) that for
purposes of determining any liability under the Securities Act, the information
omitted from the form of prospectus filed as part of this registration
statement in reliance upon Rule 430A and contained in a form of prospectus
filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the
Securities Act shall be deemed to be part of this registration statement as of
the time it was declared effective; and (3) that for the purpose of determining
any liability under the Securities Act, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New Haven, State of
Connecticut on February 7, 2000.
DSL.NET, INC.
By: /s/ David F. Struwas
----------------------------------
David F. Struwas
President, Chief Executive
Officer and Director
We, the undersigned officers and directors of DSL.net, Inc., hereby
severally constitute and appoint David F. Struwas, Robert Q. Berlin and Stephen
Zamansky, 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 document 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 February 7, 2000
______________________________________ Officer and Director
David F. Struwas (Principal Executive
Officer)
/s/ Robert Q. Berlin Chief Financial Officer February 7, 2000
______________________________________ and Vice President,
Robert Q. Berlin Strategic Planning
(Principal Financial and
Accounting Officer)
/s/ Robert Gilbertson Director February 7, 2000
______________________________________
Robert Gilbertson
/s/ William J. Marshall Director February 7, 2000
______________________________________
William J. Marshall
</TABLE>
II-6
<PAGE>
<TABLE>
<CAPTION>
Signature Title(s) Date
--------- -------- ----
<S> <C> <C>
/s/ William Seifert Director February 7, 2000
______________________________________
William Seifert
/s/ James D. Marver Director February 7, 2000
______________________________________
James D. Marver
/s/ Paul K. Sun Director February 7, 2000
______________________________________
</TABLE> Paul K. Sun
II-7
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit No. Exhibit
----------- -------
<C> <S>
1.01++ Form of Underwriting Agreement.
2.01 Agreement and Plan of Merger, dated as of November 30, 1999, by
and among DSL.net, Long Wharf Mergeco, Inc. and Tycho Network,
Inc. (incorporated by reference to Exhibit 2 filed with our Form
8-K dated as of December 1, 1999).
3.01 Amended and Restated Certificate of Incorporation of DSL.net, as
amended (incorporated by reference to Exhibit 3.02 filed with our
registration statement on Form S-1 (No. 333-80141)).
3.02 Amended and Restated By-laws of DSL.net (incorporated by reference
to Exhibit 3.03 filed with our registration statement on Form S-1
(No. 333-80141)).
4.01 Specimen Certificate for shares of DSL.net's Common Stock
(incorporated by reference to exhibit of corresponding number
filed with our registration statement on Form S-1 (No. 333-
80141)).
4.02 Description of Capital Stock (contained in the Certificate of
Incorporation filed as Exhibit 3.02 with our registration
statement on Form S-1 (No. 333-80141)).
4.03* Form of Stock Purchase Warrant dated as of October 12, 1999
between DSL.net and certain investors.
4.04* Form of Stock Subscription Warrant dated as of October 12, 1999 by
and between DSL.net and Comdisco, Inc.
5.01++ Legal Opinion of Testa, Hurwitz & Thibeault, LLP.
10.01+ Amended and Restated 1999 Stock Plan (incorporated by reference to
the exhibit of corresponding number filed with our registration
statement on Form S-1
(No. 333-80141)).
10.02+ 1999 Employee Stock Purchase Plan (incorporated by reference to
the exhibit of corresponding number filed with our registration
statement on Form S-1
(No. 333-80141)).
10.03 Amended and Restated Investors' Rights Agreement dated as of July
16, 1999 between DSL.net and the purchasers named therein
(incorporated by reference to the exhibit of corresponding number
filed with our registration statement on Form S-1
(No. 333-80141)).
10.04 Master Lease Agreement dated as of March 4, 1999 between Comdisco,
Inc. and DSL.net, as modified by the Addendum thereto
(incorporated by reference to the exhibit of corresponding number
filed with our registration statement on Form S-1 (No.333-80141)).
10.05 Credit Agreement dated as of May 12, 1999 by and between DSL.net
and Fleet National Bank (incorporated by reference to the exhibit
of corresponding number filed with our registration statement on
Form S-1 (No. 333-80141)).
10.06 Security Agreement dated as of May 12, 1999 by and between DSL.net
and Fleet National Bank (incorporated by reference to the exhibit
of corresponding number filed with our registration statement on
Form S-1 (No. 333-80141)).
10.07* Lease Agreement dated February 5, 1999 by and between DSL.net and
Long Wharf Drive, LLC, as amended.
10.08* Amendment No. 1 dated June 9, 1999 to Lease Agreement by and
between DSL.net and Long Wharf Drive, LLC.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
10.09* Amendment No. 2 dated November 9, 1999 to Lease Agreement by and
between DSL.net and Long Wharf Drive, LLC.
10.10* Amendment No. 3 dated January 20, 2000 to Lease Agreement by and
between DSL.net and Long Wharf Drive, LLC.
10.11 Amended and Restated Shareholders' Agreement, as amended, by and
among DSL.net and certain investors, as amended (incorporated by
reference to exhibit of corresponding number filed with our
registration statement on Form S-1 (No. 333-80141)).
10.12 Form of Subscription Agreement dated as of October 28, 1998 by and
among DSL.net certain investors (incorporated by reference to
Exhibit 10.10 filed with our registration statement on Form S-1
(No. 333-80141)).
10.13 Series A Preferred Stock and Warrant Purchase Agreement dated
January 8, 1999 by and among DSL.net and the investors named
therein (incorporated by reference to Exhibit 10.11 filed with our
registration statement on Form S-1 (No. 333-80141)).
10.14 Securities Exchange and Subscription Agreement dated April 15, 1999
by and between DSL.net, VantagePoint Venture Partners 1996, L.P.
and VantagePoint Communications Partners, L.P. (incorporated by
reference to Exhibit 10.12 filed with our registration statement on
Form S-1 (No. 333-80141)).
10.15 Series C Preferred Stock Purchase Agreement dated March 31, 1999 by
and among DSL.net and the investors named therein (incorporated by
reference to Exhibit 10.13 filed with our registration statement on
Form S-1 (No. 333-80141)).
10.16 Series D Preferred Stock Purchase Agreement dated May 12, 1999 by
and among DSL.net and the investors named therein (incorporated by
reference to Exhibit 10.14 filed with our registration statement on
Form S-1 (No. 333-80141)).
10.17 Preferred Stock Purchase Agreement dated June 2, 1999 by and
between DSL.net and Raymond C. Allieri (incorporated by reference
to Exhibit 10.15 filed with our registration statement on Form S-1
(No. 333-80141)).
10.18 Series E Preferred Stock Purchase Agreement dated July 6, 1999 by
and between DSL.net and Microsoft Corporation (incorporated by
reference to Exhibit 10.16 filed with our registration statement on
Form S-1 (No. 333-80141)).
10.19 Series E Preferred Stock Purchase Agreement dated July 16, 1999 by
and between DSL.net and Staples, Inc. (incorporated by reference to
Exhibit 10.17 filed with our registration statement on Form S-1
(No. 333-80141)).
10.20+ Additional Compensation Agreement dated as of December 29, 1998
between DSL.net and David Struwas (incorporated by reference to
Exhibit 10.18 filed with our registration statement on Form S-1
(No. 333-80141).
10.21+ Additional Compensation Agreement dated as of December 29, 1998
between DSL.net and John Jaser (incorporated by reference to
Exhibit 10.19 filed with our registration statement on Form S-1
(No. 333-80141).
10.22* On-Net Service Agreement dated February 2, 1999 by and between
DSL.net and MCI Worldcom Technologies, Inc. as amended.
10.23 Amendment No. 1 to Amended and Restated Investor's Rights Agreement
(incorporated by reference to Exhibit 10.21 filed with registration
statement on Form S-1 (No. 333-80141)).
23.01++ Consent of Testa, Hurwitz & Thibeault, LLP (contained in Exhibit
5.01).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit
No. Exhibit
------- -------
<C> <S>
23.02* Consent of PricewaterhouseCoopers LLP.
23.03* Consent of Deloitte & Touche LLP.
24.01* Power of Attorney (contained on pages II-6 and II-7).
</TABLE>
- --------
* Filed herewith.
+ Indicates a management contract or any compensatory plan, contract or
arrangement.
++ To be filed by amendment.
<PAGE>
Exhibit 4.03
THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE 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 Section 13 of that certain
Stock Purchase Warrant, as amended (the "Old Warrant"), issued pursuant to that
certain Note and Warrant Purchase Agreement dated November 18, 1998, to purchase
shares of the Series A Preferred Stock, par value $.001 per share, of the
Company (the "Series A Preferred Stock"), wherein the Company agreed to issue a
new warrant to replace the Old Warrant upon the automatic conversion of the
Company's Series A Preferred Stock. Upon issuance of this Stock Purchase
Warrant, the Old Warrant shall be null and void.
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 _______ fully paid and nonassessable shares of
common stock, par value $.0005 per share, of the Company(the "Common Stock").
The shares of Common Stock issuable pursuant to this Section 1 (the "Shares")
shall also be subject to adjustment pursuant to Section 8 hereof.
2. Purchase Price. The purchase price for the Shares shall be $_______ per
--------------
share, 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 be 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
<PAGE>
-2-
(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 Common Stock
computed using the following formula:
Y (A-B)
-------
X= A
Where
X -- The number of shares of Common Stock to be issued to the holder of
this Warrant.
Y -- The number of shares of Common Stock purchasable under this Warrant.
A -- The fair market value of one share of the Company's Common Stock.
B -- The Exercise Price (as adjusted to the date of such calculations).
For purposes of this Paragraph 5, the fair market value of Common Stock shall
mean the average of the closing bid and asked prices of the Common Stock quoted
in the over-the-counter market in which the Common Stock is traded, or the
closing price quoted on any exchange on which the Common 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 exchange). If the Common 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
Common 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 after October 12, 1999 and prior to the expiration of
this Warrant subdivide its
<PAGE>
-3-
Common Stock, by split-up or otherwise, or combine its Common Stock, or issue
additional shares of its Preferred Stock or Common Stock as a dividend with
respect to any shares of its Common 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 Common
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 after October 12, 1999 and 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 Common 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.
