Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1
Filing Table of Contents
Document/Exhibit Description Pages Size
1: S-1/A S-1 Amendment Number 2 120 618K
2: EX-1.1 Form of Underwriting Agreement 46 164K
3: EX-4.6 Common Stock Warrant Dtd 4/22/99 7 30K
4: EX-4.7 Warrant Agreement Dtd 4/22/99 14 63K
10: EX-10.11 Amendment to Amended and Restated Employment Agrmt 4 18K
5: EX-10.2 Credit Agreement Dtd 9/04/1998 75 272K
6: EX-10.2.1 Amendment No. 1 to Credit Agreement Dtd 2/12/99 12 30K
11: EX-10.27 Agreement for High Speed Internet Service 39 132K
12: EX-10.27.1 First Amendment to Master License Agrmt Dtd 5 28K
4/23/99
13: EX-10.27.2 Marketing/Administration Agreement 12 49K
14: EX-10.27.3 First Amendment to Marketing/Administration Agrmt 3 17K
Dtd 4/23/99
7: EX-10.6 Amended and Restated Employment Agreement 14 56K
8: EX-10.8 Amendment to Amended and Restated Employment Agrmt 4 16K
9: EX-10.9 Material Contract 17 65K
15: EX-11.1 Statement Re Computation of Per Share Earnings 2± 12K
16: EX-23.2 Consent of Arthur Anderson, LLP 1 7K
17: EX-27.1 Financial Data Schedule 2 11K
| Page | (sequential) | | | | (alphabetic) | Top |
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| | |
- Alternative Formats (Word, et al.)
- Amended and Restated Stock Option Plan
- Bear, Stearns & Co. Inc
- Business
- Capitalization
- Cautionary Note Regarding Forward-Looking Statements
- Certain Relationships and Related Transactions
- (Continued)
- Conversion
- Cost of services
- Depreciation and amortization
- Description of Capital Stock
- Dilution
- Dividend Policy
- Duncan M. Fitchet, Jr
- Exhibits and Financial Statement Schedules
- First Union Capital Markets Corp
- Government Regulation; Potential Taxes
- Impact of the Year 2000 Issue
- Income (loss) from discontinued operations
- Indemnification of Directors and Officers
- Legal Proceedings
- Liquidity and Capital Resources
- Loans to and from Executive Officers and Affiliates
- Management
- Management's Discussion and Analysis of Financial Condition and Results of Operations
- Net revenues
- Non-cash compensation
- Notes to Consolidated Financial Statements
- Notes to Financial Statements
- Offering, The
- Options Granted in Fiscal Year 1998
- Organization of CAIS Internet
- Other Expenses of Issuance and Distribution
- OverVoice
- Patents and Other Proprietary Information
- Principal Stockholders
- Prospectus Summary
- Recent Sales of Unregistered Securities
- Report of Independent Public Accountants
- Risk Factors
- Selected Financial Data
- Selling, general and administrative
- Series A Shares
- Series B Shares
- Shares Eligible for Future Sale
- Statement of Cash Flows for the Period from January 1, 1996 to May 10, 1996
- Statement of Changes in Stockholders' Equity for the Period from January 1, 1996 to May 10, 1996
- Statement of Operations for the Period from January 1, 1996 to May 10, 1996
- The Offering
- Ulysses G. Auger, Sr
- Undertakings
- Underwriting
- Use of Proceeds
- Where You Can Find More Information
- Wit Capital Corporation
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| 1 | 1st Page - Filing Submission
|
| 2 | Bear, Stearns & Co. Inc
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| " | First Union Capital Markets Corp
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| " | Wit Capital Corporation
|
| 4 | Prospectus Summary
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| 7 | The Offering
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| " | Risk Factors
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| 9 | (Continued)
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| 12 | OverVoice
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| 19 | Where You Can Find More Information
|
| " | Cautionary Note Regarding Forward-Looking Statements
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| 20 | Use of Proceeds
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| " | Dividend Policy
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| 21 | Capitalization
|
| 23 | Dilution
|
| 24 | Selected Financial Data
|
| 26 | Management's Discussion and Analysis of Financial Condition and Results of Operations
|
| 29 | Net revenues
|
| " | Cost of services
|
| " | Selling, general and administrative
|
| " | Depreciation and amortization
|
| " | Non-cash compensation
|
| 30 | Income (loss) from discontinued operations
|
| 31 | Liquidity and Capital Resources
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| 33 | Impact of the Year 2000 Issue
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| 35 | Business
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| 47 | Government Regulation; Potential Taxes
|
| 48 | Patents and Other Proprietary Information
|
| 49 | Legal Proceedings
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| 51 | Management
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| 53 | Duncan M. Fitchet, Jr
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| 54 | Ulysses G. Auger, Sr
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| 56 | Options Granted in Fiscal Year 1998
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| 58 | Amended and Restated Stock Option Plan
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| 59 | Principal Stockholders
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| 60 | Certain Relationships and Related Transactions
|
| " | Organization of CAIS Internet
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| 62 | Loans to and from Executive Officers and Affiliates
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| 66 | Description of Capital Stock
|
| " | Series A Shares
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| " | Conversion
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| 67 | Series B Shares
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| 71 | Shares Eligible for Future Sale
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| 72 | Underwriting
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| 76 | Report of Independent Public Accountants
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| 82 | Notes to Consolidated Financial Statements
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| 102 | Statement of Operations for the Period from January 1, 1996 to May 10, 1996
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| 103 | Statement of Changes in Stockholders' Equity for the Period from January 1, 1996 to May 10, 1996
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| 104 | Statement of Cash Flows for the Period from January 1, 1996 to May 10, 1996
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| 105 | Notes to Financial Statements
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| 108 | Item 13. Other Expenses of Issuance and Distribution
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| " | Item 14. Indemnification of Directors and Officers
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| 109 | Item 15. Recent Sales of Unregistered Securities
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| 112 | Item 16. Exhibits and Financial Statement Schedules
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| 114 | Item 17. Undertakings
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As filed with the Securities and Exchange Commission on April 28, 1999.
