<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 8, 2000
REGISTRATION NO. 333-92839
________________________________________________________________________________
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
-------------------
ONSITE ACCESS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 4813 13-4076396
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
1372 BROADWAY
NEW YORK, NEW YORK 10018
(212) 324-1500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-------------------
KENNETH J. HALL
EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
ONSITE ACCESS, INC.
1372 BROADWAY
NEW YORK, NEW YORK 10018
(212) 324-1500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
-------------------
COPIES TO:
<TABLE>
<S> <C>
LEE S. PARKS, ESQ. WILLIAM J. WHELAN, III, ESQ.
STEVEN G. SCHEINFELD, ESQ. CRAVATH, SWAINE & MOORE
FRIED, FRANK, HARRIS, SHRIVER & JACOBSON WORLDWIDE PLAZA
ONE NEW YORK PLAZA 825 EIGHTH AVENUE
NEW YORK, NEW YORK 10004-1980 NEW YORK, NEW YORK 10019-7475
(212) 859-8000 (212) 474-1000
</TABLE>
-------------------
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,
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 registration statement for the same
offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
-------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED PER SHARE PRICE(1) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.001 par value per
share............................. 19,170,500 $13.00 $249,216,500 $65,794(2)
- -----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) The registrant previously paid a fee of $52,800 in connection with the
initial filing of this Registration Statement. An additional fee of $12,994
is being paid in connection with the filing of this Amendment No. 1.
-------------------
THE REGISTRANT HEREBY AMENDS THE 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 COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
________________________________________________________________________________
<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
PRELIMINARY PROSPECTUS
16,670,000 SHARES
[LOGO]
ONSITE ACCESS, INC.
COMMON STOCK
-------------------
We are selling 16,670,000 shares of common stock. The underwriters named in
this prospectus may purchase up to 2,500,500 additional shares of common stock
from us to cover over-allotments.
This is an initial public offering of common stock. We expect the initial
public offering price to be between $11.00 and $13.00 per share, and have
applied for our common stock to be included for quotation on the Nasdaq National
Market under the symbol 'OSAX'.
-------------------
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE 'RISK FACTORS' BEGINNING
ON PAGE 7.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved 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 Discount....................................... $ $
Proceeds to OnSite Access, Inc., before expenses............ $ $
</TABLE>
-------------------
SALOMON SMITH BARNEY J.P. MORGAN & CO.
-------------------
CIBC WORLD MARKETS THOMAS WEISEL PARTNERS LLC
, 2000
<PAGE>
INSIDE FRONT COVER
[artwork]
<PAGE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT
MAKING AN OFFER OF THESE SECURITIES IN ANY STATE WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION PROVIDED BY THIS
PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT COVER OF
THIS PROSPECTUS.
-------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.......................................... 2
Summary Financial and Operating Information................. 5
Risk Factors................................................ 7
Cautionary Notice Regarding Forward-Looking Statements...... 19
Use of Proceeds............................................. 20
Dividend Policy............................................. 20
Capitalization.............................................. 21
Dilution.................................................... 22
Selected Financial and Operating Data....................... 23
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 25
Business.................................................... 33
Management.................................................. 47
Certain Transactions........................................ 61
Principal Stockholders...................................... 63
Description of Capital Stock................................ 66
Shares Eligible for Future Sale............................. 69
United States Tax Consequences to Non-United States
Holders................................................... 71
Underwriting................................................ 74
Legal Matters............................................... 76
Experts..................................................... 76
Where You Can Find More Information......................... 76
Index to Consolidated Financial Statements.................. F-1
</TABLE>
Until , 2000, or 25 days after the date of this prospectus, all
dealers that buy, sell or trade the common stock, whether or not participating
in this offering, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
<PAGE>
PROSPECTUS SUMMARY
The information in this prospectus assumes that the initial public offering
price will be $12.00 per share, the midpoint of the range disclosed on the cover
of this prospectus.
Unless otherwise indicated, all references in this prospectus to the number
of outstanding shares of our common stock:
give effect to the conversion of our outstanding Series A, Series C and
Series D preferred stock into common stock on a one-for-one basis and the
conversion of our outstanding Series B preferred stock into common stock
based on the assumed initial public offering price, both of which will
occur immediately prior to the completion of this offering; and
do not include the number of shares that we will issue if the underwriters
exercise their over-allotment option.
OUR BUSINESS
We provide comprehensive communications solutions for small and medium-sized
business customers in multi-tenant commercial office buildings. We offer a suite
of data, voice and enhanced services delivered through in-building broadband
communications networks that we own and operate. Our offerings include data
networking, high speed Internet access, local and long distance voice services
and enhanced services.
We began offering services in the New York metropolitan area in September
1997. To date, we have contracts with real estate owners that will enable us,
upon the execution of property-specific access agreements, to offer our services
in buildings representing approximately 362 million rentable square feet of
commercial office space. We currently have property-specific access agreements
for approximately 120 million rentable square feet of commercial office space,
with 118 buildings in service representing approximately 26.5 million rentable
square feet. We are also developing a nationwide data network and have
constructed 10 data network access points to serve 22 metropolitan areas. We
intend to offer our services in up to approximately 50 metropolitan areas over
the next two to three years.
OUR STRATEGY
Our objective is to be the complete communications solutions provider to
small and medium-sized business customers in multi-tenant commercial office
buildings within our markets. To achieve our objective, we:
Offer a bundled package of communications services, including data, voice
and enhanced services, billed in a single invoice for customer convenience.
Establish lasting relationships with our customers by delivering
responsive, high quality service and customer care on a personalized basis.
Expect to expand our service offerings and create new communications
channels, such as business web portals, to address our customers' evolving
communications and Internet needs.
Partner with real estate owners to facilitate our access to buildings and
penetration of our target customer base.
To implement these strategies, we have designed and deployed a high speed
communications network architecture that addresses the current and expected
communications needs of our small and medium-sized business customers. We invest
in, own and control network facilities only when we believe that such investment
provides competitive cost and performance advantages. We believe our network
architecture is:
Flexible -- we offer high speed data services through either copper or
fiber-based technologies based on the individual needs of our customers.
2
<PAGE>
Cost effective -- we achieve economies of scale by aggregating demand from
many smaller business customers within a commercial office building while
creating operating efficiencies through our building-centric service
approach.
Capital efficient -- we first deploy copper-based digital subscriber line
equipment within our served buildings and allow for demand-driven
deployment of more expensive fiber-optic equipment as customer usage of
high-bandwidth communications services increases.
Scalable -- our in-building broadband network enables us to increase a
customer's bandwidth easily and efficiently.
OUR SOLUTION
Our solution offers a number of advantages to small and medium-sized
business customers, including:
comprehensive service offerings designed to meet the current and expected
communications services needs of small and medium-sized business customers.
competitively priced services.
dedicated building communications managers who offer individualized and
customized service.
rapid and easy provisioning.
responsive customer service available 24 hours a day, 365 days a year.
additional enhanced communications services.
- -------------------
As a result of our development activities and the deployment of our
networks, from inception to date, we have incurred operating losses, net losses
and negative operating cash flow. As of December 31, 1999, we had an accumulated
deficit of approximately $40.7 million. We currently intend to increase
substantially our capital expenditures and operating expenses in an effort to
expand rapidly our infrastructure and network services on a nationwide basis as
well as to develop and integrate our billing and collections, operational
support and administrative systems. We expect to incur substantial operating
losses, net losses and negative cash flow during our network buildout and
initial penetration into each new market we enter. We expect these losses and
negative cash flows to continue for at least the next several years.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common stock offered by OnSite Access................ 16,670,000 shares.
Common stock to be outstanding after this offering... 62,875,657 shares.
Proposed Nasdaq National Market symbol............... 'OSAX'
</TABLE>
In the above table and throughout this prospectus, unless otherwise
indicated, the number of shares of common stock that will be outstanding after
this offering is based on 10,708,245 shares outstanding as of December 31, 1999,
plus:
16,670,000 shares of common stock to be sold by us in this offering; and
35,497,412 shares of common stock to be issued upon the conversion of all
of our preferred stock.
The number of shares of common stock to be outstanding after this offering
excludes:
22,863,170 shares of common stock that we have agreed to issue to real
estate owners and agents upon the exercise of warrants having an exercise
price of $2.36 per share, which warrants vest upon the execution of, or the
occurrence of events relating to the execution of, property-specific access
agreements;
up to 1,275,718 shares of common stock that may be issued to real estate
owners and agents upon the exercise of warrants that we may agree to issue
having an exercise price of no less than $2.36 per share;
800,000 shares of restricted common stock sold to officers under our stock
incentive plan at $5.13 per share in January 2000;
3,177,500 shares of common stock issuable upon the exercise of outstanding
options at a weighted average exercise price of $2.40;
103,375 shares of common stock reserved for issuance under our stock
incentive plan; and
up to 611,112 shares of common stock that may be issued to our Canadian
joint venture partner upon the conversion of its joint venture interests.
- -------------------
Our principal executive office is located at 1372 Broadway, New York, New
York 10018, and our telephone number is (212) 324-1500. We maintain a site on
the World Wide Web at www.onsiteaccess.com; HOWEVER, THE INFORMATION FOUND ON
OUR WEBSITE IS NOT A PART OF THIS PROSPECTUS.
OnSite Access, the OnSite Access logo, The First Foot and Building-Centric
are service marks owned by our company. We have filed for registration of these
service marks.
4
<PAGE>
SUMMARY FINANCIAL AND OPERATING INFORMATION
The following table presents our summary consolidated financial information
and has been derived from our audited financial statements for the period from
July 5, 1996 (date of inception) through December 31, 1996, and for the years
ended December 31, 1997, 1998 and 1999, which except for the period ended
December 31, 1996, are included in another section of this prospectus. As
adjusted balance sheet data give effect to (1) the sale of 16,670,000 shares of
common stock in this offering and (2) the conversion of our outstanding
preferred stock into common stock. The information set forth below should be
read in conjunction with 'Selected Financial and Operating Data,' 'Management's
Discussion and Analysis of Financial Condition and Results of Operations' and
our consolidated financial statements and the notes to our consolidated
financial statements, each of which is included in this prospectus.
Adjusted EBITDA consists of earnings before non-cash equity compensation,
net interest expense, taxes, depreciation and amortization. You should not think
of adjusted EBITDA as an alternative to operating income as an indicator of our
operating performance or as an alternative to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) as a measure of liquidity. We have provided adjusted EBITDA because
it is a measure of financial performance commonly used in the communications
industry, however, other companies may calculate it differently than we do. We
have presented adjusted EBITDA to enhance your understanding of our operating
results.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 5, 1996) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ---------------------------------
1996 1997 1998 1999
---------------- ------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Network service revenue..................................... $ -- $ 19 $ 871 $ 3,646
Consulting revenue.......................................... 20 329 73 --
------ ------- ------- --------
Total revenue....................................... 20 348 944 3,646
Operating expenses:
Direct costs of revenues................................ -- 140 634 3,090
Selling, general and administrative (including non-cash
equity compensation of $0, $64, $503 and $6,523,
respectively)......................................... 77 1,241 4,478 29,361
Depreciation and amortization........................... 1 23 366 2,838
------ ------- ------- --------
Total operating expenses............................ 78 1,404 5,478 35,289
------ ------- ------- --------
Operating loss.............................................. (58) (1,056) (4,534) (31,643)
Other income (expense), net................................. (3) (64) (394) (899)
------ ------- ------- --------
Loss before income taxes.................................... (61) (1,120) (4,928) (32,542)
Provision for income taxes.................................. -- -- -- --
------ ------- ------- --------
Net loss.................................................... (61) (1,120) (4,928) (32,542)
Accreted and deemed dividends on preferred stock............ -- -- -- (12,081)
------ ------- ------- --------
Net loss applicable to common stockholders.................. $ (61) $(1,120) $(4,928) $(44,623)
------ ------- ------- --------
------ ------- ------- --------
Net loss per common share, basic and diluted................ $(0.02) $ (0.33) $ (1.19) $ (8.93)
------ ------- ------- --------
------ ------- ------- --------
Weighted average number of shares outstanding............... 3,339,500 3,439,714 4,156,836 4,998,545
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------
ACTUAL AS ADJUSTED
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................... $24,412 $206,768
Property and equipment, net................................. 20,052 20,052
Total assets................................................ 74,775 257,131
Total liabilities........................................... 15,615 15,615
Redeemable preferred stock.................................. 59,807 --
Total stockholders' (deficit) equity........................ (647) 241,516
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 5, 1996) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, -----------------------------------------------
1996 1997 1998 1999
---------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT OTHER OPERATING DATA)
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Net cash used in operating activities.............. $(64) $ (891) $(3,340) $(17,165)
Net cash used in investing activities.............. (9) (350) (1,241) (18,692)
Net cash provided by financing activities.......... 73 1,362 5,381 59,347
Adjusted EBITDA.................................... (57) (969) (3,665) (22,282)
Capital expenditures............................... 3 588 1,979 20,094
OTHER OPERATING DATA
(AT THE END OF THE PERIOD):
Buildings in service............................... -- 2 24 118
Rentable square feet of buildings in service....... -- 309,900 4,508,221 26,501,619
</TABLE>
6
<PAGE>
RISK FACTORS
This offering involves a high degree of risk. You should carefully consider
the risks described below and the other information in this prospectus,
including our consolidated financial statements and the related notes, before
you purchase any shares of our common stock.
RISKS RELATED TO OUR BUSINESS
BECAUSE WE HAVE A SHORT OPERATING HISTORY, YOU HAVE LIMITED INFORMATION ON WHICH
TO EVALUATE OUR BUSINESS AND YOUR INVESTMENT DECISION
Our business was founded in July 1996, and we have limited historical
financial and operating data upon which you can evaluate our business and
prospects as well as your investment decision. We entered into our first access
agreement in June 1997 and began to provide commercial services in September
1997. We have limited commercial operations and have recognized limited revenues
since our inception. In addition, our executive management team and other
employees have worked together at our company for only a short period of time.
You should evaluate our chances of financial and operational success in light of
these factors as well as the risks, uncertainties, expenses, delays and
difficulties associated with starting a new business.
WE HAVE EXPERIENCED INCREASING NEGATIVE ADJUSTED EBITDA, NET LOSSES AND NEGATIVE
CASH FLOW, WHICH WILL CONTINUE
We may not achieve or sustain positive adjusted EBITDA, income or cash flow
in the future. Since our formation, we have incurred increasing negative
adjusted EBITDA (earnings before non-cash equity compensation, net interest
expense, taxes, depreciation and amortization), substantial net losses and
negative cash flow from combined operating and investing activities on both an
annual and quarterly basis. For 1999, we had negative adjusted EBITDA of
approximately $22.3 million, net losses of approximately $32.5 million and
negative cash flow from combined operating and investing activities of
approximately $35.9 million.
Moreover, we expect to continue to incur significant development and
marketing costs. As a result, we will need to generate significant revenue to
achieve profitability, which may not occur. If our revenue does not grow as
needed to offset our increases in these costs, it is unlikely our business will
succeed.
OUR BUSINESS MODEL IS UNPROVEN AND MAY NOT SUCCEED
We may not be able to deploy our communications services as planned, achieve
significant market acceptance, achieve favorable operating results or
profitability, or generate revenues sufficient to cover our capital and
operating costs. To be successful, we must develop, market and implement
communications solutions that are widely accepted by small and medium-sized
businesses at prices that cover both our operating expenses and our significant
development costs. We have not validated our business model and strategy in the
market. We believe that the combination of our unproven business model and the
highly competitive and fast-changing communications market in which we compete
makes it impossible to predict:
the extent to which our communications services will achieve market
acceptance;
customer penetration in the buildings where we provide service; or
our overall success.
THERE MIGHT NOT BE SUFFICIENT DEMAND FOR OUR DATA AND ENHANCED SERVICES AMONG
SMALL AND MEDIUM-SIZED BUSINESSES
Demand for data services has grown rapidly, and this market is characterized
by rapidly changing technology, evolving industry standards and frequent new
service introductions. If the commercial market for Internet access and other
broadband data services develops more slowly
7
<PAGE>
than expected or if the communications services that we offer are not widely
accepted among small and medium-sized businesses, our revenues will not grow as
quickly as necessary to achieve or sustain profitability. Demand and market
acceptance for recently introduced services in this industry, including our
enhanced services, are also subject to a high level of unpredictability. Heavy
use of the Internet may impede further development to the extent that users
experience delays, transmission errors and other difficulties. In addition,
customers who have already invested substantial resources in other technologies
may be particularly reluctant or slow to employ our services.
THE COMMUNICATIONS INDUSTRY IS HIGHLY COMPETITIVE, AND WE MAY NOT BE ABLE TO
COMPETE EFFECTIVELY
We face significant competition from traditional and new communications
companies, including in-building competitors, local and long distance telephone
companies and Internet, digital subscriber line and cable modem service
providers. Many of our competitors have longer operating histories and customer
relationships, greater financial, technical, and marketing resources, larger
customer bases and greater brand or name recognition than we have. Furthermore,
the numerous companies that may seek to enter our market may expose us to severe
price competition for our services which could impede our ability to become
profitable. Our competitors may also be able to respond more quickly to
technological developments and changes in customers' needs.
In-building competitors. In-building competitors, such as Allied Riser
Communications, Broadband Office, Cypress Communications, Intermedia
Communications, NEXTLINK Communications, RCN Telecom Services, SiteLine,
Teligent and WinStar are attempting to gain access to office buildings in our
target markets. To the extent these competitors successfully develop
relationships with real estate owners in our target markets, we may face
difficulties in building our networks and marketing our services within our
target buildings. In addition, some competitors have, or may obtain, rights to
install networks and offer competitive services in some of the buildings in
which we have access rights.
Local telephone companies. Incumbent local telephone companies, including
the regional bell operating companies, and competitive local telephone companies
have several competitive strengths which may place us at a competitive
disadvantage. These competitive strengths include:
an established brand name and reputation;
significant capital to deploy fiber-optic equipment rapidly;
competitive price and service offerings; and
their own existing in-building and inter-building connections.
Long distance telephone companies. Many of the leading long distance
telephone carriers, including AT&T, MCI WorldCom and Sprint, are expanding their
capabilities to support high speed, end-to-end data networking services, and
could begin to develop their own in-building broadband networks. The newer
national long distance telephone carriers, such as Broadwing, Level 3, Qwest and
Williams Communications, are also building and managing nationwide high speed
fiber-optic data networks and partnering with Internet service providers. In
addition, these carriers may extend their networks by installing in-building
fiber optic cables.
Internet, digital subscriber line, and cable modem service providers.
Customers can use the services provided by Internet, digital subscriber line,
and cable modem service providers instead of our services. Internet service
providers, such as Concentric Networks, EarthLink, GTE Internetworking,
MindSpring, Prodigy, PSINet, Sprint, UUNET, a subsidiary of MCI WorldCom, and
Verio, provide Internet access to residential and business customers, generally
using the existing communications infrastructure. Digital subscriber line
companies, such as Covad, Network Access Solutions, NorthPoint and Rhythms
NetConnections, and/or their Internet service provider customers, typically
provide high speed Internet access. Cable modem service providers, such as
Excite@Home and its @Work subsidiary, High Speed Access, RCN Telecom Services
and Road Runner, also provide high speed Internet access. On-line service
providers, such as America
8
<PAGE>
Online, Compuserve, Microsoft Network, and WebTV, provide Internet connectivity,
ease-of-use and a stable environment for modem connections.
WE MUST OBTAIN ADDITIONAL ACCESS AGREEMENTS WITH REAL ESTATE OWNERS, INSTALL OUR
IN-BUILDING BROADBAND NETWORKS AND OBTAIN CUSTOMERS BEFORE OUR IN-BUILDING
COMPETITORS DO OR WE COULD FACE A SIGNIFICANT COMPETITIVE DISADVANTAGE
We could face a significant competitive disadvantage and our business and
results of operations could suffer if we do not obtain access agreements with
real estate owners, install our in-building broadband networks and obtain
customers before our in-building competitors do. To date, we have contracts with
real estate owners that enable us, upon the execution of property-specific
access agreements, to offer our services in buildings representing approximately
362 million rentable square feet of commercial office space. These contracts
have specified dates for the execution of property-specific access agreements.
We currently have property-specific access agreements for approximately 120
million rentable square feet of commercial office space, with 118 buildings in
service representing approximately 26.5 million rentable square feet. If
property-specific access agreements are not executed, we will not be able to
offer our services in the applicable buildings.
The first communications provider in a building has the first opportunity to
obtain customers. Once customers subscribe for services from a communications
provider, it becomes more difficult for competitors to attract those customers.
We may not be able to accomplish this first-mover objective due to a number of
factors, including:
real estate owners may decide not to permit us to install our networks in
their buildings or they may not offer terms that are as favorable as the
terms they offer our competitors;
our access agreements typically do not preclude our competitors from
gaining access to these buildings; and
each building in which we have obtained access rights but have not yet
built a network is also vulnerable to other in-building competitors.
In addition, our typical license or access agreement has an initial term of
approximately five to ten years, with renewal options ranging from five to
fifteen years. Many of these agreements contain minimum performance criteria. If
these agreements are terminated for failure to meet these performance criteria
or are not otherwise renewed, then we may not have access to customers. This
could reduce our revenues and may require us to expend significant financial and
other resources to secure access rights to other buildings and customers.
OUR BUSINESS WILL BE HARMED IF OUR INFORMATION SYSTEMS ARE NOT REPLACED OR
FURTHER DEVELOPED
Sophisticated information systems are vital to our growth and our ability to
achieve operating efficiencies. A failure of any of these systems could
substantially impair our ability to provide services, send invoices and monitor
our operations. Systems we have identified as being presently inadequate to meet
the increased demands of our anticipated growth include our:
billing and collections systems;
operational support systems, such as order entry, order management,
customer service databases and trouble ticketing; and
administrative systems, such as financial, accounting and human resources.
We estimate that modifying or replacing these systems will cost
approximately $34 million over the next two years, although actual costs may be
higher. Our plans for the development and implementation of these systems rely,
for the most part, on acquiring products and services offered by third-party
vendors and integrating those products and services. We may be unable to
implement these systems on a timely basis or at all, and these systems may not
perform as expected. We may also be unable to maintain and upgrade these systems
as necessary.
9
<PAGE>
We are also dependent on the systems of our data and voice providers, and,
in some cases, on the interface between our systems and those of our providers.
Therefore, any systems failures experienced by our providers could also have
similar adverse effects on our systems and prevent or impair our service
delivery.
WE DEPEND HEAVILY ON A LIMITED NUMBER OF CUSTOMERS; A SIGNIFICANT REDUCTION IN
THE SERVICES PROVIDED TO THESE CUSTOMERS WOULD HARM OUR RESULTS OF OPERATIONS
We derive a large portion of our revenue from a limited number of customers.
In 1999, our five largest customers accounted for approximately 24% of our
revenue, with Vantas, an affiliate of FrontLine Capital Group, which is the name
under which Reckson Service Industries, Inc. does business, accounting for
approximately 11% of our revenue and Reckson Associates Realty Corp., also an
affiliate of FrontLine Capital Group, accounting for approximately 7% of our
revenue. If any of these customers, or if a significant number of smaller
customers, cancel, defer or significantly reduce the services they order from
us, our revenues and profitability will suffer. We may not be able to generate
additional revenue from existing or new customers to replace the revenue that is
lost.
WE DEPEND HEAVILY ON A LIMITED NUMBER OF REAL ESTATE OWNERS; A DETERIORATION IN
OUR RELATIONSHIP WITH THESE REAL ESTATE OWNERS WOULD HARM OUR RESULTS OF
OPERATIONS
We derive a large portion of our revenue from customers located within the
buildings of a limited number of real estate owners. In 1999, we derived 62% of
our revenue from customers located within the buildings of five real estate
owners. Of this amount, customers within the buildings of:
Reckson Associates accounted for approximately 21% of our revenue;
Taconic Investment Partners accounted for approximately 12% of our revenue;
SL Green Realty Corp. accounted for approximately 11% of our revenue;
Cogswell Realty Group accounted for approximately 9% of our revenue; and
130 Williams Street LLC accounted for approximately 9% of our revenue.
These real estate owners may permit competitors to offer services within
their buildings, fail to cooperate with us in seeking to obtain customers within
their buildings, or terminate or fail to renew our access agreements. Any of
these events would have a material adverse effect on our results of operations,
increase the costs of acquiring and retaining customers, and impede our growth.
In addition, any deterioration in our relationship with these real estate owners
or a significant number of other real estate owners with whom we have
relationships would have a material adverse effect on our results of operations.
THE COMMUNICATIONS INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL CHANGES, AND NEW
TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE
The communications industry is subject to rapid and significant
technological changes, including continuing developments in digital subscriber
line technology and alternative technologies for providing high speed data
communications. These alternative technologies include cable modem, fixed
wireless, satellite or other high speed transmission technology. As a
consequence:
we expect that new products and technologies will emerge that may be
superior to, and/or render obsolete, the products and technologies we
currently use, including copper-based transmission technologies;
our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
we will rely on third parties, including some of our competitors and
potential competitors, to develop and provide us with access to
communications and networking technology.
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If we fail to adapt successfully to technological changes or fail to obtain
access to new or improved technologies, our business would suffer.
WE MUST MAKE SIGNIFICANT CAPITAL EXPENDITURES BEFORE GENERATING REVENUE, WHICH
MAY PROVE INSUFFICIENT TO JUSTIFY THOSE EXPENDITURES
We will have to make significant capital expenditures to develop our
business and deploy our networks, services and systems. The amount and timing of
these expenditures are uncertain and will depend upon our ability to execute our
plans in a timely and cost-effective manner. If our revenue does not grow as
expected, or capital expenditures exceed our estimates, our business and
financial condition would suffer.
In particular, when we install our in-building broadband networks, we incur
significant initial expenditures. These expenditures vary depending on the size
of the building and whether we encounter any construction-related difficulties.
We typically install a network before we have any customers in that building.
Since we generally do not solicit customers within a building until our network
is in place, and since our costs can vary, we do not know whether we will be
able to recoup our expenditures within any building. If we fail to attract
enough customers, or any customers at all, within a particular office building,
we would not be able to recoup our expenditures within that building. In
addition, some of our agreements with real estate owners require us to remove
our equipment when our access agreements terminate or are not renewed.
Accordingly, we may incur significant costs in connection with this equipment
removal which could harm our financial condition and results of operations.
To effectively address the next generation of services that our customers
may request, we are also incurring costs to deploy fiber-optic cable as part of
our in-building broadband networks, although most of this fiber-optic cable is
not currently being used. We would incur significant capital expenditures to
install fiber-optic equipment to work with our existing fiber-optic cabling if
our customers demand capacity that exceeds our copper-based broadband network
capacity. We would also experience increased capital funding requirements if we
needed to install fiber-optic equipment to fulfill this demand.
TO PROVIDE OUR DATA AND VOICE SERVICES, WE MUST PURCHASE COMMUNICATIONS CAPACITY
FROM THIRD PARTIES WHO MAY BE UNABLE OR UNWILLING TO MEET OUR REQUIREMENTS
We must purchase communications capacity from third parties in order to
provide our services and to connect our networks to the networks of other
communications providers. These third parties may be unable or unwilling to meet
our operational requirements, service our networks timely and cost effectively,
and guarantee needed capacity, quality assurance or costs. We primarily rely on
(1) Level 3 Communications to provide collocation space for our data network
access points, (2) Cablevision LightPath and Focal Communications Corporation to
provide local voice services and (3) MCI WorldCom to provide long distance
services to our customers. Technical difficulties arising from the networks of
any of these data or voice services providers, or contractual or other problems
with our business relationships with these providers, could have a material
adverse effect on our business and results of operations.
We also rely on other communications providers for data connectivity to link
our served buildings to our data network access points and our data network
access points to our network operations center. Our failure to obtain adequate
connections from other communications providers on a timely basis could delay or
impede our ability to provide services and generate revenue. In addition, in
some of our target markets, there is only one established carrier available to
provide the necessary connection. This increases our costs and makes it
extremely difficult, if not impossible, to obtain redundant connections.
Sufficient capacity or redundant capacity may not be readily available from
third parties at commercially reasonable rates, if at all. Our failure to obtain
sufficient redundant connectivity could result in service interruptions or an
inability to provide service in selected buildings which could, in time, lead to
a loss of customers and damage to our reputation.
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We have also entered into contracts with our data providers, Internet access
providers and wholesale voice service providers. Under some of our contracts, if
we fail to meet our minimum volume commitments for connectivity, we will be
obligated to pay underutilization charges. In addition, we have committed to pay
for approximately $10.6 million of services from our data and voice providers
through 2003 under these contracts. We will have to pay those providers even if
we do not use their services.
OUR BUSINESS COULD SUFFER FROM A REDUCTION OR INTERRUPTION FROM OUR EQUIPMENT
SUPPLIERS OR OTHER THIRD PARTIES ON WHOM WE RELY FOR INSTALLATION AND PROVISION
OF FIELD SERVICE
We purchase our equipment from various vendors and outsource a significant
portion of the installation and field service of our networks to third parties.
Any reduction in, or interruption of, service from any of our major vendors or
installation and field service providers such as Copper Mountain, Lucent
Technologies or Cisco Systems could delay our network buildout, impair our
ability to acquire or retain customers and harm our business generally. These
vendors may also not be able to meet our requirements in a timely and
satisfactory manner, and we may not be able to obtain additional or alternative
vendors when and if needed. In addition, the price of the equipment we purchase
may substantially increase over time, increasing the costs we pay in the future.
It could take a significant period of time to establish relationships with
alternative suppliers for each of our technologies and substitute their
technologies into our network.
A SYSTEM FAILURE OR BREACH OF NETWORK SECURITY COULD DELAY OR INTERRUPT SERVICE
TO OUR CUSTOMERS
A natural disaster or other unanticipated interruption of service or damage
at any of our network facilities would impair the reliability of our
transmission services in our markets. Additionally, failure by any network
service provider to provide communications capacity required by us, as a result
of a natural disaster, operational disruption or for any other reason, could
cause interruptions in the delivery of our services. Damage or failure that
causes interruptions in the delivery of our services could impair our ability to
acquire or retain customers as well as harm our reputation and business.
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Unauthorized access could also potentially jeopardize
the security of confidential information stored in the computer systems of our
customers, which might result in liability to our customers, and also might
deter potential customers. Although we have implemented and plan to continue
adding security measures that are standard within the telecommunications
industry, we may be unable to implement these measures in a timely manner or, if
and when implemented, our security measures may be circumvented. Eliminating
computer viruses and alleviating other security problems may require
interruptions, incurrence of costs or delays or cessations of service to our
customers and these customers' end users. Any of the foregoing factors relating
to network security could have a material adverse effect on our business.
WE MAY BE UNABLE TO DELIVER OUR SERVICES IF OUR IN-BUILDING BROADBAND NETWORK OR
A DATA NETWORK ACCESS POINT ENCOUNTERS TECHNICAL DIFFICULTIES
Our in-building broadband network is the primary channel through which we
deliver our communications services to our customers. Our customers are obtained
from the tenant base of commercial office buildings, and each building in which
we have constructed our in-building broadband network is a site for potential
concentration of our customers. Since our customers within a commercial office
building are served by the same in-building broadband network, any network
problems affecting this network may affect the delivery of services to all of
our customers in that building. Any technical difficulties within a particular
in-building broadband network may prevent our customers in that building from
receiving services. In addition, we aggregate traffic from our in-building
broadband networks through a data network access point. Any technical
difficulties at a data network access point may prevent a group of in-building
broadband networks from receiving service. If we are unable to deliver services
as a result of any of these technical difficulties, our business may suffer
through the loss of revenue and customers.
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OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE
SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES
ANALYSTS OR INVESTORS
Due to numerous factors, many of which are outside of our control, our
quarterly operating results are likely to fluctuate significantly in the future
and may fail to meet or exceed the expectations of securities analysts or
investors. In this event, the trading price of our common stock would likely
decline. These factors include:
the rate at which we can attract and retain customers and the rate of
tenant turnover in buildings in which we have installed our networks;
the prices our customers are willing to pay for the services we provide and
the intensity of price competition we face from competitors;
our expenditures related to the nationwide expansion of our networks and
the development of our services;
the introduction of new services or technologies by our competitors that
are incompatible with or superior to the products and services we provide;
regulatory developments, including interpretations of the 1996
Telecommunications Act, which could intensify competition in the
telecommunications industry; and
technical difficulties or network downtime which could interfere with the
delivery of our services.
OUR FAILURE TO MANAGE OUR GROWTH EFFECTIVELY COULD IMPAIR OUR BUSINESS
If we are successful in implementing our business plan, our operations will
expand rapidly. This rapid expansion could place a significant strain on our
management, financial and other resources. Our network infrastructure may need
future expansions and adaptations to respond to growth in the number of
customers served, increased capacity demands and changes to our service
offerings.
Our ability to manage future growth, if it occurs, will depend on our
ability to:
control expenses related to our business plan;
maintain responsive customer service;
maintain regulatory compliance with federal and state authorities as we
enter into new metropolitan areas;
improve existing, and implement new, billing and collections, operational
support and administrative systems; and
expand, train and manage our employee base.
The failure to manage our growth effectively would impair our business and
operational performance. We may not be able to expand or adapt our networks to
meet the increasing demands of customers or evolving industry standards.
WE WILL NEED SIGNIFICANT ADDITIONAL FUNDS, WHICH WE MAY NOT BE ABLE TO OBTAIN
We believe our current capital resources, together with the proceeds of this
offering, will be sufficient for our operating and working capital requirements
and for the deployment and operation of our networks in targeted markets through
approximately the second quarter of 2001. We will need significant additional
funds beyond then to complete our nationwide buildout. We expect that the actual
amount and timing of our future capital requirements will depend on the demand
for our services and on regulatory, technological and competitive developments,
including additional market developments and new opportunities, in our industry.
We may seek additional financing earlier than 2001 if:
we accelerate the schedule or expand the scope of our nationwide network
buildout;
our plans or projections change or prove to be inaccurate;
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we acquire other companies or businesses; or
market conditions allow us to raise public or privately financed capital on
attractive terms.
We may be unsuccessful in raising sufficient capital at all or on terms that
we consider acceptable. If we are unable to obtain adequate funds on acceptable
terms, our ability to deploy and operate our networks, fund our expansion or
respond to competitive pressures would be significantly impaired. These
limitations could hinder our ability to become profitable.
IF WE BORROW FUNDS IN THE FUTURE, IT COULD LIMIT OUR FLEXIBILITY
If we decide to borrow funds in the future to fund our business, the terms
of those borrowings would likely contain restrictive covenants limiting our
ability to incur additional indebtedness, pay dividends, make capital
expenditures or undertake other transactions. The instruments governing any
borrowings could also require us to pledge assets as security for the
borrowings. If we were to leverage our business by incurring significant debt,
we may be required to devote a substantial portion of our cash flow to service
that indebtedness. This could require us to modify our business plan, for
example, by delaying the capital expenditures necessary to expand on a
nationwide basis.
WE MUST ATTRACT AND RETAIN KEY PERSONNEL IN A TIGHT LABOR MARKET OR WE WILL BE
UNABLE TO MANAGE OUR GROWTH
Competition for personnel with the qualifications we require is intense. The
loss of the services of key personnel or the failure to attract additional
personnel as required could inhibit the growth of our business or depress the
price of our common stock. We are also highly dependent upon the efforts of our
existing senior management team. Although we have entered into employment
arrangements with members of our executive management team, these arrangements
do not obligate the employees to remain with us for any length of time. In
addition, we have not purchased any key person life insurance for any of our
executive officers. We also believe that our future success will depend in large
part on our ability to attract and retain qualified technical and sales
personnel.
OUR INTELLECTUAL PROPERTY PROTECTION MAY BE INADEQUATE TO PROTECT OUR
PROPRIETARY RIGHTS, AND WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS
We rely on a combination of confidentiality agreements and other contracts
to establish and protect our technology and other intellectual property rights.
We have applied for federal registration of some of our trademarks and
servicemarks that we believe are important for market identification or the
branding of our business. We have not yet obtained any registrations, and we may
not be able to obtain registrations for those trademarks and servicemarks. We
currently have no patents or patent applications pending. The steps we have
taken may be inadequate to protect our technology, processes or other
intellectual property. Moreover, as is the case in many industries, our
competitors may independently develop technologies or processes that are
substantially equivalent or superior to ours. Third parties may assert
infringement claims against us and, in the event of an unfavorable ruling on any
claim, we may be unable to obtain a license or similar agreement to use
technology, processes and intellectual property we rely upon to conduct our
business. We also rely on unpatented trade secrets and know-how to maintain our
competitive positions, which we seek to protect, in part, by confidentiality
agreements. However, these agreements may be breached or terminated, and we may
not have adequate remedies for any breach. In addition, our competitors may
otherwise learn or discover our trade secrets. Our management personnel were
previously employees of other communications companies. In many cases, these
individuals are conducting activities for us in areas similar to those in which
they were involved prior to joining us. As a result, we or our employees could
be subject to allegations of violation of trade secrets, breaches of
confidentiality and other similar claims.
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AS AN INTERNET ACCESS PROVIDER, WE MAY INCUR LIABILITY FOR INFORMATION
DISSEMINATED THROUGH OUR NETWORK
The law relating to the liability of Internet access providers and on-line
services companies for information carried on or disseminated through their
networks is unsettled. As the law in this area develops, we may face potential
liability for information carried on and disseminated through our network. This
liability could require us to implement measures to reduce our exposure to such
liability, including the expenditure of substantial financial, managerial, legal
and other resources or the discontinuation of certain products or service
offerings. Any costs incurred as a result of these measures or the imposition of
this liability could harm our business.
OUR COMMUNICATIONS SERVICES ARE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION THAT
COULD CHANGE IN AN ADVERSE MANNER
Communications services are subject to significant regulation at the
federal, state, local and international levels. These regulations affect us, our
existing and potential competitors, and our suppliers. Delays in receiving
required regulatory approvals or the enactment of new and adverse regulations or
regulatory requirements may have a material adverse effect on us. Also,
regulatory decisions affecting the telecommunications industry could affect our
operating results by increasing competition, decreasing revenue, increasing
costs or impairing our ability to offer some of our services. Interconnection
agreements are also subject to state commission, FCC and judicial oversight.
These government bodies may modify the terms or prices of our interconnection
agreements in ways that adversely affect our business and expose us to increased
competition. For example, on December 9, 1999, the FCC ordered incumbent local
telephone companies to offer line sharing arrangements that will permit
competing carriers to offer digital subscriber line services over the same
copper loop facilities used by the incumbent local telephone company to provide
voice telephone service. The prices for these arrangements will be determined by
state utility commissions. If these prices are set at low levels, it could allow
our competitors to offer low-cost alternatives to our services and put downward
pressure on our prices for Internet access and other data services.
REGULATORY AND LEGISLATIVE DEVELOPMENTS REGARDING ACCESS BY COMMUNICATIONS
SERVICE PROVIDERS TO OFFICE BUILDINGS COULD IMPAIR OUR BUSINESS
There is no current national legal requirement that owners or managers of
commercial office buildings give competitive providers of communications
services access to buildings to install communications equipment. Several states
have adopted such regulations, and others may be adopted elsewhere in the
future. Recently, the FCC announced that it is considering a rule to require
non-discriminatory riser access in multiple tenant buildings. Several bills have
been introduced in the current Congress that would impose similar obligations on
real estate owners although, to date, none of these bills has been passed. Some
of the issues being considered by the FCC and Congress include requiring real
estate owners to provide riser access to communications carriers on a
non-discriminatory basis and requiring some communications providers to provide
access to their risers to other communications providers. We cannot predict
whether or in what form these proposals will be adopted. If they are adopted and
regulatory or legal requirements change access rights to our target buildings or
our networks, these requirements could harm our business and expose us to
increased competition.