(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 Common 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.
<PAGE>
-4-
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.
13. 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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-5-
DSL.net, Inc.
By: _______________________________
Title:
Address: 545 Long Wharf Drive
New Haven, CT 06511
<PAGE>
Exhibit 4.04
SECURITIES REPRESENTED BY THIS CERTIFICATE 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. 5
Warrant to Subscribe for Common Stock
STOCK SUBSCRIPTION
WARRANT
Not Transferable or Exercisable
-------------------------------
Except Upon Conditions Herein Specified
---------------------------------------
This Warrant is issued to Comdisco, Inc., a Delaware corporation (the
"Subscriber") with an address at 6111 North River Road, Rosemont, Illinois 60018
by DSL.net, Inc., a Delaware corporation (the "Company"), pursuant to Section 5
of that certain Stock Subscription Warrant dated March 4, 1999 (the "Old
Warrant"), to purchase shares of the Series A Preferred Stock, par value $.001
per share, of the Company (the "Series A Preferred Stock"), wherein the Company
agreed to issue a new warrant to replace the Old Warrant upon the conversion of
the Series A Preferred Stock. Upon issuance of this Stock Subscription Warrant,
the Old Warrant shall be null and void.
THIS CERTIFIES that, for value received, the Subscriber is entitled to
subscribe for and purchase from the Company 111,242 shares (such number subject
to adjustment from time to time as hereinafter provided) of Common Stock, par
value $0.0005 per share ("Warrant Stock"), of the Company. The purchase price
for the Warrant Stock shall be $0.90 per share (subject to adjustment from time
to time) (the "Warrant Price"). This Warrant shall be exercisable at any time
beginning October 12, 1999 through October 12, 2002 (the "Term of this
Warrant").
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
<PAGE>
-2-
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 Common 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 1, 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 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
<PAGE>
-3-
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
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.
<PAGE>
-4-
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 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
<PAGE>
-5-
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. 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,
<PAGE>
-6-
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. 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.
SECTION 6. Transfer of Warrant. 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. 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
<PAGE>
-7-
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 7. 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 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 8. 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 9. 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 9, 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 10. 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.
<PAGE>
-8-
SECTION 11. 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 12. 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 securityholders.
(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.
<PAGE>
-9-
(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.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
-10-
IN WITNESS WHEREOF, DSL.NET, INC. has caused this Warrant to be executed by
its duly authorized officer, and this Warrant to be dated as of October 12,
1999.
DSL.NET, INC.
By: ______________________________
Name: David F. Struwas
Title: President & CEO
ATTEST:
________________________
Name: Stephen Zamansky
<PAGE>
Subscription
Date: _______________________
To: DSL.net, Inc.
The undersigned hereby subscribes for ___________ shares of Common Stock
covered by this Warrant. The certificate(s) for such shares shall be issued in
the name of the undersigned or as otherwise indicated below:
_____________________________
Signature
_____________________________
Name for Registration
_____________________________
Mailing Address
<PAGE>
Exhibit 10.07
LEASE
-----
THIS AGREEMENT, made as of the 5th day of February, 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
<PAGE>
parking spaces, provided however, that in the event Landlord reduces the number
of parking 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 (I 5) 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,
-3-
<PAGE>
the obligation to pay Additional Rent in accordance with Section 3. below,
excepting (i) such 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).
-4-
<PAGE>
Additional Rent: Any required payments to Landlord from Tenant, including but
not limited to Tenant's proportionate Share of Operating and Tax Expenses.
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
-6-
<PAGE>
Share of Operating and Tax Expenses for such Operating Year. Within one hundred
twenty (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 (1 0) 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
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not to exceed five percent (5%) of the gross revenues of the Property; service
contracts with 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
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makes late payments would be difficult to determine but would include, without
limitation, 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
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first day of the seventh full calendar month of the term to and including the
day immediately 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 (4/th/) 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 Landlord,
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<PAGE>
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 (3 0) 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 suspended by reason of
accident or of repairs, alterations or improvements necessary to be made
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<PAGE>
(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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<PAGE>
(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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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.
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32. COMPLLANCE WITH LAW:
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
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Landlord and Landlord's Broker. Landlord shall have no obligation or liability
of any nature whatsoever to pay any commission, broker's fee or otherwise to
Tenant's Broker. Tenant's Broker shall be paid by Landlord's Broker. Each party
agrees to indemnify the other and hold it harmless from all liabilities arising
from breach of the representations stated above. The representations and
obligations contained in this subparagraph 34(H) shall survive the termination
of this Lease.
I. Successors and Assigns:
----------------------
The provisions of this Lease, except as herein otherwise specifically provided
shall extend to, bind and inure to the benefit of the parties hereto and their
respective personal representatives, heirs, successors and permitted assigns.
J. Consents and Approvals:
----------------------
In the event that Tenant shall seek the approval by or consent of Landlord and
Landlord shall fail or refuse to give such consent or approval, Tenant shall not
be entitled to any damages for any withholding or delay of such approval or
consent by Landlord, it being intended that Tenant's sole remedy shall be an
action for injunction or specific performance and that said remedy of any action
for injunction or specific performance shall be available only in those cases
where Landlord shall have expressly agreed in writing not to unreasonably
withhold or delay its consent.
K. Interpretation:
---------------
Irrespective of the place of execution or performance, this Lease shall be
governed by and construed in accordance with the laws of the State of
Connecticut. If any provision of this Lease or the application thereof to any
person or circumstances shall, for any reason and to any extent, be invalid or
unenforceable, the remainder of this Lease and the application of that provision
to other persons or circumstances shall not be affected but rather shall be
enforced to the extent permitted by law. The table of contents, captions,
headings and titles in this Lease are solely for convenience of reference and
shall not affect its interpretation. This Lease shall be construed without
regard to any presumption or other rule requiring construction against the party
causing this Lease to be drafted. If any words or phrases in this Lease shall
have been stricken out or otherwise eliminated, whether or not any other words
or phrases have been added, this Lease shall be construed as if the words or
phrases so stricken out or otherwise eliminated were never included in this
Lease and no implication or inference shall be drawn from the fact that said
words or phrases were so stricken out or otherwise eliminated. Each covenant,
agreement, obligation or other provision of this Lease shall be deemed and
construed as a separate and independent covenant of the party bound by,
undertaking or making same, not dependent on any other provision of this Lease
unless otherwise expressly provided. All terms and words used in this Lease,
regardless of the number or gender in which they are used, shall be deemed to
include any other number and any other gender as the context may require.
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<PAGE>
L. Authority:
---------
Each person executing this Lease warrants to the other party that it has full
right and authority to enter into this Lease and that each person signing on
behalf of such party is authorized to do so.
M. Complete Agreement:
------------------
There are no representations, agreements, arrangements or understandings, oral
or written, between the parties relating to the subject matter of this Lease
which are not fully expressed in this Lease. This Lease cannot be changed or
terminated orally or in any manner other than by a written agreement executed by
both parties.
LANDLORD:
Witnessed by: LONG WHARF DRIVE, LLC
____________________________ By:_____________________________
Its:_________________________
____________________________
STATE OF CONNECTICUT )
) ss.:
COUNTY OF __________ )
On this the __ day of ____________, 1999 before me _________ , the
undersigned officer, personally appeared Barbara E. Hampton, who acknowledged
herself to be the __________ of Long Wharf Drive, LLC and that she, as such
________ and being authorized to do so, executed the foregoing instrument for
the purposes therein contained.
IN WITNESS WHEREOF, I hereunto set my hand and official seal.
________________________________
Notary Public
My Commission Expires:
-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 10.08
AMENDMENT NO. 1 TO LEASE
THIS AMENDMENT NO. 1 TO LEASE, is made and entered into as of the 9th day
of June, 1999 between Landlord and Tenant named below.
LANDLORD: LONG WHARF DRIVE, LLC
310 Orange Street
New Haven, CT 06511
TENANT: dsl.net, incorporated
545 Long Wharf Drive
New Haven, CT 06511
BUILDING- 545 Long Wharf Drive
New Haven, CT 06511
WHEREAS, Landlord and Tenant executed a lease dated as of February 5, 1999
(the "Lease'), by which Tenant leaned 12,078 rentable square feet on the fifth
(5th) floor of the Building (the "Premises'); and
WHEREAS, Tenant also leases and occupies certain "Temporary Space," as that
term is defined in the Lease; and
WHEREAS, Tenant wishes to lease an additional 19,422 rentable square feet
of space located on the fifth (5th) floor in the Building (the "Additional
Space"), thereby increasing the size of the Premises to 31,500 rentable square
feet; and
WHEREAS, Tenant wishes to continue its occupancy of the Temporary Space
until the "Additional Space Commencement Date," as that term is defined below;
and
WHEREAS, Landlord and Tenant wish to execute an amendment of the Lease
stating, among other things, the new area of the Premises , the annual Base
Rent, the monthly rent installment, and Tenant's Proportionate Share,
NOW, THEREFORE, the parties to this Amendment No. 1 to Lease, in
consideration of the covenants hereinafter contained and the sum of6ne Dollar
($1.00) to each party paid by the other, the receipt of which is hereby
acknowledged, I do covenant and agree as follows:
1. Unless otherwise stated herein, this Amendment is effective on the day
and year written above.
2.
<PAGE>
-2-
(a) Tenant shall acquire and lease from Landlord the Additional
Space, said Additional Space being shown and designated on the plan attached
hereto as- 'bit , on the later to occur of (i) June 15, 1999, and (ii) the date
the Additional Space is "Substantially Completed, " the later to occur of said
dates being referred to as the "Additional Space Commencement Date." The
Additional Space shall be deemed "Substantially Completed" when Landlord has
completed certain improvements (the "Improvements") as shown on the plans which,
when approved by Landlord, shall be narratively described by title block in
Exhibit B attached hereto and made a part hereof (the "Additional Space
- ---------
Construction Plans"), as shall be determined by Landlord's project architect or
construction manager, despite the fact that minor or insubstantial details of
construction, decoration or mechanical adjustment 'remain to be performed,
provided said minor terms can be fully performed within sixty (6 use of the
Additional Space. The Improvement cost and expense as more particularly describe
of the Additional Space shall be for a term as shall be co-terminous with the
expiration date of the Lease.