Registration Statement No. 333-72769
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------
CAIS INTERNET, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 4813 52-2066769
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
1255 22nd Street, N.W. Ulysses G. Auger, II
Fourth Floor Chairman and Chief Executive Officer
Washington, D.C. 20037 CAIS Internet, Inc.
(202) 715-1300 1255 22nd Street, N.W.
(Address, including zip code, and Fourth Floor
telephone number, including area code, Washington, D.C. 20037
of registrant's principal executive Telephone (202) 715-1300
offices) Facsimile (202) 463-7190
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
Copies to:
Morris F. DeFeo, Jr. Lorraine Massaro
Swidler Berlin Shereff Friedman, LLP Chadbourne & Parke, LLP
3000 K Street, N.W., Suite 300 30 Rockefeller Plaza
Washington, D.C. 20007 New York, NY 10112
Telephone (202) 424-7500 Telephone (212) 408-5100
Facsimile (202) 424-7647 Facsimile (212) 541-5369
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please 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, please 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, please 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, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering: [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act, please check the following box: [_]
----------------
CALCULATION OF REGISTRATION FEE
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Proposed
Maximum
Title of Securities to be Aggregate Offering Amount of
Registered Price(1) Registration Fee(2)
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Common stock, $.01 par value........... $130,000,000 $36,140
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(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rules 457(c) and (o) under the Securities Act of 1933.
(2) $20,850 was paid in connection with the initial filing of this registration
statement on February 22, 1999.
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to said Section 8(a), may determine.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this 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 or any applicable state securities +
+commission becomes effective. This prospectus is not an offer to sell these +
+securities and is not soliciting an offer to buy these securities in any +
+state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED APRIL 28, 1999
PROSPECTUS
6,000,000 Shares
[CAIS INTERNET LOGO]
Common Stock
-----------
This is the initial public offering of shares of CAIS Internet's common stock.
We expect that the initial public offering price will be between $14.00 and
$16.00 per share.
We have applied to list the common stock on The Nasdaq National Market under
the symbol "CAIS."
Investing in our shares involves a high degree of risk. See "Risk Factors"
beginning on page 7 for a discussion of certain factors that you should
consider before you invest in the common stock being sold with this prospectus.
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.
-----------
[Download Table]
Per
Share Total
----- -----
Public offering price.............................................. $ $
Underwriting discounts and commissions............................. $ $
Proceeds, before expenses, to us................................... $ $
-----------
The underwriters may purchase up to an additional 900,000 shares of common
stock from us at the public offering price less underwriting discounts solely
to cover over-allotments.
Bear, Stearns & Co. Inc.
Volpe Brown Whelan & Company
First Union Capital Markets Corp.
Friedman Billings Ramsey
Wit Capital Corporation
as e-Manager(TM)
This date of this prospectus is , 1999
[OverVoice Phone Jack Graph appears here]
Our trademarks and pending trademark applications include "OVERVOICE,"
"CAIS," "LANJACK," "MEET JACK" and "DESKJACK." This prospectus also contains
our product names, trade names and trademarks and those of other entities.
ii
PROSPECTUS SUMMARY
We have prepared this summary to assist you in your review of this document.
This summary highlights what we believe are the significant aspects of our
business and this offering. However, we have not included all of the
information that may be important to you. You should carefully read this entire
document, including the specific risks described in the "Risk Factors" section
beginning on page 7 and the other documents to which we refer. For more
information about CAIS Internet, see "Where You Can Find More Information."