POTENTIAL REGULATION OF INTERNET SERVICE PROVIDERS COULD ADVERSELY AFFECT OUR
OPERATIONS
To date, Internet service providers have been subject to very little
regulation by the federal and state governments. The FCC has exempted Internet
service providers from regulations governing communications carriers, including
the obligation to pay access charges and contribute to the Universal Service
Fund. The FCC is currently examining the status of Internet service providers
and the services they provide. If the FCC were to determine that Internet
service providers are required to pay contributions to the Universal Service
Fund in the same manner as communications carriers, it could have a material
adverse effect on us and all other Internet
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service providers. Also, various levels of government are considering new laws
concerning Internet user privacy, infringement, pricing, quality of products and
services, intellectual property ownership, and taxation of Internet businesses.
In some cases, courts have been asked to apply existing laws in areas such as
property ownership, copyright, trademark, trade secret, obscenity and defamation
to the Internet in new ways. The adoption of new laws, or court decisions
concerning the application of existing laws to the Internet, may decrease the
growth in the use of the Internet or change the economics of providing Internet
service to our customers, which could have a material adverse effect on our
business.
UNCERTAIN FEDERAL AND STATE TAX AND OTHER SURCHARGES ON OUR SERVICES MAY RESULT
IN INCREASED COSTS, UNANTICIPATED LIABILITIES AND DECREASES IN EARNINGS
Communications providers are subject to a variety of complex federal and
state surcharges and fees on their gross revenues from interstate and intrastate
services, including regulatory fees, and surcharges related to the support of
the Universal Service Fund. A finding that we misjudged the applicability of the
surcharges and fees could result in increased costs, unanticipated liabilities
and decreases in earnings.
YEAR 2000 ISSUES COULD HARM OUR BUSINESS AS A RESULT OF REDUCED DEMAND FOR OUR
SERVICES AND INTERNAL AND EXTERNAL OPERATIONS DIFFICULTIES
The year 2000 problem is the potential for system and processing failures of
date-related data arising from the use of two digits by computer-controlled
systems, rather than four digits, to define the applicable year. We rely,
directly and indirectly, on the systems of business enterprises such as
customers, suppliers, utilities, creditors and financial institutions, which
could be subject to operational difficulties arising out of year 2000 issues.
Any failure on the part of our principal internal systems or other business'
systems as a result of the year 2000 problem could harm our business,
reputation, financial condition or results of operations.
RISKS RELATED TO THIS OFFERING
THE SALE OR AVAILABILITY FOR SALE OF SUBSTANTIAL AMOUNTS OF OUR COMMON STOCK
COULD ADVERSELY AFFECT OUR STOCK PRICE
The sale or availability for sale of substantial amounts of our common
stock, including shares issuable upon the exercise of stock options or warrants,
in the public market after the completion of this offering could adversely
affect the market price of our common stock and materially impair our ability to
raise capital through future offerings of our common stock. There will be
62,875,657 shares of common stock outstanding immediately after this offering,
or 65,376,157 shares if the underwriters exercise their over-allotment option in
full. The 16,670,000 shares sold in this offering will be freely tradeable
without restriction or further registration under the Securities Act, unless
held by our affiliates as that term is defined in Rule 144 under the Securities
Act. The 46,205,657 shares of common stock outstanding prior to this offering
are restricted securities as defined in Rule 144 and may not be sold in absence
of registration other than in accordance with Rule 144 or Rule 701 under the
Securities Act or another exemption from registration.
In connection with this offering, we, our directors and a number of our
officers and stockholders have agreed, subject to exceptions, not to dispose of
or hedge any shares of common stock for a period of 180 days after the
completion of this offering without the underwriters' consent; however, the
underwriters may release these shares from the restrictions at any time. Market
sales of shares held by principal stockholders or any other stockholder or the
availability of shares for future sale may have an adverse effect on the market
price of our common stock. See 'Shares Eligible for Future Sale' for a more
detailed description of the restrictions on selling shares of our common stock
after this offering.
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INVESTORS IN THIS OFFERING WILL INCUR IMMEDIATE AND SUBSTANTIAL DILUTION, WHICH
COULD ADVERSELY IMPACT THE VALUE OF THEIR INVESTMENT
If you purchase common stock in this offering, you will pay more for your
shares than the existing stockholders paid for their shares. As a result, you
will experience immediate and substantial dilution of approximately $8.56 per
share, representing the difference between the assumed initial public offering
price of $12.00 per share and our net tangible book value per share after this
offering. In addition, you may experience additional dilution if holders of
stock options, whether currently outstanding or subsequently granted, exercise
their options or if warrantholders exercise their warrants to purchase common
stock. All of the shares issuable upon the exercise of currently outstanding
stock options and outstanding warrants will be issued at a purchase price per
share less than the public offering price per share. See 'Dilution' on page 22
for a more complete description of how the value of your investment in our
common stock will be diluted upon completion of this offering.
CONCENTRATION OF OWNERSHIP AMONG PRINCIPAL STOCKHOLDERS AND MANAGEMENT MAY LIMIT
YOUR ABILITY TO INFLUENCE CORPORATE MATTERS
Our executive officers, directors and principal stockholders together will
beneficially own approximately 61% of our common stock after the completion of
this offering. These stockholders, if they vote together, will be able to
exercise significant influence over all matters requiring stockholder approval,
including the election of directors and approval of significant corporate
transactions. This concentration of ownership may also delay or prevent a change
in control of us. See 'Principal Stockholders' on page 63 for more detailed
information about the ownership of common stock by our executive officers,
directors and principal stockholders.
EXTERNAL FACTORS COULD ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK
There is currently no public market for our common stock. An active trading
market may not develop or be sustained after this offering, even if our common
stock is quoted on Nasdaq. The initial public offering price will be determined
through negotiation between us and representatives of the underwriters and may
not be indicative of the market price for the common stock after this offering.
The market price of our common stock could fluctuate significantly as a
result of:
economic and stock market conditions generally and specifically as they may
impact providers of communications services;
changes in financial estimates and recommendations by securities analysts
following our stock;
earnings and other announcements by, and changes in market evaluations of,
providers of communications services;
changes in business or regulatory conditions affecting providers of
communications services;
announcements or implementation by us or our competitors of technological
innovations or new communications services; and
trading volume of our common stock.
The securities of many companies have experienced extreme price and volume
fluctuations in recent years, often unrelated to the companies' operating
performance, and particularly in the communications sector. For example, market
prices for securities of technology companies, which may include voice,
Internet-related and data communications companies, have frequently reached
elevated levels, often following these companies' initial public offerings.
These levels may not be sustainable and may not bear any relationship to these
companies' operating performances. If the market price of our common stock
reaches an elevated level following this offering, it is likely to materially
and rapidly decline. In the past, following periods of volatility in the market
price of a company's securities, a company's stockholders have often instituted
securities class action litigation
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against the company. If we were involved in a class action suit of this type, it
could divert the attention of our senior management and have a material adverse
effect on our business and financial condition.
THE NET PROCEEDS OF THIS OFFERING MAY BE ALLOCATED IN WAYS WITH WHICH YOU AND
OTHER STOCKHOLDERS MAY NOT AGREE
Our management has significant flexibility in applying the proceeds we
receive in this offering. Because the proceeds are not required to be allocated
to any specific investment or transaction, you cannot determine the value or
propriety of our management's use of the proceeds on our behalf. See 'Use of
Proceeds' on page 20 for a more detailed description of how management intends
to apply the proceeds of this offering.
ANTI-TAKEOVER PROVISIONS OF DELAWARE'S GENERAL CORPORATION LAW AND OUR
CERTIFICATE OF INCORPORATION COULD DELAY OR DETER A CHANGE IN CONTROL
Amendments we intend to make to our amended and restated certificate of
incorporation and our bylaws, as well as various provisions of the Delaware
General Corporation Law, may make it more difficult to effect a change in
control of our company. The existence of these provisions may adversely affect
the price of our common stock, discourage third parties from making a bid for
our company or reduce any premiums paid to our stockholders for their common
stock. For example, we intend to amend our certificate of incorporation to
authorize our board of directors to issue up to shares of blank check
preferred stock and to attach special rights and preferences to preferred stock.
The issuance of this preferred stock may make it more difficult for a third
party to acquire control of us or cause the market price of our common stock to
decrease. We also intend to amend our certificate of incorporation to provide
for the division of the board of directors into three classes as nearly equal in
size as possible with staggered three-year terms. This classification of the
board of directors could have the effect of making it more difficult for a third
party to acquire our company, or of discouraging a third party from acquiring
control of our company. See 'Description of Capital Stock -- Preferred Stock'
and 'Description of Capital Stock -- Anti-takeover Effects of Our Certificate of
Incorporation and Bylaws and Provisions of Delaware Law' for a more complete
description of our capital stock, our certificate of incorporation and the
effects of the Delaware General Corporation Law which could hinder a third
party's attempts to acquire control of us.
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CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes 'forward-looking statements' for purposes of the
Securities Act of 1933 and the Securities Exchange Act of 1934. All statements
other than statements of historical fact in this prospectus, including
statements regarding our competitive strengths, business strategy, future
financial position, budgets, projected costs and plans and objectives of
management are forward-looking statements. In addition, forward-looking
statements generally can be identified by the use of forward-looking terminology
such as 'may,' 'will,' 'expect,' 'should,' 'intend,' 'estimate,' 'anticipate,'
'believe,' 'continue' or similar terminology. We can give no assurance that the
expectations reflected in forward-looking statements will prove to have been
correct. Our actual results could differ materially from those anticipated in
these forward-looking statements as a result of factors including those set
forth under the 'Risk Factors,' 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and 'Business' sections, and
elsewhere in this prospectus. All written and oral forward-looking statements
attributable to us are expressly qualified in their entirety by the factors we
disclose that could cause our actual results to differ materially from our
expectations.
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USE OF PROCEEDS
We estimate that we will receive net proceeds of approximately
$184.4 million, or approximately $212.4 million if the underwriters'
over-allotment option is exercised in full, from the sale of the shares of
common stock offered by us, at an assumed initial public offering price of
$12.00 per share, after deducting the estimated underwriting discounts and
commissions and offering expenses payable by us.
We intend to use the net proceeds of this offering for the following
purposes:
approximately $126.6 million for the construction of additional in-building
broadband networks, the purchase of communications equipment and related
capital expenditures;
approximately $3.2 million for the payment of dividends on our Series B, C
and D preferred stock due immediately prior to their conversion into common
stock; and
the remainder for working capital and general corporate purposes.
Our management continually evaluates potential strategic acquisitions and
investments, but at the present time, we have no commitments or agreements with
respect to any acquisition or investment other than our Canadian joint venture
described on page 40. Pending these uses, we intend to invest the net proceeds
from this offering in U.S. government securities and other investment-grade,
interest-bearing instruments.
The foregoing represents our present intentions with respect to the
allocation of proceeds of this offering based upon our present plans and
business conditions. The occurrence of unforeseen events or changed business
conditions could result in the application of the proceeds of this offering in a
manner other than as described in this prospectus.
DIVIDEND POLICY
Our board of directors has never declared or paid any cash dividends on our
common stock and does not expect to do so in the foreseeable future. We
currently intend to retain any earnings to finance the expansion and development
of our business. Our board of directors will make any future determination of
the payment of dividends based on conditions then existing, including our
earnings, financial condition and capital requirements, as well as such economic
and other conditions as the board of directors may deem relevant. In addition,
the payment of dividends may be limited by financing agreements that we may
enter into in the future.
20
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization (1) as of December 31,
1999, on an actual basis, (2) pro forma for the conversion of our preferred
stock into common stock, and (3) pro forma further adjusted for an amendment to
our certificate of incorporation to increase the number of our authorized shares
of common stock to and preferred stock to and the
sale of 16,670,000 shares of common stock offered by this prospectus.
This table does not include (1) up to 24,138,888 shares of common stock that
may be issued to real estate owners and agents upon the exercise of warrants,
(2) 800,000 shares of restricted common stock sold to officers under our stock
incentive plan in January 2000, (3) 3,177,500 shares of common stock issuable
upon the exercise of outstanding options, (4) 103,375 shares of common stock
reserved for issuance under our stock incentive plan and (5) up to 611,112
shares of common stock that may be issued to our Canadian joint venture partner
upon the conversion of its joint venture interest.
This table should be read in conjunction with 'Selected Financial and
Operating Data,' 'Management's Discussion and Analysis of Financial Condition
and Results of Operations' and our consolidated financial statements and the
notes to our consolidated financial statements, each of which is included in
this prospectus.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $ 24,412 $ 22,331 $206,768
-------- -------- --------
-------- -------- --------
Capital lease obligations, net of current portion........... $ 1,779 $ 1,779 $ 1,779
Redeemable Series B, C and D preferred stock................ 59,807 -- --
Stockholders' equity (deficit):
Preferred stock, $0.001 par value: shares
authorized, none issued and outstanding (pro forma as
adjusted)............................................. -- -- --
Series A preferred stock, $0.001 par value: 5,869,000
shares authorized, issued and outstanding (actual),
none (pro forma and pro forma as adjusted)............ 7,099 -- --
Common stock, $0.001 par value: 75,000,000 shares
authorized, 10,708,245 shares (actual), 46,205,657
shares (pro forma) and 62,875,657 shares (pro forma as
adjusted) issued and outstanding...................... 11 46 63
Additional paid-in capital.................................. 60,325 125,115 309,535
Stockholder loans........................................... (2,471) (2,471) (2,471)
Deferred equity compensation................................ (24,879) (24,879) (24,879)
Accumulated deficit......................................... (40,732) (40,732) (40,732)
-------- -------- --------
Total stockholders' equity (deficit)................ (647) 57,079 241,516
-------- -------- --------
Total capitalization........................................ $ 60,939 $ 58,858 $243,295
-------- -------- --------
-------- -------- --------
</TABLE>
21
<PAGE>
DILUTION
Our net tangible book value as of December 31, 1999, after giving effect to
the conversion of our outstanding preferred stock into common stock, which will
occur upon the completion of this offering, was approximately $32.0 million, or
$0.69 per share. Net tangible book value per share is equal to our total
tangible assets minus total liabilities divided by the number of shares of
common stock outstanding. Assuming we had also sold the 16,670,000 shares of
common stock offered hereby at an assumed initial public offering price of
$12.00, and after deducting underwriting discounts and commissions and estimated
offering expenses payable by us, our net tangible book value at December 31,
1999 would have been approximately $216.5 million, or $3.44 per share. This
represents an immediate increase in net tangible book value of $2.75 per share
to existing stockholders and an immediate dilution of $8.56 per share to new
investors in this offering. Dilution is determined by subtracting net tangible
book value per share after the offering from the amount of cash paid by a new
investor for a share of common stock. The following table illustrates the
substantial and immediate per share dilution to new investors:
<TABLE>
<CAPTION>
PER SHARE
--------------
<S> <C> <C>
Assumed initial public offering price....................... $12.00
Net tangible book value as of December 31, 1999......... $0.69
Increase attributable to new investors.................. 2.75
-----
Net tangible book value after giving effect to the
offering.................................................. 3.44
------
Dilution to new investors................................... $ 8.56
------
------
</TABLE>
The following table sets forth as of December 31, 1999 the number of shares
of common stock purchased from us, the total consideration paid and the average
price per share paid by existing stockholders, after giving effect to the
conversion of our outstanding preferred stock into common stock, and by new
investors. The calculations with respect to shares purchased by new investors in
this offering reflect an assumed offering price of $12.00 per share:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------------ ------------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE($)
------ ------- ------ ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 46,205,657 73% $ 94,716,941 32% 2.05
New investors................. 16,670,000 27 200,040,000 68 12.00
----------- --- ------------ ---
Total......................... 62,875,657 100% $294,756,941 100% 4.69
----------- --- ------------ ---
----------- --- ------------ ---
</TABLE>
If the underwriters exercise their over-allotment in full, the pro forma net
tangible book value per share of common stock as of December 31, 1999 would have
been $3.74 per share, which would result in dilution to the new investors of
$8.26 per share, and the number of shares held by the new investors will
increase to 19,170,500, or 29% of the total number of shares to be outstanding
after this offering.
The foregoing tables assume no exercise of any outstanding stock options or
warrants to purchase common stock. As of December 31, 1999, there were
outstanding options to purchase an aggregate of 2,623,500 shares of common stock
at a weighted average exercise price of $1.81 per share under our stock option
plan. As of December 31, 1999 we had agreed to issue warrants entitling the
holders to purchase an aggregate of 18,175,918 shares of common stock at an
exercise price of $2.36 per share. If all of these options and warrants had been
exercised on December 31, 1999 before the issuance of common stock in this
offering, our net tangible book value would have been approximately $79.7
million, or $1.19 per share. On issuance of common stock in this offering, our
net tangible book value on December 31, 1999 would have been approximately
$264.1 million, or $3.16 per share, the increase in net tangible book value
attributable to new investors would have been $1.97 per share and the dilution
in net tangible book value to new investors would have been $8.84 per share.
22
<PAGE>
SELECTED FINANCIAL AND OPERATING DATA
The following selected financial data should be read in conjunction with,
and are qualified by reference to, 'Management's Discussion and Analysis of
Financial Condition and Results of Operations' and our consolidated financial
statements and the notes to our consolidated financial statements, each of which
is included in this prospectus. The selected financial data presented are for
the period from July 5, 1996 (date of inception) through December 31, 1996, and
the years ended December 31, 1997, 1998 and 1999. The statement of operations
data for the years ended December 31, 1997, 1998 and 1999 and the balance sheet
data as of December 31, 1998 and 1999 are derived from our financial statements,
which have been audited by Ernst & Young LLP, independent auditors, and are
included elsewhere in this prospectus. The statement of operations data for the
period from July 5, 1996 (date of inception) to December 31, 1996 and the
balance sheet data as of December 31, 1996 and 1997 are derived from our audited
financial statements, which are not included in this prospectus.
Adjusted EBITDA consists of earnings before non-cash equity compensation,
net interest expense, taxes, depreciation and amortization. You should not think
of adjusted EBITDA as an alternative to operating income as an indicator of our
operating performance or as an alternative to cash flows from operating
activities (as determined in accordance with generally accepted accounting
principles) as a measure of liquidity. We have provided adjusted EBITDA because
it is a measure of financial performance commonly used in the communications
industry, however, other companies may calculate it differently than we do. We
have presented adjusted EBITDA to enhance your understanding of our operating
results.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 5, 1996) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, ------------------------------------
1996 1997 1998 1999
--------------- ------- ------- --------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Network service revenue...................... $ -- $ 19 $ 871 $ 3,646
Consulting revenue........................... 20 329 73 --
------ ------- ------- --------
Total revenue........................ 20 348 944 3,646
Operating expenses:
Direct costs of revenues................. -- 140 634 3,090
Selling, general and administrative
(including non-cash equity compensation
of $0, $64, $503 and $6,523,
respectively).......................... 77 1,241 4,478 29,361
Depreciation and amortization............ 1 23 366 2,838
------ ------- ------- --------
Total operating expenses............. 78 1,404 5,478 35,289
------ ------- ------- --------
Operating loss............................... (58) (1,056) (4,534) (31,643)
Other income (expense), net.................. (3) (64) (394) (899)
------ ------- ------- --------
Loss before income taxes..................... (61) (1,120) (4,928) (32,542)
Provision for income taxes................... -- -- -- --
------ ------- ------- --------
Net loss..................................... (61) (1,120) (4,928) (32,542)
Accreted and deemed dividends on preferred
stock...................................... -- -- -- (12,081)
------ ------- ------- --------
Net loss applicable to common stockholders... $ (61) $(1,120) $(4,928) $(44,623)
------ ------- ------- --------
------ ------- ------- --------
Net loss per common share, basic and
diluted.................................... $(0.02) $ (0.33) $ (1.19) $ (8.93)
------ ------- ------- --------
------ ------- ------- --------
Weighted average number of shares
outstanding................................ 3,339,500 3,439,714 4,156,836 4,998,545
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------
1996 1997 1998 1999
------- ------ ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ -- $ 122 $ 922 $24,412
Property and equipment, net.............................. 3 568 2,233 20,052
Total assets............................................. 20 906 4,224 74,775
Total liabilities........................................ 5 845 8,772 15,615
Redeemable preferred stock............................... -- -- -- 59,807
Total stockholders' equity (deficit)..................... 15 61 (4,548) (647)
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(JULY 5, 1996) YEAR ENDED DECEMBER 31,
TO DECEMBER 31, -----------------------------------------------
1996 1997 1998 1999
---------------- ----------- ----------- -----------
(IN THOUSANDS, EXCEPT OTHER OPERATING DATA)
<S> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Net cash used in operating
activities......................... $(64) $ (891) $(3,340) $(17,165)
Net cash used in investing
activities......................... (9) (350) (1,241) (18,692)
Net cash provided by financing
activities......................... 73 1,362 5,381 59,347
Adjusted EBITDA...................... (57) (969) (3,665) (22,282)
Capital expenditures................. 3 588 1,979 20,094
OTHER OPERATING DATA
(AT THE END OF THE PERIOD):
Buildings in service................. -- 2 24 118
Rentable square feet of buildings in
service............................ -- 309,900 4,508,221 26,501,619
</TABLE>
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our
consolidated financial statements and the notes to our consolidated financial
statements, each of which is included in this prospectus. This prospectus
contains forward-looking statements relating to future events and our future
financial performance. Actual results could be significantly different from
those discussed in this prospectus. Factors that could cause or contribute to
such differences include those summarized in the section entitled 'Risk
Factors,' as well as those discussed in other sections of this prospectus.
OVERVIEW
Since our inception in July 1996, our principal activities have consisted
of:
entering into access agreements with real estate owners;
designing, developing and installing our in-building broadband networks;
identifying collocation space and locations for our data network access
points as well as acquiring and deploying equipment and facilities;
obtaining customers;
raising capital;
hiring management and other key personnel;
developing and integrating our billing and collections, operational support
and administrative systems;
negotiating and executing agreements with wholesale communications
providers; and
obtaining required governmental authorizations.
As a result of our development activities and the deployment of our
networks, from inception to date, we have incurred operating losses, net losses
and negative operating cash flow. As of December 31, 1999, we had an accumulated
deficit of approximately $40.7 million. We currently intend to increase
substantially our capital expenditures and operating expenses in an effort to
expand rapidly our infrastructure and network services on a nationwide basis as
well as to develop and integrate our billing and collections, operational
support and administrative systems. We expect to incur substantial operating
losses, net losses and negative cash flow during our network buildout and
initial penetration into each new market we enter. We expect these losses and
negative cash flows to continue for at least the next several years.
FACTORS AFFECTING OPERATIONS
REVENUE
We currently derive a majority of our revenue from voice services and high
speed Internet access. We generally enter into one year service agreements with
our customers. Our voice services, including local and long distance, generally
have a fixed monthly recurring line component and a usage-based component
charged on a per call or per minute basis. Data services are generally billed as
fixed monthly recurring charges based on data transfer speeds selected by the
customer. We also bill our customers for non-recurring installation charges and
some equipment based on optional enhanced services, such as network security and
virtual private networks. All of our services are billed monthly in a single
invoice.
Revenue from a limited number of customers has comprised a substantial
portion of our revenue and may represent a substantial portion of our revenue in
the future. In 1999, our five largest customers accounted for approximately 24%
of our revenue, with Vantas accounting for approximately 11% of our revenue and
Reckson Associates accounting for approximately 7% of our revenue.
25
<PAGE>
Revenue from customers located within the buildings of a limited number of
real estate owners has comprised a substantial portion of our revenue and may
represent a substantial portion of our revenue in the future. In 1999, we
derived 62% of our revenue from customers located within the buildings of five
real estate owners. Of this amount, customers within the buildings of:
Reckson Associates accounted for approximately 21% of our revenue;
Taconic Investment Partners accounted for approximately 12% of our revenue;
SL Green Realty Corp. accounted for approximately 11% of our revenue;
Cogswell Realty Group accounted for approximately 9% of our revenue; and
130 Williams Street LLC accounted for approximately 9% of our revenue.
We also selectively offer our services to customers in buildings in which we
have not installed our in-building broadband network. While providing services
to these customers has lower margins than providing services to our in-building
broadband network customers, we will continue to pursue these customers to the
extent they present attractive financial opportunities or help us gain entry
into buildings to which we may not otherwise have access.
The market for voice and data services is highly competitive, and, as such,
we have seen our prices decline, and expect them to continue to decline, over
time. We expect in the coming years that an increasing percentage of our revenue
will come from high speed Internet access, data networking and enhanced services
such as virtual private networking, web-based e-mail, network security products
and remote access services.
DIRECT COSTS OF REVENUE
Our direct costs of revenue primarily include (1) payments to wholesale
voice services, Internet and data transmission capacity providers, (2) payments
to real estate owners for a portion of the communications services revenue
generated within their buildings and (3) costs for customer premises equipment.
We pay monthly recurring and usage-based charges to wholesale voice services
providers, which typically vary based on our customers' monthly usage. In order
to provide our data services, including high speed Internet access, we pay fixed
monthly charges for data transmission circuits between the buildings we serve
and our data network access points, as well as between our data network access
and our Internet and data backbone providers. Our contracts with wholesale voice
services providers and Internet and data transmission capacity providers
typically range in terms from three to seven years and may include minimum
volume commitments. We do not provide or lease telephone equipment to customers.
However, we do install data equipment which we provide at no cost to our typical
Internet access customer and expense as incurred. We expect that our voice and
connectivity service costs will increase as we enter new markets and initiate
services for customers in newly served buildings.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Our selling, general and administrative expenses include sales and
marketing, customer service, technical support, information systems, billing and
collections, general management and administrative functions, and non-cash
equity compensation. The number of our employees in functional areas, such as
customer service, engineering and operations, will increase as we expand our
network, and as the number of our customers increases. Selling, general and
administrative expenses include:
Sales and marketing costs. Our sales and marketing efforts focus on
creating, expanding and retaining our relationships with real estate owners
as well as the businesses in the buildings we serve. Sales and marketing
includes costs of employee salaries and commissions, marketing, advertising
and promotional expenses.
General and administrative costs. As we expand our network, we expect the
number of employees located in specific markets to grow. Some functions,
such as customer service,
26
<PAGE>
network operations, finance, billing and site planning, are likely to
remain centralized in order to achieve economies of scale.
Non-cash equity compensation. Non-cash equity compensation includes:
a charge for compensation to one of our officers; and
amortization of deferred compensation resulting from the granting of
stock options and sales of restricted stock to our employees with
exercise prices per share treated for accounting purposes as below the
fair value of our common stock at the dates of grant. We are amortizing
the deferred compensation over the vesting period of the applicable
stock option or restricted stock. We expect to incur deferred
compensation in current and future quarters and these amounts could be
material.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization primarily includes depreciation of cabling
infrastructure, hardware and software, furniture and fixtures, and leasehold
improvements. Cabling infrastructure includes installation expense, such as the
capitalization of salaries and overhead in connection with installations of our
in-building broadband networks. We expect depreciation and amortization, as a
percentage of revenue, to increase significantly as we expand and add new
buildings to our network.
We intend to issue up to 24,138,888 warrants to real estate owners and
agents at an exercise price of no less than $2.36 per share. To date, we have
agreed to issue up to 22,863,170 warrants to real estate owners and agents and
have incurred fees of approximately $2.5 million in connection with such
agreements. These warrants vest upon the execution of, or the occurrence of
events relating to the execution of, access agreements and thus the measurement
date for valuing the warrants is the date on which these events occur. On the
measurement dates, the fair market value of the warrants is capitalized and
amortized over the future periods not to exceed the term of the related access
agreements. To date, 4,420,038 warrants have vested at a fair market value of
approximately $24.6 million. We also issued 250,000 shares of common stock and
500,000 warrants to one of the real estate owners in exchange for $1.5 million
in cash and that owner's agreement to facilitate the execution of
property-specific access agreements.
OTHER INCOME (EXPENSE), NET
Other income (expense), net consists primarily of net interest expenses
associated with our borrowings.
INCOME TAXES
Prior to July 1, 1999, each of our predecessor entities was a limited
liability company which elected to be treated as a partnership and, as such, all
federal and state income taxes were the responsibility of its members. From July
1, 1999 to December 31, 1999, we did not generate any taxable income and,
therefore, have not paid any federal income taxes for this period. A full
valuation allowance has been recorded on the net deferred tax asset, consisting
primarily of net operating loss carryforwards, because of the uncertainty of the
realization of the deferred tax asset. As of December 31, 1999, this valuation
allowance was approximately $7.7 million. In the future, if we achieve operating
profits and the net operating losses have been exhausted or have expired, we
will experience tax expense.
27
<PAGE>
RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
Revenue in 1999 was $3.6 million, which represented an increase of 286%, or
$2.7 million, from 1998. The increase in revenue was due to the addition of new
customers and the provisioning of new and additional services to our customers.
DIRECT COSTS OF REVENUE
Direct costs of revenue were $3.1 million in 1999, which represented an
increase of 387%, or $2.5 million, from 1998. The increase in direct costs of
revenue was due to the additional buildout of data network access points and our
greater volume of voice and data traffic.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses were $29.4 million in 1999,
which represented an increase of 556%, or $24.9 million, from 1998.
Selling, general administrative expenses, excluding non-cash equity
compensation, were $22.8 million in 1999, which represented an increase of 474%,
or $18.9 million, from 1998. The increase in selling, general and administrative
expenses was due to costs incurred in preparation for the launch of our
commercial services on a nationwide basis, including increases in staffing
levels, marketing and advertising efforts and legal fees associated with the
development of new markets. The remainder of the increase was due to office rent
for our new corporate headquarters.
Non-cash equity compensation was $6.5 million in 1999, which represented an
increase of $6.0 million, from 1998. The increase was due to the issuance of
options and sale of restricted stock to employees and officers of our company.
In future periods, we will continue to record non-cash equity compensation. The
compensation will be recorded over the vesting periods of the stock options and
restricted stock.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $2.8 million in 1999, which represented an
increase of 675%, or $2.5 million, from 1998. This increase was due principally
to purchases of equipment to buildout our additional data network access points
as we continue to implement our national expansion. We also recorded
amortization expense of $505,000 in 1999 in connection with compensation we gave
to real estate owners and agents in return for access to buildings. Such
compensation is capitalized and then amortized over future periods not to exceed
the term of the related access agreements.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $(899,000) in 1999, which represented an
increase of 128%, or $(505,000), from 1998. This increase was due to the
interest expense related to a $6.5 million convertible loan from an affiliate of
FrontLine Capital Group and $20.0 million in promissory notes from the private
equity investors. The outstanding principal and accrued interest on the $6.5
million convertible note was converted into 5,869,000 shares of Series A
preferred stock. The $20.0 million in promissory notes, plus accrued and unpaid
interest, were cancelled in exchange for the issuance of Series B, C and D
preferred stock.
28
<PAGE>
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUE
Revenue in 1998 was $944,000, which represented an increase of 171%, or
$596,000, from 1997. The increase in revenue was due to the addition of revenue
from new customers for our communications services which represented $852,000.
This amount was offset by a decrease in consulting revenues of $256,000. We do
not expect to provide consulting services in the future.
DIRECT COSTS OF REVENUE
Direct costs of revenue were $634,000 in 1998, which represented an increase
of 354%, or $495,000, from 1997. The increase was due to costs associated with
the addition of new customers for our communications services and costs
associated with the installation and operation of our network operations center
and data network access points.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and expenses were $4.5 million in 1998, which represented
an increase of 261%, or $3.2 million, from 1997.
Selling, general and administrative expenses, excluding non-cash equity
compensation, were $4.0 million in 1998, which represented an increase of 238%,
or $2.8 million, from 1997. The increase in selling, general and administrative
expenses was due to increases in staffing levels and the expansion of our
network operations.
Non-cash equity compensation was $503,000 in 1998, which represented an
increase of $439,000 from 1997. This increase was due to the issuance of options
to one of our officers to purchase membership interests in OnSite Ventures,
L.L.C., our predecessor limited liability company.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization was $366,000 in 1998, which represented an
increase of 1,468%, or $343,000, from 1997. The increase was due to the
expansion of our network operations.
OTHER INCOME (EXPENSE), NET
Other income (expense), net was $(394,000) in 1998, which represented an
increase of 515%, or $(330,000), from 1997. This increase was due to the
interest expense related to the $6.5 million convertible note issued to an
affiliate of FrontLine Capital Group which has been paid off.
QUARTERLY FINANCIAL INFORMATION
The following table presents our unaudited quarterly statement of operations
data for the eight quarters ended December 31, 1999. Selling, general and
administrative expenses include non-cash equity compensation of $503,000 for the
three months ended September 30, 1998, $4.7 million for the three months ended
September 30, 1999 and $1.8 million for the three months ended December 31,
1999. This information has been derived from our unaudited financial statements.
In the opinion of management, this unaudited information has been prepared on
the same basis as the annual financial statements and includes all adjustments
consisting only of normal recurring adjustments necessary for a fair
presentation of the information for the quarters presented. This information
should be read in conjunction with the financial statements and related notes
included elsewhere in the prospectus. The operating results for any quarter are
not necessarily indicative of results for any future period.
29
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- --------- -------- -------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Network service revenue............. $ 81 $ 165 $ 271 $ 354 $ 547 $ 748 $ 1,022 $ 1,329
Consulting revenue.................. 73 -- -- -- -- -- -- --
----- ----- ------- ------- ------- ------- -------- --------
Total revenue................. 154 165 271 354 547 748 1,022 1,329
Operating expenses:
Direct costs of revenue.......... 69 126 179 260 410 562 790 1,328
Selling, general and
administrative.................. 558 798 1,778 1,344 1,744 3,365 10,546 13,706
Depreciation and amortization.... 51 81 103 131 202 330 713 1,593
----- ----- ------- ------- ------- ------- -------- --------
Total operating expenses...... 678 1,005 2,060 1,735 2,356 4,257 12,049 16,627
----- ----- ------- ------- ------- ------- -------- --------
Operating loss...................... (524) (840) (1,789) (1,381) (1,809) (3,509) (11,027) (15,298)
Other income (expense), net......... (43) (60) (118) (173) (281) (753) 42 93
----- ----- ------- ------- ------- ------- -------- --------
Net loss............................ $(567) $(900) $(1,907) $(1,554) $(2,090) $(4,262) $(10,985) $(15,205)
----- ----- ------- ------- ------- ------- -------- --------
----- ----- ------- ------- ------- ------- -------- --------
</TABLE>
LIQUIDITY AND CAPITAL RESOURCES
The development and expansion of our business requires significant capital
expenditures. From inception through December 31, 1999, we have incurred capital
expenditures, including equipment held under capital leases, totaling $22.7
million, primarily related to the construction of in-building broadband networks
and the buildout of data network access points.
To date, we funded our capital expenditures and operating losses through
various financings, including:
a $6.5 million convertible subordinated promissory note having an interest
rate of 12% per annum issued to an affiliate of FrontLine Capital Group in
February 1998, which was converted into 5,869,000 shares of Series A
preferred stock in July 1999;
a $3.0 million senior secured promissory note having an interest rate of
15% per annum issued to both JAH Realties, L.P. and an affiliate of
FrontLine Capital Group in February 1999;
promissory notes having an interest rate of 12% per annum for an aggregate
principal amount of $20.0 million issued to the private equity investors in
April 1999. With the proceeds from the $20.0 million in promissory notes,
we repaid the $3.0 million senior secured promissory note issued to both
JAH Realties and an affiliate of FrontLine Capital Group;
as part of our reorganization and recapitalization transaction, we entered
into a preferred stock purchase agreement with our private equity investors
in April 1999. Pursuant to this agreement, we issued an aggregate of
75,461,745 shares of Series B, Series C and Series D preferred stock to our
private equity investors in three installments from July to December 1999,
for an aggregate consideration of $60.0 million. We issued the first
installment of preferred stock to these private equity investors in
exchange for the cancellation of the $20.0 million in promissory notes,
plus accrued and unpaid interest of approximately $500,000; and
in July 1999, pursuant to a subscription agreement, we issued 511,620
shares of our common stock to various affiliated parties for an aggregate
purchase price of $230,229.
Upon the completion of this offering, all outstanding shares of our Series
A, Series C and Series D preferred stock will automatically convert into shares
of our common stock on a one-for-one basis, and all outstanding shares of our
Series B preferred stock will automatically convert into shares of our common
stock at the initial public offering price.
Immediately prior to the conversion of the preferred stock into common
stock, upon the completion of this offering, dividends on the Series B, C and D
preferred stock, totaling approximately $3.2 million, will become due and
payable.
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<PAGE>
We have operating lease commitments for office space and equipment which
expire through July 31, 2010. These operating leases provide for basic annual
rents plus escalation charges. Our minimum commitments through the life of these
leases amount to approximately $10.7 million.
In September 1999, we entered into a line of credit, which expires on
September 30, 2000, with Ascend Communications, a wholly owned subsidiary of
Lucent Technologies, Inc. Under this line of credit, we may borrow $50 million
for purchases of equipment from Lucent Technologies. Each draw on the line of
credit for a purchase of equipment converts into a new 36 month lease for that
equipment. As of December 31, 1999, we had borrowed $2.3 million under this line
of credit. As of December 31, 1999, future minimum lease payments under all
existing equipment leases, as well as the capital lease with Ascend, are $2.9
million.
In February 2000, we entered into a non-binding letter of intent with
Transamerica Business Credit Corporation for a $10 million line of credit. The
availability of the line of credit is subject to the satisfactory completion of
business, credit and legal analysis of our company by Transamerica. Under this
line of credit, if approved by Transamerica, we would be able to borrow for the
purchases of equipment, furniture and fixtures. This line of credit would expire
on July 31, 2000, and each draw on the line of credit would convert into a new
36 month lease.
In February 2000, we entered into a non-binding letter of intent for a $10
million line of credit with Jacom Computer Services, a wholly owned subsidiary
of Unicapital Corporation. Under this line of credit, we would be able to borrow
for the purchases of equipment and software up to $5.0 million before this
offering and up to an additional $5.0 million after this offering. Each draw on
the line of credit would convert into a new 36 month lease.
In February 2000, we entered into a joint venture with Oxford Properties
Group Inc., one of Canada's largest commercial real estate and management
services companies, to deploy our in-building broadband network in 86
multi-tenant buildings representing approximately 24.4 million square feet of
office space in Toronto and five other Canadian cities. The joint venture will
operate under the name OxfordOnSite and will initially be owned two-thirds by us
and one-third by Oxford. We will manage the joint venture and receive a
management fee based on OxfordOnSite's revenue. We have agreed to contribute
up to approximately $11.5 million to the joint venture and Oxford has agreed to
contribute to the joint venture up to approximately $5.8 million, each over
approximately the next 15 months. We have also agreed to issue up to 611,112
shares of our common stock upon the conversion of Oxford's joint venture
interest as a result of the exercise of Oxford's put rights or our call rights.
We have also entered into contracts with our wholesale voice services
providers, Internet access providers and data transmission capacity providers.
Under some of our contracts, if we fail to meet our minimum volume commitments
for national connectivity under these contracts, we will be obligated to pay
underutilization charges. In addition, we have committed to pay for
approximately $10.6 million of services from our voice and data providers
through 2003 under these contracts. We will have to pay these providers even if
we do not use their services.