(b) Landlord will use commercially reasonable efforts to
Substantially Complete the Improvements by June 15, 1999, provided Tenant has
submitted the Additional Space Construction Plans on a timely basis as required
by Landlord and Tenant does not otherwise interfere with Landlord's construction
of the Improvements. Landlord shall have no liability for Landlord's failure to
Substantially Complete the Improvements by June 15, 1999.
(c) Tenant's costs ("Tenant's Additional Space Costs") for the
improvements shall be the contract price paid by Landlord title construction of
the improvements and all or materials associated therewith, as the same may
have been revised by any change orders, plus the following: (i) permit fees;
(ii) space planning and 'other design costs; (iii) fees of a third party
construction manager, (iv) fees of architects and engineers in connection with
the design of the Improvements; (y) general contractor profit and overhead; (vi)
administrative fees of Landlord in connection with overseeing the design and
construction of the Improvements; (vii) the cost of installing submeter(s) in
the Additional Space for measuring Tenant's electrical consumption; and (viii)
all other costs and expenses in connection with the design and construction of
the Improvements.
(d) Landlord shall provide Tenant an allowance of up to Twelve and
00/100 Dollars ($12.00) per rentable square foot of the, Additional Space (the
"Additional Space Improvement Allowance"), to be applied against Tenant's
Additional Space Costs. Within sixty (60) days of Substantial Completion of the
Additional Space, Landlord shall furnish to Tenant a final accounting of
Tenant's Additional Spare Costs, that Tenant's Additional Space. To the extent
that Tenant's Additional Costs exceed Ten and 00/100 Dollars ($10.00) per
rentable square foot of the Additional Space but are less than or equal to
Twelve and 00/100 Dollars per rentable square foot of the Additional Space (the
"Additional Space Excess Tenant's Costs"), annual Base Rent shall be increased
as follows: the Additional Space Excess Tenant's Costs shall be fully amortized
on a straight-line basis over the remaining initial Term, using an annual
interest factor of ten percent (10%), so as to arrive at a monthly amortization
amount (the "Additional Space Monthly Amortized Allowance Amount"). The
preceding sentence notwithstanding, Tenant shall also remain fully liable and
obligated to pay for all Tenant's Additional Space- Costs in excess of Twelve
and 00/100 Dollars ($12.00) per rentable square
<PAGE>
-3-
foot of the Additional Space as provided in subparagraph 2(e) below. The
Additional Space Monthly Amortized Allowance Amount shall be added to the
monthly installment of Base Rent and shall be treated as Base Rent for all
purposes of the Lease. Upon defection of the Additional Space Monthly Amortized
Allowance Amount, the parties shall enter into an amendment to this Lease to
establish the increased Base Rent. Any Additional Space Excess Tenant's Costs
arising hereunder and the corresponding increase to Base Rent shall be in
addition to, and not in lieu of, any increase in Base Rent arising as a result
of any "Excess Tenant's Costs" as set forth in subparagraph 5(C)(d) of the
Lease.
(e) If Tenant's. Additional Space Costs exceed the Additional Space
improvement Allowance, then Tenant shall pay Landlord such excess within ten
(10) days after receipt of such final accounting, as Additional Rent.
(f) If Tenant's Additional Space Costs are less than the Additional
Space Improvement Allowance and "Tenant's Costs," as that term is defined in
subparagraph 5(C)(a) of the Lease (for the construction of the original Premises
as contemplated in paragraph 5 of the Lease) are greater than the "Improvement
Allowance, " as that term is defined in subparagraph 5(C)(b) of the Lease, then
any unused portion of the Additional Space Improvement Allowance shall be
applied by Landlord toward the difference between Tenant's Costs and the
Improvement Allowance. For example, if Tenant's Costs equal $14.00 per rentable
square foot of the original Premises (with the Improvement Allowance being
capped at $12.00 per rentable square foot of the rentable Square foot of the
original Premises) and Tenant's Additional Space Costs equal $10.00 per.
rentable square foot of the Additional Space (with the Additional Space
Improvement Allowance being capped at $12.00 per rentable square foot of the
Additional Space), then Landlord shall apply the balance of the Additional Space
Improvement Allowance (said balance being $2.00 per rentable square foot of the
Additional Space) toward Tenant's Costs. Tenant shall remain solely liable for
any deficiency remaining for T6iiant's Costs. If any surplus exists from the
Improvement Allowance and/or the Additional Space Improvement Allowance after
each has been applied toward Tenant's Costs and Tenant's Additional Space Costs,
as the case may be, the same shall be retained by Landlord. If the cross-funding
contemplated by this subparagraph 2(f) is utilized, then the corresponding
increase to Base Rent set forth in subparagraph 5(C)(d) of the Lease and in
subparagraph 2(d) shall be calculated pursuant to subparagraph 2(g) below.
(g) Pursuant to subparagraph 2(f) above, if the quotient obtained by
dividing the sum of Tenant's Costs and Tenant's Additional Space Costs by the
size of the entire Premises (i.e. the entire Premises consisting of 31,500
rentable square feet) is less dm Ten and 00/100 Dollars ($10-00) per rentable
square foot of the entire Premises, then the increase(s) to Base Rent set forth
in subparagraph 5(C)(d) of the Lease and subparagraph 2(d) of this Amendment
shall be inapplicable. For example, although the Improvement Allowance actually
disbursed toward Tenant's Costs may be in excess of $10-00 per rentable square
foot of the original Premises (which would otherwise trigger the increase to
Base Rent), if Tenant's Additional Space Costs, and therefore the Additional
Space Improvement Allowance, is a number which, when calculated on a per
rentable square foot of the Additional Space basis, is such that the total
amount of the sum of Tenant's Costs and Tenant's Additional Space Costs result
in an average cost of $10.00
<PAGE>
-4-
per rentable square foot of the entire Premises or less, then there shall be no
such increase to Base Rent. Similarly, if, following any cross-funding
contemplated by the provisions of subparagraph 2(f) above, the average of
Tenant's Costs and Tenant's Additional Space Costs are in excess of $10.00 per
rentable square foot of the entire Premises, then Base Rent shall increase per
the provisions of subparagraph 5(C)(d) of the Lease and 2(d) herein.
(h) Tenant acknowledges and agrees. that the improvement Allowance
contemplated in paragraph 5(C)(b) of the Lease shall apply only to the rentable
square footage of the original Premises, which consist of 12,078 rentable square
feet. The purpose of this subparagraph 2(h) is to prevent the duplication of the
payment of any improvement allowance for the same area of space.
(i) Tenant agrees that it shall continue making all payments of Base.
Rent and Additional Rent on the original Premises as provided in the Lease until
the increased rental provisions contained in Section 4 below become effective.
3. Effective on the Additional Space Commencement Date:
(a) Subparagraph I(A) of the f-case is hereby modified by deleting
the term "12,078 rentable square feet' in the second line of said subparagraph,
and inserting the term "31'500 rentable square feet" in lieu thereof.
(b) Tenant shall be required to pay Tenant's share of all Electricity
Charges serving the Building. For purposes of this subparagraph 3(b), Tenant
agrees that its share shall be 11.80% with respect to its obligation for the
payment of said Electricity Charges. The intent of the preceding sentence is to
provide that although "Tenant's Proportionate Share" shall not be increased for
a period of ninety (90) days after the Additional Space Commencement Date as
provided in Section 4 below, with respect to Tenant's payments of "Tenant's
Proportionate Share of Operating and Tax Expenses," as that term is defined in
the Lease, Tenant's Proportionate Share shall nevertheless be increased
immediately on the Additional Space Commencement Date with respect to all
Electricity Charges for the Building, regardless of whether the same are
ordinarily included in Operating Expenses.
(c) The number of parking spaces allocated to Tenant shall be
proportionately increased in accordance with the parking ratio requirements set
forth in Paragraph l(B).
4. Effective as of that date which is ninety (90) days following the
Additional space Commencement Date:
(a) The paragraph entitled "Base Rent" in Paragraph 3 of the Lease is
hereby deleted in its entirety and replaced with the following:
"Base Rent: The Base Rent payable during the initial Term shall
be Four Hundred Forty-One Thousand and 00/100 Dollars ($441,000.00) per
annum (based on a per rentable square foot per annum rate of $14.00), which
shall be payable in advance, in
<PAGE>
-5-
equal monthly installments of Thirty-Six Thousand Seven Hundred Fifty and
00/100 Dollars ($36,750.00).'
(b) The paragraph entitled "Tenant's Proportionate Share" in
Paragraph 3 is hereby modified by deleting the term "4.52%" and inserting the
term "11.80%," in lieu thereof.
5. Commencing as of March 1, 1999, the 'Temporary Space, " as defined in
Paragraph 2(A) of the Lease, is hereby modified to include an additional 1,500
rentable square feet, such that the Temporary Space shall consist of a total of
4,000 rentable square feet, as shown on A,-3 annexed hereto and made a part
hereof. Further, as of March 1, 1999, the second paragraph of Paragraph 2(E) of
the Lease is hereby deleted in its entirety and replaced with the following:
"Commencing March 1, 1999 and continuing on the first day of each
calendar month through and including the Additional Space Commencement Date
(the "Temporary Space Term'), in addition to and not in lieu of Tenant's
other obligations under this Lease, Tenant shall pay to Landlord, in the
manner provided in Section 3 below, for its use and occupancy of the
Temporary Space, Base Rent in the amount of Four Thousand Six Hundred
Sixty-Six and 67/100 Dollars ($4,666.67). Tenant shall also be responsible
during the Temporary Space Term for payment of its Proportionate Share of
Operating and Tax Expenses as defined below, except that Tenant's
proportionate share of such costs for Tenant's use and occupancy of the
Temporary Space, shall be 1.50%. If Tenant fails to vacate the Temporary
Space by the Additional Space Commencement Date, the same shall constitute
an event of default under this Lease and, in addition to the other rights
afforded Landlord hereunder, the provisions of Section 26 hereof shall
apply to such holdover."