Overview
We provide cost-effective high-speed Internet connections to both commercial
and residential customers, primarily using digital subscriber line technology
(DSL) and our patented OverVoice technology. We currently offer our digital
subscriber line service, "HyperDSL," in conjunction with Covad Communications
Group and Bell Atlantic. We use our OverVoice technology to simultaneously
transmit voice and data over a single traditional copper telephone line at
speeds of up to 175 times those of 56.6k dial-up modems. An OverVoice user is
therefore able to have both always-on, high-speed Internet access and complete
use of the telephone at the same time over one traditional telephone line.
Using our OverVoice technology and existing copper telephone wiring, we are
able to create an Ethernet network connecting multiple computers or web-enabled
devices within a hotel, multiple dwelling unit or single family home. We
believe we can offer always-on, high-speed Internet access simultaneously to
multiple users in hotels and residences more cost-effectively than other
technologies available today.
As of April 16, 1999, we have installed the OverVoice technology in over
1,900 apartment units in 15 multiple dwelling unit buildings and in over 2,100
guest rooms in eight hotels. We have contracts with 11 additional hotel
properties to install OverVoice in more than 2,500 guest rooms. In addition, we
have national contracts with Hilton Hotels Corporation and with OnePoint
Communications Corp.
On December 23, 1998, we entered into a master agreement with Hilton, under
which Hilton has licensed us the right to offer high-speed Internet access
service in 225 Hilton-owned, managed or franchised hotels throughout the United
States. In order to participate, each Hilton hotel must enter into an addendum
to the master agreement. As of April 16, 1999, 153 of these hotels have
notified Hilton that they intend to sign an addendum to participate under the
terms of the master agreement.
We have entered into a seven-year contract with OnePoint to install our
OverVoice technology in certain multiple dwelling unit buildings. Under a trial
agreement, we have installed OverVoice in 14 buildings within four properties.
With our new contract, we anticipate that we will install OverVoice in a
minimum of 30 multiple dwelling unit buildings with approximately 10,000 units.
Additionally, together with OnePoint, we will market high-speed Internet
services to approximately 300 additional multiple dwelling unit buildings where
OnePoint has a preferential right of entry to provide Internet and other
communications services.
We believe that the demand for high-speed Internet access in single family
homes and the trend toward using more than one personal computer at home, also
make OverVoice a cost-effective solution for providing dedicated high-speed
Internet access in single family homes and for "home networking." We currently
offer our HyperDSL services to the residential market. Furthermore, we are
developing a commercially deployable OverVoice solution for the single family
home market, to be offered in conjunction with a HyperDSL connection.
Industry Background
Internet access and enhanced Internet services represent two of the fastest
growing segments of the telecommunications services marketplace. According to
industry estimates, the number of Internet users in the
1
United States who access the world wide web reached approximately 70.1 million
in 1998 and has been forecast to grow to approximately 178.7 million by the
year 2003. Currently, individuals most commonly access the Internet from home
or while traveling by using a dial-up service.
Due to the inconveniences of dial-up Internet service, most businesses that
are large enough to justify the costs opt for an always-on, high-speed Internet
connection, such as a T-1. Smaller businesses are also moving rapidly toward
high-speed access solutions as newer technologies like digital subscriber line
become available. However, until recently, high-speed Internet access has not
been available to most business travelers and residents of multiple dwelling
units and single family homes due to the cost and difficulty of implementing
such service.
We believe that business users have grown accustomed to the high-speed
Internet access that they have at work and are increasingly seeking cost-
effective options for high-speed access at home and while traveling. As a
result, we believe demand is ever increasing for cost-effective, high-speed
Internet connectivity in the hotel, business and residential communities.
Our Business Strategy
Our objective is to become a leading national provider of high-speed
Internet access. The following are key elements of our business strategy to
achieve this objective:
. Offer the Most Cost-Effective, Always-On, High-Speed Internet Access
to Our Customers. We believe that hotel and multiple dwelling unit
property owners are seeking to use high-speed Internet access as a
tool to increase their occupancy and rental rates. We believe our
OverVoice technology is a cost-effective, always-on, high-speed
Internet solution for hotel guests and multiple dwelling unit
residents. In addition, we believe that many members of the single
family home market are seeking cost-effective high-speed Internet
access.
. Roll-Out Our OverVoice Technology Nationwide. Our goal is to make our
OverVoice technology the standard for high-speed Internet access in
hotels and multiple dwelling units. We intend to continue to
penetrate the hotel and multiple dwelling unit markets through both
direct sales and strategic relationships including our agreements
with Hilton and OnePoint.
. Attract End-Users in Hotels and Multiple Dwelling Units. We intend to
stimulate the demand for our OverVoice services through joint
marketing programs and sales calls. For hotel guests we believe that
it is important to make dedicated high-speed Internet access simple
and affordable. For multiple dwelling units, we believe that our
ability to offer multiple Internet connection speeds at different
price points, utilizing our rate shaper technology, enhances our
ability to attract end users.