We currently intend to substantially increase our operating expenses and
capital expenditures in an effort to rapidly expand our infrastructure and
network services on a nationwide basis. In addition, we intend to develop and
integrate our billing and collections, operational support and administrative
systems and estimate that modifying or replacing these systems will cost
approximately $34 million over the next two years, although actual costs may be
higher. During our expansion, we expect that our revenues will not increase at a
rate commensurate with these additional operating expenses and capital
expenditures, and therefore, we will incur substantial net losses and will have
negative cash flow from operating and investing activities.
To effectively address the next generation of services that our customers
may request, we are also incurring costs to deploy fiber-optic cable as part of
our in-building broadband networks, although most of this fiber-optic cable is
not currently being used. We would incur significant capital expenditures to
install fiber-optic equipment to work with our existing fiber-optic cabling if
our customers demand capacity that exceeds our copper-based broadband network
capacity. We
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<PAGE>
would also experience increased capital funding requirements if we needed to
install fiber-optic equipment to fulfill this demand.
We believe our current capital resources, together with the proceeds of this
offering, will be sufficient for our operating and working capital requirements
and for the deployment and operation of our networks in targeted markets through
approximately the second quarter of 2001. We will need significant additional
funds beyond then to complete our nationwide buildout. We expect that the actual
amount and timing of our future capital requirements will depend on the demand
for our services and on regulatory, technological and competitive developments,
including additional market developments and new opportunities, in our industry.
We may seek additional financing earlier than 2001 if:
we accelerate the schedule or expand the scope of our network rollout plan;
our plans or projections change or prove to be inaccurate;
we acquire other companies or businesses; or
market conditions allow us to raise public or privately financed capital on
attractive terms.
We may be unsuccessful in raising sufficient capital at all or on terms that
we consider acceptable. If we are unable to obtain adequate funds on acceptable
terms, our ability to deploy and operate our networks, fund our expansion or
respond to competitive pressures would be significantly impaired. These
limitations could hinder our ability to become profitable.
YEAR 2000 READINESS DISCLOSURE
The year 2000 problem is the potential for system and processing failures of
date-related data arising from the use of two digits by computer controlled
systems, rather than four digits, to define the applicable year. We completed
our year 2000 assessment in 1999 and have not experienced any material year 2000
difficulties to date. We do not expect to incur any material costs related to
year 2000. We rely, directly and indirectly, on the systems of business
enterprises such as customers, suppliers, utilities, creditors and financial
institutions, which could be subject to operational difficulties arising out of
year 2000 issues. Any failure on the part of our principal internal systems or
other business systems as a result of the year 2000 problem could harm our
business, reputation, financial condition or results of operations.
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BUSINESS
OUR BUSINESS
We provide comprehensive communications solutions for small and medium-sized
business customers in multi-tenant commercial office buildings. We offer an
integrated and scalable suite of data, voice and enhanced services delivered
through in-building broadband communications networks that we own and operate.
Our offerings include data networking, high speed Internet access, local and
long distance voice services, and enhanced services.
Our facilities-based, building-centric service approach is designed to
address the current and evolving communications needs of our customers. This
approach consists of developing a customized in-building broadband network that
we design, install, own and operate within multi-tenant commercial office
buildings and providing focused consultative sales and customer service. We
believe that by owning and operating the in-building broadband network, or what
we refer to as the first foot of the communications network, we can better
control our relationship with our customers. By managing the initial
provisioning and ongoing delivery of complete customer care, we alleviate our
customer's need to interface with other communications providers. Our
in-building broadband network, together with our consultative customer sales and
support, enables small and medium-sized businesses to obtain core telephony
services bundled with bandwidth-enabled data services, which we believe may not
otherwise be available to them on a cost-effective basis.
To date, we have contracts with real estate owners that will enable us, upon
the execution of property-specific access agreements, to offer our services in
buildings representing approximately 362 million rentable square feet of
commercial office space. We currently have property-specific access agreements
for approximately 120 million rentable square feet of commercial office space,
with 118 buildings in service representing approximately 26.5 million rentable
square feet. We are also developing a nationwide data network and have
constructed 10 data network access points to serve 22 metropolitan areas. We
intend to offer our services in up to approximately 50 metropolitan areas over
the next two to three years.
We began offering services in the New York metropolitan area in September
1997. Our predecessor company was Veritech Ventures, LLC, a New York limited
liability company formed in July 1996. In November 1997, Veritech Ventures
contributed substantially all of its assets and liabilities to OnSite Ventures,
L.L.C., a Delaware limited liability company. In July 1999, we completed a
reorganization and recapitalization transaction in which OnSite Ventures merged
into our company. As a result of the merger, all of the membership interests in
OnSite Ventures were automatically converted into shares of our common stock.
OUR MARKET OPPORTUNITY
Small and medium-sized businesses represent a significant portion of the
total communications spending in the United States. According to International
Data Corporation, there are 7.4 million businesses with under 100 employees in
the United States. International Data Corporation estimates that spending on
voice and data communications by these customers totaled $53 billion in 1998,
and is expected to grow to $83 billion by 2003.
We believe that small and medium-sized businesses represent an attractive
market opportunity that has not been adequately served by incumbent local
telephone companies or competitive service providers. We believe that one of the
reasons this market segment has been underserved has been the inability of
service providers to obtain capital and operating efficiencies similar to those
currently attained by servicing large business customers. To achieve such
efficiencies, we use broadband technologies to aggregate communication services
from small and medium-sized businesses located within multi-tenant commercial
office buildings. We believe that the high concentration of target customers
within these buildings creates efficiencies for the deployment of our
in-building broadband network and the marketing of our services. Since these
businesses often lack the scale and resources to hire dedicated in-house
communications professionals, we have found that they value the simplified
approach of working with a single source provider of integrated communications
solutions.
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The U.S. Department of Energy estimates that there are approximately 188,000
commercial buildings in the United States larger than 50,000 square feet. We
typically target commercial office buildings with greater than 50,000 rentable
square feet and with ten or more tenants whose communications needs we believe
are underserved. The principal in-building communications network for the vast
majority of these buildings consists of original copper wiring installed by the
incumbent local telephone company. We have found that these legacy networks are
inadequate for provisioning high quality, high speed data services that are
increasingly demanded by small and medium-sized business customers. Accordingly,
we believe we are well positioned to fully and cost-effectively address the
complete set of data, voice and enhanced services needs of this market segment
through our facilities-based, building-centric approach.
OUR STRATEGY
Our objective is to be the complete communications solutions provider to
small and medium-sized business customers in multi-tenant commercial office
buildings within our markets. To achieve our objective, we:
Offer a bundled package of communications services. We offer a complete
suite of data, voice and enhanced services to our customers. By offering
comprehensive communications services, we believe we can provide a
customized suite of services to fit each customer's individual needs. We
believe that customers who purchase our bundled services prefer the
convenience of a single provider for all services and are therefore less
likely to seek other providers.
Establish lasting relationships with our customers. We deliver responsive,
high quality service and customer care on a personalized basis to foster
lasting relationships with our customers. We provide tenants with
continuous sales and marketing services through our dedicated consultants,
whom we refer to as building communications managers. We also provide
tenants with operational support and customer service through our customer
care representatives and customer service coordinators. We believe that
this focused team approach forges close relationships with our customers
and promotes increased customer penetration and retention.
Expect to expand service offerings and create new communications channels.
We plan to expand our service offerings to include new broadband
applications and Internet-based services. We intend to market and deliver
many of these new services to our customers through an enhanced web-based
interface that will allow our customers to obtain communications and
business services from application service providers as well as local
merchants and building-related providers. For that purpose, we plan to
customize web portals for individual buildings through which we will
provide both value added services for our customers and real estate owners
and a marketing and sales channel for our service partners.
Partner with real estate owners. We will continue to establish mutually
beneficial relationships with real estate owners to facilitate our access
to buildings and penetration of our target customer base. We often work
with real estate owners to develop a joint marketing strategy to reach
prospective customers. Partnering with owners of large portfolios of
buildings also enables us to expand quickly and efficiently on a nationwide
basis. Building owners benefit from these relationships through the
addition of a no-cost, value-added technology upgrade to their buildings as
well as the opportunity to receive a portion of the communications services
revenue generated within their buildings.
Deploy capital efficient in-building broadband networks. We typically
install both copper and fiber-optic cabling in our served buildings, which
enables us to address the current needs of our customers while providing
for future growth in broadband capacity and increases in service features.
Initially, we deploy copper-based digital subscriber line equipment while
deferring investments in more expensive fiber-optic switching equipment. We
believe our digital subscriber line technology is capable of providing the
bandwidth necessary to satisfy
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our customers' current data needs while requiring significantly less
capital investment than immediately activating our fiber-optic
infrastructure. We selectively install switching equipment for use with our
fiber-optic cabling when a customer in that building has bandwidth needs
exceeding the current capabilities of our copper-based infrastructure. By
minimizing our initial capital outlay, we broaden our target market
opportunity because we can economically serve a wider range of building
sizes and pursue more cost-effective customer penetration within buildings.
Own and control critical network elements. We own the critical in-building
broadband network elements of our served buildings, including the copper
and fiber-optic cabling and related high speed data communications
equipment. We are also developing a nationwide data network that connects
our served buildings and allows us to gain the cost and performance
advantages of data traffic aggregation, routing redundancy and proactive
network monitoring. We believe that owning data network elements, such as
switching equipment and application servers, enables us to create a
platform for providing highly reliable broadband applications. We believe
that these investments increase our control over the data network and
enhance our ability to provide faster, more reliable data services.
Expand our network to other metropolitan areas. We are developing a
nationwide data network and have constructed 10 data network access points
to serve 22 metropolitan areas. We intend to offer our services in up to 50
metropolitan areas over the next two to three years.
OUR SOLUTION
Our solution offers a number of advantages to small and medium-sized
business customers, including:
Comprehensive service offerings. We offer scalable solutions designed to
meet the complete communications needs of small and medium-sized business
customers. Our bundled services are billed in a single invoice for
increased customer convenience. Our services include:
-- data services such as high speed Internet access and data networking;
-- voice services such as local and long distance, and custom calling
features; and
-- enhanced services such as e-mail, web hosting, virtual private networks
and network security.
Competitively priced services. Efficiencies created by our in-building
broadband network and the concentration of target customers within our
served buildings allow us to offer bundled services on a cost-effective
basis. We offer local voice services at prices that are typically lower
than comparable voice services provided by incumbent local telephone
companies. We also offer long distance and high speed Internet access at
competitive rates and provide additional discounts to customers who
purchase bundled services.
Dedicated building communications managers. We create a local, single point
of contact for our customers by assigning a building communications manager
to each building to manage the ongoing relationship with each customer. Our
building communications managers work with existing and prospective
customers to identify solutions for their communications needs. Once these
requirements have been identified, the building communications manager
works with our operations department to develop and deliver a customized
bundle of services targeted to those customers' current and evolving
communications needs. We provide on-going incentives for our building
communications managers to increase customer penetration and retention.
Rapid and easy provisioning. Unlike other communications providers who rely
on incumbent local telephone companies to complete each customer
installation, once we have installed our in-building broadband network, we
are typically able to provision services to a new customer on an average of
five business days. We connect each customer's voice and local area
networks directly to our in-building broadband network so that our
customers usually
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do not need to purchase or install any new equipment. Our in-building
broadband network also allows our existing customers to upgrade to higher
bandwidth data services or provision new services without dispatch of
technical personnel.
Responsive customer service. We have developed an organizational structure
dedicated to being responsive to customer needs and concerns. We maintain a
network operations center which permits us to identify and resolve network
problems efficiently. We also maintain a toll-free customer service hotline
and employ field support technicians who are on call 24 hours a day, 365
days a year.
Additional enhanced services. We currently provide our customers with
enhanced services including web-based e-mail, web hosting, virtual private
networking and network security products and services. Through internal
development and selective strategic alliances with commerce, content and
technology providers, we anticipate offering additional enhanced services
in the future. We have designed our in-building and nationwide data
networks to be capable of providing high availability, bandwidth-enabled
data services such as Internet protocol-based video streaming, information
technology outsourcing and business applications hosting.
OUR NETWORK
We believe our network is designed to address the current data, voice and
enhanced services needs of our small and medium-sized business customers in a
capital efficient manner while ensuring that feature and bandwidth capabilities
exist to provide next generation services. We invest in network facilities when
we believe such investment provides competitive cost and performance advantages.
The major elements of our in-building and nationwide network include:
an in-building broadband network consisting of
-- a physical point-of-presence in which we own, install and manage high
speed data communications equipment and in which we install and manage
voice communications equipment provided by our wholesale voice services
providers; and
-- copper and fiber-optic cabling that we configure, install, own and
manage in the building's vertical utility shaft, also known as its
riser system;
nationwide data network access points consisting of high speed data
switching equipment and application servers that we own and co-locate with
national Internet backbone providers;
data and voice transmission capacity provided through
-- leased communications capacity connecting our served buildings to our
data network access points, each of which are connected to our network
operations center for data services; and
-- our wholesale voice services providers' nationwide network for voice
services; and
a network management system that we own and operate to monitor network and
system availability, performance and usage 24 hours a day, 365 days a year.
IN-BUILDING BROADBAND NETWORK
Each of our buildings typically has a dedicated 100 square foot locked space
that houses data and voice communications equipment. This area serves as our
physical point-of-presence within the building and is built to our
specifications to include primary power supplies and battery back-up equipment
capable of providing up to eight hours of standby power.
We typically install both copper and fiber-optic cabling in our served
buildings, which enables us to address the current communications needs of our
customers while providing for future growth in broadband capacity and increases
in service features. The cabling extends from a
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termination block on each floor to the data and voice switching equipment housed
in our physical point-of-presence within a building. When a customer in the
building initially requests service, our technician extends a connection from
the floor termination block to a demarcation point inside the customer's leased
office space. For data customers, additional equipment is installed in the
customer's premises and connected to their internal local area network.
For data services, we typically own and install at our physical
point-of-presence copper-based digital subscriber line access multiplexer
equipment capable of providing high speed Internet and data connections to our
customers within a building. We believe our digital subscriber line technology
is capable of providing the bandwidth necessary to satisfy our customers'
current data needs and requires significantly less capital investment than
immediately activating our fiber-optic infrastructure. Our digital subscriber
line equipment and copper cabling can provide symmetrical data connections with
speeds of up to 1.5 million bits per second today. We expect to provide
transmission speeds of up to 6.0 million bits per second within the next twelve
months.
The speed and effectiveness of digital subscriber line technology vary based
on the quality of the copper cable and the distance of the end user from the
digital subscriber line access multiplexer equipment, which is typically housed
in a telephone carrier's central office. By locating data communications
equipment in our served buildings, we reduce the distance that our copper
cabling infrastructure extends from the farthest end user to the communications
equipment in our building point-of-presence. This distance is typically less
than 1,000 feet.
To ensure high quality service, we configure our in-building copper cabling
to minimize the potential interference and service degradation that can result
from transmitting voice and data signals over a shared medium. In addition, our
in-building copper cabling does not have elements such as loading coils or
bridged taps, which were commonly used by incumbent local telephone companies to
extend the functional reach of copper cable from their central office. Digital
subscriber line providers that provision service from an incumbent local
telephone company's central office often have to locate and remove loading coils
and bridged taps from the copper cable in order to provide service, an expensive
and inconvenient process.
For voice services, we connect our copper cabling infrastructure with remote
transmission equipment, also known as voice digital loop carriers, which are
owned by our wholesale voice services provider and located at our physical
point-of-presence. We are evaluating new technologies which would allow the
integration of voice traffic from the existing voice digital loop carrier
equipment onto our owned data network equipment. Since this migration would
require additional capital expenditures, we continue to evaluate this
development as it becomes more efficient and economical for our customers.
DATA NETWORK ACCESS POINTS
For our nationwide data network, we connect our in-building broadband
network to a regional data network access point. In most markets, we also use a
local data network access point to aggregate and direct traffic to a regional
data network access point. The regional data network access point consists of
application servers, communications traffic routers and data switching equipment
to provide connectivity to nationwide Internet service providers. The switching
equipment housed in our data network access points can manage asynchronous
transfer mode, frame relay and Internet protocol transmissions, all of which are
high speed, digital transmission technologies. We generally connect each
regional data network access point to multiple Internet service providers to
provide redundant Internet connectivity to our network. In each of our regional
data network access points, we co-locate application servers that interconnect
to other network and application service providers. This approach allows us to
provide value-added data applications to our customers with a highly reliable,
high speed nationwide network.
DATA AND VOICE TRANSMISSION CONNECTIVITY
For our data network, we lease the communications capacity that connects the
buildings we serve to our data network access points. A data network access
point connects to a national
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Internet backbone as well as to our network operations center where we manage
and monitor our network traffic.
For our voice network, our wholesale voice services providers are typically
responsible for connecting our in-building networks to their external
facilities. Currently, our wholesale voice services providers monitor all our
voice service elements.
NETWORK MANAGEMENT SYSTEM
We have built a network management system that monitors network and systems
availability, performance and usage 24 hours a day, 365 days a year. Our network
operations center generally allows us to test equipment at each point in our
in-building and nationwide data networks.
REAL ESTATE ACCESS
Prior to deploying our in-building broadband networks, we secure access
rights from the real estate owner to install and operate our in-building
broadband network within the commercial office building. Our typical license or
access agreement has an initial term ranging from five to ten years, with
renewal options ranging from five to fifteen years. These agreements also may
provide for a marketing arrangement under which the real estate owner recommends
our services to existing and prospective tenants.
Property selection. Our real estate professionals select properties,
negotiate access agreements and facilitate relationships with commercial real
estate owners nationwide. We focus on national real estate investment trusts,
property managers, real estate agents and owners with portfolios of local
properties. We also target insurance companies and pension funds that hold
commercial real estate. We consider a number of factors in selecting buildings
for our services, including building location, building size, number of tenants,
tenant mix, revenue opportunity, competition, network access and buildout costs.
We typically target buildings with more than 50,000 rentable square feet and ten
or more tenants. In addition, we evaluate the presence of any existing
communications providers in the building.
Value to real estate owners. We offer the following value proposition to
real estate owners:
No cost, technology upgrade. We install, at no cost to the real estate
owner, an in-building broadband network that becomes an amenity to the
building.
Marketing and leasing amenity. Our services represent a significant
marketing and leasing amenity to attract and retain tenants, which we
believe increases tenant satisfaction and results in increased occupancy
and rental rates.
Recurring incremental revenue stream. We provide real estate owners with
the opportunity to share in the communications services revenues generated
within their buildings.
Building communications manager as an extension of the building staff. We
assign to each property a building communications manager who functions as
an extension of the building staff and is available to assist with the
day-to-day communications requirements of the tenants at no cost to the
real estate owner.
Real estate marketing. We support our business development efforts with
local and national advertising, trade show marketing and other marketing
support. We believe these efforts will be critical in facilitating the branding
of our company among real estate owners, brokers and management and leasing
agents and in educating them on the value of our services. The majority of the
advertising activities have been and will be focused within real estate trade
journals, as well as other local and national publications with sections
dedicated to or targeted to the real estate community.
Real estate agents and property managers. We plan to develop relationships
with third party agents or property managers who have influence with real estate
owners. These agents and managers are either large national real estate
brokerage firms or large national real estate telecommunications management
organizations. The terms of these relationships may require us to
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pay fees or issue equity in our company in return for facilitating contracts
with real estate owners. In addition, we sometimes pay referral fees for
contracted buildings.
OUR MAJOR REAL ESTATE RELATIONSHIPS
We have contracts with the following real estate owners that enable us, upon
the execution of property-specific access agreements, to offer our services in
buildings representing approximately 362 million rentable square feet of
commercial office space:
<TABLE>
<CAPTION>
REAL ESTATE OWNER SQUARE FEET PRINCIPAL MARKETS
- ----------------- ----------- -----------------
<S> <C> <C>
Angelo, Gordon & Co........ 8.2 Dallas, Denver, Indianapolis, Los Angeles, New York
Tri-State Area, Philadelphia, Phoenix and Washington, DC
Childress Klein
Properties............... 5.4 Atlanta
Cummings Properties........ 4.2 Boston
Equity Office Properties... 22.4 Atlanta, Boston, Chicago, Columbus, Dallas, Ft.
Worth, Houston, New York Tri-State Area, Norfolk,
Philadelphia, San Francisco, Washington DC
JMB/Walton Street
Capital.................. 10.6 Boston, Chicago, Cleveland, Houston, Los Angeles,
Minneapolis, Pittsburgh, San Diego, San Francisco,
Seattle, South Florida
Legacy Partners
Commercial............... 8.0 Denver, Los Angeles, New York Tri-State Area, San
Diego, San Francisco, Washington DC
Lend Lease Real Estate
Investments, Inc......... 50.0 Atlanta, Charlotte, Chicago, Cincinnati, Columbus,
Dallas, Denver, Indianapolis, Kansas City, Los
Angeles, New York Tri-State Area, Orlando,
Philadelphia, Phoenix, San Diego, San Francisco, St.
Louis, Tampa, Washington DC
Oxford Properties.......... 24.4 Calgary, Edmonton, Montreal, Ottawa, Toronto,
Vancouver
Praedium Funds............. 8.1 Chicago, Houston, Indianapolis, Los Angeles, New York
Tri-State Area, Orlando, Philadelphia, Phoenix, San
Diego, St. Louis, South Florida
Prime Group Realty......... 8.5 Chicago
Reckson Associates......... 12.1 New York Tri-State Area
SL Green Realty............ 15.0 New York Tri-State Area
Starwood Capital........... 4.5 Boston, Chicago, Los Angeles, New York Tri-State
Area, Phoenix, Washington DC
The Taylor Simpson Group... 8.1 Atlanta, Dallas, Detroit, Minneapolis, New York
Tri-State Area, South Florida, St. Louis
Tishman Speyer
Properties............... 20.0 Chicago, Indianapolis, Los Angeles, New York
Tri-State Area, Orlando, Washington DC
TMW Real Estate Group...... 5.1 Atlanta, Boston, Charlotte, Chicago, Los Angeles,
Orlando, Phoenix, San Diego, Seattle, Washington DC
Tower Realty Management.... 20.6 Baltimore, Boston, Chicago, Dallas, Detroit, Los
Angeles, New York Tri-State Area, Philadelphia,
Phoenix, San Francisco, Seattle, South Florida,
Tampa, Washington DC
Transwestern Investment
Company.................. 5.7 Atlanta, Chicago, Denver, Detroit, Houston, Los
Angeles, New York Tri-State Area, Phoenix, San
Antonio, Washington DC
Trizec Hahn................ 23.9 Chicago, Detroit, Kansas City, Los Angeles,
Minneapolis, New York Tri-State Area, Pittsburgh, St.
Louis
</TABLE>
(table continued on next page)
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<PAGE>
(table continued from previous page)
<TABLE>
<CAPTION>
REAL ESTATE OWNER SQUARE FEET PRINCIPAL MARKETS
- ----------------- ----------- -----------------
(IN MILLIONS)
<S> <C> <C>
The Witkoff Group.......... 13.5 Chicago, Dallas, New York Tri-State Area,
Philadelphia
86 owners, each with less
than 4.0 million rentable
square feet.............. 83.7 Various markets
-----
Total...................... 362.0
-----
-----
</TABLE>
Of the total amount of rentable square feet set forth in the table above, we
have property-specific access agreements for approximately 120 million rentable
square feet of commercial office space, with 118 buildings in service
representing approximately 26.5 million rentable square feet. If
property-specific access agreements are not executed, we will not be able to
offer our services in the applicable buildings.
In addition, we have relationships with building communications agents and
leasing agents, including Cushman & Wakefield, Devnet, Insignia/ESG and US
Realtel.
NETWORK DEPLOYMENT PROCESS
We have assembled a group of communications professionals and construction
engineers with experience in riser infrastructures, local and wide area networks
and fiber-optics. We believe that our communications and construction
capabilities allow us to deploy rapidly and efficiently our in-building
broadband networks within the markets we penetrate.
Standardized in-building broadband network model. Our communications
professionals and construction engineers have developed a standardized
in-building broadband network model that we can adapt and customize to a
particular building. This basic model is designed to:
achieve optimal service delivery to our customers;
maximize the technological and cost-efficiency of our combination copper
and fiber-optic cabling infrastructure; and
minimize the space and resources dedicated to supporting our infrastructure
and associated electronic equipment.
Constructing our in-building broadband network. Prior to the commencement of
construction of an in-building broadband network, our construction engineers
conduct a formal, detailed survey of the building site. Our construction
engineers then develop a network design specific to the building based on our
standard in-building broadband network methodology. The construction engineers
also identify potential contractors from our pool of national and local vendors
to install our in-building broadband network. We typically outsource, on a fixed
price basis, services from cabling contractors and electrical contractors for
installation of the copper and fiber-optic cabling. Our own field technician
installs the voice and data communications equipment and coordinates the
installation process among our vendors to ensure that installation complies with
our design specifications as well as applicable national and local building and
industry codes and standards.
The total construction time for the completion of our in-building broadband
network and related equipment is typically between 60 and 90 days for a
metropolitan area commercial office building. For an average building under
contract with approximately 250,000 rentable square feet, we expect to spend
approximately $92,000 for the construction of the vertical copper and fiber-
optic infrastructure and the installation of related electronic equipment for
data transmission which would typically enable us to provide data and voice
services to all tenants in an average building. These construction costs vary
considerably with building size, location, complexity of the construction
project and other factors. We choose not to invest in voice switching equipment
or transmission facilities between our owned network elements.
Building connections to our customers. Once we have completed the
construction and installation of our in-building broadband network and have
received an order for service from a
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customer, our field technicians connect the customer's local area data network
or telephone system to our in-building broadband network and install any
necessary customer premises equipment. Typically, this connection can be
completed on an average of five business days. Once this connection is made, our
field technician will help the customer test the network connection to verify
that the intended desktop computers or phones are receiving our service.
Buildout of data network access points. Our data network access equipment is
housed in nationwide carrier facilities where multiple Internet service
providers co-locate their transmission equipment. These facilities are managed
by a collocation provider. We inspect, assemble, test and inventory all data
network access equipment prior to installation. We then work with our
collocation provider to identify the equipment location and service requirements
within the particular collocation facility. The equipment is installed in the
collocation facility by us or through a major equipment vendor.
OUR SERVICES
Our service offerings are designed to improve the business communications
capabilities of small and medium-sized business customers and include data,
voice and enhanced services. We provide a customized suite of services to fit
our customers' individual needs. These services fall into three categories and
are summarized as follows:
Data services. Our data services currently include high speed Internet
access, frame relay data networking and other high-speed data transmission
services. We currently provide dedicated high speed Internet access in a variety
of bandwidth connections with symmetrical speeds of up to 1.5 million bits per
second. We expect to provide transmission speeds of up to 6.0 million bits per
second within the next twelve months. While some data service providers require
a user to dial a phone number and wait while the modem connects to the Internet,
our dedicated service is 'always on,' providing instantaneous connection to the
Internet and the ability to send and receive data continuously. We selectively
install fiber-optic switching equipment for use with our fiber-optic cabling
when a customer's current bandwidth needs exceed the existing capabilities of
our copper infrastructure.
Voice services. We offer our customers the complete range of local and long
distance voice services that we purchase through our wholesale voice services
providers. Our local voice services include:
standard phone lines with custom line features such as voice mail, call
waiting, call forwarding, call return, three way conference calling,
extension dialing, call hunting and caller ID; and
other high-volume dedicated circuit offerings such as T-1 access, which can
provide up to 24 voice channels.
We also offer local number portability, which allows our customers to retain
their existing local phone number when switching from their current local
telephone provider to our service. We provide a complete range of competitively
priced domestic and international long distance services, toll free service,
conference calling, calling cards and operator services.
Enhanced services. We offer enhanced services designed to provide data and
Internet solutions for small and medium-sized businesses. These services
include:
web-based e-mail, a hosted service based on a web mail interface that
requires no software downloads or configurations;
web-hosting, a managed data service that provides customers with a web
presence;
virtual private networking, a data networking solution for secure,
cost-effective transmission of private Internet protocol traffic through
the Internet; and
network and data security products and services which include corporate
firewall, user authentication and data encryption services.
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We intend to increase our service offerings in the future to include
value-added business applications including:
unified messaging services, which allow users to send and receive e-mail,
voicemail and faxes through a single interface;
Internet protocol-based video conferencing;
e-commerce services, which provide users the ability to sell products and
services on the Internet;
remote file storage and back-up; and
business software management.
We have designed our in-building broadband and nationwide data networks to
be capable of providing high availability, bandwidth-enabled services. Through
internal development and selective strategic alliances with commerce, content
and technology providers, we anticipate offering these enhanced services through
building-specific web interfaces or web portals.
In February 2000, we invested $1.0 million in Mi8 Corporation, an
application service provider, which provides small and medium-sized businesses
with cost-effective access to business-class software and enterprise technology
solutions delivered over the Internet. Mi8's initial application services focus
on groupware and enterprise applications, and include Microsoft
Outlook/Exchange, IBM/Lotus Notes and GoldMine.
OUR SALES AND MARKETING
We offer an attractively priced, comprehensive suite of data, voice and
enhanced services utilizing a consultative sales approach. We use our
relationship with real estate owners, building management and leasing
representatives to market our services directly to the tenants in properties. A
key to our strategy is our building communications manager, who acts as the
building's communications consultant and is responsible for developing and
maintaining relationships with the tenants within the building. By targeting
buildings with a high concentration of potential customers, we are able to
increase the effectiveness of our sales and marketing efforts.
Building sales and marketing approach. Prior to the completion of our
in-building broadband network, the building communications manager works with
the real estate owner or managing or leasing agents to develop a database of the
tenants and profiles of their businesses and potential communications needs. The
building representative then typically sends a survey and a letter introducing
the building communications manager to each tenant. We also use lobby signage,
direct mail and other promotional events to create awareness of our brand and
services among the tenants of the building. Shortly after completion of the
in-building broadband network, we typically schedule a kick-off lobby event led
by the building communications manager to provide tenants with the opportunity
to meet our employees and familiarize themselves with our services. The building
communications manager then follows up with direct consultative sales efforts
supported by on-going promotions which may include installation fee waivers or
discounts.
Building communications managers. We recruit our building communications
managers from the communications industry and provide them with ongoing,
in-house training on our broad range of service offerings. Building
communications managers are compensated with a base salary and a commission plan
structured to encourage increased building penetration and customer retention
within their assigned buildings. While many communications companies pay their
sales personnel a large, one-time percentage of a sales commission shortly after
a sale, our building communications managers receive a smaller up-front sales
commission but have the opportunity for larger commissions paid over the life of
the customer relationship. We anticipate that this commission structure will not
only forge stronger customer relationships but will also reduce turnover of our
building communications managers.
Organizational structure. Each building communications manager is typically
responsible for several buildings, depending on the size of the building and the
building's market demographics. In larger markets, we will have a team of four
to six building communications managers led by a
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team leader, who will in turn report to the sales director for a given market.
In smaller markets, the building communications manager will report directly to
the sales director. The sales director will report to the general manager for
the particular market. The general manager has full sales and marketing
responsibility for the given market.
Sales and marketing support. We support our building communications managers
with sales engineering and account administrative support. Our sales engineers
can provide additional technical sales support for data and enhanced services as
needed by our customers. In addition, we have a centralized marketing team
responsible for developing, promoting and branding our services. The marketing
team is also responsible for ensuring that our services remain competitive with
the marketplace by continually monitoring the competitive landscape on a
market-by-market basis. The team monitors changes in service offerings,
competition and price variations. We supplement our sales and marketing
operations through our website located at www.onsiteaccess.com.
OUR CUSTOMER CARE
We have established an organizational structure dedicated to being highly
responsive to customer needs and concerns.
Rapid and easy provisioning. Unlike other providers of voice and
bandwidth-enabled data services who rely on incumbent local telephone
companies to complete each customer installation, once we have installed
our in-building broadband network, we are able to independently provision a
new customer in that building on an average of five business days.
Network management. We monitor our network 24 hours a day, 365 days a year,
from our network operations center. Our network management system permits
us to identify and resolve network problems quickly. The network operations
center maintains visibility into each element of our network, allowing us
to provide reliable service and efficient customer installation, as well as
rapid response to customer inquiries. Currently, all voice service network
elements are monitored by our voice services providers who have procedures
in place to notify our network operations center when there is a problem
with a voice connection or network element.
Customer service hotline. We operate a toll-free customer service hotline
that operates 24 hours a day, 365 days a year, to address customer needs
and concerns.
Field support. We have field technicians in each market who are on call
24 hours a day, 365 days a year. These technicians provide on-premises
field installation, troubleshooting, equipment repair and other customer
support functions.
Billing and back-office support. We currently issue customers' bills on a
monthly basis with a single bill for all services. Our customer service
center handles billing inquiries. We are in the process of implementing a
new billing system from Daleen Technologies that will enable us to continue
to provide a single integrated bill for all services used by a customer as
well as provide discounts to purchasers of bundled services. We also plan
to offer a web-based billing interface for customer convenience. In
addition, we are selecting and implementing a new operations support system
which will increase the speed and efficiency of our order provisioning and
customer care.
COMPETITION
The market for data and voice services for small and medium-sized businesses
is extremely competitive. We face competition on price and quality of service
from traditional and new communications companies with longer operating
histories, more established customer relationships, greater financial, technical
and marketing resources, larger customer bases and greater brand or name
recognition than we have. These competitors include:
in-building competitors;
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incumbent local telephone companies;
long distance companies; and
Internet, digital subscriber line and cable modem service providers.
Furthermore, the numerous companies that may seek to enter our niche may
expose us to severe price competition for our services or for securing building
access rights. Our competitors may also be able to respond more quickly to
technological developments and changes in customers' needs. Any of these factors
may limit our ability to compete effectively and could harm our business,
results of operations and ability to grow. See 'Risk Factors -- Risks Related to
Our Business -- The communications industry is highly competitive, and we may
not be able to compete effectively.'
GOVERNMENT REGULATION
Telecommunications services, including local and long distance telephone
services, are subject to regulation at both the federal and state levels. The
FCC regulates interstate services, and state public utilities commissions
regulate intrastate communications services, including local service. The FCC
has preempted state regulation of, but does not directly regulate, enhanced
services involving more than pure transmission of customer-provided information,
including Internet access services.
We are in the process of applying for authority from various state
regulatory commissions to provide voice telephone service. To date, we have
received authorization from the FCC for international services, and from New
York, Connecticut, California, the District of Columbia, Illinois and
Massachusetts for local and in-state long distance services. We do not expect to
encounter substantial legal barriers to entry into regulated communications
services. We also do not expect to face regulatory restrictions on the pricing
or terms of any regulated communications service offerings we might choose to
offer that would have a material adverse effect on our business. Changes in the
regulatory environment, however, could lead to more intrusive regulation of our
service offerings and prices that could have a material adverse effect on our
business.
Building access. Under current FCC regulations, commercial real estate
owners have the right to control wiring within their premises, beyond the
demarcation point at which telecommunications carriers terminate their
facilities. The demarcation point is typically at a minimum point of entry to
the building, such as the basement. In some older buildings, demarcation points
may be located in each tenant's office, but the real estate owner may demand
that the carrier establish a new demarcation point at the minimum point of
entry. These rules allow the real estate owner to install and maintain its own
inside wire, or to contract with companies such as us to maintain wiring on its
behalf.
Currently, there is no national legal requirement that owners or managers of
commercial office buildings give access to competitive providers of
communications services, but such laws and regulations have been adopted in
several states. For example, state laws in Connecticut and Texas generally
require commercial real estate owners to provide nondiscriminatory access to
communications carriers who have customers within a building, and limit what the
real estate owner may charge for such access. These laws require that such
carriers be permitted to install their own inside wiring, and there is no
requirement that real estate owners allow these carriers to use existing inside
wiring.
Nationwide laws and regulations concerning building access have been
proposed in the past and may be adopted in the future. On June 10, 1999, the FCC
announced it was considering adopting rules on a number of issues related to
riser access in multiple tenant environments, and requested comments on the
issues, including the following:
the FCC's tentative conclusion that utilities must allow communications and
cable service providers access to rooftop and other rights-of-way and riser
conduit in multiple tenant environments on just, reasonable and
nondiscriminatory rates, terms and conditions;
whether incumbent phone companies should make available unbundled access to
riser cable and wiring within multiple tenant environments; and
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whether real estate owners offering access to any communications provider
should be required to make comparable access available to all such
providers on a nondiscriminatory basis, and whether the FCC has the
authority to impose such a requirement.
We cannot predict the outcome of the FCC's proceeding or of any legislation that
may be enacted into law. If these initiatives are adopted, they could
potentially reduce the value of our building access agreements with real estate
owners, harm our business and expose us to increased competition. The actual
effects, however, would depend on the terms of any new regulations or
legislation.
Telecommunications Act of 1996. The Telecommunications Act eliminates many
of the pre-existing legal barriers to competition in communications businesses.
The Telecommunications Act also preempts many of the state barriers to local
telephone service competition that previously existed in state and local laws
and regulations and sets basic standards for relationships between
communications providers.
The Telecommunications Act removes barriers to entry in the local exchange
telephone market by preempting state and local laws that restrict competition
and by requiring incumbent local telephone companies, including the Bell
operating companies divested by AT&T in 1984, to provide nondiscriminatory
access and interconnection to potential competitors, such as cable operators,
wireless communications providers and long distance companies. In addition, the
Telecommunications Act provides relief from the earnings restrictions and price
controls that had governed the local telephone business for many years. The
Telecommunications Act will also, once certain thresholds are met, allow the
Bell operating companies to enter the long distance market within their own
local service regions.
Regulations promulgated by the FCC under the Telecommunications Act require
incumbent telephone companies to open their telephone networks to competition by
providing competitors interconnection, access to unbundled network elements and
collocation facilities within central offices. Although we currently do not
contract directly with such companies for these services, we purchase network
services from vendors who have exercised these rights and thereby can offer us
competitive prices.
Numerous parties appealed various aspects of the FCC's regulations under the
Telecommunications Act, and implementation of several provisions of the rules
was delayed while the courts considered these appeals. On January 25, 1999, the
Supreme Court issued an opinion confirming the FCC's authority to issue
regulations implementing the pricing and other provisions of the
Telecommunications Act and reinstating most of the challenged rules. However,
the Supreme Court vacated a key FCC rule identifying the network elements that
incumbent local telephone companies are required to unbundle. In response to the
Supreme Court's decision, the FCC revised its rules on November 5, 1999, largely
reaffirming and in some respects extending the obligation of incumbent local
telephone companies to offer elements of their networks to competitors at
cost-based rates. We expect that this decision will be subject to further court
proceedings. On December 9, 1999, the FCC ordered incumbent local telephone
companies to offer line sharing arrangements that will permit competing carriers
to offer digital subscriber line services over the same copper loop facilities
used by the incumbent local telephone company to provide voice telephone
service. The prices for these arrangements will be determined by state utility
commissions. If these prices are set at low levels, it could allow our
competitors to offer low-cost alternatives to our services and put downward
pressure on our prices for Internet access and other data services. Future
regulatory proceedings and court appeals may create delay and uncertainty in
effectuating the interconnection and local competition provisions of the
Telecommunications Act, and could affect the availability and pricing of the
network services we purchase.
The Telecommunications Act establishes conditions that must be satisfied
before Bell operating companies are allowed to offer long distance service to
customers within their local service regions. These conditions include 14
checklist requirements designed to open the Bell operating company networks to
competitors. Bell Atlantic currently has an application pending before the FCC
for authority to offer long distance service in New York State, one of its most
important markets.