6. Effective as of the date of this Amendment, Paragraph 4 of the Lease
entitled "Letter of Credit" is hereby modified by deleting the fifth (5th)
sentence in its entirety, which sentence defines the term ''Required Amount,"
and inserting the following sentence in lieu thereof:
"As used herein, the term "Required Amount' shall mean (a) $517,418.37,
for the period from the Commencement Date to and including the day
immediately preceding the first (lst) anniversary of the Commencement Date,
(b) $413,934.70, for the period from the first anniversary of the
Commencement Date to and including the day immediately preceding the second
(2nd) anniversary of the Commencement Date, (c) $310,451.03, for the period
from the second anniversary of the Commencement Date to and including the
day immediately preceding the third (3rd) Anniversary of the Commencement
Date, (d) $206,967.36, for the period from the third anniversary of the
Commencement ]Date to and including the day immediately preceding the
fourth (4th) Anniversary of the Commencement Date, and (r.) $103,483.60,
for the period from the fourth (4th) anniversary of the Commencement Date
to and including the day immediately preceding the fifth (5th) anniversary
of the Commencement Date.
<PAGE>
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7. Effective as of February 5, 1999, Paragraph 5(C)(d) of the Lease is
hereby modified by deleting the word "If" from the first line of said section
and inserting in lieu thereof the phrase "To the extent that". Further, the
following is hereby added after the first sentence of said section: "The
preceding sentence notwithstanding, Tenant shall also remain fully liable and
obligated to pay for all Tenant's Costs in excess of Twelve and 00/100 Dollars
($12-00) per rentable square foot of the Premises as provided in subparagraph
5(C)(c) above."
8. Subitem "(i)" of Paragraph 33 of the Lease is hereby deleted in its
entirety.
9. Each party represents to the other that (i) it has not dealt with any
broker, agent or other intermediary who is or may be entitled to be paid a
broker commission or finder's -fee in connection with this Amendment No. 1 to
Lease, except for Insignia/ESG ("Landlord's Broker") and Sentry Commercial Real
Estate Service, Inc. ("Tenant's Broker"); and (ii) there are no claim for
brokerage commissions or finder's fees in connection with this Amendment, except
as to Landlord's Broker and Tenant's Broker. Landlord acknowledges that any
commission or finder's fee due to the Broker(s) in connection with this Lease
shall be the sole obligation of Landlord. Each party agrees to indemnify the
other and hold it harmless from all liabilities arising from breach of the
representations stated above. The representations and obligations contained in
this Section 9 shall survive the termination of this Amendment.
10. Except as set forth above, the Additional Space shall be added to the
Premises for the remainder of the Term on the Additional Space Commencement Date
and shall be subject to all of the terms and conditions of the Lease.
11. Tenant hereby represents and warrants to Landlord that "dsl.net,
incorporated," "DSL.net, Inc." and "DSL.NET, INC." are one and the same entity.
12. As of March 1, 1999, Exhibit A-3 attached hereto and made a part
-----------
hereof is hereby substituted for and shall replace, for all purposes, Exhibit A-
---------
3 originally attached to and made a part of the Lease.
- -
13. Except as modified by this Amendment No- I to Lease, the terms and
provisions of the Lease are hereby confirmed and ratified, and that instrument
shall remain in fall force and effect as modified herein.
<PAGE>
-7-
IN WITNESS WHEREOF, Landlord and Tenant have signed this Amendment No. 1 to
Lease as of the day and year first above written.
Signed, Sealed, and Delivered
in the Presence of: LANDLORD
LONG WHARF DRIVE, LLC
____________________________________ By:_____________________________________
____________________________________ Its
TENANT
dsl.net, incorporated
____________________________________ By:_____________________________________
____________________________________ Its Authorized Signatory
<PAGE>
Exhibit 10.09
AMENDMENT NO. 2 TO LEASE
THIS AMENDMENT NO. 2 TO LEASE is made and entered into as of the 9th day
of November, 1999 between Landlord and Tenant named below,
LANDLORD: LONG WHARF DRIVE, LLC
310 Orange Street
New Haven, CT 06511
TENANT: DSL.NET, INC.
545 Long Wharf Drive
New Haven, CT 06511
BUILDING: 545 Long Wharf Drive
New Haven, CT 06511
WHEREAS, Landlord and Tenant executed a lease dated as of February 5, 1999
(as amended by the amendment more particularly described below, collectively the
"Lease"), by which Tenant leased 12,078 rentable square feet on the fifth (5th)
floor of the Building (the "Initial Premises"); and
WHEREAS, by Amendment No. 1 to Lease dated as of June 9, 1999 (the "First
Amendment"), Tenant leased an additional 19,422 rentable square feet on the
fifth (5th) floor of the Building;
WHEREAS, by this Amendment No. 2 to Lease (the "Second Amendment"), Tenant
wishes to lease an additional 15,600 rentable square feet of space on the ninth
(9th) floor in the Building (the "Ninth Floor Space"), thereby increasing the
size of the entire Premises to 47,100 rentable square feet; and
WHEREAS, Landlord and Tenant wish to execute an amendment of the Lease
stating, among other things, the new area of the Premises, the rent for the
Ninth Floor Space and Tenant's Proportionate Share.
NOW, THEREFORE, the parties to this Second Amendment, in consideration of
the covenants hereinafter contained and the sum of One Dollar ($1.00) to each
party paid by the other, the receipt of which is hereby acknowledged, do
covenant and agree as follows:
1. Unless other-wise stated herein, this Second Amendment is effective on
the day and year written above. Further, all capitalized terms used in this
Second Amendment but not defined herein shall have the same meanings ascribed
thereto in the Lease.
2.
<PAGE>
-2-
(a) Effective as of December 15, 1999 (the "Ninth Floor Phase I
Commencement Date"), the Premises shall be increased and expanded to include the
first phase of the Ninth Floor Space consisting of approximately 6,000 rentable
square feet (the "Phase I Space") which Phase I Space is shown as the cross
hatched area on Exhibit A-1, annexed hereto and made a part hereof The
-----------
provisions of this subparagraph shall be deemed a grant of a lease. In the event
that Landlord shall fail to deliver the Phase I Space by the Ninth Floor Phase I
Commencement Date for reasons other than "force majeure," as that term is
defined in the Lease, or the acts or delay of Tenant, then the "Ninth Floor
Space Rent," as that term is defined below, with respect to the Phase 1 Space
shall be abated until such time as Landlord shall deliver the Phase I Space to
Tenant. The abatement of the rent attributable to the Phase I Space only shall
be Tenant's sole remedy for Landlord's failure to deliver the Phase 1 Space by
December 15, 1999. However, the immediately preceding sentence notwithstanding,
in the event Landlord does not deliver the Phase I Space by December 31, 1999,
then Tenant shall have the right to terminate this Second Amendment upon ten
(10) days prior written notice to Landlord and thereafter, neither party shall
have any further liability to the other with respect to this Second Amendment.
If Tenant exercises the termination right provided hereunder, the Lease shall
nevertheless remain in full force and effect as if the Second Amendment had
never been executed between the parties.
(b) Landlord and Tenant acknowledge that Landlord will continue to
occupy the remaining portion of the Ninth Floor Space from the Ninth Floor Phase
I Commencement Date until January 1, 2000. As such, on or before the Ninth Floor
Phase I Commencement Date, Landlord shall, at Landlord's sole cost and expense,
construct a temporary barrier or temporary demising partition between the Phase
I Space and the remaining portion of the Ninth Floor Space, using building
standard materials; the design, location and general sufficiency of which shall
be determined by Landlord and subject to Tenant's approval, which approval shall
not be unreasonably withheld, conditioned or delayed.
(c) If, during the time between the Ninth Floor Phase 1 Commencement
Date and January 1, 2000, Landlord and Tenant share any Facilities on the ninth
floor (individually a "Shared Facility" and collectively, "Shared Facilities")
including, without limitation, a pantry, conference rooms, common corridors,
telephone fines or a voice/date/communication room, Landlord shall retain
control over the use and occupancy of the Shared Facilities and Tenant shall be
responsible for any costs incurred by Landlord in connection with Tenant's use
of the Shared Facilities or any damage to such Shared Facilities caused by the
acts, omissions or negligence of Tenant or agent, employee or invitee of Tenant.
The Shared Facilities are outlined in Exhibit B, attached hereto and made a part
hereof
(d) Further, during the period between the Ninth Floor Phase 1
Commencement Date and January 1, 2000, Landlord and Tenant agree, to the
greatest extent possible, to cause their respective employees, visitors and
contractors to (A) avoid entering the portion of the Ninth Floor that is
occupied by the other party, (B) avoid making excessive noise or conducting any
other activities that would unreasonably disturb the business operations of the
other party, (C) respect the confidentiality of the business operations of the
other party, and
<PAGE>
-3-
(D) take such measures as are reasonably prudent to protect the safety and
confidentiality of their respective property.
3.