. Accelerate the Roll-Out of Our HyperDSL Services. We have initiated
the roll-out of a new always-on, high-speed Internet access service
using digital subscriber line technology under the name HyperDSL. We
believe digital subscriber line technology currently represents the
most economical always-on, high-speed Internet solution for
commercial customers and, when used in conjunction with OverVoice,
for single-family residences requiring multiple points of access.
. Expand Our National Network. We operate a nationwide network and have
agreements with most of the major backbone providers, which enables
us to exchange Internet traffic over their respective networks. We
currently maintain six points of presence and intend to add at least
ten more in major metropolitan areas by the end of 1999. In addition,
we intend to add 15 points of presence by the end of 2000. In June
1998, we signed a ten-year fiber agreement with Qwest Communications
Corporation, under which we have access to all of Qwest's points of
presence nationwide, which totaled 200 as of April 16, 1999.
2
. Leverage the OverVoice Platform to Deliver Future Services and
Products. We believe that our OverVoice technology provides a
platform to deliver a variety of broadband services and products to
our customers, including Internet protocol telephony, video
conferencing, traditional video services, high definition television
(HDTV) and digital audio radio. We intend to expand our service and
product offerings through internal research and development, and by
acquiring complementary businesses and technologies.
Company Information
We are located at 1255 22nd Street, N.W., Fourth Floor, Washington, D.C.
20037. Our telephone number is (202) 715-1300, and our Internet address is
www.cais.com. Information available on our web site is not part of this
prospectus.
3
THE OFFERING
[Enlarge/Download Table]
Common stock offered by CAIS Internet... 6,000,000 shares
Common stock to be outstanding after the
offering.............................. 18,987,959 shares. This does not include
5,016,110 shares issuable pursuant to the
exercise of warrants and stock options
outstanding as of April 28, 1999. This figure
also assumes that the underwriters do not
exercise their over-allotment option.
Over-allotment option................... Up to 900,000 shares. If the over-allotment
option is exercised in full by the
underwriters, the total public offering price,
underwriters' discounts and net proceeds to
CAIS Internet after deducting estimated fees
and expenses will be $103.5 million, $7.3
million and $94.3 million, respectively.
Use of proceeds......................... To expand our business, including capital
expenditures, increased sales and marketing,
and for additional working capital associated
with the roll-out of our OverVoice technology
and digital subscriber line services. In
addition, to repay indebtedness, redeem shares
of Series B cumulative mandatory redeemable
convertible preferred stock, finance possible
strategic acquisitions of complementary
businesses, customer bases, products or
technologies, and for general corporate
purposes.
Proposed Nasdaq National Market symbol.. "CAIS"
Risk Factors
Investing in our shares of common stock involves a high degree of risk. You
should read "Risk Factors" beginning on page 7 as well as the other cautionary
statements throughout the prospectus to ensure you understand the risks
associated with an investment in our common stock.
Additional Information
For additional information concerning the common stock, see "Description of
Capital Stock" and "Where You Can Find More Information."
4
SUMMARY FINANCIAL DATA
The historical financial data set forth below in the Statement of Operations
Data for the periods ended, or as of dates, on or prior to May 10, 1996,
reflect the results of operations of Capital Area Internet Service, Inc. prior
to its acquisition by CAIS Internet. This data is shown under the caption
"Predecessor." The historical financial data subsequent to May 10, 1996 reflect
the results of operations of CAIS Internet's continuing operations. In February
1999, CAIS Internet completed the spin-off of Cleartel Communications, Inc.
(after the dissolution of Cleartel Communications Limited Partnership) and for
financial reporting purposes has accounted for Cleartel Communications, Inc.'s
results as discontinued operations. Accordingly, the results of operations for
Cleartel Communications, Inc. have been excluded from the summary financial
data below.
Certain summary financial data below is presented on a pro forma basis. The
column entitled "Pro Forma" gives effect to the following:
. the issuance of Series A convertible preferred stock in February 1999 for
gross proceeds of $11,500,000, less issuance costs of $135,000, the
repayment of $1,500,000 of borrowings from Cleartel Communications
Limited Partnership, and the payment of $210,000 to extend our credit
agreement with ING (U.S.) Capital LLC;
. the spin-off of Cleartel Communications, Inc. to our stockholders in
February 1999 and the related $700,000 of Owners' Deficit as of December
31, 1998;
. CAIS Internet's assumption of debt in a total principal amount of
$1,450,000 originally payable by Cleartel Communications Limited
Partnership to Ulysses G. Auger, Sr., a director of CAIS Internet, in
exchange for an equal reduction in the account payable by CAIS Internet
to Cleartel Communications Limited Partnership;
. CAIS Internet's issuance of Series B cumulative mandatory redeemable
convertible preferred stock to Ulysses G. Auger, Sr. in exchange for the
retirement of the $1,450,000 of assumed debt;
. CAIS Internet's issuance of additional Series B cumulative mandatory
redeemable convertible preferred stock in exchange for $3,107,000 of
related party debt; and
. the issuance of warrants in connection with the Series A convertible
preferred stock, which have been valued in the accompanying table
assuming an offering price of $15.00 per share (based on the midpoint of
the offering price range).