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Although, no Bell operating company has yet received FCC authorization to
provide in-region long distance service, it is possible that the FCC may approve
Bell Atlantic's pending application and/or future applications by other
companies. When this happens, we anticipate that the Bell operating companies
will intensify their efforts to compete against our service offerings.
Other regulatory issues. The data services business, including Internet
access, is largely unregulated at this time apart from federal, state, and local
laws and regulations applicable to businesses in general. However, this business
may become subject to regulatory restraints in the future. Some federal, state
and local governments are considering a number of legislative and regulatory
proposals with respect to Internet user privacy, infringement, pricing, quality
of products and services and intellectual property ownership. We are also unsure
how existing laws will be applied to the Internet in areas such as property
ownership, copyright, trademark, trade secret, obscenity and defamation.
Additionally, some jurisdictions have sought to impose taxes and other burdens
on providers of data services, and to regulate content provided via the Internet
and other information services. We expect that proposals of this nature will
continue to be debated in Congress and state legislatures in the future. The
adoption of new laws or the adaptation of existing laws to the Internet may
decrease the use of the Internet, which could in turn have a material adverse
effect on our Internet business.
The wiring and other facilities we install in buildings are subject to
numerous local regulations such as building and electrical codes, licensing
requirements and construction requirements. These regulations vary on a
city-by-city and county-by-county basis. At present, we have no plans to own any
transmission facilities outside of the buildings we serve, such as fiber-optic
cables or radio links to other buildings, but if we decide to do so in the
future then we will have to comply with a variety of additional laws, rules and
regulations governing access to public rights-of-way, in the case of cable
facilities, and FCC licensing of the radio spectrum, in the case of radio
facilities.
EMPLOYEES
To date, we have 229 full-time employees, excluding temporary personnel and
consultants. None of our employees is represented by a labor union, and we
generally consider relations with our employees to be satisfactory.
PROPERTIES
Our corporate headquarters consists of approximately 43,000 rentable square
feet located in New York City, which we occupy under a lease that expires in
July 2010. We maintain a network operations center at another location in New
York City while construction of our new network operations center is in progress
at our corporate headquarters. We also lease space for sales offices and network
equipment installations in a number of other locations throughout the United
States.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information regarding our executive officers,
directors and other senior management personnel:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Howard E. Taylor.......... 49 Chairman of the Board and Chief Executive Officer
Scott M. Jarus............ 43 President and Chief Operating Officer
Kenneth J. Hall........... 41 Executive Vice President and Chief Financial Officer
Sharon K. Kelly........... 50 Executive Vice President and Chief Marketing Officer
Richard J. Miller......... 41 Executive Vice President, Business Development
W. Montgomery Cerf........ 43 Director
William P. Collatos....... 45 Director
Steven F. Foster.......... 37 Director
Jeffrey D. Neumann........ 37 Director
Scott H. Rechler.......... 32 Director
OTHER SENIOR MANAGEMENT
Daren W. Hornig........... 32 Executive Vice President, Market Development
Executive Vice President and Chief Technology
Brandon R. Knicely........ 37 Officer
Brian M. Benz............. 38 Senior Vice President, Finance
Jack Moses................ 48 Senior Vice President, Human Resources
Waiman Lee................ 47 Vice President, Information Services
Louis E. Martinez......... 31 Vice President, Operations
Joan E. Mazzu............. 33 Vice President, National Market Development
</TABLE>
HOWARD E. TAYLOR has been our Chairman and Chief Executive Officer and a
director since July 1999. From September 1997 to July 1999, he was the President
and Chief Operating Officer of WinStar Broadband Services, a provider of
business-to-business telecommunications services. From November 1994 to
September 1997, Mr. Taylor served as the President of Custom Business Group for
Southern New England Telephone. From September 1990 to November 1994, he was the
Vice President, Marketing, Multinational Accounts for MCI Communications.
SCOTT M. JARUS has been our President and Chief Operating Officer since June
1998. Prior to joining our company, Mr. Jarus served as Senior Vice President of
Operations at RCN Telecom, a full-service communications provider to the
residential market, from August 1997 to June 1998. From December 1994 to May
1997, Mr. Jarus was co-founder and Vice President of Multimedia Medical Systems,
a provider of high-end multimedia applications to the healthcare industry. From
July 1985 to October 1994, Mr. Jarus served as Vice President of Operations and
in other senior management positions at Metromedia Communications Corporation, a
domestic and international carrier of voice and data services.
KENNETH J. HALL has been our Executive Vice President and Chief Financial
Officer since July 1999. From April 1997 to December 1998, Mr. Hall served as
Senior Vice President, Chief Financial Officer and Treasurer of Icon CMT Corp.,
an Internet service provider and web-centric consulting firm. In December 1998,
upon Qwest Communications International, Inc.'s acquisition of Icon, Mr. Hall
served as Senior Vice President of Finance and Operations and Chief Financial
Officer of Qwest Internet Solutions Inc., a wholly owned subsidiary of Qwest,
until April 1999. From February 1996 to March 1997, he was the Chief Financial
Officer of Global DirectMail Corp, an international direct marketer of computer
products and office supplies. Prior to such time, Mr. Hall was employed by
National Football League Properties, Inc. as Vice President of Finance and
Administration and Chief Financial Officer from 1992 to 1995 and Director of
Finance from 1990 to 1991. Mr. Hall's experience also includes management
positions with Price Waterhouse L.L.P. and Coopers and Lybrand L.L.C.
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SHARON K. KELLY has been our Executive Vice President and Chief Marketing
Officer since September 1999. From April 1998 to September 1999, Ms. Kelly was
Senior Vice President, Business Operations for WinStar Broadband Services. From
December 1994 to April 1998, Ms. Kelly was Vice President, Marketing & Data
Sales for Southern New England Telephone. Ms. Kelly was the Principal of Sharon
Kelly & Associates, a strategic sales and marketing consulting firm from October
1991 to December 1994. From July 1987 to September 1991, Ms. Kelly was Vice
President/Group Director for Citicorp/Quotron Systems in their information
services division.
RICHARD J. MILLER has been our Executive Vice President, Business Development
since June 1999. From April 1996 to June 1999, Mr. Miller was a Senior Vice
President at GE Equity, a division of GE Capital, which invested in the
Internet, healthcare, retail and broadcasting industries. From October 1994 to
March 1996, Mr. Miller was a principal in Avatar Capital Partners, a consulting
and investment company. From July 1988 to September 1994, Mr. Miller was a
general partner in RFE Investment Partners, a venture capital fund. Mr. Miller
has also served with Ernst & Young as a tax manager and is a certified public
accountant.
W. MONTGOMERY CERF has been a director since July 1999. He is a Managing
Director of J.P. Morgan Capital Corporation, a subsidiary of J.P. Morgan & Co.,
which he joined in 1983. Mr. Cerf also serves as a director of NewSouth
Communications and is a member of the valuation committee for TL Ventures, III
and IV.
WILLIAM P. COLLATOS has been a director since January 2000. He is a general
partner of Spectrum Equity Investors, L.P., a private investment firm which
manages $1.0 billion of equity capital for investments in telecommunications,
information, media and communications companies. Prior to co-founding Spectrum
in 1994, Mr. Collatos was a founding general partner of Media/Communications
Partners and a general partner of TA Associates. Mr. Collatos currently serves
on the boards of Galaxy Telecom, Inc., TSR Paging, Inc., Golden Sky Systems Inc.
and ITXC Inc.
STEVEN F. FOSTER has been a director since September 1999. Mr. Foster has been a
Partner at Crosspoint Venture Partners since February 1998. From November 1995
to January 1998, Mr. Foster was Director, Business Development at 3Com
Corporation. From January 1992 to October 1995, Mr. Foster held a similar
position at Hewlett Packard.
JEFFREY D. NEUMANN has been a director since July 1999. He is Executive Vice
President and Chief Investment Officer of FrontLine Capital Group, which he
joined in March 1998. From April 1996 to February 1998, Mr. Neumann was a vice
president at GE Equity, a division of GE Capital. Previously, Mr. Neumann served
as the President of Modern Healthcare Resources from 1990 to 1996. Mr. Neumann
is also a director of VANTAS Incorporated, eSourceOne, Inc., CommerceInc
Corporation and Realty Tracking Services, Inc.
SCOTT H. RECHLER has been a director since July 1999. He is the President, Chief
Executive Officer and a director of FrontLine Capital Group. Mr. Rechler is also
the Co-Chief Executive Officer, President and a director of Reckson Associates
Realty Corp. Mr. Rechler has been employed at Reckson Associates Realty Corp.
since 1989. Mr. Rechler is also a director of VANTAS Incorporated, eSourceOne,
Inc. and Keystone Property Trust.
DAREN W. HORNIG has been our Executive Vice President, Market Development since
January 1997. He was also a co-founder of our company. From May 1996 to December
1996, Mr. Hornig was Managing Director, Business Development for Globix
Corporation, an Internet service provider. From May 1994 to May 1996,
Mr. Hornig was Associate Director of Real Estate in the New York Tri-State area
for Galbreath Company, a nationwide professional real estate concern. From March
1991 to May 1994, Mr. Hornig was an associate with Newmark & Company Real
Estate, Inc.
BRANDON R. KNICELY has been our Executive Vice President and Chief Technology
Officer since August 1997. From May 1994 to August 1997, Mr. Knicely was a
principal with Networked Systems & Consulting Group, a consulting firm focused
on the design and performance of large internetworks. From 1993 to 1994, he
worked as a Director of Youth and Media Programs for the Church of Christ. From
1985 to 1993, Mr. Knicely worked as a communications specialist in the Sales and
Marketing division of IBM Corporation.
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BRIAN M. BENZ has been our Senior Vice President, Finance since July 1999. Prior
to that time, Mr. Benz was our Chief Financial Officer from January 1998 to July
1999. Mr. Benz was Chief Financial Officer, Secretary at Yoyodyne Entertainment,
an Internet promotions and direct marketing service from December 1996 to
December 1997. From January 1994 to December 1996, Mr. Benz was Chief Financial
Officer, Secretary for Physicians' Online. Prior to that time, Mr. Benz was an
investment banker with Merrill Lynch Interfunding, a leveraged buyout fund and
an accountant with Touche Ross & Co. Mr. Benz is a certified public accountant.
JACK MOSES has been our Senior Vice President, Human Resources since January
2000. From September 1999 to January 2000, Mr. Moses served as Partner, Human
Resources for USWEB/CKS. From March 1998 to December 1998, Mr. Moses served as
Vice President, Human Resources for Icon CMT Corp. Upon the acquisition of Icon
by Qwest Communications International, Inc., Mr. Moses served as a Regional Vice
President, Human Resources from December 1998 until August 1999. From October
1996 to March 1998, Mr. Moses served as Vice President of Human Resources at The
Swatch Group, North America. Mr. Moses served as the Vice President of Human
Resources from September 1991 until September 1996 and as the Director of Human
Resources from June 1990 to September 1991 at Dawson Home Fashions, Inc., a
wholly owned subsidary of Dawson International, PLC.
WAIMAN LEE has been our Vice President of Information Services since November
1999. Prior to joining our company, Mr. Lee served as Vice President of
Information Technology at RCN Telecom, from September 1997 to November 1999.
From April 1984 to August 1997, Mr. Lee served as Senior Director of Information
Technology and in other management positions within the Information Technology
department at MobileMedia Communications Corporation, a provider of paging and
wireless communications products and services.
LOUIS E. MARTINEZ has been our Vice President, Operations since June 1998. From
January 1996 to June 1998, Mr. Martinez was Director of Network Operations at
IDT Corporation, an international telecommunications company. From January 1995
to January 1996, Mr. Martinez was the Director, Corporate Internet Sales at IDT.
Prior to such time, Mr. Martinez was employed by B.C. Textiles as Operations
Manager from March 1993 to January 1995.
JOAN E. MAZZU has been our Vice President, National Market Development since
November 1999. She was our General Manager from May 1999 to October 1999.
Ms. Mazzu served as Vice President, General Manager at Kastle Systems, a
full-service provider of electronic security services to the national real
estate market from September 1994 to May 1999. From April 1992 to August 1994,
Ms. Mazzu was Vice President of Operations for Kastle Systems.
BOARD OF DIRECTORS
Our board of directors is currently composed of six directors. Shortly after
completion of this offering, we will increase the number of members of our board
of directors so that we may include three independent directors. We intend to
amend our certificate of incorporation to divide the board of directors into
three classes: Class I, whose terms will expire at the annual meeting of
stockholders to be held in 2001, Class II, whose terms will expire at the annual
meeting of stockholders to be held in 2002, and Class III, whose terms will
expire at the annual meeting of stockholders to be held in 2003. At each annual
meeting of stockholders beginning in 2001, the successors to directors whose
terms will then expire will be elected to serve from the time of election and
qualification until the third annual meeting following election.
In addition, our certificate of incorporation will provide that the
authorized number of directors may be changed only by resolution of the board of
directors. Any additional directorships resulting from an increase in the number
of directors will be distributed among the three classes so that, as nearly as
possible, each class will consist of one-third of the total number of directors.
COMMITTEES OF THE BOARD OF DIRECTORS
Our committees consist of an audit committee, a funding committee and a
compensation committee. The audit committee recommends the annual appointment of
our auditors with whom
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the audit committee reviews the scope of audit and non-audit assignments and
related fees, accounting principles we use in financial reporting, internal
auditing procedures and the adequacy of our internal control procedures. The
audit committee is composed of Messrs. Cerf and Neumann. The funding committee
determines when all drawdowns under financing arrangements will be made and
recommends other financings to the board of directors. The funding committee is
composed of Messrs. Neumann and Taylor. The compensation committee reviews and
approves the compensation and benefits for our key executive officers,
administers our employee benefit plans and makes recommendations to the board of
directors regarding grants of stock options and other incentive compensation
arrangements. Our compensation committee is composed of Messrs. Cerf, Foster and
Taylor.
COMPENSATION OF DIRECTORS
Directors who are also our employees receive no additional compensation for
their services as directors. Directors who are not our employees will not
receive a fee for attendance in person at meetings of our board of directors or
committees of our board of directors, but they will be reimbursed for travel
expenses and other out-of-pocket costs incurred in connection with attending
meetings.
EXECUTIVE OFFICERS
Our board of directors appoints our executive officers. Our executive
officers serve at the discretion of our board of directors.
EMPLOYMENT, SEVERANCE AND NON-COMPETITION AGREEMENTS
In June 1999 we entered into employment agreements with Messrs. Taylor and
Miller, and in January, July, October, and November 1999 we entered into
employment agreements with Messrs. Hornig, Hall, Jarus, and Knicely,
respectively. The agreements provide for Mr. Taylor to serve as our Chief
Executive Officer, Mr. Jarus to serve as our President and Chief Operating
Officer, Mr. Hall to serve as our Executive Vice President and Chief Financial
Officer, Mr. Miller to serve as our Executive Vice President, Business
Development, Mr. Hornig to serve as our Executive Vice President, Market
Development and Mr. Knicely to serve as our Chief Technology Officer at an
annual base salary of $355,000, $270,000, $260,000, $200,000, $200,000 and
$160,000, respectively. Messrs. Taylor, Jarus, Hall, Miller, Hornig and Knicely
are each eligible to receive a bonus based upon a combination of their
individual and our overall performance.
To compensate Mr. Taylor for the possible forfeiture of certain options held
by him to acquire shares of WinStar Communications, an affiliate of his former
employer, we extended him a three year loan in the principal amount of
$2.0 million. We will forgive one third of the loan on each the first three
anniversaries of Mr. Taylor's employment if he is then employed by us. We will
gross-up Mr. Taylor for any income taxes incurred with such forgiveness. Should
we terminate Mr. Taylor's employment without cause, the remaining balance of the
loan will be forgiven. If Mr. Taylor's WinStar stock options are not forfeited,
Mr. Taylor will repay the loan in an amount up to the net after tax proceeds he
would have retained had he exercised the options and sold the underlying stock
on the date they were otherwise scheduled to vest.
If Messrs. Taylor's or Hall's employment is terminated without cause during
the first year of their employment, they will be entitled to severance equal to
one year of base salary, and in addition, Mr. Hall will also be eligible to
receive his applicable bonus. If Messrs. Taylor's or Hall's employment is
terminated without cause anytime thereafter, they will be entitled to severance
equal to six months of their base salary, and in addition, Mr. Hall will be
entitled to an amount equal to his bonus for the last fiscal year, six months of
additional vesting of restricted stock and up to one year of benefits.
Mr. Hall's severance payment will be a minimum of $195,000. If Mr. Jarus' or
Mr. Knicely's employment is terminated without cause they will be entitled to
severance equal to six months of base salary, six months of additional vesting
of restricted stock and up to six months of benefits. Mr. Hornig's employment
agreement provides for a term of three
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years. If Mr. Hornig is terminated without cause he is entitled to receive
severance equal to his base salary until the earlier of January 1, 2002 or one
year from termination. If Messrs. Taylor, Hall or Jarus are terminated within
one year of a change in control of our company, they will be entitled to
severance equal to two times their base salary and all of the restricted stock
will immediately vest. In addition, Messrs. Jarus and Hall will be entitled to
receive an amount equal to two times their bonus for the last fiscal year and
one year of benefits. If Mr. Miller is terminated during the first twelve months
of Mr. Taylor's employment with our company as an executive officer for any
reason other than death or disability, an additional 222,500 of his restricted
shares will vest.
EXECUTIVE COMPENSATION
The table below summarizes information concerning the compensation paid by
us during 1999 to our current chief executive officer, one individual who served
as our chief executive officer during 1999, and our four other most highly
compensated executive officers, all of whom are collectively defined as the
'named executive officers':
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
------------------- ---------------------------- ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS RESTRICTED STOCK AWARD(S)(1) COMPENSATION
- --------------------------- ------ ----- ---------------------------- ------------
<S> <C> <C> <C> <C>
Howard E. Taylor ................... $184,327 $292,884(2) $7,740,000
Chairman of the Board and Chief
Executive Officer(3)
Scott M. Jarus ..................... 222,952 111,029 2,902,500
President and Chief Operating
Officer(4)
Kenneth J. Hall .................... 114,333 57,699 2,515,500
Executive Vice President and Chief
Financial Officer(5)
Richard J. Miller .................. 102,308 61,233(6) 1,722,150
Executive Vice President, Business
Development(7)
Daren W. Hornig .................... 200,000 100,000 748,446 $11,240(8)
Executive Vice President,
Market Development
Brandon R. Knicely ................. 160,000 67,200 1,064,250
Executive Vice President and Chief
Technology Officer
</TABLE>
- ---------
(1) In 1999, the named executive officers were granted rights to purchase shares
of restricted common stock which expired three months after the date of the
grant. All of the named executive officers exercised their rights in 1999
and purchased the following number of shares of restricted stock:
Mr. Taylor, 2,000,000 shares; Mr. Jarus, 750,000 shares; Mr. Hall, 650,000
shares; Mr. Miller, 445,000 shares; Mr. Hornig, 193,397 shares; and
Mr. Knicely, 275,000 shares. The value of those shares of restricted stock
on the date of purchase are set forth above, and the value of those shares
as of December 31, 1999 was as follows: Mr. Taylor, $13,680,000; Mr. Jarus,
$5,130,000; Mr. Hall, $4,446,000; Mr. Miller, $3,043,800; Mr. Hornig,
$1,322,835; and Mr. Knicely, $1,881,000. We loaned the following amounts to
the named executive officers at an annual interest rate of 5.82% to enable
them to purchase the restricted stock: Mr. Taylor, $898,000; Mr. Jarus,
$336,750, Mr. Hall, $291,850; Mr. Miller, $199,805; Mr. Hornig, $86,835; and
Mr. Knicely, $123,475. These loans were extended on a full recourse basis,
which means that in the event of a default by these individuals, we may seek
payment directly from these individuals. For more information concerning
these loans, see 'Certain Transactions -- Relationships with Management and
Executive Officers.'
(footnotes continued on next page)
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(footnotes continued from previous page)
One-eighth of Messrs. Taylor, Jarus, Hall, Miller, Hornig and Knicely's
shares vest six months after each commenced his employment with us, and
1/48th of such shares continue to vest each month thereafter, provided that
they are still employed by us.
(2) Includes a $200,000 signing bonus for Mr. Taylor.
(3) Mr. Taylor commenced his employment in July 1999.
(4) Mr. Jarus acted as our Chief Executive Officer until July 1999.
(5) Mr. Hall commenced his employment in July 1999.
(6) Includes a $10,000 signing bonus for Mr. Miller.
(7) Mr. Miller commenced his employment in June 1999.
(8) Represents reimbursement of legal expenses to Mr. Hornig.
OPTION GRANTS IN FISCAL 1999
The following table sets forth information regarding stock options granted
during 1999 to each of the named executive officers.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------------------------
PERCENT OF
TOTAL POTENTIAL REALIZABLE VALUE AT
NUMBER OF OPTIONS ASSUMED ANNUAL RATES OF STOCK
SECURITIES GRANTED TO FAIR MARKET PRICE APPRECIATION FOR OPTION
UNDERLYING EMPLOYEES EXERCISE OR VALUE PRICE ON TERM
OPTIONS IN FISCAL BASE PRICE DATE OF GRANT EXPIRATION -----------------------------
NAME GRANTED 1999 (PER SHARE) (PER SHARE) DATE 0% 5% 10%
- ---- ---------- ---------- ----------- -------------- ---------- -------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Brandon R. Knicely... 25,000 1.0% $4.00 $6.33 11/30/09 $58,250 $157,750 $310,250
</TABLE>
The options become exercisable in equal monthly installments beginning on
the date the named executive officer began employment with us and continuing for
four years thereafter.
AGGREGATE OPTION EXERCISES IN FISCAL 1999 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth information concerning the value of
unexercised in-the-money options held by the named executive officer as of
December 31, 1999.
There was no public trading market for the common stock at December 31,
1999. Accordingly, the values of exercisable and unexercisable in-the-money
options have been calculated on the basis of the fair market value of our common
stock at December 31, 1999 ($6.84 per share) as determined by our board of
directors, less the applicable exercise price per share multiplied by the number
of shares underlying the options.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS
SHARES OPTIONS AT FISCAL YEAR-END AT FISCAL YEAR-END
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE(1) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Brandon R. Knicely......... -- -- 15,104 9,896 $42,895 $28,303
</TABLE>
The options were granted to the named executive officer at an exercise price
of $4.00 per share.
ONSITE ACCESS, INC. 1999 STOCK PLAN
We adopted the OnSite Access, Inc. 1999 stock plan on June 30, 1999. The
1999 stock plan provides for the granting of incentive stock options to our
employees and nonqualified stock options and stock purchase rights to our
employees, directors and consultants.
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The following is a summary description of the 1999 stock plan. This summary
description is qualified in its entirety by the plan which is filed as an
exhibit to this registration statement, of which this prospectus is a part.
OVERVIEW
The 1999 stock plan provides our employees, directors and consultants with
an opportunity to purchase shares of our common stock. The purpose of the plan
is to attract and retain the best available personnel and to incentivize them to
promote the success of our business.
ADMINISTRATION
The 1999 stock plan will be administered by the administrator, which will be
either the board of directors or a committee appointed by the board.
Generally, the administrator:
will select those persons to whom options and stock purchase rights will be
granted, and
will determine the terms and conditions of options and stock purchase
rights, including the purchase price per share and the vesting provisions.
ELIGIBLE INDIVIDUALS
Any of our current or future employees, directors or consultants will be
eligible to participate in the 1999 stock plan.
SHARES SUBJECT TO 1999 STOCK PLAN
The maximum number of shares available for the granting of options and stock
purchase rights under the 1999 stock plan is 9,489,897. If an option or stock
purchase right expires, is surrendered pursuant to an option exchange program,
or is otherwise terminated without having been exercised in full, the shares
allocated to the expired, surrendered or otherwise terminated option or stock
purchase rights may again become available for grant or sale under the plan.
Options will be designated as either incentive stock options, which are
intended to qualify for special tax treatment, or nonqualified stock options.
The per share exercise price of any option or stock purchase right will be fixed
by the administrator at the time the option is granted. The per share exercise
price of any incentive stock option will not be less than 100% of the fair
market value on the date the option is granted or 110% in the case of an option
granted to a 10% stockholder. Each option is exercisable at such dates and in
such installments as determined by the administrator. Each option will be for a
term determined by the administrator.
Options and stock purchase rights will not be transferable except by will or
the laws of descent or distribution.
The purchase price for shares acquired pursuant to the exercise of an option
must be paid in full concurrently with the exercise of an option. The purchase
price may be paid in cash, or as otherwise determined by the administrator.
In the event of a merger of our company with or into another corporation, or
the sale of substantially all of our assets, each outstanding option and stock
purchase right shall be assumed or an equivalent option substituted by the
successor corporation or a parent or subsidiary of the successor corporation. In
the event that the successor corporation refuses to or otherwise does not assume
or substitute for the option or stock purchase right, the optionee shall have
the right to exercise the option or stock purchase right as to all of the shares
subject to the option, including shares as to which it would not otherwise be
exercisable.
If an option or stock purchase right becomes fully vested and exercisable in
lieu of assumption or substitution in the event of a merger or sale of our
assets, the administrator shall notify the optionee in writing or electronically
that the option or stock purchase right shall be
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<PAGE>
fully exercisable for a period of 15 days from the date of such notice, and that
the option or stock purchase right shall terminate upon the exercise of such
period. For the purposes of this paragraph, the option or stock purchase right
shall be considered assumed if, following the merger or sale of assets, the
option or right confers the right to purchase or receive, for each share subject
to the option or stock purchase right immediately prior to the merger or sale of
assets, the consideration, whether stock, cash, or other securities or property,
received in the merger or sale of such assets by holders of common stock for
each share held on the effective date of the transaction, and, if holders were
offered a choice of consideration, the type of consideration chosen by the
holders of a majority of the outstanding shares.
STOCK PURCHASE RIGHTS
A stock purchase right allows a grantee to purchase shares which are subject
to a vesting schedule after purchase. A restricted stock purchase agreement
grants the company the right to repurchase the unvested shares upon the
voluntary or involuntary termination of the purchaser's service with the company
for any reason, including death or disability.
TERMINATION OF EMPLOYMENT
Each option agreement will set forth the terms and conditions applicable to
the option upon termination of the optionee's employment. In the absence of a
specified time in the option agreement, the option shall remain exercisable for
three months following the optionee's termination. If the optionee does not
exercise his or her option in the specified time, the option shall terminate.
INCOME TAX WITHHOLDING
When an optionee recognizes taxable income in connection with the receipt of
shares under the 1999 stock plan, the optionee must pay us an amount equal to
the federal, state and local income taxes and other amounts as may be required
by law to be withheld by us prior to the issuance of shares. If permitted by the
administrator in satisfaction of the obligation to pay withholding taxes, the
optionee may elect to have withheld a portion of the shares then issuable to him
or her having an aggregate fair market value equal to the withholding taxes.
ADJUSTMENT UPON CHANGE IN CAPITALIZATION
In the event of a change in capitalization, the administrator will adjust
the maximum number and class of shares or other stock or securities with respect
to which options or stock purchase rights may be granted under the 1999 stock
plan to any eligible individual in any calendar year and the number and class of
shares or other stock or securities which are subject to outstanding options or
stock purchase rights and the purchase price covered by each outstanding option
or stock purchase right.
EFFECT OF LIQUIDATION
In the event of our proposed liquidation or dissolution, the administrator
shall notify each optionee as soon as practicable prior to the effective date of
the proposed transaction. The administrator in its discretion may provide for an
optionee to have the right to exercise his or her option or stock purchase right
until 15 days prior to the transaction as to all of the shares covered by the
option or stock purchase right, including shares which would not otherwise be
exercisable. In addition, the administrator may provide that any company
repurchase option applicable to any shares purchased upon exercise of an option
or stock purchase right shall lapse as to all shares, provided the proposed
dissolution or liquidation takes place at the time and in the manner
contemplated. To the extent it has not been previously exercised, an option or
stock purchase right will terminate immediately prior to the consummation of
such proposed action.
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<PAGE>
MULTIPLE AGREEMENTS
The terms of any option under the 1999 stock plan will be set forth in an
agreement between us and the optionee.
AMENDMENT AND TERMINATION
The 1999 stock plan terminates on the tenth anniversary of its adoption. The
board may at any time and from time to time amend, alter, suspend or terminate
the plan. However, no such amendment, alteration, suspension or termination may
adversely alter any outstanding options without the consent of the optionee. In
addition, amendments may require stockholder approval.
FEDERAL INCOME TAX CONSEQUENCES APPLICABLE TO THE 1999 STOCK PLAN
In general, an optionee will not recognize taxable income upon the grant or
exercise of an incentive stock option and we will not be entitled to any
business expense deduction. However, upon the exercise of an incentive stock
option, the excess of the fair market value on the date of exercise of the
shares received over the exercise price of the option will be treated as an
adjustment to alternative minimum taxable income unless the shares are sold in
the same taxable year as exercise. In order for the exercise of an incentive
stock option to qualify as an incentive stock option, an optionee generally must
be an employee of Onsite or a subsidiary from the date the incentive stock
option is granted through the date three months before the date of exercise or
one year preceding the date of exercise in the case of an optionee whose
employment is terminated due to disability. The employment requirement does not
apply where an optionee's employment is terminated upon death.
If an optionee holds the shares acquired upon exercise of an incentive stock
option for more than two years after the date of grant and for more than one
year after the date of exercise, then upon disposition of the shares, the
difference, if any, between the sales price of the shares and the exercise price
of the option will be treated as long-term capital gain or loss. If an optionee
disposes of the shares acquired upon exercise of an incentive stock option prior
to satisfying these holding period requirements, the optionee will recognize
ordinary income at the time of disposition, generally in an amount equal to the
excess of the fair market value of the shares at the time of exercise over the
exercise price of the option. The balance of any gain realized will be
short-term or long-term capital gain. If the optionee sells the shares prior to
satisfying the holding period requirements at a price below fair market value at
the time the option was exercised, the amount of ordinary income will be limited
to the amount realized on the sale over the exercise price of the option. In
general, if we comply with applicable income reporting requirements, we will be
allowed a business expense deduction to the extent an optionee recognizes
ordinary income. If the optionee disposes of the shares at a loss, the loss will
be a capital loss.
In general, an optionee who receives a nonqualified stock option will not
recognize income at the time of the grant of the option. Upon exercise of a
nonqualified stock option, an optionee will recognize ordinary income in an
amount equal to the excess of the fair market value of the shares on the date of
exercise over the exercise price of the option. The basis in the shares acquired
upon exercise of a nonqualified stock option will equal the fair market value of
such shares at the time of exercise. The holding period of the shares for
capital gain purposes will begin on the date of exercise. In general, if we
comply with applicable income reporting requirements, we will be entitled to a
business expense deduction in the same amount as the optionee recognizes
ordinary income. In the event of a sale of the shares received upon the exercise
of a nonqualified stock option, any appreciation or depreciation after the
exercise date generally is taxed as capital gain or loss. However, any gain will
be subject to reduced tax rates if the shares were held for more than twelve
months.
In the absence of a Section 83(b) election (as described below), a grantee
who receives restricted stock upon exercise of a stock purchase right will
recognize no income at that time. When the restrictions expire, a grantee will
recognize ordinary income (treated as compensation) equal to the fair market
value of the shares when the restrictions expire over the amount paid, if
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<PAGE>
any, for the restricted stock. If the restrictions applicable to a grant of
restricted stock expire over time (for example, if the restrictions on 20% of a
grant expire on specified anniversaries of the date of grant), the grantee will
include the fair market value of the portion of the shares as to which the
restrictions expire as ordinary income (treated as compensation) as the
restrictions expire. The grantee's basis in the shares is equal to the amount
included in income on the expiration of the restrictions plus the amount paid,
and the capital gains holding period begins when the restrictions end. Any
subsequent disposition of the shares will be taxed as capital gain or loss,
provided that any gain will be subject to reduced rates of tax if the shares are
held for more than 12 months. Dividends received by the grantee in respect of
shares of restricted stock constitute ordinary income (treated as compensation)
in the year received. In general, if we comply with the applicable income
reporting requirements, we will be entitled to a business expense deduction
equal to the amount of the shares when they are included in the grantee's
income, and we will also be entitled to a business expense deduction (in the
year paid) for dividends paid to the grantee in respect of shares of restricted
stock.
If a Section 83(b) election is made within 30 days of the initial grant of
restricted stock upon the exercise of a stock purchase right, the grantee must
include the fair market value of the shares on the date of grant, less the
amount paid for the shares, as ordinary income (treated as compensation) as of
the date of grant and the capital gains holding period begins at the time
issued. In general, if we comply with the applicable income reporting
requirements, we will be entitled to a corresponding business expense deduction
equal to the fair market value of the shares included in the grantee's income,
but dividends on the shares would not be deductible. Any subsequent disposition
of the shares by the grantee, other than by forfeiture, will be taxed as capital
gain or loss, provided that any gain will be subject to reduced rates of tax if
the shares are held for more than 12 months. No deduction is permitted to a
grantee who has made the Section 83(b) election and who subsequently forfeits
the restricted stock, other than a capital loss for the amount, if any, a
grantee paid for the restricted stock, over the amount realized, if any, upon
such forfeiture, and such loss will be treated as a short term or long term
capital loss. In that case, we would be required to include as ordinary income
the amount of deduction we claimed with respect to the restricted stock.
This discussion assumes that at the time of exercise, the sale of the shares
would not subject an optionee to liability under Section 16(b) of the Exchange
Act. Special rules may apply with respect to persons who may be subject to
Section 16(b). Optionees who are or may become subject to Section 16(b) should
consult with their own advisors.
EXCISE TAXES
Under certain circumstances, the accelerated vesting or exercise of options
or expiration of restrictions on restricted stock in connection with a change in
control of our company may be deemed an excess parachute payment for purposes of
the golden parachute tax provisions of Section 280G of the Internal Revenue
Code. To the extent it is so considered, the grantee may be subject to a 20%
excise tax on the excess parachute payment and we may be denied a tax deduction
with respect to the excess parachute payment.
2000 STOCK INCENTIVE PLAN
PURPOSE
The purpose of the stock incentive plan is to further strengthen us by
providing an incentive to our employees, officers, directors, consultants and
advisors. The plan provides incentives through the granting or awarding of
incentive and nonqualified stock options, stock appreciation and dividend
equivalent rights, restricted stock, performance units, and performance shares.
Under the plan, we can make awards to our employees, to individuals who have
received a formal, written offer of employment and to our officers, directors,
consultants and advisors. We use these awards to encourage the recipients to
devote their abilities and energies to our success.
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ADMINISTRATION
The compensation committee administers the stock incentive plan. Each award
under the stock incentive plan will be evidenced by an agreement that includes
the terms of the grant. Under the stock incentive plan, the committee has the
authority to, among other things:
select the individuals to whom awards will be granted;
determine the type, size and terms and conditions of awards; and
establish the terms for treatment of awards upon a termination of
employment.
SHARES AVAILABLE FOR ISSUANCE
Under the stock incentive plan, we will have a total of shares of
common stock available for the grant of awards.
The maximum number of shares with respect to which we may grant awards to
any individual during any calendar year is . If our capitalization
changes, however, the committee may adjust the maximum number and class of
shares with respect to which awards may be granted, the number and class of
shares which are subject to outstanding awards and the purchase price. The
maximum dollar amount that an individual may receive during the term of the
stock incentive plan in respect of cash-denominated performance units may not
exceed $ .
TERMS OF STOCK OPTIONS
The stock option committee will determine whether any option is a
nonqualified or incentive stock option at the time of grant. The committee will
also determine the per share exercise price of an option granted under the stock
incentive plan at the time of grant. This will be set forth in the option
agreement. The purchase price per share under each incentive stock option must
not be less than 100% of the fair market value of our common stock as of the
date of grant (or 110% in the case of an incentive stock option granted to a
holder of more than 10% of our voting stock). Each option is exercisable at the
dates and in the installments determined by the committee. The committee may
accelerate the exercisability of any option at any time. Each option terminates
at the time determined by the committee. However, the term of each option may
not exceed ten years, or five years in the case of an incentive stock option
granted to a 10% stockholder.
Unless otherwise determined by the committee at the time of grant or
thereafter, no options are transferable except by will or the laws of descent
and distribution or, in the case of an option other than an incentive stock
option, pursuant to a domestic relations order. An option other than an
incentive stock option may, however, provide that it can be transferred to
members of the optionee's immediate family, to trusts solely for the benefit of
the immediate family members and to partnerships in which family members and/or
trusts are the only partners. Options may be exercised during the optionee's
lifetime only by the grantee or his guardian or legal representative. In the
discretion of the committee, the purchase price for shares may be paid:
in cash;
by transferring shares of common stock to us if such shares have been held
by such person for at least six months prior to the exercise of the option;
or
by a combination of the foregoing.
In addition, options may be exercised through a registered broker-dealer
pursuant to cashless exercise procedures approved by the committee. The
committee will set forth the terms and conditions applicable to any option upon
a termination of the employment or service of the optionee.
STOCK APPRECIATION RIGHTS
The stock incentive plan permits us to grant stock appreciation rights
either in connection with the grant of an option or as a freestanding right. A
stock appreciation right permits a grantee
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<PAGE>
to receive, upon exercise of the stock appreciation right, cash and/or shares,
in an amount equal to the excess of the then per share fair market value over
the per share fair market value on the date the stock appreciation right was
granted or option exercise price, in the case of a stock appreciation right
granted in connection with an option. When a stock appreciation right is
granted, however, the committee may establish a limit on the maximum amount a
grantee may receive on exercise. The committee will decide at the time that the
stock appreciation right is granted the date or dates at which it will become
vested and exercisable.
DIVIDEND EQUIVALENT RIGHTS
Dividend equivalent rights may be granted in connection with any award under
the stock incentive plan. Dividend equivalent rights may be payable currently or
deferred until the lapsing of the restrictions on the dividend equivalent rights
or until the vesting, exercise, payment, settlement or other lapse of
restrictions on the related award. Dividend equivalent rights may be settled in
cash, shares of common stock or a combination of cash and shares in single or
multiple installments.
RESTRICTED STOCK
The committee will determine the terms of each restricted stock award at the
time of grant, including the price, if any, to be paid by the grantee for the
restricted stock, the restrictions placed on the shares, and the time or times
when the restrictions will lapse. In addition, at the time of grant, the
committee may decide:
whether any deferred dividends will be held for the grantee or deferred
until the restrictions lapse;
whether any deferred dividends will be reinvested in additional shares of
common stock or held in cash;
whether interest will be accrued on any dividends that are not reinvested
in additional shares of restricted stock; and
whether any stock dividends paid will be subject to the restrictions
applicable to the restricted stock award.
Shares of restricted stock are non-transferable until all restrictions upon
the shares lapse.
PERFORMANCE UNITS AND PERFORMANCE SHARES
The committee may also award performance units and performance shares. The
vesting of performance units and performance shares will be based upon our
attainment of specified performance goals set by the committee. The performance
goals may include:
earnings per share;
share price;
pre-tax profits;
net earnings;
return on equity or assets;
return on certain specified assets;
revenues;
EBITDA;
market share or market penetration;
free cash flow; or
any combination of these goals.
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When granting performance units or performance shares, the committee may
provide the manner in which performance will be measured against the performance
objectives. The committee may also adjust the performance objectives to reflect
the impact of specified corporate transactions, special charges, foreign
currency effects, accounting changes, and other similar extraordinary or
nonrecurring events. Performance units may be expressed in dollars or in shares
of common stock. Payments in respect of performance units will be made in cash,
shares of common stock, shares of restricted stock or a combination of cash,
shares of common stock or shares of restricted stock.