(a) Effective as of January 1, 2000, the Premises shall be further
increased and expanded to include the remaining portion of the Ninth Floor
Space, the entire Ninth Floor Space being more particularly depicted on Exhibit
-------
A-2, attached hereto and made a part hereof, so that the Premises shall consist
- ---
of 47,100 rentable square feet. The provisions of this subparagraph shall be
deemed a grant of a lease. The parties hereby stipulate and agree that the Ninth
Floor Space has been established using the current Building Owners and Managers
Association International ANSI Z 65.1 Copyright 1996 Standard Method of
Measurement and shall not be subject to remeasurement. In the event that
Landlord shall fail to deliver the remaining portion of the Ninth Floor Space by
January 1, 2000 for reasons other than "force majeure," as that term is defined
in the Lease, or the acts or delay of Tenant, then the "Ninth Floor Space Rent,"
as that term is defined below with respect to the remaining portion of the Ninth
Floor Space, shall be abated until such time as Landlord shall deliver the
remaining portion of the Ninth Floor Space to Tenant. However, Tenant shall
continue to pay rent on the Phase 1 Space at the annual rate of $14.25 per
rentable square foot of the Phase 1 Space until the remaining portion of the
Ninth Floor Space is delivered to Tenant, whereupon Tenant shall commence-paying
the entire Ninth Floor Space Rent as provided herein. The abatement of the rent
attributable to the remaining portion of the Ninth Floor Space only shall be
Tenant's sole remedy for Landlord's failure to deliver the remaining portion of
the Ninth Floor Space by January 1, 2000. The immediately preceding sentence
notwithstanding, in the event Landlord does not deliver the remaining portion of
the Ninth Floor Space by February 15, 2000, then Tenant shall have the right to
terminate this Second Amendment upon ten (10) days prior written notice to
Landlord and thereafter, neither party shall have any further liability to the
other with respect to this Second Amendment. If Tenant exercises the termination
right provided hereunder, the Lease shall nevertheless remain in full force and
effect as if the Second Amendment had never been executed between the parties.
(b) Except for the work to be undertaken by Landlord as set forth in
Paragraph 3(c) below, Tenant accepts the Ninth Floor Space in "AS IS" condition,
subject to all faults therein, and acknowledges that no representation with
respect to the condition thereof has been made by Landlord to Tenant. Except as
expressly provided in subparagraph 3(c) below, Landlord shall have no
responsibility for altering or improving the Ninth Floor Space for or on behalf
of Tenant, nor for any failure of the Ninth Floor Space to comply with all laws,
rules and regulations, as more particularly describe in Section 32 of the Lease
(collectively, "Laws"). Tenant shall be responsible, at its own expense, for any
alterations or improvements to be made to the Ninth Floor Space, which shall be
made in compliance with Laws.
(c) The provisions of Paragraph 3(b) notwithstanding, Landlord shall
construct a secured doorway (the "Doorway") leading from the ninth floor common
area to the Ninth Floor Space. The Doorway shall consist of a door with a
building standard door lock, the design and location of the Doorway shall be
shown on plans or a sketch to be prepared by Landlord and approved by Tenant,
which approval shall not be unreasonably withheld,
<PAGE>
-4-
conditioned or delayed. The materials to be used shall be selected by Landlord
in its sole reasonable discretion, and the cost of constructing the Doorway
shall be borne by Landlord. Landlord shall use reasonable efforts to avoid
interfering with the operation of Tenant's business during the course of
Landlord's construction of the Doorway; provided, however, in no event shall
Landlord have any liability to Tenant for lost business nor shall Tenant be
entitled to abate the rent in the event said construction does cause an
interruption of Tenant's business in the Ninth Floor Space.
(d) Landlord agrees that, without cost to Landlord, it shall
reasonably assist Tenant in the development of plans and drawings with respect
to any construction of the Ninth Floor Space by Tenant, which assistance shall
include the review and approval of Tenant's plans illustrating in detail
Tenant's proposed construction of the Ninth Floor Space (the "Ninth Floor Space
Construction Plans"), which approval shall not be unreasonably withheld,
conditioned or delayed. Any and all work to be undertaken by Tenant with respect
to the Ninth Floor Space shall be performed by Tenant at Tenant's sole cost and
expense. Tenant shall not undertake any work in the Ninth Floor Space without
having first received Landlord's approval as set forth above. Tenant agrees that
following its initial construction of the Ninth Floor Space, all as shall be set
forth in the Ninth Floor Space Construction Plans, Tenant shall not make any
subsequent improvements or alterations to the Ninth Floor Space without the
prior written consent of Landlord, which consent shall not be-unreasonably
---
withheld, conditioned or delayed.
4. The term of the Lease with respect to the Phase 1 Space shall commence
on December 15, 1999. The term of the Lease with respect to the remaining
portion of the Ninth Floor Space shall commence on January 1, 2000, and the term
of the Lease with respect to the entire Ninth Floor Space (including the Phase 1
Space) shall terminate and expire on December 31, 2002 (the period from the
respective ninth floor commencement dates through December 31, 2002 being
referred to herein as the "Ninth Floor Space Term") unless extended as provided
hereinbelow. Upon the expiration of the Ninth Floor Space Term, as the same may
be extended, Tenant shall surrender and vacate the Ninth Floor Space in
accordance with the terms of the Lease. In the event Landlord is unable to
deliver the Phase 1 Space by December 15, 1999 and/or the remaining portion of
the Ninth Floor Space by January 1, 2000 as set forth above, the expiration date
of the Ninth Floor Space shall nevertheless remain unmodified.
5. Provided Tenant is not then in default under any of the terms and
conditions of the Lease, as amended, Tenant shall have the right (the "Extension
Right") to extend the Ninth Floor Space Term for a period of time as shall be
coterminous with the "Expiration Date" of the Lease, as that term is defined in
the Lease (the "Extension Period"). The parties hereby stipulate and agree that
the Expiration Date of the Lease and, therefore, the expiration date of the
Extension Period (if exercised) is May 31, 2005. Tenant's Extension Right shall
be subject to the following terms and conditions. The Extension Right shall be
exercised by Tenant delivering written notice to Landlord at least six (6)
months prior to the expiration of the Ninth Floor Space Term. The Extension
Period shall be subject to all of the terms and conditions of the Lease, as
amended, and the Ninth Floor Space Rent shall remain the same as in effect
during the last month prior to the Extension Period.
<PAGE>
-5-
6. Tenant shall use and occupy the Ninth Floor Space as provided in
Paragraph 2(c) of the Lease.
7. Tenant shall continue to make all payments of Base Rent and Additional
Rent as set forth in the Lease during the Ninth Floor Space Term and for the
remaining term of the Lease. In addition to the payments of Base Rent and
Additional Rent, and not in lieu thereof, commencing on December 15, 1999 and
continuing for the duration of the Ninth Floor Space Term, Tenant shall pay rent
for the Ninth Floor Space (the "Ninth Floor Space Rent") pursuant to the
following schedule:
December 15, 1999 - December 31, 1999: $4,037.50 ($237.50 per day x 17 days
at 6,000 rentable square feet)
January 1, 2000 - December 31, 2002: $222,300.00 per annum; $18,525.00 per
month; $14.25 per rentable square foot (at 15,600 rentable square feet)
8. Commencing as of January 1, 2000 and continuing for the duration of
the Ninth Floor Space Term as the same may be extended pursuant to Paragraph 5
above, the paragraph entitled "Tenant's Proportionate Share" in Paragraph 3 of
the Lease, as amended by Paragraph 4(b) of the First Amendment, is hereby
amended by deleting the term "11.80%" and inserting the term "17.64%" in lieu
thereof If Tenant has not elected to extend the Ninth Floor Space Term as
aforesaid, then as of the first day following the expiration of the Ninth Floor
Space Term, (i.e. January 1, 2003), the term "Tenant's Proportionate Share"
shall be modified by substituting the term "11.80%" for the term "17.64%" which
shall be Tenant's Proportionate Share for the remainder of the term of the
Lease, unless the Premises are further increased or the Ninth Floor Space Term
extended. Further, Tenant shall be solely responsible for the payment of all
electricity furnished to the Ninth Floor Space. If the Ninth Floor Space is
separately submetered, Tenant shall pay for all of its electricity usage
directly to the local utility server and the costs of any submetering shall be
borne by Tenant. In the event the Ninth Floor Space is not separately metered,
then the cost to Landlord for furnishing electricity to the Ninth Floor Space
shall be deemed "Electricity Charges," as that term is defined in the Lease, and
all such Electricity Charges shall be included in "Operating Expenses," as that
term is defined in the Lease.
9. Throughout the Ninth Floor Space Tem-4 in addition to the number of
parking spaces allotted to Tenant pursuant to Paragraph 1(B) of the Lease, as
amended by Paragraph 3(c) of the First Amendment, Landlord shall provide Tenant
with two (2) unreserved parking spaces on the property for every 1,000 rentable
square feet of the Ninth Floor Space. Tenant shall have no further right to use
said additional parking spaces following the expiration of the Ninth Floor Space
Term or any earlier termination of the Lease.
10. For the period commencing December 15, 1999 and continuing through and
including December 31, 1999, the Premises shall be deemed to consist of 37,500
rentable square feet. For the period commencing January 1, 2000 and continuing
for the remainder of the Ninth Floor Space Term, the Premises shall be deemed to
consist of 47,100 rentable square feet. The preceding sentence notwithstanding,
Tenant agrees that in no event shall the "Improvement
<PAGE>
-6-
Allowance" contemplated in Paragraph 5(c)(b) of the Lease apply to any area
other than the Initial Premises (consisting of 12,078 rentable square feet) nor
shall the "Additional Space Improvement Allowance" contemplated in Paragraph
2(d) of the First Amendment apply to any area other than the "Additional Space,"
(consisting of 19,422 rentable square feet) as that term is defined in the First
Amendment (except for the "cross funding" permitted by Paragraph 2(f) of the
First Amendment). The purpose of this Paragraph 10 is to prohibit the payment of
the Improvement Allowance and the Additional Space Improvement Allowance against
the rentable square feet contained in the Ninth Floor Space due to the inclusion
of the Ninth Floor Space within the term "Premises" by virtue of this Second
Amendment.
11. Paragraph 33 of the Lease entitled "Right of First Offer" is hereby
amended by adding the following paragraph to the end of said section:
"If at any time after the first two (2) lease years of this Lease, Landlord
decides to seek offers to lease all or any part of the space remaining on the
sixth (6th) floor of the Building, Landlord will provide Tenant with Landlord's
Offer. The provisions of the preceding paragraph pertaining to the time period
for Tenant to accept Landlord's Offer, the amendment between the parties
incorporating the terms of Landlord's Offer and the termination of the right of
first offer shall apply to the terms contained in this paragraph, mutatis
-------
mutandis."