The column entitled "Pro Forma As Adjusted" gives effect to this offering
including:
. the issuance of 6,000,000 shares of common stock in the offering and
application of the net offering proceeds;
. the conversion of the Series A convertible preferred stock into 2,827,168
shares of common stock upon the closing of the offering;
. the redemption of $3,000,000 in aggregate face value of Series B
cumulative mandatory redeemable convertible preferred stock, the payment
of accrued dividends at a rate of 8% per annum thereon, and the
conversion of the remaining Series B shares into 103,806 shares of common
stock (based upon the midpoint of the offering price range);
. the repayment of remaining amounts due to Cleartel Communications, Inc.
and amounts outstanding under our credit agreement with ING (U.S.)
Capital LLC;
. the write-off of unamortized debt discount and deferred financing costs
(approximately $1,109,000 as of December 31, 1998) to be recorded upon
the repayment of borrowings outstanding under our credit agreement with
ING (U.S.) Capital LLC;
. the grant to an OverVoice customer of warrants to purchase 66,667 shares
of common stock which, upon the effective date of the offering, have a
put option that allows the OverVoice customer to sell all of its warrants
(or shares of common stock issued pursuant to the exercise of the
warrants) back to CAIS Internet at the initial public offering price per
share;
. the issuance of 66,500 shares of CAIS Internet common stock to the
OverVoice customer sub-account within a fund jointly controlled by CAIS
Internet and the OverVoice customer which will be expensed upon issuance;
and
5
SUMMARY FINANCIAL DATA
(continued)
. the acceleration of deferred compensation expense (approximately
$1,909,000 as of December 31, 1998) upon the acceleration of the vesting
of options to purchase common stock held by our President and Executive
Vice President of Sales and Marketing on the date immediately prior to
the earliest to occur of: (i) the effective date of a registration
statement; or (ii) the pricing of the initial public offering; or (iii)
the execution and delivery of an underwriting agreement related to an
initial public offering.
[Enlarge/Download Table]
(In thousands, except per share amounts)
Predecessor Successor
--------------------------------------- ------------------------------
Period from Period from
January 1, 1996 May 11, 1996 Year Ended
Year Ended December 31, to to December 31,
----------------------- May 10, December 31, ------------
1994 1995 1996 1996 1997 1998
----------- ----------- --------------- ------------ ------- --------
(unaudited) (unaudited)
Statement of Operations
Data:
Net revenues............ $481 $2,240 $1,287 $2,410 $4,556 $5,315
Cost of services........ 124 697 323 834 2,010 3,118
Operating expenses...... 267 596 381 2,478 6,844 12,664(1)
Interest and other
expense (income)....... 1 3 (2) 212 288 1,101
---- ------ ------ ------- ------- --------
Income (loss) from
continuing operations.. $ 89 $ 944 $ 585 $(1,114) $(4,586) $(11,568)
==== ====== ====== ======= ======= ========
Basic and diluted loss
per common share from
continuing operations.. $ (0.11) $ (0.48) $ (1.17)
======= ======= ========
Weighted-average common
shares outstanding--
basic and diluted...... 9,648 9,648 9,869
======= ======= ========
[Download Table]
As of December 31, 1998
-------------------------------
Pro Pro Forma
Actual Forma As Adjusted
-------- ------- ------------
Balance Sheet Data:
Cash............................................ $ 95 $ 9,750 $78,967
Working (deficit) capital ...................... (9,374) 3,266 74,875
Total assets.................................... 15,678 15,477 85,402
Long-term debt, net of current portion.......... 10,767 6,183 --
Stockholders' (deficit) equity.................. (13,604) (6,208) 80,768
--------
(1) Operating expenses increased significantly in 1998 primarily due to costs
relating to development and trials of OverVoice. Please see "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
6
RISK FACTORS
You should carefully consider the following factors and other information in
this document before you decide whether to purchase our common stock. The risks
set forth below are in addition to risks that apply to most businesses.
Our performance may be difficult to evaluate since we have had a limited
operating history during which we have incurred significant net losses,
experienced negative cash flows and accumulated a significant deficit.
Our limited historical operating data may make it more difficult for you to
evaluate our performance. We incurred a net loss for the fiscal year ended
December 31, 1997 of approximately $2.7 million, and we incurred net losses and
negative cash flows from operations for the fiscal year ended December 31, 1998
in the amounts of approximately $12.2 million and $3.2 million, respectively.
On December 31, 1998, we had a stockholders' deficit of approximately $13.6
million.