The agreement evidencing the award of performance shares or performance
units will include the terms and conditions of the awards, including those
applicable if the grantee's employment terminates.
AMENDMENTS AND TERMINATION
The stock incentive plan will terminate on . The board may at
any time amend or terminate the stock incentive plan. If required by law, no
amendment or termination will be effective without the approval of our
stockholders. In addition, no amendment or termination may adversely impair any
rights or obligations under any awards previously granted, except with the
written consent of the grantee.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is a general summary of the principal federal
income tax consequences under current law for awards granted to employees under
the stock incentive plan. The summary is not intended to be exhaustive and,
among other things, does not describe state, local or foreign income and other
tax consequences.
STOCK OPTIONS
An optionee will not recognize any taxable income upon the grant of a
nonqualified stock option and we will not be entitled to a tax deduction with
respect to the grant. Generally, upon exercise of a nonqualified option, the
excess of the fair market value of common stock on the date of exercise over the
exercise price will be taxable as ordinary income to the optionee. If we comply
with applicable reporting requirements and with Section 162(m) of the Internal
Revenue Code, we will be entitled to a federal income tax deduction in the same
amount and at the same time as the optionee recognizes ordinary income. The
later disposition of shares acquired upon the exercise of a nonqualified option
will ordinarily result in capital gain or loss to the optionee. Any gain will be
subject to reduced tax rates if the shares have been held for more than twelve
months.
Except as described below, an optionee will not recognize taxable income at
the time of grant or exercise of an incentive stock option, and we will not be
entitled to a tax deduction with respect to the grant or exercise. However, the
exercise of an incentive stock option may result in an alternative minimum tax
liability for the optionee.
Generally, if an optionee has held shares acquired upon the exercise of an
incentive stock option for more than one year and more than two years after the
date of grant of the incentive stock option, upon disposition of the shares by
the optionee, the difference, if any, between the sales price of the shares and
the exercise price will be treated as long-term capital gain or loss to the
optionee.
Generally, upon a sale or other disposition of shares acquired upon the
exercise of an incentive stock option within one year after the date of exercise
or within two years after the date of grant of the incentive stock option, any
excess of the fair market value of the shares at the time of exercise of the
option or, if less, at the time of disposition over the exercise price of such
option will constitute ordinary income to the optionee. Any excess of the amount
realized by the holder on the disqualifying disposition over the fair market
value of the shares on the date of exercise will generally be capital gain.
Subject to any deduction limitation under Section 162(m) of
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the Internal Revenue Code and our compliance with applicable reporting
requirements, we will be entitled to a federal income tax deduction equal to the
amount of the ordinary income recognized by the holder.
SECTION 280G OF THE INTERNAL REVENUE CODE. Under certain circumstances, the
accelerated vesting or exercise of options or stock appreciation rights, or the
accelerated lapse of restrictions with respect to other awards, in connection
with a change of control might be deemed an 'excess parachute payment' for
purposes of the golden parachute tax provisions of Section 280G of the Internal
Revenue Code. To the extent it is so considered, the grantee may be subject to a
20% excise tax and we may be denied a federal income tax deduction.
SECTION 162(m). Section 162(m) of the Internal Revenue Code generally
disallows a federal income tax deduction to any publicly held corporation for
compensation paid in excess of $1 million in any taxable year to the chief
executive officer or any of the four other most highly compensated executive
officers who are employed by the corporation on the last day of the taxable
year. Section 162(m) of the Code does, however, allow a deduction for qualified
'performance-based compensation', the material terms of which are disclosed to
and approved by stockholders. The stock incentive plan has been structured so
that compensation resulting from awards of options, stock appreciation rights,
performance shares and performance units may qualify as 'performance-based
compensation', and, if so qualified, would be deductible.
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CERTAIN TRANSACTIONS
REORGANIZATION, RECAPITALIZATION AND RELATED TRANSACTIONS
Our predecessor company was Veritech Ventures, LLC, a New York limited
liability company formed in July 1996. In November 1997, Veritech Ventures
contributed substantially all of its assets and liabilities to OnSite Ventures,
L.L.C., a Delaware limited liability company. In June 1999, we completed a
reorganization and recapitalization transaction in which OnSite Ventures merged
into our company. As a result of the merger, all of the membership interests in
OnSite Ventures were converted into shares of our common stock.
FINANCINGS
In February 1998, we issued a $6.5 million convertible subordinated
promissory note having an interest rate of 12% per annum to an affiliate of
FrontLine Capital Group, one of our largest stockholders. In connection with our
reorganization and recapitalization, the outstanding principal and accrued
interest of approximately $796,000 due on the note was converted into 5,869,000
shares of Series A preferred stock.
In February 1999, we issued a $3.0 million senior secured promissory note
having an interest rate of 15% per annum to both JAH Realties and an affiliate
of FrontLine Capital Group.
In April 1999, we issued $20.0 million in promissory notes, each with an
interest rate of 12% per annum, to our private equity investors consisting of
FrontLine Capital Group, Veritech Ventures LLC, Spectrum Equity Investors III,
L.P., J.P. Morgan Investment Corporation, Crosspoint Venture Partners and AT&T
Venture Fund II, L.P., each of whom beneficially owns our common stock. With a
portion of the proceeds from the $20.0 million in promissory notes, we repaid
the $3.0 million senior secured promissory note issued to both JAH Realties and
an affiliate of FrontLine Capital Group.
PREFERRED STOCK PURCHASE AGREEMENT
As part of our reorganization and recapitalization, we entered into a
preferred stock purchase agreement with our private equity investors. Pursuant
to this agreement, we issued an aggregate of 75,461,745 shares of Series B,
Series C and Series D preferred stock for an aggregate consideration of $60.0
million. We issued a portion of this preferred stock to our private equity
investors in exchange for the cancellation of the $20.0 million in promissory
notes, plus accrued and unpaid interest of approximately $500,000.
SUBSCRIPTION AGREEMENT
In July 1999, we issued 323,128 shares of common stock to an affiliate of
FrontLine Capital Group for an aggregate consideration of $145,408, or $.45 per
share.
INVESTOR RIGHTS AGREEMENT
The parties to the preferred stock purchase agreement and some of our
officers also entered into an investor rights agreement in April 1999, which
provides, among other things, that the preferred stockholders have rights to
participate in registration statements filed by us for the sale of our common
stock in an underwritten offering for our own account, subject to the ability of
the underwriters to limit the number of shares included in the registration and
giving priority to the issuance of shares held by us. The existence and exercise
of these registration rights may make it more difficult for us to arrange future
financings and may have an adverse effect on the market price of our common
stock.
VOTING AGREEMENT
The parties to the preferred stock purchase agreement also entered into a
voting agreement in April 1999, which provides, among other things, that:
Spectrum Equity Investors III, L.P., J.P. Morgan Investment Corporation and
Crosspoint Venture Partners, each of whom beneficially owns more than 5% of
our common stock, may each nominate one member to our board of directors;
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an affiliate of FrontLine Capital Group may nominate two members to our
board of directors;
all of the parties to the voting agreement shall vote their shares in favor
of each other's nominees;
all of the parties to the voting agreement shall vote their shares of
common stock and preferred stock to elect our chief executive officer to
our board of directors; and
one of our founders who is an affiliate of a stockholder may attend all
meetings of our board of directors and committees and will be provided with
any materials that we provide to our board.
The voting agreement will terminate upon the closing of this offering.
RELATIONSHIPS WITH A STOCKHOLDER AND ITS AFFILIATES
In 1999, we had communications services agreements with affiliates of
FrontLine Capital Group to offer communications services to tenants in their
buildings. Under these agreements, we paid a total of $40,000 to these entities
in 1999.
In 1999, we provided communications services to affiliates of FrontLine
Capital Group. Revenues from these entities totaled $766,000 during this period.
In 1999, we paid affiliates of FrontLine Capital Group $126,000 for leased
office space.
In February 2000, we agreed to issue to an affiliate of FrontLine Capital
Group, up to 353,258 warrants to purchase shares of common stock at an exercise
price of $2.36 per share. These warrants vest upon the execution of access
agreements.
Scott Rechler, one of our directors, is the President, Chief Executive
Officer and a director of FrontLine Capital Group.
RELATIONSHIPS WITH ONE OF OUR PRINCIPAL UNDERWRITERS
Pursuant to our preferred stock purchase agreement, we issued shares of
preferred stock to affiliates of J.P. Morgan Securities Inc., which is a
representative of the underwriters. Under this agreement, we issued an aggregate
of 13,205,805 shares of Series B and C preferred stock to these affiliates of
J.P. Morgan Securities Inc. in exchange for $10.5 million, $3.5 million of which
was paid in the form of cancellation of indebtedness, including accrued and
unpaid interest, issued in connection with this agreement. The Series B and C
preferred stock were sold together at a price of $1.00 per share of Series B
preferred stock and $.39 per share of Series C preferred stock. The collective
percentage ownership interest of these entities is approximately 11.2% of our
common stock. Each of the transactions with the affiliates of J.P. Morgan
Securities Inc. has been approved by our board of directors and was completed on
the same terms as with several other unaffiliated third parties participating in
the same transactions.
RELATIONSHIPS WITH MANAGEMENT AND EXECUTIVE OFFICERS
We have entered into letter agreements and restricted stock purchase
agreements with some of our officers. See 'Management -- Employment, Severance
and Non-competition Agreements' and 'Management -- OnSite Access, Inc. 1999
stock plan.' In connection with the purchase of their restricted stock, we
extended loans to Messrs. Taylor, Jarus, Hall, Miller, Knicely and Hornig and
Ms. Kelly, in the principal amounts of $898,000, $336,750, $291,850, $199,805,
$123,475, $86,835 and $179,600, respectively. These loans have an interest rate
of 5.82% per annum and are fully recourse, which means, that in the event of
default by these individuals, we may seek payment directly from these
individuals rather than having to proceed first against any collateral securing
the loan.
In addition, to compensate Mr. Taylor for the possible forfeiture of certain
options held by him to acquire shares of WinStar Communications, an affiliate of
his former employer, we extended him a three year loan in the principal amount
of $2.0 million which is forgiven in equal installments annually. See
'Management -- Employment, Severance and Non-competition Agreements.'
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of common stock as of January 31, 2000 and as adjusted to reflect the
sale of the common stock offered hereby by:
each person or group within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934 known by us to own beneficially 5% or more
of our common stock;
our directors and named executive officers; and
all our directors and executive officers as a group.
As used in this table, 'beneficial ownership' means the sole or shared power
to vote or direct the voting or to dispose or direct the disposition of any
security. A person is deemed to be the beneficial owner of securities that can
be acquired within 60 days from the date of this prospectus through the exercise
of any option, warrant or right. Shares of common stock subject to options,
warrants or rights that are currently exercisable or exercisable within 60 days
are deemed outstanding for computing the ownership percentage of the person
holding such options, warrants or rights, but are not deemed outstanding for
computing the ownership percentage of any other person. The amounts and
percentages assume the conversion of all outstanding preferred stock and are
based upon 47,005,657 shares of common stock outstanding as of January 31, 2000
and 63,675,657 shares of common stock outstanding as of the completion of this
offering.
The address for each executive officer is c/o OnSite Access, Inc., 1372
Broadway, New York, New York 10018.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
BENEFICIALLY OWNED PERCENTAGE OWNED
PRIOR TO ----------------------------------
NAME AND AFTER OFFERING PRIOR TO OFFERING AFTER OFFERING
---- ------------------ ------------------ ---------------
<S> <C> <C> <C>
FrontLine Capital Group(1)...................
10 East 50th Street
New York, New York 10022 16,243,854 34.6% 25.5%
Spectrum Equity Investors III, L.P.(2) ......
245 Lytton Avenue, Suite 175
Palo Alto, California 94301 7,357,722 15.6 11.6
Crosspoint Venture Partners(3) ..............
2925 Woodside Road
Woodside, California 94062 5,184,973 11.0 8.1
J.P. Morgan Investment Corporation(4) .......
60 Wall Street
New York, New York 10260 5,184,972 11.0 8.1
Jeffrey D. Neumann(5) .......................
10 East 50th Street
New York, New York 10022 16,343,854 34.8 25.7
Scott H. Rechler(6) .........................
10 East 50th Street
New York, New York 10022 16,308,854 34.7 25.6
William P. Collatos(7) ......................
245 Lytton Avenue, Suite 175
Palo Alto, California 94301 7,357,722 15.6 11.6
Steven F. Foster(8) .........................
2925 Woodside Road
Woodside, California 94062 5,184,973 11.0 8.1
W. Montgomery Cerf(9) .......................
60 Wall Street
New York, New York 10260 5,184,972 11.0 8.1
Howard E. Taylor............................. 2,000,000 4.3 3.1
Daren W. Hornig(10).......................... 821,845 1.7 1.3
Scott M. Jarus............................... 750,000 1.6 1.2
</TABLE>
(table continued on next page)
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(table continued from previous page)
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK
BENEFICIALLY OWNED PERCENTAGE OWNED
PRIOR TO ----------------------------------
NAME AND AFTER OFFERING PRIOR TO OFFERING AFTER OFFERING
---- ------------------ ----------------- --------------
<S> <C> <C> <C>
650,000 1.4 1.0
Kenneth J. Hall..............................
550,000 1.2 *
Richard J. Miller............................
291,666 * *
Brandon R. Knicely...........................
All directors and executive officers as a
group (10 persons)(11)..................... 38,586,521 82.1 60.6
</TABLE>
- ---------
* Represents beneficial ownership of less than one percent.
(1) Consists of 8,466,396 shares held by RSI-OSA Holdings, Inc. and 7,777,458
shares held by RSI-OnSite Holdings LLC. These shares may be deemed to be
beneficially owned by each of Messrs. Neumann and Rechler because they are
shareholders, directors and/or officers of FrontLine Capital Group, the
sole shareholder of RSI-OSA Holdings, Inc. and the sole member of
RSI-OnSite Holdings LLC, provided that each of Messrs. Neumann and Rechler
disclaims beneficial ownership of such shares.
(2) These shares may be deemed to be beneficially owned by Mr. Collatos because
he is a general partner of Spectrum Equity Investors III, L.P., provided
that Mr. Collatos disclaims beneficial ownership of such shares.
(3) These shares may be deemed to be beneficially owned by Mr. Foster because
he is a partner of Crosspoint Venture Partners, provided that Mr. Foster
disclaims beneficial ownership of such shares.
(4) Consists of 4,147,977 shares held by J.P. Morgan Investment Corporation and
1,036,994 shares held by Sixty Wall Street SBIC Fund, L.P. These entities
are affiliates of J.P. Morgan Securities Inc., and these shares may be
deemed to be beneficially owned by Mr. Cerf, because he is a managing
director of J.P. Morgan Investment Corporation and Sixty Wall Street SBIC
Corporation. Mr. Cerf disclaims beneficial ownership of these shares.
(5) Consists of (a) 100,000 shares held by Mr. Neumann; (b) 16,243,854 shares
that Mr. Neumann may be deemed to beneficially own because he is an officer
of FrontLine Capital Group, the sole shareholder of RSI-OSA Holdings, Inc.
and the sole member of RSI-OSA Holdings, LLC, provided that Mr. Neumann
disclaims beneficial ownership of these shares indirectly held by FrontLine
Capital Group.
(6) Consists of (a) 45,000 shares held by Mr. Rechler; (b) 20,000 shares that
Mr. Rechler may be deemed to beneficially own because such shares are held
by members of his immediate family; (c) 16,243,854 shares that Mr. Rechler
may be deemed to beneficially own because he is an officer, director and
stockholder of FrontLine Capital Group, the sole stockholder of RSI-OSA
Holdings, Inc. and the sole member of RSI-OSA Holdings, LLC, provided that
Mr. Rechler disclaims beneficial ownership of these shares indirectly held
by FrontLine Capital Group.
(7) Consists of 7,357,722 shares that Mr. Collatos may be deemed to
beneficially own because he is a general partner of Spectrum Equity
Investors III, L.P., provided that Mr. Collatos disclaims beneficial
ownership of such shares.
(8) Consists of 5,184,973 shares that Mr. Foster may be deemed to beneficially
own because he is a partner of Crosspoint Venture Partners, provided that
Mr. Foster disclaims beneficial ownership of such shares.
(9) Consists of 5,184,972 shares that Mr. Cerf may be deemed to beneficially
own because he is a managing director of J.P. Morgan Investment Corporation
and Sixty Wall Street SBIC Corporation, the general partner of Sixty Wall
Street SBIC Fund, L.P. Mr. Cerf disclaims beneficial ownership of such
shares.
(footnotes continued on next page)
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(footnotes continued from previous page)
(10) Consists of (a) 735,284 shares held directly by Mr. Hornig; and (b) 86,561
shares that Mr. Hornig may be deemed to beneficially own because such
shares are beneficially owned or deemed to be beneficially owned by members
of his immediate family, provided that Mr. Hornig disclaims beneficial
ownership of such shares.
(11) Includes shares that our directors may be deemed to beneficially own
because of their relationships with our private equity investors, provided
that our directors disclaim beneficial ownership of such shares.
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DESCRIPTION OF CAPITAL STOCK
We intend to amend our certificate of incorporation and bylaws prior to the
completion of this offering. The forms of our certificate of incorporation and
bylaws will be filed as exhibits to the registration statement of which this
prospectus is a part. The following summarizes the terms and provisions of our
capital stock upon the closing of this offering. However, you should read the
forms of our certificate of incorporation and bylaws for the actual terms of our
capital stock.
Upon the closing of this offering, our authorized capital stock will consist
of million shares, par value $0.001 per share, of common stock and million
shares, par value $0.001 per share, of preferred stock.
COMMON STOCK
Each share of our common stock will be identical in all respects and will
entitle its holder to the same rights and privileges enjoyed by all other holder
of shares of common stock and will subject them to the same qualifications,
limitations and restrictions to which all other holders of common stock will be
subject. The common stock is not subject to conversion or redemption.
VOTING RIGHTS
Holders of our common stock will be entitled to one vote per share on all
matters to be voted on by our stockholders. Holders of common stock will not
have cumulative rights, so that holders of a plurality of the shares of common
stock present at a meeting at which a quorum is present will be able to elect
all of our directors eligible for election in a given year. The holders of a
majority of the voting power of the issued and outstanding common stock will
constitute a quorum.
DIVIDENDS
Holders of our common stock will be entitled to receive ratably such
dividends, if any, as are declared by our board of directors out of funds
legally available for the declaration of dividends, subject to the preferential
rights of any holder of preferred stock that may from time to time be
outstanding.
LIQUIDATION
Upon our liquidation, dissolution or winding up, the holders of our common
stock will be entitled to share pro rata in the distribution of all of our
assets available for distribution after satisfaction of all of our liabilities
and the payment of the liquidation preference of any preferred stock that may be
outstanding.
OTHER PROVISIONS
The holders of our common stock will have no preemptive or other
subscription rights to purchase common stock, and there will be no redemptive
rights or sinking fund provisions.
PREFERRED STOCK
Our board of directors will be authorized to issue preferred stock in one or
more series and to establish the number of shares to be included in each series
and to fix the designations, powers, preferences and rights of the shares of
each series and any qualifications, limitations or restrictions of each series.
Because the board of directors will have the power to establish the preferences
and rights of the shares of any series of preferred stock, it may afford the
holders of any series of preferred stock preferences, powers and rights,
including voting rights, senior to the rights of the holders of common stock.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of our company.
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WARRANTS
We intend to issue up to 24,138,888 warrants to real estate owners and
agents at an exercise price of no less than $2.36 per share. To date, we have
agreed to issue up to 22,863,170 warrants to real estate owners and agents,
2,574,221 of which are Class B Warrants. The warrants vest upon the execution
of, or the occurrence of events relating to the execution of, access agreements.
The warrants, other than the Class B Warrants, are typically exercisable at any
time following the earlier of six months after this offering or 12 months from
the date of the warrant agreement. The Class B Warrants are exercisable at any
time following the earlier of 12 months after this offering or 14 months from
the date of the warrant agreement. All warrants are exercisable for a period of
five years.
LIMITATION ON DIRECTORS' LIABILITIES
Our certificate of incorporation will limit the liability of our directors
to us and our stockholders to the fullest extent permitted by Delaware law.
Specifically, our directors will not be personally liable for money damages for
breach of fiduciary duty as a director, except for liability
for any breach of the director's duty of loyalty to us or our stockholders;
for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
under Section 174 of the Delaware General Corporation Law, which concerns
unlawful payments of dividends, stock purchases or redemptions; and
for any transaction from which the director derived an improper personal
benefit.
ANTI-TAKEOVER EFFECTS OF OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND
PROVISIONS OF DELAWARE LAW
Our certificate of incorporation, bylaws and Section 203 of the Delaware
General Corporation Law contain provisions that may make the acquisition of
control of our company by means of a tender offer, open market purchase, proxy
fight or otherwise, more difficult.
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
We must comply with the provisions of Section 203 of the Delaware General
Corporation Law. In general, Section 203 prohibits a publicly held Delaware
corporation from engaging in a 'business combination' with an 'interested
stockholder' for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner.
A 'business combination' includes a merger, asset sale or other transaction
resulting in a financial benefit to the interested stockholder. An 'interested
stockholder' is a person who, together with affiliates and associates, owns, or,
in some cases, within three years prior, did own, 15% or more of the
corporation's voting stock. Under Section 203, a business combination between
OnSite and an interested stockholder is prohibited unless it satisfies one of
the following three conditions:
our board of directors must have previously approved either the business
combination or the transaction that resulted in the stockholder becoming an
interested stockholder;
upon consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting stock outstanding at the time the transaction
commenced, excluding, for purposes of determining the number of shares
outstanding, shares owned by (1) persons who are directors and also
officers and (2) employee stock plans, in some instances; and
the business combination is approved by our board of directors and
authorized at an annual or special meeting of the stockholders by the
affirmative vote of the holders of at least 66 2/3% of the outstanding
voting stock that is not owned by the interested stockholder.
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STAGGERED BOARD
Our certificate of incorporation will provide that the number of directors
shall be fixed from time to time by a resolution of our board of directors. Our
certificate of incorporation will also provide that the board of directors shall
be divided into three classes. The members of each class of directors will serve
for staggered three-year terms. As permitted by the Delaware General Corporation
Law, the members of our classified board of directors will be removable from
office only by our stockholders for cause. Vacancies on the board of directors
shall be filled by a majority of the remaining directors, or by a sole remaining
director, or by our stockholders if the vacancy was caused by the action of our
stockholders.
ADVANCE NOTICE PROVISION
Our certificate of incorporation and bylaws will provide that stockholders
must follow an advance notification procedure to nominate candidates for the
board of directors and to propose business to be conducted at an annual meeting.
SPECIAL MEETINGS OF STOCKHOLDERS; WRITTEN CONSENT PROVISION
Our certificate of incorporation will provide that special meetings of our
stockholders may be called only by the board of directors, the chairman of the
board or the president. Our certificate of incorporation will also remove our
stockholders' ability to act by written consent. These provisions may render it
more difficult for stockholders to take action opposed by the board of
directors.
ADOPTION, AMENDMENT OR REPEAL OF BYLAWS
Our certificate of incorporation will limit the ability of our stockholders
to adopt, amend or repeal our bylaws. Specifically, any adoption, amendment or
repeal of a bylaw by our stockholders will require passage by a supermajority
vote.
SUPERMAJORITY APPROVALS
The provisions of our certificate of incorporation referred to above will
not be able to be altered without supermajority approval by our stockholders.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, 62,875,657 shares of common stock will be
outstanding, or 65,376,157 shares if the underwriters exercise their
over-allotment option in full. Of these shares, the shares of common stock,
assuming the underwriters exercise their over-allotment option in full, sold in
this offering will be freely tradeable without restriction or further
registration under the Securities Act, unless held by an 'affiliate' of our
company as that term is defined in Rule 144 under the Securities Act. All of the
shares of common stock outstanding prior to this offering are 'restricted
securities,' as defined under Rule 144. These shares are restricted securities
because they were issued in private transactions not involving a public offering
and may not be sold in the absence of registration other than in accordance with
Rule 144 or Rule 701 promulgated under the Securities Act or another exemption
from registration. This prospectus may not be used in connection with any resale
of shares of common stock acquired in this offering by our affiliates.
In connection with this offering, we, our directors and a number of our
officers and stockholders have agreed, subject to specified exceptions, not to
dispose of or hedge any shares of common stock for a period of 180 days after
the completion of this offering without the underwriters' consent; however, the
underwriters may release these shares from the restrictions at any time. We
cannot predict what effect, if any, market sales of shares held by principal
stockholders or any other stockholder or the availability of shares for future
sale will have on the market price of our common stock.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of the restricted
securities from the issuer or from an affiliate of the issuer, a person, or
persons whose shares of common stock are aggregated, including persons who may
be deemed our affiliates, would be entitled to sell within any three-month
period a number of shares of common stock that does not exceed the greater of:
(1) one percent of the then-outstanding shares of common stock, which equals
approximately 62,876 shares immediately after this offering; or
(2) the average weekly trading volume during the four calendar weeks
preceding the date on which notice of the sale is filed with the SEC.
Sales under Rule 144 are also subject to specified restrictions as to the
manner of sale, notice requirements and the availability of current public
information about us. In addition, under Rule 144(k), if a period of at least
two years has elapsed since the later of the date restricted securities were
acquired from us or the date they were acquired from one of our affiliates, a
stockholder who is not our affiliate at the time of sale and who has not been
our affiliate for at least three months prior to the sale would be entitled to
sell shares of common stock in the public market immediately without compliance
with the foregoing requirements under Rule 144. Rule 144 does not require the
same person to have held the securities for the applicable periods. The
foregoing summary of Rule 144 is not intended to be a complete description
thereof.
In addition, any employee, director or officer of, or consultant to our
company who acquired shares pursuant to a written compensatory plan or contract
may be entitled to rely on the resale provisions of Rule 701 of the Securities
Act, which permits non-affiliates to sell their Rule 701 shares without having
to comply with the public information, holding period, volume limitation or
notice provisions of Rule 144, and permits our affiliates to sell their Rule 701
shares without having to comply with the holding period restrictions of Rule
144, in each case, commencing 90 days after the date of this prospectus.
Immediately following this offering, none of the 46,205,657 'restricted
securities' will be available for immediate sale in the public market pursuant
to Rule 144(k). Beginning 90 days after the date of this prospectus, and without
consideration of the contractual restrictions described above, shares
issued under or acquired upon exercise of options issued under the 1999 stock
plan will be outstanding and eligible for sale in reliance upon Rule 701.
Additional shares may be available if options are exercised in the 180-day
period following the date of this prospectus. Shares of common stock issued
pursuant to the 1999 stock plan generally will be available for sale in the open
market by holders who are not our affiliates and, subject to the
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<PAGE>
volume and other applicable limitations of Rule 144, by holders who are our
affiliates, unless those shares are subject to vesting restrictions or the
contractual restrictions described above.
Warrants to purchase shares of common stock will also be outstanding after
the completion of this offering. Holders of warrants have the right, subject to
certain conditions and limitations, to include the shares issuable upon exercise
of their warrants in various registration statements relating to our securities.
By exercising their registration rights and causing a large number of shares to
be registered and sold in the public market, these holders may cause the price
of our common stock to fall. In addition, their participation in our
registration statements could have an adverse effect on our ability to raise
needed capital.
Prior to this offering, there has been no public market for our common
stock. We cannot predict the timing or amount of future sales of shares, or the
effect, if any, that future sales of shares, or the availability of shares for
future sale, will have on the market price of the common stock prevailing from
time to time. Sales of substantial amounts of the common stock, including shares
issuable upon the exercise of stock options or warrants, in the public market
after the lapse of the restrictions described above, or the perception that such
sales may occur, could materially adversely affect the prevailing market prices
for the common stock and our ability to raise equity capital in the future. See
'Risk Factors -- Risks Related to this Offering -- The sale or availability for
sale of substantial amounts of our common stock could adversely affect our stock
price.'
REGISTRATION RIGHTS
Some holders of our common stock are entitled to registration rights, which
are described under 'Certain Transactions -- Reorganization, Recapitalization
and Related Transactions -- Investor rights agreement.'
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<PAGE>
UNITED STATES TAX CONSEQUENCES TO NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States federal
income and estate tax consequences of the ownership and disposition of our
common stock by a non-U.S. holder. As used in this prospectus, the term
'non-U.S. holder' is a person who holds our common stock other than:
a citizen or individual resident of the United States,
a corporation or partnership created or organized in or under the laws of
the United States or of any political subdivision of the United States,
other than a partnership treated as foreign under U.S. Treasury
regulations,
an estate whose income is includable in gross income for U.S. federal
income tax purposes regardless of its source, or
a trust, in general, if it is subject to the primary supervision of a court
within the U.S. and the control of one or more U.S. persons.
An individual may, subject to certain exceptions, be treated as a resident
of the U.S. for U.S. federal income tax purposes, instead of a nonresident, by,
among other things, being present in the United States for at least 31 days in
the calendar year and for an aggregate of at least 183 days during a three-year
period ending in the current calendar year -- counting for these purposes all
of the days present in the current year, one-third of the days present in the
immediately preceding year and one-sixth of the days present in the second
preceding year. Residents are subject to U.S. federal tax as if they were U.S.
citizens.
This discussion does not consider:
U.S. state and local or non-U.S. tax consequences,
specific facts and circumstances that may be relevant to a particular
non-U.S. holder's tax position, including, if our common stock is held by a
U.S. partnership, the U.S. tax consequences of holding and disposing of our
common stock may be affected by certain determinations made at the partner
level,
the tax consequences for the stockholders, partners or beneficiaries of a
non-U.S. holder,
special tax rules that may apply to certain non-U.S. holders, including
without limitation, banks, insurance companies, dealers in securities and
traders in securities, or
special tax rules that may apply to a non-U.S. holder that holds our common
stock as part of a 'straddle,' 'hedge' or 'conversion transaction.'
The following discussion is based on provisions of the U.S. Internal Revenue
Code of 1986, as amended, applicable Treasury regulations and administrative and
judicial interpretations, all as of the date of this prospectus, and all of
which are subject to change, retroactively or prospectively. The following
summary is for general information. ACCORDINGLY, EACH NON-U.S. HOLDER SHOULD
CONSULT A TAX ADVISOR REGARDING THE UNITED STATES FEDERAL, STATE, LOCAL AND
NON-U.S. INCOME AND OTHER TAX CONSEQUENCES OF ACQUIRING, HOLDING AND DISPOSING
OF SHARES OF OUR COMMON STOCK.
DIVIDENDS
We do not anticipate paying cash dividends on our common stock in the
foreseeable future. See 'Dividend Policy.' In the event, however, that dividends
are paid on shares of common stock, dividends paid to a non-U.S. holder of
common stock generally will be subject to withholding of United States federal
income tax at a 30% rate, or such lower rate as may be provided by an applicable
income tax treaty. Non-U.S. holders should consult their tax advisors regarding
their entitlement to benefits under a relevant income tax treaty.
Dividends that are effectively connected with a non-U.S. holder's conduct of
a trade or business in the United States or, if an income tax treaty applies,
attributable to a permanent establishment in the United States, are generally
subject to U.S. federal income tax on a net income basis at regular graduated
rates, but are not generally subject to the 30% withholding tax
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<PAGE>
if the non-U.S. holder files the appropriate U.S. Internal Revenue Service form
with the payor. Any U.S. trade or business income received by a non-U.S. holder
that is a corporation may also, under certain circumstances, be subject to an
additional 'branch profits tax' at a 30% rate or such lower rate as specified by
an applicable income tax treaty.
Dividends paid prior to 2001 to an address in a foreign country are
presumed, absent actual knowledge to the contrary, to be paid to a resident of
such country for purposes of the withholding discussed above and for purposes of
determining the applicability of a tax treaty rate. For dividends paid after
2000:
a non-U.S. holder of common stock who claims the benefit of an applicable
income tax treaty rate generally will be required to satisfy applicable
certification and other requirements,
in the case of common stock held by a foreign partnership, the
certification requirement will generally be applied to the partners of the
partnership and the partnership will be required to provide certain
information, including a United States taxpayer identification number, and
look-through rules will apply for tiered partnerships.
A non-U.S. holder of common stock that is eligible for a reduced rate of
U.S. withholding tax under an income tax treaty may obtain a refund or credit of
any excess amounts withheld by filing an appropriate claim for a refund with the
U.S. Internal Revenue Service.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to U.S. federal income tax
in respect of gain recognized on a disposition of common stock unless:
the gain is U.S. trade or business income, in which case, the branch
profits tax described above may also apply to a corporate non-U.S. holder,
the non-U.S. holder is an individual who holds the common stock as a
capital asset within the meaning of Section 1221 of the U.S. Internal
Revenue Code, is present in the United States for more than 182 days in the
taxable year of the disposition and meets certain other requirements,
the non-U.S. holder is subject to tax pursuant to the provisions of the
U.S. tax law applicable to certain United States expatriates, or
we are or have been a U.S. real property holding corporation for federal
income tax purposes at any time during the shorter of the five-year period
ending on the date of disposition or the period that the non-U.S. holder
held the common stock.
Generally, a corporation is a U.S. real property holding corporation if the
fair market value of its U.S. real property interests equals or exceeds 50% of
the sum of the fair market value of its worldwide real property interests plus
its other assets used or held for use in a trade or business. We have not
determined whether we are a U.S. real property holding corporation. There is a
possibility that we are, or will become, such a corporation. Even if we are or
were to become a U.S. real property holding corporation, the tax relating to
stock in a U.S. real property holding corporation will not apply to a non-U.S.
holder whose holdings, direct and indirect, at all times during the applicable
period, constituted 5% or less of the common stock, provided that the common
stock was regularly traded on an established securities market. We believe that
our common stock will be regularly traded on an established securities market
for this purpose in any quarter during which it is listed on the Nasdaq National
Market.
FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual who is a non-U.S.
holder at the time of death will be included in the individual's gross estate
for United States federal estate tax purposes, unless an applicable estate tax
or other treaty provides otherwise and, therefore, may be subject to United
States federal estate tax.
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INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
We must report annually to the U.S. Internal Revenue Service and to each
non-U.S. holder the amount of dividends paid to that holder and the tax withheld
with respect to those dividends. Copies of the information returns reporting
those dividends and withholding may also be made available to the tax
authorities in the country in which the non-U.S. holder is a resident under the
provisions of an applicable income tax treaty or agreement.
Under certain circumstances, U.S. Treasury Regulations require information
reporting and backup withholding at a rate of 31% on certain payments on common
stock. Under currently applicable law, non-U.S. holders of common stock
generally will be exempt from these information reporting requirements and from
backup withholding on dividends paid prior to 2001 to an address outside the
U.S. For dividends paid after 2000, however, a non-U.S. holder of common stock
that fails to certify its non-U.S. holder status in accordance with applicable
U.S. Treasury Regulations may be subject to backup withholding at a rate of
31% on payments of dividends.
The payment of the proceeds of the disposition of common stock by a holder
to or through the U.S. office of a broker or through a non-U.S. branch of a U.S.
broker generally will be subject to information reporting and backup withholding
at a rate of 31% unless the holder either certifies its status as a non-U.S.
holder under penalties of perjury or otherwise establishes an exemption. The
payment of the proceeds of the disposition by a non-U.S. holder of common stock
to or through a non-U.S. office of a non-U.S. broker will not be subject to
backup withholding or information reporting unless the non-U.S. broker is a U.S.
related person. In the case of the payment of proceeds from the disposition of
common stock by or through a non-U.S. office of a broker that is a U.S. person
or a U.S. related person, information reporting, but currently not backup
withholding, on the payment applies unless the broker receives a statement from
the owner, signed under penalty of perjury, certifying its non-U.S. status or
the broker has documentary evidence in its files that the holder is a non-U.S.
holder and the broker has no actual knowledge to the contrary. For this purpose,
a U.S. related person is:
a controlled foreign corporation for U.S. federal income tax purposes,
a foreign person 50% or more of whose gross income from all sources for the
three-year period ending with the close of its taxable year preceding the
payment, or for such part of the period that the broker has been in
existence, is derived from activities that are effectively connected with
the conduct of a U.S. trade or business, or
effective after 2000, a foreign partnership if, at any time during the
taxable year, (1) at least 50% of the capital or profits interest in the
partnership is owned by U.S. persons, or (2) the partnership is engaged in
a U.S. trade or business.
Effective after 2000, backup withholding may apply to the payment of
disposition proceeds by or through a non-U.S. office of a broker that is a U.S.
person or a U.S. related person unless certain certification requirements are
satisfied or an exemption is otherwise established and the broker has no actual
knowledge that the holder is a U.S. person. Non-U.S. holders should consult
their own tax advisors regarding the application of the information reporting
and backup withholding rules to them, including changes to these rules that will
become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a
non-U.S. holder will be refunded, or credited against the holder's U.S. federal
income tax liability, if any, provided that the required information is
furnished to the U.S. Internal Revenue Service.
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UNDERWRITING
Subject to the terms and conditions stated in the underwriting agreement
dated the date of this prospectus, each underwriter named below has severally
agreed to purchase, and we have agreed to sell to each underwriter, the number
of shares set forth opposite the name of each underwriter.
<TABLE>
<CAPTION>
UNDERWRITER NUMBER OF SHARES
- ----------- ----------------
<S> <C>
Salomon Smith Barney Inc....................................
J.P. Morgan Securities Inc..................................
CIBC World Markets Corp.....................................
Thomas Weisel Partners LLC..................................
----------
Total................................................... 16,670,000
----------
----------
</TABLE>
The underwriting agreement provides that the obligations of the several
underwriters to purchase the shares included in this offering are subject to
approval of various legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all the shares (other than those covered
by the over-allotment option described below) if they purchase any of the
shares.
The underwriters, for whom Salomon Smith Barney Inc., J.P. Morgan Securities
Inc., CIBC World Markets Corp. and Thomas Weisel Partners LLC are acting as
representatives, propose to offer some of the shares directly to the public at
the public offering price listed on the cover page of this prospectus and some
of the shares to various dealers at the public offering price less a concession
not in excess of $ per share. The underwriters may allow, and these
dealers may reallow, a concession not in excess of $ per share on sales to
other dealers. If all of the shares are not sold at the initial offering price,
the representatives may change the public offering price and the other selling
terms. The representatives have advised us that the underwriters do not intend
to confirm any sales to any accounts over which they exercise discretionary
authority.
We have granted to the underwriters a 30-day option to purchase up to
2,500,500 additional shares of common stock at the public offering price less
the underwriting discount. The underwriters may exercise their option solely for
the purpose of covering over-allotments, if any, in connection with this
offering. To the extent this option is exercised, each underwriter will be
obligated, subject to various conditions, to purchase a number of additional
shares approximately proportionate to its initial purchase commitment.
At our request, the underwriters will reserve up to approximately 1,083,550
shares of common stock to be sold, at the initial public offering price, to our
directors, officers and employees, and their friends and family members. This
directed share program will be administered by Salomon Smith Barney Inc. The
number of shares of common stock available for sale to the general public will
be reduced to the extent these individuals purchase reserved shares. Any
reserved shares which are not so purchased will be offered by the underwriters
to the general public on the same basis as the other shares offered hereby.
In connection with this offering, we, our directors and a number of our
officers and stockholders have agreed, subject to exceptions, not to dispose of
or hedge any shares of common stock for a period of 180 days after the
completion of this offering without the underwriters' consent; however, the
underwriters may release these shares from the restrictions at any time.