- --------
12. 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 Second Amendment,
except for Insignia/ESG ("Landlord's Broker") and Sentry Commercial Real Estate
Services, Inc. ("Tenant's Broker"); and (ii) there are no claims for brokerage
commissions or finder's fees in connection with this Amendment, except as to
Landlord's Broker and Tenant's Broker. Landlord acknowledges that any commission
or finder's fee due to the Broker(s) in connection with this Lease shall be the
sole obligation of Landlord. Each party agrees to indemnify the other and hold
it harmless from all liabilities arising from breach of the representations
stated above. The representations and obligations contained in this Section 12
shall survive the termination of this Amendment. Notwithstanding anything
contained in this Second Amendment to the contrary, in the event Tenant
terminates this Second Amendment as provided in Subparagraphs 2(a) and 3(a)
above, then the Brokers shall not be entitled to any commissions and if Landlord
has previously made such payments to the Brokers, the Brokers shall refund said
amounts in full to Landlord within thirty (30) days of Tenant's election to
terminate this Second Amendment.
13. Except as set forth above, commencing December 15, 1999 as to the
Phase 1 Space and January 1, 2000 as to the entire Ninth Floor Space, the Phase
1 Space and entire Ninth Floor Space, respectively, shall be added to the
Premises for duration of the Ninth Floor Space Term and shall be subject to all
of the terms and conditions of the Lease.
14. Except as modified by this Second Amendment, the terms and provisions
of the Lease are hereby confirmed and ratified, and that instrument shall remain
in full force and effect as modified herein.
<PAGE>
-7-
IN WITNESS WHEREOF, Landlord and Tenant have signed this Amendment No. 2 to
Lease as of the day and year first above written.
Signed, Sealed, and Delivered
in the Presence of: LANDLORD:
LONG WHARF DRIVE, LLC
____________________________________ By:_____________________________________
____________________________________ Its:
TENANT
DSL.NET, INC.
____________________________________ By:_____________________________________
____________________________________ Its Authorized Signatory
<PAGE>
Exhibit 10.10
AMENDMENT NO. 3 TO LEASE
THIS AMENDMENT NO. 3 TO LEASE (the "Third Amendment") is made and entered
into as of the 20/th/ day of January, 2000 between Landlord and Tenant named
------ -------------
below.
LANDLORD: LONG WHARF DRIVE, LLC
310 Orange Street
New Haven, CT 06511
TENANT: dsl.net, incorporated
545 Long Wharf Drive
New Haven, CT 06511
BUILDING: 545 Long Wharf Drive
New Haven, CT 06511
WHEREAS, Landlord and Tenant executed a lease (the "Initial Lease") dated
as of February 5, 1999 (as amended by the amendments more particularly described
below, collectively the "Lease"), by which Tenant leased 12,078 rentable square
feet on the fifth (5/th/) floor of the Building (the "Initial Premises"); and
WHEREAS, by Amendment No. 1 to Lease dated as of June 9, 1999 (the "First
Amendment"), Tenant leased an additional 19,422 rentable square feet on the
fifth (5/th/) floor of the Building, thereby increasing the size of the entire
Premises to 31,500 rentable square feet; and
WHEREAS, by Amendment No. 2 to Lease (the "Second Amendment"), Tenant
leased an additional 15,600 rentable square feet of space on the ninth (9/th/)
floor in the Building (the "Ninth Floor Space"), which, upon the commencement
dates thereof, as more particularly described in said Second Amendment, shall
increase the size of the entire Premises to 47,100 rentable square feet; and
WHEREAS, for the purposes of this Third Amendment, the term "Premises"
shall be equivalent to 31,500 rentable square feet, and shall not include the
Ninth Floor Space; and,
WHEREAS, pursuant to Section 5C(b) of the Initial Lease and Section 2(d) of
the First Amendment, Landlord shall provide Tenant an Improvement Allowance and
Additional Space Improvement Allowance (collectively, the "Allowance") in an
amount equal to Twelve and 00/100 Dollars ($12.00) per rentable square foot of
the Premises; and
WHEREAS, Tenant has substantially completed the Construction Work and the
Improvements, as said terms are defined in the Initial Lease and the First
Amendment respectively; and
WHEREAS, pursuant to Section 5C(b) of the Initial Lease and Section 2(d) of
the First Amendment, Landlord has delivered to Tenant a final accounting of
Tenant's Costs and Tenant's
<PAGE>
Additional Space Costs (collectively, the "Costs"), which accounting states that
said Costs total the sum of Three Hundred Ninety-Three Thousand Eight Hundred
Sixty-One and 79/100 Dollars ($393,861.79), which sum is equal to Twelve and
50/100 Dollars ($12.50) per rentable square foot of the Premises; and
WHEREAS, the Excess Tenant's Costs and Additional Space Excess Tenant's
Costs, as said terms are defined in Section 5C(d) of the Initial Lease and
Section 2(d) of the First Amendment respectively (collectively, the "Excess
Costs"), are Sixty-Three Thousand and 00/100 Dollars ($63,000.00), which sum is
equal to Two and 00/100 Dollars ($2.00) per rentable square foot of the
Premises, and which, pursuant to said provisions of the Lease, shall be payable
by Tenant through an increase in annual Base Rent; and
WHEREAS , the remaining balance of the Costs in excess of the Allowance
("Remaining Balance"), is Fifteen Thousand Seven Hundred Fifty and 00/100
Dollars ($15,750.00), which sum is equal to 50/100 Dollars ($.50) per rentable
square foot of the Premises, and which, pursuant to Section 5C(c) of the Initial
Lease and Section 2(e) the First Amendment, is to be payable by Tenant through a
payment to Landlord of Additional Rent, and which payment has been received by
Landlord; and
WHEREAS, the parties wish to acknowledge the commencement of the Lease; and
WHEREAS, Landlord and Tenant wish to execute an amendment of the Lease
stating, among other things, the new Base Rent for the Premises, the new
Additional Rent obligation of Tenant, and confirmation of the Lease
commencement.
NOW, THEREFORE, the parties to this Third Amendment, in consideration of
the covenants hereinafter contained and the sum of One Dollar ($ 1.00) to each
party paid by the other, the receipt of which is hereby acknowledged, do
covenant and agree as follows:
1. Unless otherwise stated herein, this Third Amendment is effective on
the day and year written above. Further, all capitalized terms used in this
Third Amendment, but not defined herein, shall have the same meanings ascribed
thereto in the Lease.
2. The Excess Costs shall, pursuant to the Lease, be fully amortized on a
straight-line basis over the remaining initial term of the Lease using an annual
interest factor of ten percent (10%) and payable through an increase in annual
Base Rent. Thus, effective January 1, 2000, the annual Base Rent shall be
increased in an amount equal to 49/100 Dollars ($.49) per rentable square foot
and the paragraph entitled "Base Rent" in Paragraph 3 of the Lease shall be
deleted in its entirety and replaced with the following:
"Base Rent: The Base Rent payable during the initial Term shall be
Four Hundred Fifty-Six Thousand Four Hundred Thirty-Five and 00/100 Dollars
($456,435.00) per annum (based on a per rentable square foot per annum rate
of $14.49), which shall be payable in advance, in equal monthly
installments of Thirty-Eight Thousand Thirty-Six and 25/100 Dollars
($38,036.25)."
<PAGE>
3. Landlord hereby acknowledges that Tenant has paid in full to Landlord
the Remaining Balance of Fifteen Thousand Seven Hundred Fifty and 00/100 Dollars
($15,750.00) pursuant to Section 5C(c) of the Initial Lease and Section 2(e) of
the First Amendment.
4. In compliance with their respective obligations regarding the
execution of a Commencement Date agreement, as set forth in subparagraph 2A of
the Lease, the parties represent the following: (i) the Commencement Date, as
defined in subparagraph 2A of the Lease, occurred on May 14, 1999 as to the
Premises described in the Initial Lease; (ii) the Additional Space Commencement
Date, as defined in subparagraph 2(a) of the First Amendment, occurred on August
9, 1999; (iii) as of the date hereof, the Premises consists of 31,500 rentable
square feet and the Tenant's Proportionate Share is 11.80%; (iv) the Base Rent
shall be as defined in Paragraph 3 hereof; (v) the Term of the Lease shall
expire on May 31, 2005.
5. The representations made in Paragraph 4 hereof do not include the
Ninth Floor Space, as the commencement dates, the term, the rent and the
increase in the size of the Premises associated with said space are separately
described in the Second Amendment.
6. Each party represents to the other that 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 Third Amendment, and
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 Paragraph 6 shall survive the
termination of the Lease.
7. Except as modified by this Third Amendment, the terms and provisions
of the Lease are hereby confirmed and ratified, and that instrument shall remain
in full force and effect as modified herein.
<PAGE>
IN WITNESS WHEREOF, Landlord and Tenant have signed this Amendment No. 3
to Lease as of the day and year first above written.
Signed, Sealed, and Delivered
in the Presence of: LANDLORD:
LONG WHARF DRIVE, LLC
____________________________________ By: _______________________________
____________________________________ Its:
TENANT:
dsl.net, incorporated
____________________________________ By: _______________________________
____________________________________ Its Authorized Signatory
<PAGE>
STATE OF CONNECTICUT)
===========
) ss.: New Haven
COUNTY OF NEW HAVEN)
---------
On this the 22nd day of December 1999, before me Theresa C. Meltese, the
---- ------------- ------------------
undersigned officer, personally appeared Alan A. BoLanc who acknowledged himself
--------------
to be the VP Operations of DSL.net, and that she, as such VP Operations 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.
____________________________________
Theresa C. Maltse
Notary Public
My Commission Expires: 11/30/2003
STATE OF TEXAS)
) ss.:
COUNTY OF BEXAR)
On this the 3rd day of January, 2000, before me Diana Vaughan, the
------------- -------------
undersigned officer, personally appeared J. Stephen Suandby who acknowledged
------------------
himself to be the Vice President of SNET Real Estate, and that he, as such Vice
-------------- ---------------- ----
President 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.