Following the completion of this offering, we believe that we will incur
further losses, in part due to expenses incurred in connection with the roll-
out of OverVoice. However, we cannot assure you that after incurring these
additional losses and expenses:
. there will be an increase in revenues;
. we will gain profits in future operating periods; or
. we will have sufficient cash available to meet continuing losses and/or
necessary capital expenditures.
Our failure to manage our growth and expansion effectively could adversely
affect our business.
Our failure to manage our future growth and expansion effectively could have
a material adverse effect on our business. Our business strategy depends in
large part on our ability to rapidly deploy OverVoice which will require
significant capital expenditures. We expect to fund our near-term capital
requirements through the funds raised in this offering. However, further
expansion of our business over the long term will require substantial
additional capital and will likely require additional outside financing. This
growth will also increase our operating complexity as well as the level of
responsibility for both existing and new management personnel. As a result, in
order to manage our growth, we must, among other things:
. continue to implement and improve our operational, financial and
management information systems, including our billing, accounts
receivable and payables tracking, fixed assets and other financial
management systems;
. hire and train additional qualified personnel; and
. continue to expand and upgrade our network infrastructure.
We also expect that demands on our network infrastructure and technical
support resources will increase rapidly as our customer base continues to grow.
We may therefore experience difficulties meeting a high demand for services in
the future. We cannot assure you that our infrastructure, technical support or
other resources will be sufficient to facilitate this growth. As we strive to
increase network utilization, there will be additional demands on our customer
support, sales and marketing resources. Competition for qualified employees is
intense and salaries are escalating very quickly. In addition, the process of
locating such personnel with the combination of skills and attributes required
to carry out our strategy is often lengthy.
We may need additional capital, which we may not be able to obtain.
We intend to rapidly enhance and develop our network and effect a broad-
based roll-out of OverVoice in order to attain our business goals. We intend to
add at least ten additional points of presence from third-party providers in
1999 and make substantial capital investments in our own points of presence or
otherwise as
7
dictated by customer demand or strategic considerations. If we do not have
enough cash from this offering, cash on hand and cash generated from our
operations to meet these cash requirements, we will need to seek alternative
sources of financing to carry out our growth and operating plans. We may not be
able to raise cash on terms acceptable to us or at all. Financings may be on
terms that are dilutive or potentially dilutive to our stockholders. If
alternative sources of financing are required, but are insufficient or
unavailable, we will have to modify our growth and operating plans, which may
negatively affect our operations, financial condition and stock performance.
The Inline agreement requires us to pay ongoing royalties.
We are required to pay Inline Connection Corporation royalties ranging
between 3.0% and 5.5% of net sales of the OverVoice technology. In the rare
cases where we do not provide the Internet access or own the OverVoice
equipment installed, this percentage may be as high as 70.0%. If we sublicense
the patents and pending patent applications relating to the OverVoice
technology to a third party, we are required to pay Inline a percentage of the
income received from the sublicense. Additionally, we have minimum annual
royalty payments starting at $100,000 in 1998 and increasing to $250,000. If we
fail to pay the minimum payments, or otherwise breach our agreement with
Inline, we will lose our exclusive right to use the OverVoice technology in
hotels and multiple dwelling units, which would have a material adverse effect
on our business.
Our business is subject to risks of technological change and evolving industry
standards.
Our future success will depend, in part, on our ability to: (1) offer
services that address the increasingly sophisticated and varied needs of our
current and prospective customers, and (2) respond to technological advances
and emerging industry standards and practices on a timely and cost-effective
basis. Internet access operations are characterized by:
. rapidly changing and unproven technology;
. evolving industry standards;
. changing customer needs; and
. numerous competitive services and product offerings.
We cannot assure you that:
. future advances in technology will be beneficial to, or compatible with,
our business;
. we will be able to incorporate such advances on a cost-effective or
timely basis; or
. our services will be necessary and cost-effective as a result of such
advances.
Although we intend to support emerging standards, we cannot assure you that
industry standards will be established, or that, if established, we will be
able to conform to the new standards in a timely fashion or maintain a
competitive position in the market. In addition, future products, services or
technologies developed by others may render our services noncompetitive,
unnecessary or obsolete.
The market in which we operate is highly competitive, and we may not be able to
compete effectively, especially against established industry competitors with
greater marketplace presence and financial resources.
We operate in a highly competitive environment for each of our lines of
business and we believe that competition is increasing. We may not be able to
compete effectively, especially against established industry competitors with
greater marketplace presence and financial resources than those we possess. In
addition, due to the high level of competition, competing technologies may
surface which may lead to the decline in the demand for our services. The
competitive environments for our different lines of business are as follows:
8
OverVoice. The major groups of competitors in the business of providing
high-speed Internet access to hotels and multiple dwelling units include:
. local exchange carriers;
. other digital subscriber line providers;
. cable TV companies and other providers using cable modems; and
. installation firms that upgrade existing wiring.