Prior to this offering, there has been no public market for the common
stock. Consequently, the initial public offering price for the shares was
determined by negotiations between us and the representatives. Among the factors
considered in determining the initial public offering price were our records of
operations, our current financial condition, our future prospects, our markets,
the economic conditions in and future prospects for the industry in which we
compete, our management, and currently prevailing general conditions in the
equity securities markets, including
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current market valuations of publicly traded companies considered comparable to
our company. The price at which the shares will sell in the public market after
this offering could be lower than the price at which they are sold by the
underwriters. An active trading market in the common stock may not develop or
continue after this offering.
The following table shows the underwriting discounts and commissions to be
paid to the underwriters by us in connection with this offering. These amounts
are shown assuming both no exercise and full exercise of the underwriters'
option to purchase additional shares of common stock to cover over-allotments.
<TABLE>
<CAPTION>
PAID BY US
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
<S> <C> <C>
Per share.................................................. $ $
Total.................................................. $ $
</TABLE>
In connection with this offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may over-allot, or engage in syndicate covering transactions,
stabilizing transactions and penalty bids. Over-allotment involves syndicate
sales of common stock in excess of the number of shares to be purchased by the
underwriters in this offering, which creates a syndicated short position.
Syndicate covering transactions involve purchases of the common stock in the
open market after the distribution has been completed in order to cover
syndicate short positions. Stabilizing transactions consist of bids or purchases
of common stock made for the purpose of preventing or retarding a decline in the
market price of the common stock while the offering is in progress. Penalty bids
permit the underwriters to reclaim a selling concession from a syndicate member
when Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member. These activities may cause the price of our common stock to be higher
than the price that otherwise would exist in the open market in the absence of
these transactions. These transactions may be effected on the Nasdaq National
Market or in the over-the-counter market, or otherwise and, if commenced, may be
discontinued at any time.
We estimate that the total expenses, excluding underwriting discounts and
commissions, of this offering will be approximately $2.1 million.
Thomas Weisel Partners LLC, one of the representatives of the underwriters,
was organized and registered as a broker-dealer in December 1998. Since December
1998, Thomas Weisel Partners has been named as a lead or co-manager on 110 filed
public offerings of equity securities, of which 79 have been completed, and has
acted as a syndicate member in an additional 54 public offerings of equity
securities. Thomas Weisel Partners does not have any material relationship with
us or any of our officers, directors or other controlling persons, except with
respect to its contractual relationship with us pursuant to the underwriting
agreement that will be entered into in connection with this offering.
Because entities controlled by J.P. Morgan & Co., which is an affiliate of
J.P. Morgan Securities Inc., beneficially own more than 10% of the preferred
stock outstanding prior to the closing of this offering, J.P. Morgan & Co. may
be deemed to have a conflict of interest with us under Rule 2720 of the Conduct
Rules of the National Association of Securities Dealers. When a NASD member with
a conflict of interest participates as an underwriter in a public offering,
Rule 2720 states that the public offering price per share can be no higher than
that recommended by a qualified independent underwriter meeting specified
standards. In accordance with this rule, Salomon Smith Barney Inc. has assumed
the responsibilities of acting as a qualified independent underwriter. In its
role as a qualified independent underwriter, Salomon Smith Barney Inc. has
performed a due diligence investigation and participated in the preparation of
this prospectus and the registration statement of which this prospectus is a
part.
We have agreed to indemnify the underwriters against various liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
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LEGAL MATTERS
Fried, Frank, Harris, Shriver & Jacobson (a partnership including
professional corporations), New York, New York, will pass upon the validity of
the issuance of the shares of common stock offered hereby. Cravath, Swaine &
Moore, New York, New York, has represented the underwriters in this offering.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our consolidated
financial statements and schedule at December 31, 1998 and 1999 and for the
years ended December 31, 1997, 1998 and 1999, as set forth in their reports
appearing elsewhere in this prospectus. We have included our financial
statements and schedule in reliance on Ernst & Young LLP's reports, given on
their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the SEC a registration statement on Form S-1 with respect
to the common stock being offered by this prospectus. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules to the registration statement. For further information
with respect to us and the shares of common stock offered by this prospectus,
you should refer to the registration statement, including its exhibits and
schedules. With respect to statements contained in this prospectus regarding the
contents of any contract or any other document, reference is made to the copy of
such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference. You may review a copy of the registration statement, including its
exhibits and schedules, at the SEC's public reference room, located at 450 Fifth
Street, N.W., Washington, D.C. 20549, or at the SEC's regional offices located
at 500 West Madison Street, Suite 1400, Chicago, IL 60661, and Seven World Trade
Center, 13th Floor, New York, NY 10048 or on the Internet at http://www.sec.gov.
You may obtain a copy of this registration statement from the SEC's public
reference room upon payment of prescribed fees. Please call the SEC at
(800) SEC-0330.
As a result of this offering, we will become subject to the information and
reporting requirements of the Exchange Act and, in accordance therewith, will
file periodic reports, proxy statements and other information with the SEC. You
may inspect and copy these reports and other information about our company at
the locations set forth above or download these reports from the SEC's website.
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Report of Independent Auditors. F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)... F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of
ONSITE ACCESS, INC.
We have audited the accompanying consolidated balance sheets of OnSite Access,
Inc. (formerly OnSite Ventures LLC and Veritech Ventures LLC) (the 'Company') as
of December 31, 1998 and 1999, and the related consolidated statements of
operations, stockholders' (deficit) equity and cash flows for each of the three
years in the period ended December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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 audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of OnSite Access, Inc.
(formerly OnSite Ventures LLC and Veritech Ventures LLC) at December 31, 1998
and 1999, and the consolidated results of its operations and its cash flows for
each of the three years in the period ended December 31, 1999, in conformity
with accounting principles generally accepted in the United States.
/s/ ERNST & YOUNG LLP
New York, New York
January 21, 2000
F-2
<PAGE>
ONSITE ACCESS, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1998 1999
----------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................... $ 921,545 $ 24,412,125
Accounts receivable, net of allowance for doubtful
accounts of $68,831 and $252,814, respectively........ 374,066 844,006
Other current assets.................................... 25,691 279,179
----------- ------------
Total current assets........................................ 1,321,302 25,535,310
Property and equipment, net................................. 2,233,364 20,052,343
Intangibles, net of accumulated amortization of $505,365.... -- 25,055,441
Deferred financing costs, net............................... 326,839 --
Other assets................................................ 342,199 4,131,673
----------- ------------
Total assets................................................ $ 4,223,704 $ 74,774,767
----------- ------------
----------- ------------
LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIT)
Current liabilities:
Accounts payable........................................ $ 971,090 $ 2,546,740
Accrued expenses........................................ 414,164 10,284,895
Current portion of capital lease obligations............ 201,205 869,975
----------- ------------
Total current liabilities................................... 1,586,459 13,701,610
Deferred rent............................................... 40,332 102,786
Capital lease obligations less current portion.............. 361,724 1,778,527
Loan payable to stockholder, including accrued interest of
$343,870.................................................. 6,738,870 --
Other liabilities........................................... 43,888 31,647
Redeemable preferred stock:
Series B -- redeemable -- par $.001: 50,000,000 shares
authorized, issued and outstanding.................... -- 49,838,943
Series C -- redeemable and convertible -- par $.001:
25,069,634 shares authorized, issued and
outstanding........................................... -- 9,814,298
Series D -- redeemable and convertible -- par $.001:
392,111 shares authorized, issued and outstanding..... -- 153,568
----------- ------------
Total redeemable preferred stock........................ -- 59,806,809
Stockholders' equity (deficit):
Series A preferred stock -- convertible -- par $.001:
5,869,000 shares authorized, issued and outstanding... -- 7,098,923
Common stock -- par $.001; 75,000,000 shares authorized;
10,708,245 issued and outstanding..................... -- 10,708
Additional paid-in capital.............................. -- 60,325,333
Members' equity......................................... 1,562,069 --
Stockholders' loans for restricted stock................ -- (2,470,580)
Deferred equity compensation............................ -- (24,878,516)
Accumulated deficit..................................... (6,109,638) (40,732,480)
----------- ------------
Total stockholders' equity (deficit)........................ (4,547,569) (646,612)
----------- ------------
Total liabilities and stockholders' equity (deficit)........ $ 4,223,704 $ 74,774,767
----------- ------------
----------- ------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
ONSITE ACCESS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Revenue............................................... $ 347,808 $ 944,090 $ 3,645,752
Operating expenses:
Direct costs of revenue........................... 139,580 634,211 3,090,152
Selling, general and administrative (including
non-cash equity compensation of $63,642,
$502,500 and $6,523,373, respectively).......... 1,241,107 4,478,169 29,361,293
Depreciation and amortization..................... 23,345 366,087 2,837,834
----------- ----------- ------------
Total operating expenses.............................. 1,404,032 5,478,467 35,289,279
----------- ----------- ------------
Operating loss........................................ (1,056,224) (4,534,377) (31,643,527)
Other income (expense):
Interest expense.................................. (2,833) (380,914) (1,115,048)
Interest income................................... 843 5,925 216,530
Preferred return and other, net................... (61,970) (18,668) --
----------- ----------- ------------
Total other income (expense).......................... (63,960) (393,657) (898,518)
Loss before income taxes.............................. (1,120,184) (4,928,034) (32,542,045)
Provision for income taxes............................ -- -- --
----------- ----------- ------------
Net loss.............................................. (1,120,184) (4,928,034) (32,542,045)
----------- ----------- ------------
Accreted and deemed dividends on preferred stock...... -- -- (12,080,797)
----------- ----------- ------------
Net loss applicable to common stockholders............ $(1,120,184) $(4,928,034) $(44,622,842)
----------- ----------- ------------
----------- ----------- ------------
Net loss per common share, basic and diluted.......... $ (0.33) $ (1.19) $ (8.93)
----------- ----------- ------------
----------- ----------- ------------
Weighted average number of shares outstanding -- basic
and diluted......................................... 3,439,714 4,156,836 4,998,545
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
ONSITE ACCESS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK DEFERRED ADDITIONAL
MEMBERS' ------------------- ----------------------- STOCKHOLDER EQUITY PAID-IN
EQUITY SHARES AMOUNT SHARES AMOUNT LOANS COMPENSATION CAPITAL
----------- --------- ------- --------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance as of
December 31, 1996... $ 75,739 -- $ -- -- $ -- $ -- $ -- $
Capital contributed.. 1,041,356 -- -- -- -- -- -- --
Non-cash equity
consideration....... 63,642 -- -- -- -- -- -- --
Preferred return..... 61,970 -- -- -- -- -- -- --
Net loss for the year
ended December 31,
1997................ -- -- -- -- -- -- -- --
----------- --------- ------- --------- ----------- ----------- ------------ -----------
Balance as of
December 31, 1997... 1,242,707 -- -- -- -- -- -- --
Return of capital.... (306,806) -- -- -- -- -- -- --
Capital contributed.. 105,000 -- -- -- -- -- -- --
Non-cash equity
consideration....... 502,500 -- -- -- -- -- -- --
Preferred return..... 18,668 -- -- -- -- -- -- --
Net loss for the year
ended December 31,
1998................ -- -- -- -- -- -- -- --
----------- --------- ------- --------- ----------- ----------- ------------ -----------
Balance as of
December 31, 1998... 1,562,069 -- -- -- -- -- -- --
Effect of
incorporation....... (1,562,069) 5,049,223 5,049 5,869,000 7,098,923 -- -- 1,651,736
Sale of common stock
and issuance of
warrants to real
estate owners and
agents.............. -- 250,000 250 -- -- -- -- 24,843,057
Issuance of stock
options and sale of
restricted stock.... -- 5,394,022 5,394 -- -- (2,408,166) (31,401,889) 33,823,805
Interest on
restricted stock.... -- -- -- -- -- (62,414) -- --
Exercise of stock
options............. -- 15,000 15 -- -- -- -- 6,735
Amortization of non-
cash equity
compensation........ -- -- -- -- -- -- 6,523,373 --
Net loss for the year
ended December 31,
1999................ -- -- -- -- -- -- -- --
Accreted dividends on
preferred stock..... -- -- -- -- -- -- -- --
----------- --------- ------- --------- ----------- ----------- ------------ -----------
Balance as of
December 31, 1999... $ -- 10,708,245 $10,708 5,869,000 $ 7,098,923 $(2,470,580) $(24,878,516) $60,325,333
----------- --------- ------- --------- ----------- ----------- ------------ -----------
<CAPTION>
ACCUMULATED
DEFICIT TOTAL
------------ ------------
<S> <C> <C>
Balance as of
December 31, 1996... $ (61,420) $ 14,319
Capital contributed.. -- 1,041,356
Non-cash equity
consideration....... -- 63,642
Preferred return..... -- 61,970
Net loss for the year
ended December 31,
1997................ (1,120,184) (1,120,184)
------------ ------------
Balance as of
December 31, 1997... (1,181,604) 61,103
Return of capital.... -- (306,806)
Capital contributed.. -- 105,000
Non-cash equity
consideration....... -- 502,500
Preferred return..... -- 18,668
Net loss for the year
ended December 31,
1998................ (4,928,034) (4,928,034)
------------ ------------
Balance as of
December 31, 1998... (6,109,638) (4,547,569)
Effect of
incorporation....... -- 7,193,639
Sale of common stock
and issuance of
warrants to real
estate owners and
agents.............. -- 24,843,307
Issuance of stock
options and sale of
restricted stock.... -- 19,144
Interest on
restricted stock.... -- (62,414)
Exercise of stock
options............. -- 6,750
Amortization of non-
cash equity
compensation........ -- 6,523,373
Net loss for the year
ended December 31,
1999................ (32,542,045) (32,542,045)
Accreted dividends on
preferred stock..... (2,080,797) (2,080,797)
------------ ------------
Balance as of
December 31, 1999... $(40,732,480) $ (646,612)
------------ ------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
ONSITE ACCESS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.................................................... $(1,120,184) $(4,928,034) $(32,542,045)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment
and deferred financing costs.......................... 23,345 366,087 2,332,469
Amortization of intangibles............................. -- -- 505,365
Allowance for doubtful accounts......................... -- 68,831 183,983
Deferred rent........................................... 40,175 157 62,454
Preferred return........................................ 61,970 18,668 --
Non-cash equity compensation............................ 63,642 502,500 6,523,373
Interest on loan payable to stockholder................. 2,778 341,092 452,169
Interest income on stockholders' loans for restricted
stock................................................. -- -- (62,639)
Changes in operating assets and liabilities:
Accounts receivable................................. (1,731) (429,172) (653,923)
Other current assets................................ (44,073) 18,382 (253,488)
Other assets........................................ (154,729) (187,470) (3,789,474)
Accounts payable.................................... 159,341 509,330 1,575,650
Accrued expenses.................................... 78,721 335,443 8,513,474
Other liabilities................................... -- 43,888 (12,239)
----------- ----------- ------------
Net cash used in operating activities....................... (890,745) (3,340,298) (17,164,871)
INVESTING ACTIVITIES
Cash paid for intangibles................................... -- -- (2,300,000)
Acquisition of property and equipment....................... (349,850) (1,241,127) (16,391,869)
----------- ----------- ------------
Net cash used in investing activities....................... (349,850) (1,241,127) (18,691,869)
FINANCING ACTIVITIES
Payment of capital lease obligations........................ (3,931) (111,381) (259,060)
Loan from stockholder....................................... 325,000 6,070,000 --
Members' contributions...................................... 1,041,356 105,000 --
Sale of redeemable preferred stock.......................... -- -- 58,143,124
Sale of common stock........................................ -- -- 1,463,256
Return of capital........................................... -- (306,806) --
Deferred financing costs.................................... -- (375,673) --
----------- ----------- ------------
Net cash provided by financing activities................... 1,362,425 5,381,140 59,347,320
----------- ----------- ------------
Increase in cash and cash equivalents....................... 121,830 799,715 23,490,580
Cash and cash equivalents at beginning of year.............. -- 121,830 921,545
----------- ----------- ------------
Cash and cash equivalents at end of year.................... $ 121,830 $ 921,545 $ 24,412,125
----------- ----------- ------------
----------- ----------- ------------
</TABLE>
See accompanying notes.
F-6
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
The accompanying financial statements reflect the historical financial
information of OnSite Access, Inc., a Delaware Corporation. The original
predecessor company was Veritech Ventures, LLC ('Veritech'), which was formed on
July 5, 1996 as a New York limited liability company. On May 18, 1998, Veritech
contributed substantially all of its assets and liabilities to OnSite Ventures,
L.L.C. ('OSV'), a Delaware limited liability company. On June 30, 1999, OSV was
merged into OnSite Access, Inc. ('OSA'), a newly formed corporation. The
accompanying consolidated financial statements reflect the operations of
Veritech and OSV prior to the formation of OSA. The mergers were accounted for
as reorganizations.
The Company provides voice, data and enhanced services to small and
medium-sized business customers in multi-tenant commercial office buildings.
The Company's success will be affected by the risks, expenses and delays
encountered by early stage companies and the competitive environment in which
they operate. Certain key risk factors which may impact the Company include: the
Company's ability to successfully market its products and services and to
generate profitable results, the availability of adequate financial and capital
resources to finance the execution of the Company's business plan, the Company's
industry is highly competitive and competition is expected to increase, the
Company operates in an industry subject to rapid technological changes and
future changes may negatively impact the Company's ability to successfully
market its products and services, the availability of adequate network capacity
from other communications carriers as well as adequate third party field support
and network security, the inability to attract and retain key personnel,
inadequacy of intellectual property protections, regulatory and legislative
requirements and the Company's ability to manage its anticipated growth
including implementation of information processing systems. The Company's
failure to mitigate these significant risk factors will have a material adverse
effect on the Company's business, financial condition and results of operations.
Although management believes that the Company will be able to successfully
mitigate these risks, management cannot give assurances that it will be able to
do so or that the Company will ever operate profitably.
In accordance with Accounting Principles Board ('APB') Opinion No. 20, in
connection with this registration of its securities the Company changed its
method of capitalizing overhead costs relating to its infrastructure
construction and revised the estimate of the value of options issued to an
officer. The effect of these changes was to increase the net loss in 1997 and
1998 by approximately $64,000 and $15,000, respectively.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All significant intercompany accounts and transactions
have been eliminated in consolidation.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated once placed in
service using the straight-line method. Equipment held under capital lease
obligations is amortized over the estimated useful life of the asset.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid financial instruments purchased with
a maturity of three months or less to be cash equivalents. At December 31, 1999,
the Company's cash and cash equivalents, principally money market funds, are
maintained at one financial institution.
F-7
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION -- CONTINUED
INTANGIBLES
Consideration given to real estate owners and agents in the form of cash and
warrants to purchase common stock in exchange for access to properties has been
recorded as intangible assets and is being amortized over the terms of the
access agreements, which are five to ten years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company periodically evaluates its long-lived assets, including property
and equipment and intangibles, to determine whether events or changes in
circumstances have occurred that indicate the remaining asset balances may not
be recoverable and an impairment loss should be recorded. Recoverability of
assets is measured by comparing the carrying amount of an asset to the
undiscounted future cash flows estimated 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.
CONCENTRATION
Revenue derived from significant customers (i.e., customers individually
accounting for 10% or more of the Company's revenues) for the years ended
December 31, 1997, 1998 and 1999 was approximately 88% (one customer), 25% (two
customers 12% and 13%), 11% (one customer), respectively.
ADVERTISING COSTS
The Company's policy is to expense advertising costs as incurred. For the
years ended December 31, 1997, 1998 and 1999, the Company incurred approximately
$19,000, $85,000, and $2,006,000 of advertising costs, respectively.
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 amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
REVENUE RECOGNITION
Revenue primarily includes voice and data services, including high speed
Internet access. Voice services are generally both subscription-based and
usage-based services to customers under one year contracts. Data services are
generally subscription-based services to customers under one year contracts.
Installation revenues are non-recurring fees for access to our network and do
not exceed the direct cost of installation. Revenues are recognized in the
period in which the services are provided and the usage occurs. All expenses
related to services provided are recognized as incurred.
INCOME TAXES
The Company accounts for income taxes using the liability method. Under this
method, deferred tax assets and liabilities are determined based on differences
between the financial reporting and tax bases of assets and liabilities.
F-8
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION -- CONTINUED
STOCK BASED COMPENSATION
The Company applies the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation.
The Company accounts for stock options using APB Opinion No. 25, Accounting for
Stock Issued to Employees and related interpretations. Options issued to
non-employees are accounted for in accordance with SFAS No. 123.
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share is calculated in accordance with SFAS No. 128,
Earnings per Share. Basic earnings (loss) per share is computed by dividing the
net income (loss) applicable to common shares by the weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share
adjusts basic earnings (loss) per share for the effects of convertible
securities, stock options and other potentially dilutive financial instruments,
only in the periods in which such effect is dilutive. Stock options, warrants
and convertible securities are excluded from the calculation of net loss per
share as their effect would be antidilutive.
RECENTLY ISSUED FINANCIAL ACCOUNTING STANDARDS
SFAS No. 131, Disclosure about Segments of an Enterprise and Related
Information, was issued in June 1997. The Company adopted the new statement for
the year ending December 31, 1998. This statement requires use of the
'management approach' model for segment reporting. The management approach model
is based on the way a company's management organizes segments within the company
for making operating decisions and assessing performance. Reportable segments
are based on products and services, geography, legal structure, management
structure, or any other manner in which management disaggregates a company. The
Company adopted this statement in fiscal 1998 in anticipation of an initial
public offering. The adoption of the statement did not have a significant impact
on its financial statements as it operates in one segment.
In March 1998, the American Institute of Certified Public Accountants
('AICPA') 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
requires internal and external costs incurred to develop internal-use computer
software during the application development stage, as well as costs to develop
or obtain software that allows for access or conversion of old data by new
systems, to be capitalized. SOP 98-1 is effective for fiscal years beginning
after December 15, 1998. The Company does not believe that its effect will be
material to the Company's reported financial position or results or operations.
In April 1998, AICPA issued Statement of Position 98-5 Reporting on the
Costs of Start-Up Activities ('SOP 98-5'). This statement requires that the
costs of start-up activities be expensed as incurred, including presenting the
cumulative effect of a change in accounting principles upon adoption of
SOP 98-5. Due to the nature of the Company's operations since inception in
September 1997, the Company has historically expensed all start-up costs. The
Company does not believe that the adoption of SOP 98-5 will affect the Company's
reported financial position or results of operations.
2. STOCKHOLDERS'/MEMBERS' EQUITY
Prior to the formation of OSA, the OSV and Veritech operating agreements
governed the maintenance of individual member capital accounts, the allocation
of profit and loss to such capital accounts, the accretion of a preferred return
to certain outstanding member capital balances and
F-9
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. STOCKHOLDERS'/MEMBERS' EQUITY -- CONTINUED
the return of such capital from available cash flow. At the time of the merger
of OSV and the Company, all membership interests were converted into shares of
the Company's common stock.
During 1997 and 1998, the Company incurred non-cash compensation expenses in
the amount of $63,642 and $502,500, respectively, for the issuance of options to
purchase membership interests in OSV.
Under the terms of the OSV and Veritech operating agreements preferred
returns were guaranteed to certain members. Such preferred returns have been
recorded as expenses in the accompanying statements of operations.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- ESTIMATED
1998 1999 USEFUL LIVES
----------- ----------- -------------
<S> <C> <C> <C>
Cabling infrastructure.............. $ 994,688 $ 5,331,588 7-15 years
Computer hardware, software and
equipment......................... 1,389,294 12,678,715 3 years
Leasehold improvements.............. 92,892 3,996,533 life of lease
Service vehicles.................... 40,592 145,860 3 years
Furniture and fixtures.............. 52,348 510,877 3 years
----------- -----------
2,569,814 22,663,573
Less accumulated depreciation and
amortization...................... 336,450 2,611,230
----------- -----------
$ 2,233,364 $20,052,343
----------- -----------
----------- -----------
</TABLE>
Cabling infrastructure consists of wiring and labor and overhead charges
incurred in the installation of in-building broadband networks.
At December 31, 1998 and 1999, $233,000 and $2,961,000 of equipment
purchases are included in accounts payable and accrued expenses, respectively.
4. CAPITAL LEASES
During 1998 and 1999, the Company entered into long-term lease agreements
for equipment. These leases have three year lease terms and bear interest
ranging from 10% to 15% per annum and provide the Company with a bargain
purchase option. For financial reporting purposes, equipment acquired pursuant
to capital leases amounted to approximately $563,000 and $2,649,000 at
December 31, 1998 and 1999, respectively.
The future minimum lease payments under the capital leases at December 31,
1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ 1,059,246
2001........................................................ 1,108,058
2002........................................................ 724,419
----------
Total minimum lease payments............................ 2,891,723
Amounts representing interest............................... 243,221
----------
Present value of net minimum lease payments (including
current portion of $869,975).............................. $2,648,502
----------
----------
</TABLE>
F-10
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. CREDIT FACILITY
In 1999, the Company entered into a line of credit (the 'Agreement') with
Ascend Communications, a wholly owned subsidiary of Lucent Technologies, Inc.,
which expires on September 30, 2000. Under the Agreement, the Company may borrow
$50 million for purchases of equipment from Ascend. Each draw on the line of
credit converts into a new 36 month lease. As of December 31, 1999, the Company
borrowed $2.3 million. This equipment has been accounted for as a capital lease.
6. COMMITMENTS AND CONTINGENCIES
LEASES
The Company has operating lease commitments for office space and equipment
which expire through July 31, 2010. These operating leases provide for basic
annual rents plus escalation charges. Minimum commitments through the life of
such leases are approximately as follows:
<TABLE>
<S> <C>
2000........................................................ 1,201,000
2001........................................................ 1,206,000
2002........................................................ 1,116,000
2003........................................................ 988,000
2004........................................................ 951,000
Thereafter.................................................. 5,264,000
-----------
Total................................................... $10,726,000
-----------
-----------
</TABLE>
In accordance with the provisions of SFAS No. 13, Accounting for Leases, the
aggregate of the total minimum lease payments is amortized on the straight-line
method over the term of the lease. The difference between the straight-line rent
expense and the amounts paid in accordance with the terms of the lease has been
included in 'Deferred Rent'. Rent expense was approximately $64,000, $168,000,
and $1,116,000 for the years ended December 31, 1997, 1998 and 1999,
respectively.
NETWORK CONTRACTS
In order to provide its services, the Company enters into contracts with its
wholesale voice services providers, Internet access providers and data
transmission capacity providers. In the event the Company fails to meet its
minimum volume commitments for connectivity it is obligated to pay
underutilization charges.
Future minimum obligations as of December 31, 1999, related to the Company's
voice and data connectivity contracts are as follows:
<TABLE>
<S> <C>
2000........................................................ 4,023,000
2001........................................................ 3,872,000
2002........................................................ 1,524,000
2003........................................................ 1,219,000
-----------
Total................................................... $10,638,000
-----------
-----------
</TABLE>
7. DEBT
LOAN FROM STOCKHOLDER
As of December 31, 1998, the Company had amounts outstanding under a loan
agreement with a stockholder of $6,500,000. In connection with the $6,500,000
loan, the Company issued the lender a 1% membership interest. The 1% membership
interest was valued at its then fair value
F-11
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT -- CONTINUED
of $105,000. The amount of loan proceeds allocated to the 1% membership interest
was recorded as a debt discount and amortized to interest expense over the term
of the loan. Amounts outstanding bore interest at 12% per annum. In connection
with the Financing Facility (see Note 8), the 1% membership interest and the
principal and accrued interest outstanding under this loan agreement were
converted on July 1, 1999 into 5,869,000 shares of Series A preferred stock.
BRIDGE LOANS
On February 10, 1999, the Company entered into a Senior Secured Promissory
Note and Loan and Security Agreement with certain stockholders in an amount not
to exceed $4 million (the 'Bridge Loan'). In February and March 1999, the
Company borrowed $3 million under the Bridge Loan which bore interest at 11% per
annum. The Bridge Loan, including accrued interest was repaid on April 16, 1999
in connection with the Financing Facility. (see Note 8)
On April 16, 1999, the Company entered into promissory notes and security
agreements with each of the investors (the 'Investor Bridge Loan') in the
aggregate principal amount of $20 million, which bore interest at 12% per annum.
The Investor Bridge Loan, including accrued interest, of $20.5 million was
converted into Series B, C and D preferred stock on July 1, 1999.
8. PREFERRED STOCK
On July 1, 1999, pursuant to an agreement dated April 16, 1999, the Company
closed on a funding of up to $60 million in the form of Series B, C and D
preferred stock (the 'Financing Facility'). The $60.0 million represents
$50.0 million for Series B preferred stock, approximately $9.8 million for
Series C preferred stock and approximately $154,000 for Series D preferred
stock. Simultaneously with the closing of the Financing Facility, the Investor
Bridge Loan, including the accrued interest, of $20.5 million was converted into
17,083,106 shares of Series B preferred stock, 8,565,344 shares of Series C
preferred stock and 133,970 shares of Series D preferred stock. In September
1999, the Company received an additional $20 million under the Financing
Facility in exchange for 16,666,667 shares of Series B preferred stock,
8,356,546 shares of Series C preferred stock, and 130,704 shares of Series D
preferred stock. In December 1999, the Company received the remaining $19.5
million under the Financing Facility in exchange for 16,250,227 shares of
Series B preferred stock, 8,147,744 shares of Series C preferred stock and
127,437 shares of Series D preferred stock.
Under the Company's Certificate of Designation, upon completion of a
qualified initial public offering ('IPO'), all outstanding shares of our
Series A, Series C and Series D preferred stock will automatically convert into
shares of our common stock on a one-for-one basis. In addition, effective as of
December 10, 1999, the Company amended its certificate of designation to provide
that Series B preferred stock will convert automatically at the IPO price into
common stock upon completion of a qualified IPO.
The preferred stockholders are entitled to certain rights as described
below:
The Series A, Series C and Series D preferred stock (collectively, the
'Convertible Preferred Stock') are convertible into common stock on a one for
one basis, subject to certain anti-dilution provisions, as defined, at any time
at the option of the holder or automatically in the event of a qualified IPO.
The holders of the Series A, B, C and D preferred stock are entitled to one vote
for each share of preferred stock on those matters expressly provided for in the
Company's certificate of incorporation, bylaws or certificate of designation. In
addition, with respect to any question upon which holders of common stock have
the right to vote, the holders of Series A and C preferred stock have the right
to one vote for each share of common stock into which each share of preferred
stock could then be converted and are entitled to vote together with the holders
of common stock as a single class.
F-12
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. PREFERRED STOCK -- CONTINUED
The Series B, C and D preferred stock (collectively, the 'Redeemable
Preferred Stock') can be redeemed upon liquidation of the Company, including any
merger or acquisition where the existing stockholders of the Company own less
than 50% of the successor entity. In the event that the Redeemable Preferred
Stock has not been redeemed prior to July 1, 2004, the Redeemable Preferred
Stock would be redeemed in three installments on July 1, 2004, July 1, 2005 and
July 1, 2006. The redemption price for the Redeemable Preferred Stock would be
the original price paid per share, plus a 12% cumulative return less any
dividends paid. The Series A preferred stock has preferred liquidation rights
ahead of common stockholders, but is subject to the liquidation and redemption
rights of the Redeemable Preferred Stock.
The Series C and D preferred stock contain beneficial conversion features.
For accounting purposes the value of the beneficial conversion features is
limited to the amount of proceeds allocated to the Series C and D preferred
stock. Accordingly, the Company has recognized an increase in net loss
applicable to common stockholders on the date of the issuance of the
Series C and D preferred stock in the amount of approximately $10.0 million.
9. INCOME TAXES
The Company was originally organized as a limited liability company ('LLC')
which elected to be taxed as a partnership for federal income tax purposes.
Since the Company was not subject to federal and state income taxes for the
period through June 30, 1999, no income tax provision was recorded. Instead, the
LLC members included the taxable income or loss of the Company in their
individual income tax returns.
Effective July 1, 1999, the Company converted to a corporation and is now
subject to federal, state and local income taxes. At June 30, 1999, the Company
recorded a net deferred tax liability of approximately $328,000. For the six
months ended December 31, 1999, the Company recorded a net deferred tax benefit
of $328,000. The Company, therefore, had no provision for federal, state or
local taxes for the year ended December 31, 1999.
Deferred income taxes represent the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial reporting
purposes and amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------
<S> <C>
Deferred Tax Assets:
Net operating loss carryforward........................ $7,945,000
Deferred rent.......................................... 84,000
Accounts receivable allowances......................... 104,000
Organizational costs................................... 46,000
Other.................................................. 2,000
----------
Gross deferred tax asset................................... 8,181,000
Deferred tax liabilities:
Depreciation and amortization.......................... 470,000
----------
Gross deferred tax liability............................... 470,000
Valuation allowance........................................ 7,711,000
----------
Net deferred tax asset/(liability)......................... $ --
----------
----------
</TABLE>
F-13
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES -- CONTINUED
At December 31, 1999, the deferred tax asset has been fully offset by a
valuation allowance because it is not more likely than not that the Company will
realize the tax benefit as defined by SFAS No. 109.
The reconciliations of income tax expense computed at the U.S. federal
statutory rate to income tax expense for the years ended December 31, 1997, 1998
and 1999 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Benefit at federal statutory rate (35%)................. $(366,000) $(1,720,000) $(11,390,000)
Expenses not deductible for U.S. tax purposes........... 24,000 77,000 2,302,000
Losses for which no benefit has been provided........... 342,000 1,643,000 9,088,000
--------- ----------- ------------
$ -- $ -- $ --
--------- ----------- ------------
--------- ----------- ------------
</TABLE>
At December 31, 1999, the Company had a net operating loss carryforward of
approximately $19,379,000 for U.S federal income tax purposes. The Company's net
operating loss began accumulating effective July 1, 1999, the date of
incorporation. The net operating loss will expire in the year 2019.
10. RELATED PARTY TRANSACTIONS
During the years ended December 31, 1997, 1998 and 1999, the Company rented
temporary office space to house regional sales personnel from an affiliate of a
stockholder whereby the Company paid approximately $0, $23,000 and $126,000,
respectively, to such affiliate.
The Company provides communications services to tenants in commercial office
buildings which are owned by an affiliate of a stockholder. Revenue from tenants
in these buildings was approximately $0, $223,000 and $766,000 and corresponding
commissions paid to the affiliate of the stockholder were approximately $0,
$9,000 and $40,000 in the years ended December 31, 1997, 1998 and 1999,
respectively.
Additionally, the Company provides communications services to affiliates of
one of the stockholders. Revenues from this stockholder's affiliates was
approximately $0, $153,000 and $645,000 for the years ended December 31, 1997,
1998 and 1999, respectively.
11. ACCRUED EXPENSES
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1998 1999
-------- -----------
<S> <C> <C>
Service providers........................................... $ 57,902 $ 521,748
Commissions................................................. 46,936 1,121,967
Bonuses..................................................... 271,326 4,246,048
Advertising................................................. -- 978,331
Property and equipment...................................... -- 1,602,161
Professional fees........................................... 38,000 1,588,200
Other....................................................... -- 226,440
-------- -----------
$414,164 $10,284,895
-------- -----------
-------- -----------
</TABLE>
F-14
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RESTRICTED STOCK AND STOCK OPTIONS
Under the Company's 1999 stock plan, as amended (the 'Plan'), 9,489,897
shares of common stock were made available for award to employees, officers,
directors, or consultants. Pursuant to the Plan, the Company's board of
directors or a committee appointed by the board may grant stock options or stock
purchase rights. The terms of any particular grant, including any
performance-based requirements, vesting terms and other restrictions are
determined by the board or by a committee appointed by the board.
The exercise price of nonstatutory options may be above, at or below fair
market value of the common stock on the grant date. The exercise price of
incentive stock options must not be less than the fair market value on the grant
date. The exercise period of options may be set by the board or the committee
appointed by the board but may not exceed ten years.
The Company accounts for stock options and other employee awards under the
provisions of APB Opinion No. 25, Accounting for Stock Issued to Employees.
For the period from July 1, 1999 through December 31, 1999, the Company
granted to employees 1,735,000 stock options with an exercise price of $.45 per
share, 742,000 stock options with an exercise price of $4.00 per share and
199,000 stock options with an exercise price of $5.13 per share.
For the period from July 1, 1999 through December 31, 1999, the Company sold
5,394,022 shares of restricted stock to certain officers of the Company for $.45
per share. In January 2000, the Company sold an additional 800,000 shares of
restricted stock to certain officers of the Company.
At the time of their issuance, the Company generally set the exercise price
of the stock options equal to what the Company believed was the fair market
value of the common stock. Due to its subsequent filing of an initial public
offering of stock, the Company has, for financial reporting purposes, used a
fair market value of $4.32 to $6.84 per share from July 1, 1999 through
December 31, 1999 to record deferred compensation. This value is based upon
analyses prepared by the Company prior to its filing for an initial public
offering.
The Company recorded deferred compensation of approximately $24,879,000 for
grants of stock options and sales of restricted stock made between July 1, 1999
and December 31, 1999. The recorded deferred compensation represents the
difference between the exercise price of stock options granted to employees or
the sales price of restricted stock sold to certain officers and fair market
value of the common stock on such dates. This amount will be amortized over the
applicable vesting period, which is generally four years. The Company will
record additional deferred compensation expense in connection with sales of
restricted stock after December 31, 1999 and options to purchase 560,000 shares
of common stock granted in January 2000.
The following table summarizes the stock option activity for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
SHARES EXERCISE PRICE
------ --------------
<S> <C> <C>
Granted..................................................... 2,676,000 $1.78
Exercised................................................... 15,000 .45
Cancelled................................................... -- --
Forfeited................................................... 37,500 .45
---------
Outstanding at December 31, 1999............................ 2,623,500 1.81
---------
---------
</TABLE>
F-15
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. RESTRICTED STOCK AND STOCK OPTIONS -- CONTINUED
The following table summarizes the status of the stock options outstanding
and exercisable at December 31, 1999:
<TABLE>
<CAPTION>
STOCK OPTIONS OUTSTANDING
---------------------------------------
WEIGHTED- NUMBER OF
REMAINING STOCK
EXERCISE NUMBER CONTRACTUAL OPTIONS
PRICES OF OPTIONS LIFE EXERCISABLE
------ ---------- ----------- -----------
<S> <C> <C> <C>
$0.45....................................... 1,682,500 9.3 years 140,797
$4.00....................................... 742,000 9.8 years --
$5.13....................................... 199,000 9.9 years --
--------- -------
2,623,500 140,797
--------- -------
--------- -------
</TABLE>
The weighted average fair value of options granted was $4.40 for the year
ended December 31, 1999. Pro forma information regarding net loss and loss per
share has been determined as if the Company had accounted for employee stock
options under the fair value method. The fair value of the stock options was
estimated at the date of grant using the Black-Scholes option pricing model with
the following assumptions for vested and non-vested options:
<TABLE>
<CAPTION>
DECEMBER 31,
ASSUMPTIONS 1999
- ----------- ----
<S> <C>
Average risk-free interest rate............................. 6.63%
Dividend yield.............................................. --
Average Life................................................ 5 years
</TABLE>
Because the Company does not have actively traded equity securities,
volatility is minimal in determining the fair value of stock-based awards to
employees.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics that are
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. For the year
ended December 31, 1999, pro forma net loss available to common stockholders and
pro forma net loss per common share amounted to approximately $44,709,000 and
$8.94, respectively.