____________________________________
Diana Vaughn
Notary Public
My Commission Expires: 07/17/2007
<PAGE>
Exhibit 10.22
MCI WORLDCOM ON-NET SERVICE AGREEMENT
This On-Net Service Agreement (the "Agreement") for services described below is
made by and between WorldCom Technologies, Inc. ("WTI"), for itself and on
behalf of its U.S.-based affiliates (collectively, "MCI WorldCom") and
Customer Name: DSL.NET, INC. (hereinafter "Customer")
Address: 50 Washington Street, 7th Floor, Norwalk, Connecticut 06854
- --------------------------------------------------------------------------------
Customer agrees to an On-Net Service term plan and Annual Volume Commitment
("AVC") or Monthly Volume Commitment ("MVC") as set forth in Schedule A,
attached hereto and incorporated herein. Effective upon the next billing cycle
following WTI's execution of this Agreement ("Effective Date"), Customer shall
pay the rates and receive the discounts for On-Net Service associated with the
selected Term and Monthly Volume Commitment (MVC) or Annual Volume Commitment
(AVC) as set forth in WTI Tariff FCC No. 2 (such discounts referred to herein as
the "Base Discounts") with the exceptions shown on Schedule A. Except as
expressly provided to the contrary, the discounts and/or rates set forth in
Schedule A are in lieu of, and not in addition to, any discounts, promotions
and/or credits (Tariffed or otherwise). AVC or MVC is calculated net of
discounts. All charges for other services, if any, will be as set forth in the
Tariffs applicable to those services at the time they are provided to Customer.
SERVICE PROVISIONING AND RECEIPT: MCI WorldCom will provide to Customer
interstate and international Services pursuant to WTI Tariff FCC No. 1, and all
other applicable tariffs of MCI WorldCom and its U.S.-based affiliates
(collectively, the "Tariff"). This Agreement incorporates by reference the
terms of the Tariff. MCI WorldCom may modify the Tariff from time to time in
accordance with law and thereby affect the services furnished to Customer. In
the event of inconsistency between the terms of the Tariff and this Agreement,
the Tariff will be deemed controlling. The rates set forth in the Tariff do not
include, and the discounts set forth in this Agreement and the Tariff do not
apply to, the following: charges for MCI WorldCom service other than those set
forth in this Agreement; non-tariffed products, access or egress (or related)
charges imposed by third parties; taxes or tax-like surcharges; and other
tariffed charges. Customer agrees to pay all these additional charges, to the
extent applicable, in addition to the charges set forth in this Agreement. If
MCI WorldCom voluntarily or involuntarily as a result of government or judicial
action cancels the Tariff in whole or in part, then effective on such
cancellation this Agreement shall, as to canceled Tariff provisions previously
applicable to this Agreement, incorporate by reference the substantively similar
provisions of MCI WorldCom's standard Guide to Services and Pricing ("Guide"),
as amended by MCI WorldCom from time to time. For purposes of such provisions,
all references to the Tariff shall include reference to the Guide.
TARIFF OPTION: MCI WorldCom shall, if required, file a Tariff option (a "Tariff
Option") consistent with the terms of Schedule A, which is incorporated into
this Agreement by this reference.
<PAGE>
SERVICE CONSIDERATIONS: This Agreement shall be binding upon acceptance by MCI
WorldCom. Acceptance of this Agreement by MCI WorldCom is subject to Customer
meeting the terms and conditions set forth in the Tariffs and the MCI WorldCom
Commercial Customer Profile Attachment. The initial Term of this Agreement
shall begin not later than the first day of the first full monthly billing
period following acceptance of this Agreement by MCI WorldCom ("Agreement Start
Date"). Customer shall not disclose the terms of this Agreement to any third
party.
APPLICABLE SERVICES: This On-Net Service Agreement includes only those services
set forth in this Agreement and its attachments.
INTERNET SERVICES: Should Customer choose to order Internet Service under and
MCI WorldCom Internet Services Agreement ("Internet Agreement") that provides
that charges for these internet services will contribute towards the AVC or MVC
of this Agreement, then MCI WorldCom shall allow such contribution subsequent to
Customer's execution of the Internet Agreement. In addition, Customer shall be
eligible to receive a discount on the charges for Internet Services as set forth
in the Internet Agreement. Internet Service monthly recurring and usage
charges, after the application of discounts, shall contribute to the AVC or MVC
if permitted in the Internet Agreement.
PAGING: Should Customer choose to order Voice Paging Service under an MCI
WorldCom Paging Agreement ("Paging Agreement"), that provides that charges for
paging services will contribute towards the AVC or MVC of this Agreement, then
MCI WorldCom shall allow such contribution subsequent to Customer's execution of
the Paging Agreement. In addition, Customer shall be eligible to receive a
discount on the charges for paging services as set forth in the Paging
Agreement. Voice Paging Service monthly recurring and usage charges, after the
application of discounts, shall contribute to the AVC or MVC if permitted in the
Paging Agreement.
MCI WORLDCOM LOCAL SERVICE: Where MCI WorldCom has received applicable
regulatory approval and filed the necessary tariff(s), Customer will be eligible
to receive a discount based upon the AVC or MVC and Term indicated in Schedule A
on its eligible monthly charges for MCI WorldCom facilities-based local exchange
service. Local exchange service is provided by an MCI WorldCom affiliate and is
subject to the terms and conditions of the On-Net Service Term Plan program set
forth in the applicable state tariffs and price lists.
UNDERUTILIZATION AND EARLY TERMINATION CHARGES: Underutilization Charges: For
Customers with an AVC as set forth in Schedule A, if at the end of any Annual
Period (as hereinafter defined), Customer's Qualifying Volume (as defined in the
Tariff) during such Annual Period fails to meet or exceed the AVC, Customer
shall pay, in addition to all other charges under this Agreement, the difference
between the AVC and Customer's Qualifying Volume during such Annual Period. Any
Underutilization Charges will be waived for the first three full billing months
of this Agreement. For purposes of this Agreement, "Annual Period" means the
consecutive twelve (12) month period commencing on the Agreement Start Date
hereof and each consecutive twelve (12) month period thereafter during the Term
or any renewal
2
<PAGE>
Term hereof. Early Termination Charges: If Customer terminates On-Net Service
prior to the expiration of the Term, Customer will be required to pay, in
addition to all accrued but unpaid charges through the date of such termination,
the difference between Customer's actual Qualifying Volume and the AVC for the
year of termination. For each subsequent year of the Term, Customer shall be
required to pay 50% of the AVC.
For Customers with an MVC as set forth in Schedule A, if at the end of any
Monthly Period (as hereinafter defined), Customer's Qualifying Volume (as
defined in the Tariff) during such Monthly Period fails to meet or exceed the
MVC, Customer shall pay, in addition to all other charges under this Agreement,
the difference between the MVC and Customer's Qualifying Volume during such
Monthly Period. Any Underutilization Charges will be waived for the first three
full billing months of this Agreement. For purposes of this Agreement, "Monthly
Period" means the period reflected on each monthly invoice. Early Termination
Charges: If Customer terminates On-Net Service prior to the expiration of the
Term, Customer will be required to pay, in addition to all accrued but unpaid
charges through the date of such termination, the difference between Customer's
actual Qualifying Volume and the MVC for the remaining months of the year of
termination. For each subsequent year of the Term, Customer shall be required
to pay 50% of the MVC for each remaining month in the Term.
CONVERSION FROM EXISTING MCI WORLDCOM TERM AGREEMENTS: If Customer meets the
conditions stated under "Termination without Liability" in the Tariff,
enrollment in this Agreement will cause an existing MCI or WTI term plan
agreement to terminate automatically without incurring Early Termination
Charges. Termination and underutilization liability charges may apply if
Customer is ineligible for conversion from existing MCI or WTI term plans
without liability and/or all services are not converted to On-Net Service.
GOVERNING LAW: This Agreement, and all causes of action arising out of this
Agreement, will be subject to the Communications Act of 1934, as amended (the
"Act"), or, if any part of this Agreement is not governed by the Act, by the
domestic law of the State of New York without regard to its choice of law
principles.
ASSIGNMENT: Neither this Agreement, nor any rights or obligations of Customer
in this Agreement, shall be transferable or assignable by Customer without MCI
WorldCom's prior written consent and any attempted transfer or assignment hereof
by Customer not in accordance herewith shall be null and void.
3
<PAGE>
MCI WORLDCOM ON-NET SERVICE AGREEMENT
Schedule A
A. Customer agrees to a On-Net Service term plan with a FIVE (5) year
commitment ("Term") and FORTY THOUSAND dollars ($40,000) Monthly Volume
Commitment ("MVC")
Term/Contract Year. The "Term" will begin on MCI WorldCom's execution of this
- ------------------
Agreement ("Contract Date") and end (5) years following the Effective Date.
Each consecutive twelve (12) Monthly Periods of the Term commencing on the
Effective Date and on each anniversary thereof will be a "Contract Year".
ADDITIONAL ATTACHMENTS: This Agreement incorporates the following
Attachment(s):
Attachment A Frame Relay Integration Addendum
- --------------------------------------------------------------------------------
ACCEPTANCE DEADLINE: This Agreement shall be of no force and effect and the
offer contained herein shall be deemed withdrawn unless this Agreement is
executed by Customer and delivered to MCI WorldCom on or before MARCH 26, 1999.
- --------------------------------------------------------------------------------
DATA
----
The following discounts shall be applied to the Private Line and/or Frame Relay
Service(s) rates set forth herein or in the applicable Tariff.
A. DISCOUNTS: The following discounts will be applied to Customer's charges
for service during the Customer Commitment Period:
- --------------------------------------------------------------------------------
BROADBAND
- --------------------------------------------------------------------------------
SERVICE TYPE DISCOUNT*
------------ ---------
- --------------------------------------------------------------------------------
Frame Relay 47%
- --------------------------------------------------------------------------------
ATM 47%
- --------------------------------------------------------------------------------
*Discounts apply to Port and PVC only. Access is additional and
non-discountable.