Many of these competitors have extensive marketplace presence and greater
technological and financial resources than we do.
The OverVoice technology also competes with technologies using other
transmission media, such as coaxial cable, wireless facilities and fiber optic
cable. If telecommunications service providers, hotels, multiple dwelling units
or single family residences install any of these alternative transmission
media, demand for OverVoice may decline.
CAIS Internet. Our principal competitors include other tier one national
backbone providers such as UUNET Technologies, Inc., PSINet Inc., BBN (a GTE
subsidiary), and other providers of always-on high-speed Internet access
including digital subscriber line services, T-1 and wireless access. To a
lesser extent, we also compete for always-on and dial-up access and web
services business with regional, tier two Internet service providers and cable
companies that operate in the same geographic markets that we serve. Because
the Internet services market has no substantial barriers to entry, we expect
that competition will continue to intensify. Eventually, we expect some form of
a market consolidation to occur, with those Internet service providers that
furnish the most value-added solutions ultimately surviving.
As a result of increased competition and vertical and horizontal integration
in the industry, we could encounter significant pricing pressure which could
cause us to significantly reduce the average selling price of some of our
products and services. We might not be able to offset the effects of any such
price reductions with an increase in the number of our customers, higher
revenue from enhanced services, cost reductions or otherwise. Market
consolidation could result in increased price and other competition in these
industries. Increased price or other competition could result in erosion of our
market share and could have a material adverse effect on our financial
condition. We cannot assure you that we will have the financial resources,
technical expertise or marketing and support capabilities to continue to
compete successfully.
We may not be able to recover our installation costs and some of our contracts
are nonexclusive.
We have incurred, and will continue to incur, significant up-front costs
installing OverVoice in hotels and multiple dwelling units. There is no
guarantee that we will be able to recover such costs. In addition, because our
trial and long-term agreements for both hotels and multiple dwelling units
generally do not contain any minimum use requirements, there is no minimum
payout that we can expect to receive. Furthermore, some of our agreements do
not require hotel owners and operators to offer our services exclusively.
Our competitive advantage depends on our intellectual property rights and our
inability to protect those rights could adversely affect our business.
Our competitive advantage depends on certain domestic and foreign patents
and patent applications relating to the OverVoice technology that we license
from and jointly own with Inline Connection Corporation. Our success relies
substantially on our ability to protect the OverVoice technology, both
domestically and abroad. We face two major risks in connection with our
intellectual property rights:
(1) Others may infringe on our intellectual property rights, resulting in:
. lack of competitiveness in the market;
. expense of time and resources to protect our patents; and
9
. dilution of the brand value of our service.
(2) Although we do not believe this to be the case, we may infringe others'
patents, resulting in:
. significant expense in defending our technology, even in the case of a
frivolous suit;
. requirement to pay damages; and
. costly and potentially impracticable redesign of our technology.
Any of the above could have a materially adverse effect on our business.
We depend upon our suppliers and have sole and limited sources of supply for
certain products and services.
We depend substantially on telecommunications services providers and we are
unable to control the pricing structure for these services. For example, in
order to provide Internet access and other on-line services to our customers,
we lease long distance fiber optic telecommunications lines from national
telecommunications services providers.
Certain of our suppliers, including regional Bell operating companies and
competitive local exchange carriers, are currently subject to various price
constraints, including tariff controls, which may change in the future. In
addition, pending regulatory proposals may affect the prices they charge us.
These regulatory changes could result in increased prices for products and
services, which could have a material adverse effect on our results of
operations.
We do not manufacture our proprietary OverVoice equipment, such as wall
jacks and the OverVoice DeskJack; rather, we depend on third parties to
manufacture and supply it. Any interruption in these manufacturers' operations
could adversely affect our ability to meet our customers' requirements.
We rely on other companies to supply our network infrastructure.
We rely on other companies to supply our network infrastructure (including
telecommunications services and networking equipment) which, in the quantities
and quality we require, is available only from sole or limited sources. We are,
therefore, vulnerable to the possibility that our suppliers may:
. compete directly with us;
. enter into exclusive arrangements with our competitors; or
. stop selling their products or components to us at commercially
reasonable prices, or at all.
The Internet relies on the exchange of traffic over a network of networks
that is owned and operated by many parties. We currently exchange traffic with
other Internet service providers with whom we maintain relationships. These
exchange agreements are not regulated and may be changed. If they become
regulated, modified or are altogether terminated, we may have to find
alternate, more expensive means to exchange traffic, or we may not be able to
do so, which would have a material adverse affect on our business.
A system failure could cause interuptions in the services we provide to our
customers.