13. PRO FORMA EARNINGS PER SHARE
Simultaneously with the Company's IPO, pursuant to the terms of the
Company's Certificate of Designation, each share of Series A, C and D preferred
stock will automatically convert into shares of common stock on a one-for-one
basis (see Note 8). Accrued dividends on the preferred stock will be paid as of
the IPO. Assuming the offering price at the midpoint of the estimated price
range of the IPO of $12.00 per share, the shares of Series B preferred stock
outstanding will be converted into 4,166,667 shares of common stock. Had the
conversion of preferred stock occurred at the date of issuance, net loss per
share for the year ended December 31, 1999 would have been $(1.90) per share.
F-16
<PAGE>
ONSITE ACCESS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. WARRANTS
The Company intends to issue up to 24,138,888 warrants to real estate owners
and agents at an exercise price of no less than $2.36 per share. The Company has
agreed to issue up to 22,863,170 warrants to real estate owners and agents and
has incurred fees of approximately $2.5 million in connection with such
agreements. These warrants vest upon execution of, or the occurrence of events
relating to the execution of, access agreements and thus the measurement date
for valuing the warrants is the date on which these events occur. On the
measurement dates, the fair market value of the warrants is capitalized and
amortized over future periods not to exceed the term of the related access
agreements. At December 31, 1999, 4,210,235 warrants had vested at a fair market
value of $23,178,306. The Company also issued 250,000 shares of common stock and
500,000 warrants to a real estate owner for $1.5 million and the real estate
owner's agreement to facilitate the execution of access agreements.
15. EVENTS SUBSEQUENT TO THE DATE OF THE AUDITORS' REPORT (UNAUDITED)
In February 2000, the Company entered into a non-binding letter of intent
with Transamerica Business Credit Corporation for a $10 million line of credit.
The availability of the line of credit is subject to the satisfactory completion
of business, credit and legal analysis of the Company by Transamerica. Under
this line of credit, if approved by Transamerica the Company would be able to
borrow for the purchases of equipment, furniture and fixtures. This line of
credit would expire on July 31, 2000, and each draw on the line of credit would
convert into a new 36 month lease.
In February 2000, the Company entered into a non-binding letter of intent
for a $10 million line of credit with Jacom Computer Services, a wholly owned
subsidiary of Unicapital Corporation. Under this line of credit, the Company
would be able to borrow for the purchases of equipment and software up to
$5.0 million before this offering and up to an additional $5.0 million after
this offering. Each draw on the line of credit would convert into a new
36 month lease.
In February 2000, the Company entered into a joint venture with Oxford
Properties Group Inc., one of Canada's largest commerical real estate and
management services companies, to deploy the Company's in-building broadband
network in 86 multi-tenant buildings representing approximately 24 million
square feet of office space in Toronto and five other Canadian cities. The joint
venture will operate under the name OxfordOnSite and will initially be owned
two-thirds by the Company and one-third by Oxford. The Company will manage the
joint venture and receive a management fee based on OxfordOnSite's revenue. The
Company has agreed to contribute to the joint venture up to approximately
$11.5 million and Oxford has agreed to contribute to the joint venture up to
approximately $5.8 million, each over approximately the next 15 months. The
Company has also agreed to issue up to 611,112 shares of the Company's common
stock upon the conversion of Oxford's joint venture interest as a result of the
exercise of Oxford's put rights or the Company's call rights.
F-17
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
16,670,000 SHARES
ONSITE ACCESS, INC.
COMMON STOCK
[LOGO]
---------
PROSPECTUS
, 2000
---------
SALOMON SMITH BARNEY
J.P. MORGAN & CO.
CIBC WORLD MARKETS
THOMAS WEISEL PARTNERS LLC
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth expenses and costs payable by us (other than
underwriting discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities described in this
registration statement. All amounts are estimated except for the Securities and
Exchange Commission's registration fee and the National Association of
Securities Dealers' filing fee.
<TABLE>
<CAPTION>
AMOUNT
------
<S> <C>
SEC Registration fee under Securities Act................... $ 65,794
NASD filing fee............................................. 25,422
Nasdaq National Market listing fees......................... 91,000
Legal fees and expenses..................................... 1,000,000
Accounting fees and expenses................................ 400,000
Printing and engraving expenses............................. 250,000
Registrar and transfer agent fees........................... 8,500
Miscellaneous expenses...................................... 259,284
----------
Total....................................................... $2,100,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 102 of the Delaware General Corporation Law, as amended (the
'DGCL'), allows a corporation to eliminate the personal liability of directors
of a corporation to the corporation or its stockholders for monetary damages for
a breach of fiduciary duty as a director, except where the director breached his
duty of loyalty, failed to act in good faith, engaged in intentional misconduct
or knowingly violated a law, authorized the payment of a dividend or approved a
stock repurchase in violation of Delaware corporate law or obtained an improper
personal benefit. Section 145 of the DGCL provides that a corporation may
indemnify directors and officers as well as other employees and individuals
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement in connection with specified actions, suits and proceedings,
whether civil, criminal, administrative, or investigative (other than an action
by or in the right of the corporation, a 'derivative action'), if they acted in
good faith and in a manner they reasonably believed to be in or not opposed to
the best interests of the corporation and, with respect to any criminal action
or proceeding, had no reasonable cause to believe their conduct was unlawful. A
similar standard is applicable in the case of derivative actions, except that
indemnification only extends to expenses (including attorneys' fees) incurred in
connection with the defense or settlement of such action, and the statute
requires court approval before there can be any indemnification where the person
seeking indemnification has been found liable to the corporation. The statute
provides that it is not exclusive of other indemnification that may be granted
by a corporation's certificate of incorporation, bylaws, disinterested director
vote, stockholder vote, agreement, or otherwise.
Our certificate of incorporation includes a provision that eliminates the
personal liability of a director for monetary damages for breach of fiduciary
duty as a director, except for liability (i) for any breach of the director's
duty of loyalty to OnSite or its stockholders; (ii) for acts or omissions not in
good faith or that involve intentional misconduct or a knowing violation of law;
(iii) under Section 174 of the DGCL regarding the unlawful payment of dividends
or an unlawful stock purchase or redemption; or (iv) for any transaction from
which the director received an improper personal benefit. Our bylaws require us
to indemnify any person made or threatened to be made a party to an action, suit
or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he or she or a person of whom he or she is the legal
representative is or was a director, officer, employee or agent of OnSite or is
or was serving at the request of OnSite as a director, officer, employee or
agent of another corporation or of a partnership, joint venture,
II-1
<PAGE>
trust or other enterprise including service with respect to employee benefit
plans maintained or sponsored by us. Our bylaws also provide that we may advance
expenses, as incurred, to our directors, officers and other agents and employees
in connection with a legal proceeding. The indemnification provisions of our
bylaws are not exclusive of any other rights to which a person may be entitled
by law, agreement, vote of stockholders or disinterested directors or otherwise.
OnSite has obtained primary insurance policies insuring certain of its
directors and officers against certain liabilities they may incur in their
capacity as directors and officers. Under these policies, the insurer, on behalf
of OnSite, may also pay amounts for which OnSite has granted indemnification to
the directors and officers of OnSite.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since our incorporation in April 1999, we have issued and sold the
securities listed below. All sales, other than those made pursuant to our stock
incentive plans, were made in reliance on Section 4(2) of the Securities Act
and/or Regulation D promulgated thereunder on the basis that the transactions
did not involve a public offering. Sales made pursuant to our stock incentive
plans were made in reliance on Rule 701 promulgated under the Securities Act on
the basis that they were made pursuant to a written compensatory plan. All sales
were made without general solicitation or advertising.
1. On July 1, 1999, we issued 4,537,603 shares of common stock to the
former members of OnSite Ventures, L.L.C., pursuant to our merger
agreement with OnSite Ventures, L.L.C., which provided that each
member's limited liability company common units automatically converted
into shares of our common stock on a one-for-one basis upon consummation
of our merger with OnSite Ventures, L.L.C.
2. On July 1, 1999, in connection with our merger with OnSite Ventures,
L.L.C., we issued 5,869,000 shares of Series A preferred stock to
RSI-OSA Holdings, Inc. in exchange for the cancellation of a
$6.5 million convertible promissory note plus accrued interest, dated as
of February 10, 1999, issued by OnSite Ventures, L.L.C.
3. On July 1, 1999, we issued an aggregate of 17,083,106 shares of
Series B preferred stock, 8,565,344 shares of Series C preferred stock
and 133,970 shares of Series D preferred stock to a group of private
equity investors in exchange for the cancellation of promissory notes
issued by OnSite Ventures, L.L.C. in an aggregate principal amount of
approximately $20 million, plus accrued interest of $500,000.
4. On July 1, 1999, pursuant to a subscription agreement, we issued an
aggregate of 511,620 shares of our common stock to certain affiliated
parties for a purchase price of $230,229.
5. On September 7, 1999, we issued an aggregate of 16,666,667 shares of
Series B preferred stock, 8,356,546 shares of Series C preferred stock
and 130,704 shares of Series D preferred stock to a group of private
investors in exchange for approximately $20.0 million of financing.
6. On December 10, 1999, we issued an aggregate of 16,250,227 shares of
Series B preferred stock, 8,147,744 shares of Series C preferred stock
and 127,437 shares of Series D preferred stock to a group of private
equity investors in exchange for approximately $19.5 million of
financing.
7. In November 1999, we agreed to issue to seven accredited investors
warrants to acquire up to 4,695,726 shares of our common stock in
exchange for the execution of access agreements for specific buildings
or services related to the facilitation of the execution of access
agreements. The warrants have an exercise price of $2.36 per share and
are exercisable for five years at any time following the earlier of six
months after this offering or 12 months from the date of the warrant
agreement.
8. In November 1999, we issued 250,000 shares of common stock, as well as
warrants to acquire 500,000 shares of our common stock to one accredited
investor in exchange for $1,500,000 and the investor's agreement to
facilitate the execution of access agreements. The warrants have an
exercise price of $2.36 per share and are exercisable for five years at
any time following the earlier of six months after this offering or 12
months from the date of the warrant agreement.
II-2
<PAGE>
9. In December 1999, we agreed to issue to 26 accredited investors warrants
to acquire up to 12,871,127 shares of our common stock in exchange for
the execution of access agreements for specific buildings or services
related to the facilitation of access agreements. The warrants have an
exercise price of $2.36 per share and are exercisable for five years at
any time following the earlier of six months after this offering or 12
months from the date of the warrant agreement.
10. In January 2000, we agreed to issue to one accredited investor warrants
to acquire up to 74,088 shares of our common stock in exchange for the
execution of access agreements for specific buildings. The warrants have
an exercise price of $2.36 per share and are exercisable for five years
at any time following the earlier of six months after this offering or
12 months from the date of the warrant agreement.
11. In January 2000, we agreed to issue to 21 accredited investors Class B
Warrants to acquire up to 2,988,600 shares of our common stock in
exchange for the execution of access agreements for specific buildings.
The Class B Warrants have an exercise price of $2.36 per share and are
exercisable for five years at any time following the earlier of 12
months after this offering or 14 months from the date of the warrant
agreement.
12. In February 2000, we agreed to issue to two accredited investors
warrants to acquire up to 1,733,629 shares of our common stock in
exchange for the execution of access agreements for specific buildings.
The warrants have an exercise price of $2.36 per share and are
exercisable for five years at any time following the earlier of six
months after this offering or 12 months from the date of the warrant
agreement.
13. To date, we have granted stock options to purchase an aggregate of
1,735,000, 742,000 and 759,000 shares of our common stock at an exercise
price of $.45, $4.00 and $5.13 per share, respectively, to our employees
and officers pursuant to our 1999 stock plan.
14. To date, we have issued an aggregate of 6,194,022 shares of common stock
to certain of our officers as the result of exercises of restricted
stock purchase rights. 5,394,022 shares were issued for $.45 per share
or an aggregate consideration of approximately $2,830,059. 800,000
shares were issued for $5.13 per share or an aggregate consideration of
approximately $4,104,000.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits:
The following documents are filed as exhibits to this registration statement:
<TABLE>
<CAPTION>
Exhibit Description
- ------- -----------
<C> <S>
1.1 *Form of Underwriting Agreement
3.1 Certificate of Incorporation of OnSite Access, Inc.
3.2 Bylaws of OnSite Access, Inc.
4.1 *Certificate for common stock
5.1 *Opinion of Fried, Frank, Harris, Shriver & Jacobson
10.1 Master Lease Agreement, dated September 29, 1999, between
Ascend Communications, Inc., a wholly owned subsidiary of
Lucent Technologies, Inc., and OnSite Access L.L.C.
10.2 *Lease for 1372 Broadway, New York, New York
10.3 *Series B, Series C and Series D Preferred Stock Purchase
Agreement, dated April 16, 1999
10.4 Subscription Agreement, dated July 1, 1999, between
RSI-OnSite Holdings LLC, Veritech Ventures LLC, Arthur Simon
and OnSite Access, Inc.
10.5 *Investor Rights Agreement, dated April 16, 1999
10.7 *1999 stock plan
10.8 *2000 stock plan
21.1 *Subsidiaries of OnSite Access, Inc.
23.1 Consent of Ernst & Young LLP
23.2 *Consent of Fried, Frank, Harris, Shriver & Jacobson
(included in Exhibit 5.1 above)
24.1 **Power of Attorney
27.1 Financial Data Schedule
</TABLE>
- ---------
* To be filed by amendment.
** Previously filed.
II-3
<PAGE>
(b) Financial Statement Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, 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 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 Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes that:
(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) For purposes of determining any liability under the Securities Act of
1933, 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.
(3) For the purpose of determining any liability under the Securities Act of
1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, 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 York, State of New
York, on February 8, 2000.
ONSITE ACCESS, INC.
By /s/ KENNETH J. HALL
..................................
KENNETH J. HALL
EXECUTIVE VICE PRESIDENT AND CHIEF
FINANCIAL OFFICER
Pursuant to the requirements of the Securities Act, this Amendment No. 1 to
the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board and Chief February 8, 2000
......................................... Executive Officer (Principal
HOWARD E. TAYLOR Executive Officer)
/S/ KENNETH J. HALL Executive Vice President and Chief February 8, 2000
......................................... Financial Officer (Principal
KENNETH J. HALL Financial and Accounting Officer)
* Director February 8, 2000
.........................................
W. MONTGOMERY CERF
* Director February 8, 2000
.........................................
STEVEN F. FOSTER
Director February , 2000
.........................................
WILLIAM P. COLLATOS
* Director February 8, 2000
.........................................
JEFFREY D. NEUMANN
* Director February 8, 2000
.........................................
SCOTT H. RECHLER
* /S/ KENNETH J. HALL
By: .....................................
KENNETH J. HALL
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
We have audited the consolidated financial statements of OnSite Access, Inc.
(formerly OnSite Ventures LLC and Veritech Ventures LLC) as of December 31, 1998
and 1999, and for each of the three years in the period ended December 31, 1999,
and have issued our report thereon dated January 21, 2000 (included elsewhere in
this Registration Statement). Our audits also included the financial statement
schedule listed in Item 16(b) of this Registration Statement. This schedule is
the responsibility of the Company's management. Our responsibility is to express
an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
New York, New York
January 21, 2000
S-1
<PAGE>
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
ONSITE ACCESS, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D(1) COL. E
------ ------ ----------------------- --------- ------
ADDITIONS
-----------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS - DEDUCTIONS - END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- --------- -------- -------- -------- ------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1997:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts.................. $ -- $ -- $-- $ --
YEAR ENDED DECEMBER 31, 1998:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts.................. -- 69,000 -- 69,000
YEAR ENDED DECEMBER 31, 1999:
Reserves and allowances deducted from asset accounts:
Allowance for uncollectible accounts.................. 69,000 634,000 450,000 253,000
</TABLE>
- ---------
(1) Uncollectible accounts written off, net of recoveries.
S-2
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as...........................'SS'
<PAGE>
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
OnSite Access, Inc.
Pursuant to 'SS' 102 of the General Corporation Law
of the State of Delaware
The undersigned, in order to form a corporation pursuant to Section
102 of the General Corporation Law of Delaware, does hereby certify:
FIRST: The name of the Corporation is OnSite Access, Inc.
SECOND: The address of the Corporation's registered office in the
State of Delaware is Corporation Trust Center, 1209 Orange Street in the City of
Wilmington, County of New Castle, Delaware 19801. The name of its registered
agent at such address is The Corporation Trust Company.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of capital stock
which the Corporation shall have the authority to issue is 156,330,745 shares
divided into two classes of which 81,330,745 shares of par value $.001 per share
shall be designated Preferred stock, and 75,000,000 shares of par value $.001
per share shall be designated Common Stock.
<PAGE>
A. Preferred Stock
1. Issuance. The Board of Directors is authorized, subject to
limitations prescribed by law, to provide for the issuance of shares of
Preferred Stock in one or more series, to establish the number of shares to be
included in each such series, and to fix the designations, powers, preferences,
and rights of the shares of each such series, and any qualifications,
limitations, or restrictions thereof, subject to the terms of any Preferred
Stock then outstanding.
B. Common Stock
1. Dividends. Subject to the preferential rights, if any, of
the Preferred Stock, the holders of shares of Common Stock shall be entitled to
receive, when and if declared by the Board of Directors, out of the assets of
the Corporation which are by law available therefor, dividends payable either in
cash, in property, or in shares of Common Stock.
2. Voting Rights. At every annual or special meeting of
stockholders of the Corporation, every holder of Common Stock shall be entitled
to one vote, in person or by proxy, for each share of Common Stock standing in
his name on the books of the Corporation and shall vote on all matters submitted
to a vote of the Common Stock together as a single class with every holder of a
series of Preferred Stock which by its terms expressly provides that it shall
vote with the Common Stock, which holders shall have the voting rights therein
provided.
3. Liquidation, Dissolution, or Winding Up. In the event of any
voluntary or involuntary liquidation, dissolution, or winding up of the affairs
of the Corporation, after payment or provision for payment of the debts and
other liabilities of the Corporation and of the preferential amounts, if any, to
which the holders of Preferred Stock shall be entitled, the holders of all
outstanding shares of Common Stock shall be entitled to share ratably in the
remaining net assets of the Corporation.
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FIFTH: The number of directors constituting the Board of Directors
shall be fixed at seven (7) of which six (6) shall be elected by holders of the
Series C Convertible Redeemable Preferred Stock voting together as a single
class so long as any shares remain outstanding and the remaining directors shall
be elected by the Holders having the right to vote on matters submitted to the
Holders of outstanding shares of the Common Stock. Election of directors need
not be by written ballot, unless the by-laws of the Corporation shall so
provide. Any director who is elected to the Board of Directors may be removed
with or without cause from the Board of Directors only upon request of the
holders who elected such director by a vote of at least the number of shares
required to elect such director. In the event that a director so elected
resigns, is removed from, or otherwise ceases to serve on, the Board of
Directors of the Corporation, for whatever reason, the vacancy shall be filled,
in accordance with applicable law, with an individual elected by the holders who
initially had the power to elect such director, as described above.
SIXTH: The name and mailing address of the Incorporator is as
follows:
<TABLE>
<CAPTION>
Name Mailing Address
---- ---------------
<S> <C>
Albrika R. Stokes Fried, Frank Harris, Shriver & Jacobson
One New York Plaza 26th Floor-
New York, NY 10004
</TABLE>
SEVENTH: The Board of Directors is expressly authorized to adopt,
amend, or repeal the by-laws of the Corporation subject to any approval which
may be required under any series of Preferred Stock.
EIGHTH: A director of the Corporation shall not be personally liable
to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director; provided, however, that the foregoing shall not
eliminate or limit the liability of a director (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the General
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Corporation Law of Delaware, or (iv) for any transaction from which the director
derived an improper personal benefit. If the General Corporation Law of Delaware
is hereafter amended to permit further elimination or limitation of the personal
liability of directors, then the liability of a director of the Corporation
shall be eliminated or limited to the fullest extent permitted by the General
Corporation Law of Delaware as so amended. Any repeal or modification of this
Article EIGHTH by the stockholders of the Corporation or otherwise shall not
adversely affect any right or protection of a director of the Corporation
existing at the time of such repeal or modification.
NINTH: The Corporation reserves the right to amend, alter, change,
or repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, subject to any approval which may
be required under any series of Preferred Stock, and all rights conferred upon
stockholders herein are granted subject to this reservation.
IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of
April, 1999 and I affirm that the foregoing certificate is my act and deed and
that the facts stated therein are true.
/s/ Albrika R. Stokes
-------------------------------
Albrika R. Stokes, Incorporator
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BY-LAWS OF
OnSite Access, Inc.
(A Delaware Corporation)
ARTICLE I
Offices
SECTION 1. Registered Office. The registered office of the
Corporation within the State of Delaware shall be in the City of Wilmington,
County of New Castle.
SECTION 2. Other Offices. The Corporation may also have an
office or offices other than said registered office at such place or places,
either within or without the State of Delaware, as the Board of Directors shall
from time to time determine or the business of the Corporation may require.
ARTICLE II
Meetings of Stockholders
SECTION 1. Place of Meetings. All meetings of the stockholders
for the election of directors or for any other purpose shall be held at any such
place, either within or without the State of Delaware, as shall be designated
from time to time by the Board of Directors and stated in the notice of meeting
or in a duly executed waiver thereof.
SECTION 2. Annual Meeting. The annual meeting of stockholders,
commencing with the year 2000, shall be held at 10:00 A.M. on the first Tuesday
of March, if not a legal holiday, and if a legal holiday, then on the next
succeeding day not a legal holiday, at 10:00 A.M., or at such other date and
time as shall be designated from time to time by the Board of Directors and
stated in the notice of meeting or in a duly executed waiver thereof. At such
annual meeting, the stockholders shall elect, by a plurality vote, a Board of
Directors and transact such other business as may properly be brought before the
meeting.
SECTION 3. Special Meetings. Special meetings of stockholders,
unless otherwise prescribed by statute, may be called at any time by the Board
of Directors or the Chairman of the Board, if one shall have been elected, or
the President and shall be called by the Secretary upon the request in writing
of a stockholder or stockholders holding of record at least 50% percent of the
voting power of the issued and outstanding shares of stock of the Corporation
entitled to vote at such meeting.
<PAGE>
SECTION 4. Notice of Meetings. Except as otherwise expressly
required by statute, written notice of each annual and special meeting of
stockholders stating the date, place and hour of the meeting, and, in the case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given to each stockholder of record entitled to vote thereat not less
than ten nor more than sixty days before the date of the meeting. Business
transacted at any special meeting of stockholders shall be limited to the
purposes stated in the notice. Notice shall be given personally or by mail and,
if by mail, shall be sent in a postage prepaid envelope, addressed to the
stockholder at his address as it appears on the records of the Corporation.
Notice by mail shall be deemed given at the time when the same shall be
deposited in the United States mail, postage prepaid. Notice of any meeting
shall not be required to be given to any person who attends such meeting, except
when such person attends the meeting in person or by proxy for the express
purpose of objecting, at the beginning of the meeting, to the transaction of any
business because the meeting is not lawfully called or convened, or who, either
before or after the meeting, shall submit a signed written waiver of notice, in
person or by proxy. Neither the business to be transacted at, nor the purpose
of, an annual or special meeting of stockholders need be specified in any
written waiver of notice.
SECTION 5. List of Stockholders. The officer who has charge of
the stock ledger of the Corporation shall prepare and make, at least ten days
before each meeting of stockholders, a complete list of the stockholders
entitled to vote at the meeting, arranged in alphabetical order, showing the
address of and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city, town or
village where the meeting is to be held, which place shall be specified in the
notice of meeting, or, if not specified, at the place where the meeting is to be
held. The list shall be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
SECTION 6. Quorum, Adjournments. The holders of a majority of
the voting power of the issued and outstanding stock of the Corporation entitled
to vote thereat, present in person or represented by proxy, shall constitute a
quorum for the transaction of business at all meetings of stockholders, except
as otherwise provided by statute or by the Certificate of Incorporation. If,
however, such quorum shall not be present or represented by proxy at any meeting
of stockholders, the stockholders entitled to vote thereat, present in person or
represented by proxy, shall have the power to adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present or represented by proxy. At such adjourned meeting at which a
quorum shall be present or represented by proxy, any business may be transacted
which might have been transacted at the meeting as originally called. If the
adjournment is for more than thirty days, or, if after adjournment a new record
date is set, a notice of
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the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
SECTION 7. Organization. At each meeting of stockholders, the
Chairman of the Board, if one shall have been elected, or, in his absence or if
one shall not have been elected, the President shall act as chairman of the
meeting. The Secretary or, in his absence or inability to act, the person whom
the chairman of the meeting shall appoint secretary of the meeting shall act as
secretary of the meeting and keep the minutes thereof.
SECTION 8. Order of Business. The order of business at all
meetings of the stockholders shall be as determined by the chairman of the
meeting.
SECTION 9. Voting. Except as otherwise provided by statute or
the Certificate of Incorporation, each stockholder of the Corporation shall be
entitled at each meeting of stockholders to one vote for each share of capital
stock of the Corporation standing in his name on the record of stockholders of
the Corporation:
(a) on the date fixed pursuant to the provisions of
Section 7 of Article V of these By-Laws as the record date for
the determination of the stockholders who shall be entitled to
notice of and to vote at such meeting; or
(b) if no such record date shall have been so fixed,
then at the close of business on the day next preceding the
day on which notice thereof shall be given, or, if notice is
waived, at the close of business on the date next preceding
the day on which the meeting is held.
Each stockholder entitled to vote at any meeting of stockholders may authorize
another person or persons to act for him by a proxy signed by such stockholder
or his attorney-in-fact, but no proxy shall be voted after three years from its
date, unless the proxy provides for a longer period. Any such proxy shall be
delivered to the secretary of the meeting at or prior to the time designated in
the order of business for so delivering such proxies. When a quorum is present
at any meeting, the vote of the holders of a majority of the voting power of the
issued and outstanding stock of the Corporation entitled to vote thereon,
present in person or represented by proxy, shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of statute or of the Certificate of Incorporation or of these By-Laws, a
different vote is required, in which case such express provision shall govern
and control the decision of such question. Unless required by statute, or
determined by the chairman of the meeting to be advisable, the vote on any
question need not be by ballot. On a vote by ballot, each
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ballot shall be signed by the stockholder voting, or by his proxy, if there by
such proxy, and shall state the number of shares voted.
SECTION 10. Inspectors. The Board of Directors may, in advance
of any meeting of stockholders, appoint one or more inspectors to act at such
meeting or any adjournment thereof. If any of the inspectors so appointed shall
fail to appear or act, the chairman of the meeting shall, or if inspectors shall
not have been appointed, the chairman of the meeting may, appoint one or more
inspectors. Each inspector, before entering upon the discharge of his duties,
shall take and sign an oath faithfully to execute the duties of inspector at
such meeting with strict impartiality and according to the best of his ability.
The inspectors shall determine the number of shares of capital stock of the
Corporation outstanding and the voting power of each, the number of shares
represented at the meeting, the existence of a quorum, the validity and effect
of proxies, and shall receive votes, ballots or consents, hear and determine all
challenges and questions arising in connection with the right to vote, count and
tabulate all votes, ballots or consents, determine the results, and do such acts
as are proper to conduct the election or vote with fairness to all stockholders.
On request of the chairman of the meeting, the inspectors shall make a report in
writing of any challenge, request or matter determined by them and shall execute
a certificate of any fact found by them. No director or candidate for the office
of director shall act as an inspector of an election of directors. Inspectors
need not be stockholders.
SECTION 11. Action by Consent. Whenever the vote of
stockholders at a meeting thereof is required or permitted to be taken for or in
connection with any corporate action, by any provision of statute or of the
Certificate of Incorporation or of these By-Laws, the meeting and vote of
stockholders may be dispensed with, and the action taken without such meeting
and vote, if a consent in writing, setting forth the action so taken, shall be
signed by the holders of outstanding stock having not less than the minimum
number of votes that would be necessary to authorize or take such action at a
meeting at which all shares of stock of the Corporation entitled to vote thereon
were present and voted.
ARTICLE III
Board of Directors
SECTION 1. General Powers. The business and affairs of the
Corporation shall be managed by or under the direction of the Board of
Directors. The Board of Directors may exercise all such authority and powers of
the Corporation and do all such lawful acts and things as are not by statute or
the Certificate of Incorporation directed or required to be exercised or done by
the stockholders.
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<PAGE>
SECTION 2. Number, Qualifications, Election and Term of
Office. The number of directors constituting the Board of Directors shall be as
provided in the Certificate of Incorporation. Any decrease in the number of
directors shall be effective at the time of the next succeeding annual meeting
of stockholders unless there shall be vacancies in the Board of Directors, in
which case such decrease may become effective at any time prior to the next
succeeding annual meeting to the extent of the number of such vacancies.
Directors need not be stockholders. Except as otherwise provided by statute or
these By-Laws, the directors (other than members of the initial Board of
Directors) shall be elected at the annual meeting of stockholders. Each director
shall hold office until his successor shall have been elected and qualified, or
until his death, or until he shall have resigned, or have been removed, as
hereinafter provided in these By-Laws.
SECTION 3. Place of Meetings. Meetings of the Board of
Directors shall be held at such place or places, within or without the State of
Delaware, as the Board of Directors may from time to time determine or as shall
be specified in the notice of any such meeting.
SECTION 4. Annual Meeting. The Board of Directors shall meet
for the purpose of organization, the election of officers and the transaction of
other business, as soon as practicable after each annual meeting of
stockholders, on the same day and at the same place where such annual meeting
shall be held. Notice of such meeting need not be given. In the event such
annual meeting is not so held, the annual meeting of the Board of Directors may
be held at such other time or place (within or without the State of Delaware) as
shall be specified in a notice thereof given as hereinafter provided in Section
7 of this Article III.
SECTION 5. Regular Meetings. Regular meetings of the Board of
Directors shall be held at such time and place as the Board of Directors may
fix. If any day fixed for a regular meeting shall be a legal holiday at the
place where the meeting is to be held, then the meeting which would otherwise be
held on that day shall be held at the same hour on the next succeeding business
day. Notice of regular meetings of the Board of Directors need not be given
except as otherwise required by statute or these By-Laws.
SECTION 6. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, if one shall have been
elected, or by two or more directors of the Corporation or by the President.
SECTION 7. Notice of Meetings. Notice of each special meeting
of the Board of Directors (and of each regular meeting for which notice shall be
required) shall be given by the Secretary as hereinafter provided in this
Section 7, in which notice shall be stated the time and place of the meeting.
Except as otherwise required by these By-
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Laws, such notice need not state the purposes of such meeting. Notice of each
such meeting shall be mailed, postage prepaid, to each director, addressed to
him at his residence or usual place of business, by first class mail, at least
two days before the day on which such meeting is to be held, or shall be sent
addressed to him at such place by telegraph, cable, telex, telecopier or other
similar means, or be delivered to him personally or be given to him by telephone
or other similar means, at least twenty-four hours before the time at which such
meeting is to be held. Notice of any such meeting need not be given to any
director who shall, either before or after the meeting, submit a signed waiver
of notice or who shall attend such meeting, except when he shall attend for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
SECTION 8. Quorum and Manner of Acting. A majority of the
entire Board of Directors shall constitute a quorum for the transaction of
business at any meeting of the Board of Directors, and, except as otherwise
expressly required by statute or the Certificate of Incorporation or these
By-Laws, the act of a majority of the directors present at any meeting at which
a quorum is present shall be the act of the Board of Directors. In the absence
of a quorum at any meeting of the Board of Directors, a majority of the
directors present thereat may adjourn such meeting to another time and place.
Notice of the time and place of any such adjourned meeting shall be given to all
of the directors unless such time and place were announced at the meeting at
which the adjournment was taken, in which case such notice shall only be given
to the directors who were not present thereat. At any adjourned meeting at which
a quorum is present, any business may be transacted which might have been
transacted at the meeting as originally called. The directors shall act only as
a Board and the individual directors shall have no power as such.
SECTION 9. Organization. At each meeting of the Board of
Directors, the Chairman of the Board, if one shall have been elected, or, in the
absence of the Chairman of the Board or if one shall not have been elected, the
President (or, in his absence, another director chosen by a majority of the
directors present) shall act as chairman of the meeting and preside thereat. The
Secretary or, in his absence, any person appointed by the chairman shall act as
secretary of the meeting and keep the minutes thereof.
SECTION 10. Resignations. Any director of the Corporation may
resign at any time by giving written notice of his resignation to the
Corporation. Any such resignation shall take effect at the time specified
therein or, if the time when it shall become effective shall not be specified
therein, immediately upon its receipt. Unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective.
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SECTION 11. Vacancies. Any vacancy in the Board of Directors,
whether arising from death, resignation, removal (with or without cause), an
increase in the number of directors or any other cause, may be filled by the
vote of a majority of the directors then in office, though less than a quorum,
or by the sole remaining director or by the stockholders at the next annual
meeting thereof or at a special meeting thereof. Each director so elected shall
hold office until his successor shall have been elected and qualified.
SECTION 12. Removal of Directors. Any director may be removed,
either with or without cause, at any time, by the holders of a majority of the
voting power of the issued and outstanding capital stock of the Corporation
entitled to vote at an election of directors.
SECTION 13. Compensation. The Board of Directors shall have
authority to fix the compensation, including fees and reimbursement of expenses,
of directors for services to the Corporation in any capacity.
SECTION 14. Committees.
(a) Compensation Committee. The Compensation Committee of the
Board of Directors (the "Compensation Committee") shall consist of three
directors, to be designated annually by the Board of Directors at its first
regular meeting held pursuant to Section 5 of Article III of these by-laws after
incorporation or after the annual meeting of stockholders, as the case may be,
or as soon thereafter as conveniently possible. The Compensation Committee shall
have and may exercise all of the powers of the Board of Directors during the
period between meeting of the Board of Directors, except as may be prohibited by
law, with respect to (i) studying, recommending, adopting, implementing,
administering, determining and authorizing the amount, terms, and conditions of
payment of any and all forms of compensation for the corporation's directors,
officers, employees and agents, (ii) approving and administering any loan to,
guarantee of any obligation of, or other assistance to any officer or other
employee of the corporation or any of its subsidiaries, including any officer or
employee who is a director of the corporation or any of its subsidiaries, (iii)
implementing and administering those qualified, nonqualified, or other stock
option or purchase plans of the corporation, as designated by the Board of
Directors, and (iv) overseeing and reviewing the administration and results of
operations of the "OnSite Access, Inc. 1999 Stock Option Plan" (the "Plan") and
any other pension benefit or retirement plan or arrangement maintained by any
subsidiary of the Company (the "Subsidiary Plan"), the Plan and any Subsidiary
Plan being referred to collectively as the "Pension Plans," and further to
acquaint the Board of Directors with the Compensation Committee's oversight and
surveillance activities in connection with the Pension Plans.
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(b) Funding Committee. The Funding Committee of the Board of
Directors (the "Funding Committee") shall consist of three directors, to be
designated annually by the Board of Directors at its first regular meeting held
pursuant to Section 5 of Article III of these by-laws after incorporation or
after the annual meeting of stockholders, as the case may be, or as soon
thereafter as conveniently possible. The Funding Committee shall have and may
exercise all of the powers of the Board of Directors during the period between
meetings of the Board of Directors, except as may be prohibited by law, with
respect to any call for additional investment under the Preferred Stock Purchase
Agreement, dated as of April 16, 1999, relating to the Series B, Series C and
Series D Preferred Stock.
(c) Audit Committee. The Audit Committee of the Board of
Directors (the "Audit Committee") shall consist solely of three directors, to be
designated annually by the Board of Directors at its first regular meeting held
pursuant to Section 5 of Article III of these by-laws after incorporation or
after the annual meeting of stockholders, as the case may be, or as soon
thereafter as conveniently possible. The Audit Committee shall have and may
exercise all of the powers of the Board of Directors during the period between
meeting of the Board of Directors, except as may be prohibited by law, with
respect to (i) the selection and recommendation for employment by the
corporation, subject to approval by the Board of Directors and the stockholders,
of a firm of certified public accountants whose duty it shall be to audit the
books and accounts of the corporation and its subsidiaries for the fiscal year
in which they are appointed and who shall report to the Audit Committee, who
shall be Ernst & Young unless and until the Audit Committee determines
otherwise, (ii) instructing the certified public accountants to expand the scope
and extent of the annual audits of the corporation into areas of any concern to
the Audit Committee, which may be beyond that necessary for the certified public
accountants to report on the financial statements of the corporation and, at its
discretion, directing other special investigations to ensure the objectivity of
the financial reporting of the corporation; (iii) reviewing the reports
submitted by the certified public accountants, conferring with the auditors and
reporting thereon to the Board of Directors with such recommendations as the
Audit Committee may deem appropriate; (iv) meeting with the corporation's
principal accounting and financial officers, the certified public accountants
and auditors, and other officers or department managers of the corporation as
the Audit Committee shall deem necessary in order to determine the adequacy of
the corporation's accounting principles and practices, and the results of the
corporation's annual audit; (iv) conducting inquiries into any of the foregoing,
the underlying and related facts, including such matters as the conduct of the
personnel of the corporation, the integrity of the records of the corporation,
the adequacy of the procedures and the legal and financial consequences of such
facts; and (vi) retaining and deploying such professional assistance, including
outside counsel and auditors and any others, as the Audit Committee shall deem
necessary or appropriate, in connection with the exercise of
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its powers on such terms as the Audit Committee shall deem necessary or
appropriate to protect the interests of the stockholders of the corporation.
(c) General. The Board of Directors may not establish any
committees other than the Compensation Committee, the Funding Committee and the
Audit Committee. The Board of Directors may designate one or more directors as
alternate members of any committee, who may replace any absent or disqualified
member at any meeting of the committee.
Except to the extent restricted by statute or the Certificate of Incorporation,
each such committee shall have and may exercise all the powers and authority of
the Board of Directors assigned to it in this Section 17 and may authorize the
seal of the Corporation to be affixed to all papers which require it. Each such
committee shall serve at the pleasure of the Board of Directors and have such
name as may be determined from time to time by resolution adopted by the Board
of Directors. Each committee shall keep regular minutes of its meetings and
report the same to the Board of Directors.
SECTION 18. Action by Consent. Unless restricted by the
Certificate of Incorporation, any action required or permitted to be taken by
the Board of Directors or any committee thereof may be taken without a meeting
if all members of the Board of Directors or such committee, as the case may be,
consent thereto in writing, and the writing or writings are filed with the
minutes of the proceedings of the Board of Directors or such committee, as the
case may be.
SECTION 19. Telephonic Meeting. Unless restricted by the
Certificate of Incorporation, any one or more members of the Board of Directors
or any committee thereof may participate in a meeting of the Board of Directors
or such committee by means of a conference telephone or similar communications
equipment by means of which all persons participating in the meeting can hear
each other. Participation by such means shall constitute presence in person at a
meeting.
ARTICLE IV
Officers
SECTION 1. Number and Qualifications. The officers of the
Corporation shall be elected by the Board of Directors and may include the Chief
Executive Officer, the President, one or more Vice-Presidents, the Secretary and
the Treasurer. If the Board of Directors wishes, it may also elect as an officer
of the Corporation a Chairman of the Board and may elect other officers
(including one or more Assistant Treasurers and one or more Assistant
Secretaries) as may be necessary or desirable for the business of the
Corporation. Any two or more offices may be held by the same person, and no
officer except the Chairman of the Board need be a director. Each officer shall
hold office until
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his successor shall have been duly elected and shall have qualified, or until
his death, or until he shall have resigned or have been removed, as hereinafter
provided in these By-Laws.