- --------------------------------------------------------------------------------
B. WAIVER OF DOMESTIC FRAME RELAY AND ATM INSTALLATION CHARGES: Commencing with
the Commencement Date and continuing through the Commitment Ending Date,
WorldCom agrees to waive WorldCom domestic installation charges and Local
Exchange Carrier installation charges (collectively, "INSTALLATION WAIVERS") in
an amount not to exceed four (4) times the base Monthly Recurring Network Node
and PVC charges for Domestic Frame Relay and ATM Service ordered following the
Commencement Date (the "NEW SERVICE"). In the event that Customer terminates
this Agreement prior to the
4
<PAGE>
Commitment Ending Date, WorldCom may debit Customer's account in the amount of
such Installation Waivers.
C. WAIVER OF MONTHLY RECURRING CHARGES: On Customer's thirteenth (13th),
twenty-fifth (25th) and 37th invoices, MCI WorldCom will apply a credit to
Customer's account which shall be equal to the monthly recurring Port and PVC
charges. In the event that this Agreement terminates prior to the expiration of
the Term, MCI WorldCom may debit Customer's account in the amount of the total
of such credit(s).
ENTIRE AGREEMENT: This Agreement, including the Tariff and the Attachments
referenced below, is the complete agreement of the parties and supersedes any
prior agreements or representations, whether oral or written, with respect
thereto. Except for Tariff modifications initiated by MCI WorldCom, no
amendment to this Agreement will be valid unless each such change is accepted in
writing by an authorized representative of both parties.
Any capitalized terms not expressly defined in an Attachment to this Agreement
shall have the meaning given to such term in this Agreement.
IN WITNESS WHEREOF, the parties have accepted and signed this Agreement and the
individuals signing below warrant and represent that they have the full legal
and regulatory authority to enter into this Agreement for and on behalf of the
respective parties.
MCI WORLDCOM TECHNOLOGIES, INC. DSL.NET, INC.
By: By: /s/ Alan A. Bolduc
------------------------------ -----------------------------
(Authorized Representative) (Authorized Representative)
Frank Grillo, V.P. Marketing
------------------------------ -----------------------------
(Title) (Print Name)
------------------------------ -----------------------------
(Date) (Date)
5
<PAGE>
ATTACHMENT A
FRAME RELAY INTEGRATION ADDENDUM
By enrolling in MCI WorldCom Domestic Frame Relay under this On-Net Service
Agreement, Customer's local access channel charges for T-1, DPLS, or DSO access,
domestic monthly recurring port charges, and domestic monthly recurring
permanent virtual circuit ("PVC") charges, after the application of discounts,
will contribute toward the AVC or MVC under this On-Net Service Agreement. In
addition, local access channel and monthly recurring charges for domestic port
and PVC will receive the discount associated with the term and AVC and MVC of
this On-Net Service Agreement as set forth in Schedule A. Customer will be
subject to the term length and early termination and under-utilization penalties
in this On-Net Service Agreement.
For Frame Relay, Metro Frame Relay and International Frame Relay, Customer will
pay the standard rates and discounts as set forth in the Tariff, including but
not limited to access charges, standard Tariffed non-recurring charges,
including but not limited to, installation charges and reconfiguration charges,
monthly recurring port and permanent virtual circuit ("PVC") charges as may be
modified in Schedule A. For High Speed Frame, Customer will pay list rates,
which will be set forth in a High Speed Frame Relay Attachment to this Agreement
if Customer selects such service. Discounts for High Speed Frame Relay shall be
as set forth in Schedule A.
The rates set forth in the Tariff do not include, and the discounts set forth in
the Tariff do not apply to, the following: charges for Frame Relay Service
Services other than those set forth herein; non-tariffed products; access or
egress (or related) charges imposed by third parties; taxes or tax-like
surcharges; and other tariffed charges, including without limitation, Universal
Service Fund charges, and Primary Interexchange Carrier Charges, which are
additional.
Customer may also enroll in Metro Frame Relay and/or International Frame Relay
under this Agreement. Such service will be subject to the term and volume
commitment agreed to by Customer under this On-Net Service Agreement, but
associated discounts will be those set forth for Metro and International Frame
Relay in the Tariff as may be modified in Schedule A.
CUSTOMER SHOULD NOT ENROLL FOR FRAME RELAY SERVICE UNDER THIS AGREEMENT IF
CUSTOMER HAS ENROLLED UNDER A MCI WORLDCOM STANDALONE FRAME RELAY AGREEMENT.
Any capitalized terms not expressly defined in this Attachment shall have the
meaning given to such term in the On-Net Service Agreement.
6
<PAGE>
FIRST AMENDMENT
TO THE ON-NET AGREEMENT
BETWEEN
WORLDCOM TECHNOLOGIES, INC.
AND DSL.NET, INC.
This First Amendment is made by and between DSL.net, Inc. ("Customer") and MCI
WORLDCOM Communications, Inc. (formerly Worldcom Technologies, Inc.) and its
appropriate affiliated companies, assigns, and successors (collectively, "MCI
Worldcom") as of Customer's execution and delivery of this First Amendment to
MCI Worldcom (the "First Amendment Contract Date"). Provided that this First
Amendment is subsequently accepted by MCI Worldcom, the rates, discounts,
charges, credits and/or other terms set forth herein shall be effective one (1)
month following the First Amendment Contract Date (the "First Amendment
Effective Date"). All capitalized terms used in this First Amendment and not
defined herein will have the meaning ascribed to them in the WTI Tariff FCC No.
1 and all other applicable tariffs of MCI Worldcom and its U.S.-based affiliates
(collectively, "Tariff").
WHEREAS, Customer and MCI Worldcom entered into a MCI Worldcom On-Net Service
Agreement signed by Customer on or about February 2, 1999 (the "On-Net
Agreement"); and
WHEREAS, Customer and MCI Worldcom desire to enter into this First Amendment for
the purpose amending the On-Net Agreement.
NOW, THEREFORE, in consideration of the mutual promises contained herein, the
parties, intending to be legally bound hereby, agree that the On-Net Agreement
is amended as follows:
1. In the paragraph titled "UNDERUTILIZATION AND EARLY TERMINATION CHARGES" to
the On-Net Agreement, the following is added thereto.
"As of the Effective Date of the Option 1 MCI Worldcom Asynchronous
Transfer Mode Service Enrollment Form and Agreement ("ATM Agreement")
signed by Customer on or about October 28, 1999, the Underutilization and
Early Termination charges only pursuant to the On-Net Agreement for Frame
Realty Service shall be waived and superceded by the applicable
Underutilization or Termination Provisions as set forth in Sections 6 and
13 of the ATM Agreement. The foregoing shall not affect any other Customer
obligations pursuant to the ATM Agreement or the On-Net Agreement.
Customer shall remain liable for any accrued Underutilization and Early
Termination charges pursuant to the On-Net Agreement prior to the Effective
Date of the ATM Agreement.
2. In Section A to Schedule A to the On-Net Agreement, the subsection titled
"Term/Contract Year" is deleted and replaced with a new subsection
------------------
"Term/Contract Year" as follows:
------------------
7
<PAGE>
"Term, Contract Year. The term of the Agreement will begin upon MCI
--------------------
Worldcom's execution of this Agreement ("Contract Date") and the end (60)
months from the First Amendment Effective Date."
3. All references in the On-Net Agreement to "ATM" or "ATM Service" are hereby
deleted.
4. In Section A of Schedule A to the On-Net Agreement, the subsection titled
"Discounts" shall be deleted and replaced with the following:
---------
BROADBAND
Service Type Discount*
------------ ---------
Domestic Frame Relay 60%
---
*Discounts apply to Port and PVC only. Access is additional and non-
discountable.
5. In Attachment A, Frame Relay Integration Addendum, to the On-Net Agreement
--------------------------------
the following is added to the first paragraph, first sentence after "will
contribute toward the AVC or MVC under this On-Net Service Agreement":
"and will contribute toward the Annual Minimum under the ATM Agreement signed by
Customer on or about October 28, 1999."
6. Modification. No charges to this First Amendment shall be effective or
valid unless in writing and signed by both parties.
7. Section References. Section titles and references used in this First
Amendment shall be without substantive meaning or content of any kind
whatsoever and are not a part of the agreements among the parties hereto
evidenced hereby.
8. Entire Agreement. This First Amendment, and the On-Net Agreement constitute
the complete and entire understanding of the parties relative to their
subject matter and supersede all previous communications, proposals,
representations, or agreements, whether written or oral, between MCI
Worldcom and Customer in this regard. Except as expressly modified above,
all other terms and conditions of the On-Net Agreement (which are
incorporated by this reference) shall remain in full force and effect. In
the event of a conflict between the terms of this First Amendment and the
Agreement, the terms of this First Amendment shall govern.
9. Acceptance. This First Amendment shall be of no force and effect and the
offer contained herein shall be deemed withdrawn unless this First Amendment
and the ATM Agreement is executed by Customer and delivered to MCI Worldcom
on or before October 30, 1999.
8
<PAGE>
IN WITNESS WHEREOF, MCI Worldcom and Customer have caused this First Amendment
to be duly executed by their authorized representatives as of the dates set
forth below.
DSL.net, Inc. MCI WORLDCOM Communications, Inc.
By:________________________________ By:_________________________________
Frank Grillo
Name:______________________________ Vice President, Marketing
Title:_______________________________ Date:________________________________
Date:_______________________________
9
<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 21, 1999, except as
to the stock dividend described in Note 8 which is as of July 21, 1999,
relating to the financial statements of DSL.net, Inc., which appear in such
Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Financial Data" in such Prospectus.
/s/ PricewaterhouseCoopers LLP
Hartford, Connecticut
February 7, 2000
<PAGE>
Exhibit 23.03
CONSENT OF DELOITTE & TOUCHE LLP
We consent to the use in this Registration Statement of DSL.net, Inc. on
Form S-1 of our report with respect to Tycho Networks, Inc. dated May 21, 1999
(October 13, 1999 as to the last three paragraphs of Note 9), appearing in the
Prospectus, which is part of this Registration Statement. We also consent to
the reference to us under the heading "Experts" in such Prospectus.
/s/ Deloitte & Touche LLP
San Jose, California
February 3, 2000