SECTION 2. Resignations. Any officer of the Corporation may
resign at any time by giving written notice of his resignation to the
Corporation. Any such resignation shall take effect at the time specified
therein or, if the time when it shall become effective shall not be specified
therein, immediately upon receipt. Unless otherwise specified therein, the
acceptance of any such resignation shall not be necessary to make it effective.
SECTION 3. Removal. Any officer of the Corporation may be
removed, either with or without cause, at any time, by the Board of Directors at
any meeting thereof.
SECTION 4. Chairman of the Board. The Chairman of the Board,
if one shall have been elected, shall be a member of the Board, an officer of
the Corporation and, if present, shall preside at each meeting of the Board of
Directors or the stockholders. He shall advise and counsel with the President,
and in his absence with other executives of the Corporation, and shall perform
such other duties as may from time to time be assigned to him by the Board of
Directors.
SECTION 5. The Chief Executive Officer. The individual elected
as chief executive officer of the Corporation by the Board of Directors shall be
the Chief Executive Officer of the Corporation and may be the President, if so
elected by the Board of Directors. He shall, in the absence of the Chairman of
the Board or if a Chairman of the Board shall not have been elected, preside at
each meeting of the Board of Directors or the stockholders. He shall perform all
duties incident to the office of Chief Executive Officer and such other duties
as may from time to time be assigned to him by the Board of Directors.
SECTION 6. President. The President shall be the chief
operating officer of the Corporation. He shall perform all duties incident to
the office of President and chief operating officer. If no Chief Executive
Officer has been appointed, in his absence or in the event of his inability or
refusal to act the President shall perform the duties of Chief Executive Officer
and, when so acting, shall have the powers of and be subject to the restrictions
placed upon the such office in respect of the performance of such duties.
SECTION 7. Vice-President. Each Vice-President shall perform
all such duties as from time to time may be assigned to him by the Board of
Directors or the President. At the request of the Chief Executive Officer or the
President or in the absence of both of them or in the event of the inability or
refusal to act of both of them,
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the Vice-President, or if there shall be more than one, the Vice-Presidents in
the order determined by the Board of Directors (or if there be no such
determination, then the Vice-Presidents in the order of their election), shall
perform the duties of the Chief Executive Officer or the President, as the case
may be, and, when so acting, shall have the powers of and be subject to the
restrictions placed upon the Chief Executive Officer or the President, as the
case may be, in respect of the performance of such duties.
SECTION 8. Treasurer. The Treasurer shall
(a) have charge and custody of, and be responsible
for, all the funds and securities of the Corporation;
(b) keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation;
(c) deposit all moneys and other valuables to the
credit of the Corporation in such depositaries as may be
designated by the Board of Directors or pursuant to its
direction;
(d) receive, and give receipts for, moneys due and
payable to the Corporation from any source whatsoever;
(e) disburse the funds of the Corporation and
supervise the investments of its funds, taking proper vouchers
therefore;
(f) render to the Board of Directors, whenever the
Board of Directors may require, an account of the financial
condition of the Corporation; and
(g) in general, perform all duties incident to the
office of Treasurer and such other duties as from time to time
may be assigned to him by the Board of Directors.
SECTION 9. Secretary. The Secretary shall
(a) keep or cause to be kept in one or more books
provided for the purpose, the minutes of all meetings of the
Board of Directors, the committees of the Board of Directors
and the stockholders;
(b) see that all notices are duly given in accordance
with the provisions of these By-Laws and as required by law;
(c) be custodian of the records and the seal of the
Corporation and, if necessary, affix and attest the seal to
all certificates for shares of the
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Corporation (unless the seal of the Corporation on such
certificates shall be a facsimile, as hereinafter provided)
and affix and attest the seal to all other documents to be
executed on behalf of the Corporation under its seal;
(d) see that the books, reports, statements,
certificates and other documents and records required by law
to be kept and filed are properly kept and filed; and
(e) in general, perform all duties incident to the
office of Secretary and such other duties as from time to time
may be assigned to him by the Board of Directors.
SECTION 10. The Assistant Treasurer. The Assistant Treasurer,
or if there shall be more than one, the Assistant Treasurers in the order
determined by the Board of Directors (or if there be no such determination, then
in the order of their election), shall, in the absence of the Treasurer or in
the event of his inability or refusal to act, perform the duties and exercise
the powers of the Treasurer and shall perform such other duties as from time to
time may be assigned by the Board of Directors.
SECTION 11. The Assistant Secretary. The Assistant Secretary,
or if there be more than one, the Assistant Secretaries in the order determined
by the Board of Directors (or if there be no such determination, then in the
order of their election), shall, in the absence of the Secretary or in the event
of his inability or refusal to act, perform the duties and exercise the powers
of the Secretary and shall perform such other duties as from time to time may be
assigned by the Board of Directors.
SECTION 12. Officers' Bonds or Other Security. If required by
the Board of Directors, any officer of the Corporation shall give a bond or
other security for the faithful performance of his duties, in such amount and
with such surety as the Board of Directors may require.
SECTION 13. Compensation. The compensation of the officers of
the Corporation for their services as such officers shall be fixed from time to
time by the Compensation Committee and approved by the Board of Directors. An
officer of the Corporation shall not be prevented from receiving compensation by
reason of the fact that he is also a director of the Corporation.
ARTICLE V
Stock Certificates and Their Transfer
SECTION 1. Stock Certificates. Every holder of stock in the
Corporation shall be entitled to have a certificate, signed by, or in the name
of the Corporation by, the
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Chairman of the Board or the President or a Vice-President and by the Treasurer
or an Assistant Treasurer or the Secretary or an Assistant Secretary of the
Corporation, certifying the number of shares owned by him in the Corporation. If
the Corporation shall be authorized to issue more than one class of stock or
more than one series of any class, the designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restriction of such preferences
and/or rights shall be set forth in full or summarized on the face or back of
the certificate which the Corporation shall issue to represent such class or
series of stock, provided that, except as otherwise provided in Section 202 of
the General Corporation Law of the State of Delaware, in lieu of the foregoing
requirements, there may be set forth on the face or back of the certificate
which the Corporation shall issue to represent such class or series of stock, a
statement that the Corporation will furnish without charge to each stockholder
who so requests the designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
SECTION 2. Facsimile Signatures. Any or all of the signatures
on a certificate may be a facsimile. In case any officer, transfer agent or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if he were such officer, transfer agent or registrar at the date
of issue.
SECTION 3. Lost Certificates. The Board of Directors may
direct a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost, stolen, or destroyed. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its discretion and
as a condition precedent to the issuance thereof, require the owner of such
lost, stolen, or destroyed certificate or certificates, or his legal
representative, to give the Corporation a bond in such sum as it may direct
sufficient to indemnify it against any claim that may be made against the
Corporation on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
SECTION 4. Transfers of Stock. Upon surrender to the
Corporation or the transfer agent of the Corporation of a certificate for shares
duly endorsed or accompanied by proper evidence of succession, assignment or
authority to transfer, it shall be the duty of the Corporation to issue a new
certificate to the person entitled thereto, cancel the old certificate and
record the transaction upon its records; provided, however, that the Corporation
shall be entitled to recognize and enforce any lawful restriction on transfer.
Whenever any transfer of stock shall be made for collateral security, and not
absolutely, it shall be so expressed in the entry of transfer if, when the
certificates are presented to the
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Corporation for transfer, both the transferor and the transferee request the
Corporation to do so.
SECTION 5. Transfer Agents and Registrars. The Board of
Directors may appoint, or authorize any officer or officers to appoint, one or
more transfer agents and one or more registrars.
SECTION 6. Regulations. The Board of Directors may make such
additional rules and regulations, not inconsistent with these By-Laws, as it may
deem expedient concerning the issue, transfer and registration of certificates
for shares of stock of the Corporation.
SECTION 7. Fixing the Record Date. In order that the
Corporation may determine the stockholders entitled to notice of or to vote at
any meeting of stockholders or any adjournment thereof, or to express consent to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock or
for the purpose of any other lawful action, the Board of Directors may fix, in
advance, a record date, which shall not be more than sixty nor less than ten
days before the date of such meeting, nor more than sixty days prior to any
other action. A determination of stockholders of record entitled to notice of or
to vote at a meeting of stockholders shall apply to any adjournment of the
meeting; provided, however, that the Board of Directors may fix a new record
date for the adjourned meeting.
SECTION 8. Registered Stockholders. The Corporation shall be
entitled to recognize the exclusive right of a person registered on its records
as the owner of shares of stock to receive dividends and to vote as such owner,
shall be entitled to hold liable for calls and assessments a person registered
on its records as the owner of shares of stock, and shall not be bound to
recognize any equitable or other claim to or interest in such share or shares of
stock on the part of any other person, whether or not it shall have express or
other notice thereof, except as otherwise provided by the laws of Delaware.
ARTICLE VI
Indemnification of Directors and Officers
SECTION 1. General. The Corporation shall indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative (other than an action by or in the right of the
Corporation) by reason of the fact that he is or was a director, officer,
employee or agent of the Corporation, or is or was serving at the request of the
Corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against expenses
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(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The termination of any action, suit or proceeding by
judgment, order, settlement, conviction, or upon a plea of nolo contendere or
its equivalent, shall not, of itself, create a presumption that the person did
not act in good faith and in a manner which he reasonably believed to be in or
not opposed to the best interests of the Corporation, and, with respect to any
criminal action or proceeding, had reasonable cause to believe that his conduct
was unlawful.
SECTION 2. Derivative Actions. The Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he is
or was a director, officer, employee or agent of the Corporation, or is or was
serving at the request of the Corporation as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection with the defense or settlement of such action or
suit if he acted in good faith and in a manner he reasonably believed to be in
or not opposed to the best interests of the Corporation, provided that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
SECTION 3. Indemnification in Certain Cases. To the extent
that a director, officer, employee or agent of the Corporation has been
successful on the merits or otherwise in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article VI, or in defense of
any claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith.
SECTION 4. Procedure. Any indemnification under Sections 1 and
2 of this Article VI (unless ordered by a court) shall be made by the
Corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
such Sections 1 and 2. Such determination shall be made (a) by the Board of
Directors by a majority vote of a quorum consisting of
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directors who were not parties to such action, suit or proceeding, or (b) if
such a quorum is not obtainable, or, even if obtainable a quorum of
disinterested directors so directs, by independent legal counsel in a written
opinion, or (c) by the stockholders.
SECTION 5. Advances for Expenses. Expenses incurred in
defending a civil or criminal action, suit or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of the director,
officer, employee or agent to repay such amount if it shall be ultimately
determined that he is not entitled to be indemnified by the Corporation as
authorized in this Article VI.
SECTION 6. Rights Not-Exclusive. The indemnification and
advancement of expenses provided by, or granted pursuant to, the other
subsections of this Article VI shall not be deemed exclusive of any other rights
to which those seeking indemnification or advancement of expenses may be
entitled under any law, by-law, agreement, vote of stockholders or disinterested
directors or otherwise, both as to action in his official capacity and as to
action in another capacity while holding such office.
SECTION 7. Insurance. The Corporation shall have power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Corporation, or is or was serving at
the request of the Corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the Corporation
would have the power to indemnify him against such liability under the
provisions of this Article VI.
SECTION 8. Definition of Corporation. For the purposes of this
Article VI, references to "the Corporation" include all constituent corporations
absorbed in a consolidation or merger as well as the resulting or surviving
corporation so that any person who is or was a director, officer, employee or
agent of such a constituent corporation or is or was serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise shall
stand in the same position under the provisions of this Article VI with respect
to the resulting or surviving corporation as he would if he had served the
resulting or surviving corporation in the same capacity.
SECTION 9. Survival of Rights. The indemnification and
advancement of expenses provided by, or granted pursuant to this Article VI
shall continue as to a person who has ceased to be a director, officer, employee
or agent and shall inure to the benefit of the heirs, executors and
administrators of such a person.
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ARTICLE VII
General Provisions
SECTION 1. Dividends. Subject to the provisions of statute and
the Certificate of Incorporation, dividends upon the shares of capital stock of
the Corporation may be declared by the Board of Directors at any regular or
special meeting. Dividends may be paid in cash, in property or in shares of
stock of the Corporation, unless otherwise provided by statute or the
Certificate of Incorporation.
SECTION 2. Reserves. Before payment of any dividend, there may
be set aside out of any funds of the Corporation available for dividends such
sum or sums as the Board of Directors may, from time to time, in its absolute
discretion, think proper as a reserve or reserves to meet contingencies, or for
equalizing dividends, or for repairing or maintaining any property of the
Corporation or for such other purpose as the Board of Directors may think
conducive to the interests of the Corporation. The Board of Directors may modify
or abolish any such reserves in the manner in which it was created.
SECTION 3. Seal. The seal of the Corporation shall be in such
form as shall be approved by the Board of Directors.
SECTION 4. Fiscal Year. The fiscal year of the Corporation
shall be fixed, and once fixed, may thereafter be changed, by resolution of the
Board of Directors.
SECTION 5. Checks, Notes, Drafts, Etc. All checks, notes,
drafts or other orders for the payment of money of the Corporation shall be
signed, endorsed or accepted in the name of the Corporation by such officer,
officers, person or persons as from time to time may be designated by the Board
of Directors or by an officer or officers authorized by the Board of Directors
to make such designation.
SECTION 6. Execution of Contracts, Deeds, Etc. The Board of
Directors may authorize any officer or officers, agent or agents, in the name
and on behalf of the Corporation to enter into or execute and deliver any and
all deeds, bonds, mortgages, contracts and other obligations or instruments, and
such authority may be general or confined to specific instances.
SECTION 7. Voting of Stock in Other Corporations. Unless
otherwise provided by resolution of the Board of Directors, the Chairman of the
Board or the President, from time to time, may (or may appoint one or more
attorneys or agents to) cast the votes which the Corporation may be entitled to
cast as a shareholder or otherwise in any other corporation, any of whose shares
or securities may be held by the Corporation, at meetings of the holders of the
shares or other securities of such other corporation. In the event one or more
attorneys or agents are appointed, the Chairman of
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the Board or the President may instruct the person or persons so appointed as to
the manner of casting such votes or giving such consent. The Chairman of the
Board or the President may, or may instruct the attorneys or agents appointed
to, execute or cause to be executed in the name and on behalf of the Corporation
and under its seal or otherwise, such written proxies, consents, waivers or
other instruments as may be necessary or proper in the circumstances.
ARTICLE VIII
Amendments
These By-Laws may be amended or repealed or new by-laws adopted (a) by action of
the stockholders entitled to vote thereon at any annual or special meeting of
stockholders or (b) if the Certificate of Incorporation so provides, by action
of the Board of Directors at a regular or special meeting thereof. Any by-law
made by the Board of Directors may be amended or repealed by action of the
stockholders at any annual or special meeting of stockholders.
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Exhibit 10.1
MASTER LEASE AGREEMENT
No. A
-----
This Master Lease Agreement dated September 29, 1999 (the "MLA") is entered into
by and between Ascend Communications, Inc., a wholly-owned subsidiary of Lucent
Technologies Inc. ("Lessor"), having its principal place of business at 1701
Harbor Bay Parkway, Alameda, CA 94502 and ONSITE ACCESS, LLC ("Lessee"), having
its principal place of business at 1372 Broadway, New York, NY 10018.
1. LEASE AGREEMENT. Lessor agrees to lease to Lessee, and Lessee agrees to
lease from Lessor, the equipment (the "Equipment") referenced in each of the
Schedules (the "Schedule" or "Schedules") which incorporate this MLA therein
(the "Lease"). So long as no Event of Default has occurred or is continuing,
Lessor agrees to lease to Lessee the groups of Equipment described on each
Schedule, subject to the following conditions, which Lessor in its sole
discretion may elect to waive with respect to a Schedule: (i) that in no event
shall Lessor be obligated to lease Equipment to Lessee hereunder where the
aggregate purchase of all Equipment leased to Lessee hereunder would exceed
FIFTY MILLION DOLLARS ($50,000,000); (ii) the Equipment leased hereunder shalll
only be Equipment (a) manufactured by Lucent Technologies Inc., or (b) third
party Equipment purchased through and authorized by Lucent Technologies Inc.,
such Equipment not to exceed twenty five percent (25%) of the Lease amount
oustanding; (iii) that TWENTY FIVE MILLION DOLLARS ($25,000,000) hereunder will
be available to the Lessee for Equipment leases upon execution; (iv) that the
remaining TWENTY FIVE MILLION DOLLARS ($25,000,000) hereunder will be available
to the Lessee for Equipment leases upon Lessee providing Lessor with evidence
satisfactory to Lessor that Lessee has received a minimum of twenty million
dollars ($20,000,000) in new equity by March 31, 2000; (v) that the lease amount
shall exclude freight, installation, maintenance, professional services and
taxes; (vi) the Equipment leased shall reside in the United States at all times;
and (vii) no new leases shall be issued after September 30, 2000.
2. TERM. Each Lease shall be effective upon the execution of the MLA and the
related Schedule by the Lessor and the Lessee. The lease term (the "Lease Term")
of the Equipment referenced in each of the Schedules shall commence on the rent
commencement date specified in each Schedule (the "Rent Commencement Date"). The
Rent Commencement Date shall be the first day of the first calendar month after
the date that the Equipment is shipped by the Supplier (the "Ship Date") as
evidenced by a shipping document provided by the Supplier related to the
Equipment (the "Shipping Document"). Lessor will provide Lessee with a copy of
the Shipping Document evidencing the Ship Date.
3. RENT. The rent (the "Rent") for the Equipment referenced in any Schedule
shall be as stated in such Schedule and shall be payable according to the
provisions of such Schedule. If any amount payable under a Schedule is not
received by Lessor within 10 days of the due date, Lessee agrees to pay an
Overdue Charge, as defined herein, with respect to such amount.
4. SELECTION AND ASSIGNMENT. Lessee will select the type, quantity and
Supplier (subject to above) of each item of Equipment designated in a Schedule,
and Lessee hereby assigns to Lessor all of its right, title and interest in and
to the related equipment purchase agreement, a copy of which has been provided
to Lessor by Lessee (the "Agreement"). The Agreement may be amended with the
consent of Lessor. Any such assignment with respect to Equipment shall become
binding upon Lessor when Lessor and Lessee have entered into a Lease with
respect to such Equipment and as of the Rent Commencement Date referenced in
such Lease. Upon such an assignment becoming effective, Lessor shall be
obligated to purchase the Equipment from the Supplier in accordance with the
provisions of the Agreement. It is expressly agreed that Lessee shall at all
times remain liable to Supplier under the Agreement to perform all duties and
obligations of Lessee thereunder, except for the obligation to purchase the
Equipment to the extent expressly assumed by the Lessor hereunder, and that the
Lessee shall be entitled to the same rights of the purchaser of the Equipment
under the Agreement, except such right, title and interest in the Equipment
retained exclusively by the Lessor as owner of the Equipment. Lessor shall have
no liability for a Supplier's failure to meet the terms and conditions of the
Agreement.
5. DELIVERY AND INSTALLATION. Lessee shall be responsible for payment of all
transportation, packing, installation, testing and other charges associated with
the delivery, installation or use of any Equipment which are not included in the
Agreement with respect to such Equipment.
6. WARRANTIES. LESSOR MAKES NO REPRESENTATION OR WARRANTY OF ANY KIND,
EXPRESS OR IMPLIED, WITH RESPECT TO ANY OF THE EQUIPMENT, ITS MERCHANTABILITY,
OR ITS FITNESS FOR A PARTICULAR PURPOSE. LESSOR SHALL NOT BE LIABLE TO LESSEE OR
ANY OTHER PERSON FOR DIRECT, INDIRECT, SPECIAL, INCIDENTAL OR CONSEQUENTIAL
DAMAGES ARISING FROM LESSEE'S USE OF THE EQUIPMENT, OR FOR DAMAGES BASED ON
STRICT OR ABSOLUTE TORT LIABILITY OR LESSOR'S PASSIVE NEGLIGENCE. LESSEE HEREBY
ACKNOWLEDGES THAT ANY MANUFACTURER'S OR SUPPLIER'S WARRANTIES WITH RESPECT TO
THE EQUIPMENT ARE FOR THE BENEFIT OF BOTH LESSOR AND LESSEE. NOTWITHSTANDING THE
FOREGOING, LESSEE'S OBLIGATIONS TO PAY EACH RENT PAYMENT DUE, OR OTHERWISE
PERFORM ITS OBLIGATIONS, UNDER THIS LEASE ARE ABSOLUTE AND UNCONDITIONAL.
7. TITLE TO AND LOCATION OF EQUIPMENT. Lessor shall retain title to each item
of Equipment. Lessee, at its expense, shall protect Lessor's title and keep the
Equipment free from all claims, liens, encumbrances and legal processes. The
Equipment is personal property and is not to be regarded as part of the real
estate on which it may be situated. If requested by Lessor, Lessee will, at
Lessee's expense, furnish a landlord or mortgagee waiver with respect to the
Equipment. The Equipment shall not be removed from the location specified in the
Schedule without the written consent of Lessor. Lessee shall, upon Lessor's
request, affix and maintain plates, tags or other identifying labels, showing
Lessor's ownership of the Equipment in a prominent position on the Equipment.
8. USE OF EQUIPMENT, INSPECTION AND REPORTS. The use of the Equipment by
Lessee shall conform with all applicable laws, insurance policies, and
warranties of the manufacturer or Supplier of the Equipment. Lessor shall have
the right to inspect the Equipment at the premises where the Equipment is
located. Lessee shall notify Lessor promptly of any claims, liens, encumbrances
or legal processes with respect to the Equipment.
9. FURTHER ASSURANCES. Lessee shall execute and deliver to Lessor such
instruments as Lessor deems necessary for the confirmation of this Lease and
Lessor's rights hereunder. Lessor is authorized to file financing statements
signed only by the Lessor in accordance with the Uniform Commercial Code, or
financing statements signed by Lessor as Lessee's attorney-in-fact. Any such
filing with respect to the Equipment leased pursuant to a true lease shall not
be deemed evidence of any intent to create a security interest under the Uniform
Commercial Code.
10. MAINTENANCE AND REPAIRS. Lessee shall, at its expense, maintain each item
of Equipment in good condition, normal wear and tear excepted. Lessee shall not
make any addition, alteration, or attachment to the Equipment without Lessor's
prior written consent. Lessee shall make no repair, addition, alteration or
attachment to the Equipment which interferes with the normal operation or
maintenance thereof, creates a safety hazard, or might result in the creation of
a mechanic's or materialman's lien.
11. LESSOR'S PERFORMANCE OF LESSEE'S OBLIGATIONS. If Lessee fails to perform
any of its obligations under a Lease, Lessor may perform any act or make any
payment which Lessor deems necessary for the maintenance and preservation of the
Equipment subject thereto and Lessor's title thereto. All sums so paid by Lessor
(together with all related Overdue Charges), and reasonable attorneys' fees
incurred by Lessor in connection therewith, shall be additional rent payable to
Lessor on demand. The performance of any such act or the making of any such
payment by Lessor shall not be deemed a waiver or release of any obligation or
default on the part of Lessee.
12. INDEMNIFICATION. Lessee assumes liability for, and hereby agrees to
indemnify, protect and hold harmless, Lessor, and its agents, employees,
officers, directors, partners and successors and assigns, from and against, all
liabilities, obligations, losses, damages, injuries, claims, demands, penalties,
actions, costs and expenses, including, without limitation, reasonable
attorneys' fees, of whatever kind and nature, in contract or in tort, arising
out of the use, condition, operation, ownership, selection, delivery, leasing or
return of any item of Equipment, regardless of when, how and by whom operated,
or any failure on the part of Lessee to perform or comply with any of its
obligations under a Lease, excluding, however, any of the foregoing which result
from the gross negligence or willful misconduct of Lessor. Such indemnities and
assumptions of liabilities and obligations shall continue in full force and
effect, notwithstanding the expiration or other termination of such Lease.
Nothing contained in any Lease shall authorize Lessee to operate the Equipment
subject thereto so as to incur or impose any liability on, or obligation for or
on behalf of, Lessor.
13. NO OFF-SET. All Rents shall be paid by Lessee irrespective of any
off-set, counterclaim, recoupment, defense or other right which Lessee may have
against Lessor, the manufacturer or Supplier of the Equipment or any other
party.
14. ASSIGNMENT BY LESSEE. Lessee shall not, without Lessor's prior written
consent, (a) sell, assign, transfer, pledge, hypothecate, or otherwise dispose
of, encumber or suffer to exist a lien upon or against, any of the Equipment or
any Lease or any interest therein, by operation of law or otherwise, or (b)
sublease or lend any of the Equipment or permit any of the Equipment to be used
by anyone other than Lessee.
15. ASSIGNMENT BY LESSOR. Lessor may assign, sell or encumber its interest in
any of the Equipment and any Lease. Upon Lessor's written consent, Lessee shall
pay directly to the assignee of any such interest all Rent and other sums due
under an assigned Lease. THE RIGHTS OF ANY SUCH ASSIGNEE SHALL NOT BE SUBJECT TO
ANY ABATEMENT, DEDUCTION, OFF-SET, COUNTERCLAIM, RECOUPMENT, DEFENSE OR OTHER
RIGHT WHICH LESSEE MAY HAVE AGAINST LESSOR OR ANY OTHER PERSON OR ENTITY.
Notwithstanding the foregoing, any such assignment (a) shall be subject to
Lessee's right to possess and use the Equipment subject to a Lease so long as
Lessee is not in default thereunder, and (b) shall not release any of Lessor's
obligations hereunder.
16. RETURN OF EQUIPMENT. Unless Lessee has exercised its option, if any, to
renew a lease or purchase the Equipment subject thereto, upon expiration of the
then current Lease Term of such Lease, Lessee shall, at its expense, cause such
Equipment to be removed, disassembled, and placed in the same condition as when
delivered to Lessee (reasonable wear and tear excepted) and properly crate such
Equipment for shipment and deliver it to a common carrier designated by Lessor.
Lessee will ship such Equipment, F.O.B. destination, to any address specified in
writing by Lessor within the continental United States. All additions,
attachments, alterations and repairs made or placed upon any of the Equipment
shall become part of such Equipment and shall be the property of Lessor.
<PAGE>
17. EVENTS OF DEFAULT. The occurrence of any of the following shall be deemed
to constitute an Event of Default hereunder: (a) Lessee fails to pay Rent, any
other amount it is obligated to pay under a Lease or any other amount it is
obligated to pay to Lessor and does not cure such failure within 10 days of such
amount becoming due; (b) Lessee fails to perform or observe any obligation or
covenant to be performed or observed by Lessee hereunder or under any Schedule,
including, without limitation, supplying all requested documentation, and does
not cure such failure within 10 days of receiving written notice thereof from
Lessor; (c) the occurrence and continuance of any default under any other lease
or agreement for borrowed money made between Lucent Technologies Inc. or its
affiliates, successors or assigns, and the Lessee; (d) any warranty,
representation or statement made or furnished to Lessor by or on behalf of
Lessee is proven to have been false in any material respect when made or
furnished; (e) the attempted sale or encumbrance by Lessee of the Equipment, or
the making of any levy, seizure or attachment thereof or thereon; or (f) the
dissolution, termination of existence, discontinuance of business, insolvency,
or appointment of a receiver of any part of the property of Lessee, assignment
by Lessee for the benefit of creditors, the commencement of proceedings under
any bankruptcy, reorganization or arrangement laws by or against Lessee, or any
other act of bankruptcy on the part of Lessee.
18. REMEDIES OF LESSOR. At any time after the occurrence of any Event of
Default, Lessor may exercise one or more of the following remedies: (a) Lessor
may terminate any or all of the Leases with respect to any or all items of
Equipment subject thereto; (b) Lessor may recover from Lessee all Rent and other
amounts then due and to become due under any or all of the Leases; (c) Lessor
may take possession of any or all items of Equipment, wherever the same may be
located, without demand or notice, without any court order or other process of
law and without liability to Lessee for any damages occasioned by such taking of
possession, and any such taking of possession shall not constitute a termination
of any Lease; (d) Lessor may demand that Lessee return any or all items of
Equipment to Lessor in accordance with Paragraph 16; and (e) Lessor may pursue
any other remedy available at law or in equity, including, without limitation,
seeking damages, specific performance or an injunction.
Upon repossession or return of any item of the Equipment, Lessor shall sell,
lease or otherwise dispose of such item in a commercially reasonable manner,
with or without notice and on public or private bid, and apply the net proceeds
thereof (after deducting the estimated fair market value of such item at the
expiration of the term of the applicable Lease, in the case of a sale, or the
rents due for any period beyond the scheduled expiration of such Lease, in the
case of any subsequent lease of such item, and all expenses, including, without
limitation, reasonable attorneys' fees, incurred in connection therewith)
towards the Rent and other amounts due under such Lease, with any excess net
proceeds to be retained by Lessor.
Each of the remedies under this Lease shall be cumulative, and not exclusive,
and in addition to any other remedy referred to herein or otherwise available to
Lessor in law or in equity. Any repossession or subsequent sale or lease by
Lessor of any item of Equipment shall not bar an action for a deficiency as
herein provided, and the bringing of an action or the entry of judgment against
Lessee shall not bar Lessor's right to repossess any or all items of Equipment.
19. CREDIT AND FINANCIAL INFORMATION. Within 90 days of the close of each of
Lessee's fiscal years, Lessee shall deliver to Lessor a copy of Lessee's annual
report, if any, and an audited balance sheet and profit and loss statement with
respect to such year. Within 30 days after the end of each of Lessee's fiscal
months, Lessee shall deliver to Lessor a balance sheet and profit and loss
statement for such month and, if requested, any other additional information
regarding historical or projected operating performance reasonably requested by
Lessor, all of which shall be certified by an officer of Lessee.
20. INSURANCE. As of the date that risk of loss for the Equipment passes from
the Supplier to the Lessee under the terms of the Agreement, Lessee shall obtain
and maintain through the end of the Lease Term of each Lease (and any renewal or
extension thereof), at its own expense, property damage and personal liability
insurance and insurance against loss or damage to the Equipment, including,
without limitation, loss by fire (with extended coverage), theft and such other
risks of loss as are customarily insured against with respect to the types of
Equipment leased hereunder and by the types of businesses in which such
Equipment will be used by Lessee. Such insurance shall be in such amounts, with
such deductibles, in such form and with such insurers as shall be satisfactory
to Lessor; provided, however, that the amount of the insurance against loss or
damage to the Equipment shall not be less than the greater of the replacement
value of the Equipment, from time to time, or the original purchase price of the
Equipment. Each insurance policy shall name Lessee as an insured and Lessor as
an additional insured or loss payee, and shall contain a clause requiring the
insurer to give Lessor at least 30 days prior written notice of any alteration
in the terms of such policy or of the cancellation thereof. Lessee shall furnish
to Lessor a certificate of insurance or other evidence satisfactory to Lessor
that such insurance coverage is in effect; provided, however, that Lessor shall
be under no duty either to ascertain the existence of or to examine such
insurance policy or to advise Lessee in the event such insurance coverage shall
not comply with the requirements hereof. Lessee shall give Lessor prompt notice
of any damage to, or loss of, any of the Equipment, or any part thereof, or any
personal injury or property damage occasioned by the use of any of the
Equipment.
21. TAXES. Lessee hereby assumes liability for, and shall pay when due, and,
on a net after-tax basis, shall indemnify, protect and hold harmless Lessor
against all fees, taxes and governmental charges (including, without limitation,
interest and penalties) of any nature imposed on or in any way relating to
Lessor, Lessee, any item of Equipment or any Lease, except state and local taxes
on or measured by Lessor's net income (other than any such tax which is in
substitution for or relieves Lessee from the payment of taxes it would otherwise
be obligated to pay or reimburse to Lessor as herein provided) and federal taxes
on Lessor's net income. Lessee shall, at its expense, file when due with the
appropriate authorities any and all tax and similar returns, and reports
required to be filed with respect thereto, for which it has indemnified Lessor
hereunder or, if requested by Lessor, notify Lessor of all such requirements and
furnish Lessor with all information required for Lessor to effect such filings.
Any fees, taxes or other charges paid by Lessor upon failure of Lessee to make
such payments shall, at Lessor's option, become immediately due from Lessee to
Lessor and shall be subject to the Overdue Charge from the date paid by Lessor
until the date reimbursed by Lessee.
22. SEVERABILITY. If any provision of any Lease is held to be invalid by a
court of competent jurisdiction, such invalidity shall not affect the other
provisions of such Lease or any provision of any other Lease.
23. NOTICES. All notices hereunder shall be in writing and shall be deemed
given when sent by certified mail, postage prepaid, return receipt requested,
addressed to the party to which it is being sent at its address set forth herein
or to such other address as such party may designate in writing to the other
party.
24. AMENDMENTS, WAIVERS AND EXTENSIONS. This MLA and each Schedule constitute
the entire agreement between Lessor and Lessee with respect to the lease of the
Equipment subject to such Schedule, and supersede all previous communications,
understandings, and agreements, whether oral or written, between the parties
with respect to such subject matter. No provision of any Lease may be changed,
waived, amended or terminated except by a written agreement, specifying such
change, waiver, amendment or termination, signed by both Lessee and Lessor,
except that Lessor may insert, on the appropriate schedule, the serial number of
Equipment, after delivery of such Equipment, and the Rent Commencement Date for
the Equipment. No waiver by Lessor of any Event of Default shall be construed as
a waiver of any future Event of Default or any other Event of Default. At the
expiration of the Lease Term with respect to a Lease, upon notice given by
Lessee at least ninety (90) days prior thereto, (a) such Lease shall be renewed
or the Equipment subject thereto shall be purchased under the terms and
conditions set forth herein for a term and rent amount or purchase price, as the
case may be, to be agreed upon, or (b) if no such agreement is reached prior to
the expiration of such Lease Term or such notice specifies that Lessee intends
to return the Equipment, then Lessee shall return the Equipment to Lessor in the
manner prescribed in Paragraph 16 of this MLA. In the absence of Lessor's timely
receipt of the notice contemplated by the preceding sentence, the Lease shall be
automatically extended, on a month-to-month basis, until terminated (upon notice
by either party given at least ninety (90) days prior to the end of the month on
which the termination is to be effective) or until renewed or the Equipment
subject thereto is purchased by agreement of the parties. Unless otherwise
agreed, Lessee shall continue to pay Rent for each month following such Lease
Term until the Equipment subject to such Lease is returned pursuant to Paragraph
16 of this MLA.
25. CONSTRUCTION. This MLA shall be governed by and construed in accordance
with the internal laws, but not the choice of laws provisions, of the State of
California. The titles of the sections of this MLA are for convenience only and
shall not define or limit any of the terms or provisions hereof. Time is of the
essence in each of the provisions hereof.
26. PARTIES. This MLA shall be binding upon, and inure to the benefit of, the
permitted assigns, representatives and successors of the Lessor and Lessee. If
there is more than one Lessee named in this MLA, the liability of each shall be
joint and several.
27. COUNTERPARTS. Each Lease may be executed in two or more counterparts,
each of which shall be deemed an original and all of which together shall
constitute but one and the same instrument.
28. OVERDUE CHARGE. Overdue Charge shall mean an amount equal to 2% per month
of any payment under a Lease which is past due, including, without limitation,
any amounts not included in any payment of Rent hereunder, or the highest charge
permitted by law, whichever is lower.
The person executing this MLA on behalf of Lessee hereby certifies that he or
she has read, and is duly authorized to execute, this MLA.
<TABLE>
<S> <C>
Accepted by:
Ascend Communications, Inc., a wholly-owned subsidiary LESSEE: ONSITE ACCESS, LLC
of Lucent Technologies Inc.
BY: /s/ Paul Hayes BY: /s/ Kenneth J. Hall
___________________________________________________ __________________________________________________
NAME: Paul Hayes NAME: Kenneth J. Hall
_________________________________________________ ________________________________________________
Print
TITLE: Director TITLE: Executive Vice President and CFO
________________________________________________ _______________________________________________
DATE: 9/29/99 DATE: 9/29/99
_________________________________________________ _______________________________________________
</TABLE>
<PAGE>
Exhibit 10.4
SUBSCRIPTION AGREEMENT
TO THE BOARD OF DIRECTORS OF
OnSite Access, Inc.
RSI-OnSite Holdings LLC, a Delaware limited liability company
("Reckson"), Veritech Ventures LLC, a New York limited liability company
("Veritech") and Arthur Simon ("Simon", and together with Reckson and Veritech,
collectively, the "Subscribers") hereby subscribe, effective upon the
consummation of the merger of OnSite Ventures, L.L.C., a Delaware limited
liability company, with and into OnSite Access, Inc., a Delaware corporation
(the "Corporation"), pursuant to that certain Agreement and Plan of Merger
between OnSite Ventures, L.L.C. and the Corporation, for 323,128 shares, 107,710
shares and 80,782 shares, respectively, of Common Stock, par value $.001 per
share, of the Corporation, in each case at a total purchase price of $.45 per
share. Upon receipt of such purchase price, the Corporation shall issue to the
Subscribers a stock certificate or certificates representing such 323,128
shares, 107,710 shares and 80,782 shares, respectively, fully paid and
non-assessable shares of Common Stock.
Each of the Subscribers hereby (i) represents and warrants
that it is an "accredited investor" as such term is defined in Rule 501(a) of
Regulation D promulgated under the Securities Act of 1933, as amended, (ii)
acknowledges that the shares subscribed for hereby may be subject to
restrictions on transfer under state or federal securities laws or other federal
or state regulatory laws, and that such shares shall bear a legend containing
the following words:
<PAGE>
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED. THE SECURITIES HAVE BEEN ACQUIRED FOR
INVESTMENT AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE
DISPOSED OF EXCEPT IN COMPLIANCE WITH SUCH ACT."
and (iii) agrees that it will transfer such shares only in compliance with such
restrictions and laws, and that the Corporation will not be required to transfer
on its books any such shares until it receives a certificate from such
transferring shareholder as to compliance with such terms.
Dated: April 16, 1999
RSI- ONSITE HOLDINGS LLC
By: Reckson Service Industries, Inc., its Sole
Member
By: /s/ Scott H. Rechler
__________________________________
Name: Scott H. Rechler
Title: President
VERITECH VENTURES LLC
By: JAH Realties, L.P.
By: JLH Realty Management Services, Inc.,
its General Partner
By: /s/ Jon Halpern
__________________________________
Name: Jon Halpern
Title: President
ARTHUR SIMON
By: /s/ Arthur Simon
______________________________________
-2-
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the references to our firm under the captions 'Experts' and
'Selected Financial Data' and to the use of our reports dated January 21, 2000,
in Amendment No. 1 to the Registration Statement (Form S-1 No. 333-92839) and
related Prospectus of OnSite Access, Inc. for the registration of 19,170,500
shares of its common stock.
/s/ ERNST & YOUNG LLP
New York, New York
February 7, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 24,412
<SECURITIES> 0
<RECEIVABLES> 1,097
<ALLOWANCES> 253
<INVENTORY> 0
<CURRENT-ASSETS> 25,535
<PP&E> 22,664
<DEPRECIATION> 2,611
<TOTAL-ASSETS> 74,775
<CURRENT-LIABILITIES> 13,702
<BONDS> 2,649
<COMMON> 11
0
59,807
<OTHER-SE> (647)
<TOTAL-LIABILITY-AND-EQUITY> 74,775
<SALES> 0
<TOTAL-REVENUES> 3,646
<CGS> 0
<TOTAL-COSTS> 3,090
<OTHER-EXPENSES> 33,314
<LOSS-PROVISION> 184
<INTEREST-EXPENSE> 1,115
<INCOME-PRETAX> (32,542)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (32,542)
<EPS-BASIC> (8.93)
<EPS-DILUTED> (8.93)