Our operations depend upon our ability to protect our network against damage
from acts of nature, power failures, telecommunications failures and similar
events. Because we lease our lines from long-distance telecommunications
companies, Internet backbone providers, the regional Bell operating companies
and competitive local exchange carriers, we depend upon those companies for
physical repair and maintenance of those lines. Despite the precautions we and
our telecommunications providers take, the occurrence of a natural disaster,
fire, electrical outage or other unanticipated problems at one of our
facilities may cause interruptions in the services we provide. Such
interruptions in operations could have a material adverse effect on our
business.
10
Viruses, break-ins and other security breaches could cause interruptions,
delays or a cessation of the services we provide to our customers.
Despite the implementation of network security measures, the core of our
Internet network infrastructure is vulnerable to computer viruses, break-ins
and similar disruptive problems. We may experience future interruptions in
service as a result of the accidental or intentional actions of Internet users,
current and former employees or others. Unauthorized use could also potentially
jeopardize the security of confidential information stored in our computer
systems and the computer systems of our customers. Although we intend to
continue to implement security measures to prevent this, these measures have
occasionally been circumvented in the past, and the possibility exists that the
measures we implement will be circumvented in the future. In addition,
eliminating such viruses and remedying such security problems may cause
interruptions, delays or cessation of service to our customers. If our security
measures fail, we may lose subscribers or be sued, resulting in additional
expenses and reduced profitability. We do not carry any insurance against these
risks because it is unavailable at a reasonable cost.
Our success depends on our retention of and the performance of management and
other key personnel.
Our success depends in significant part upon the continued service and
performance of our senior management personnel and other employees who possess
longstanding industry relationships and technical knowledge of our operations.
While we do not maintain any "key person" insurance, we have entered into
employment agreements with certain key employees. Our future success also
depends on our ability to attract, train, retain and motivate highly skilled
personnel. To date, we have successfully attracted and retained qualified,
high-level personnel; we have not had to devote significant time and resources
recruiting such personnel; and personnel turnover has not affected our
development efforts. However, competition for qualified, high-level
telecommunications personnel is intense and we cannot assure you that we will
be able to continue to attract and retain such talent. The loss of the services
of one or more of our key individuals, or the failure to attract and retain
additional key personnel, could have a material adverse effect on our business.
We could face government regulation and changes in current or future laws or
regulations could restrict our operations; We may be subject to potential
taxes.
As an Internet service provider, we are not currently subject to direct
regulation by the Federal Communications Commission or any other agency, other
than regulations applicable to businesses generally. Nevertheless, Internet-
related regulatory policies are continuing to develop, and it is possible that
we could be exposed to regulation in the future. For example, the FCC has
stated its intention to consider whether to regulate voice and fax telephony
services provided over the Internet as "telecommunications" even though
Internet access itself would not be regulated. The FCC is also considering
whether such Internet-based telephone service should be subject to universal
service support obligations, or pay carrier access charges on the same basis as
traditional telecommunications companies.
Local telephone companies assess access charges to long distance companies
for the use of the local telephone network to originate and terminate long
distance calls, generally on a per-minute basis. Access charges have been a
matter of continuing dispute, with long distance companies complaining that the
rates are substantially in excess of cost, and local telephone companies
arguing that access rates are justified to subsidize lower local rates for end
users and other purposes. Both local and long distance companies, however,
contend that Internet-based telephony should be subject to these charges. We
have no current plans to install gateway equipment and offer telephony, and so
we do not believe we would be directly affected by these developments. However,
we cannot predict whether these debates will cause the FCC to reconsider its
current policy of not regulating Internet service providers.
In addition, a number of state and local government officials have asserted
the right or indicated a willingness to impose taxes on Internet-related
services and commerce, including sales, use and access taxes. We cannot
accurately predict whether the imposition of any such taxes would have a
material adverse effect on
11
our business, financial condition or results of operations. For more
information about our regulatory situation, please see "Business--Government
Regulation; Potential Taxes."
We may be liable for information sent through our network.
The law relating to the liability of Internet service providers and on-line
services companies for information carried on, stored on or disseminated
through their network is unsettled, even with the recent enactment of the
Digital Millennium Copyright Act. We believe that it is currently also
unsettled as to whether the Telecommunications Act of 1996 prohibits and
imposes liability for any of the services we provide should the content of
information transmitted be subject to the statute. While no one has ever filed
a claim against us relating to this issue, someone may file a claim of that
type in the future and may be successful in imposing liability on us. If that
happens, we may have to spend significant amounts of money to defend ourselves
against these claims and, if we are not successful in our defense, the amount
of damages that we will have to pay may be significant. Any costs that we incur
as a result of defending these claims or the amount of liability that we may
suffer if our defense is not successful could materially adversely affect our
profitability.
If, as the law in this area develops, we become liable for information
carried on, stored on, or disseminated through our network, we may decide to
take steps to reduce our exposure to this type of liability. This may require
us to spend significant amounts of money for new equipment and may also require
us to discontinue offering certain of our products or services.
Due to the increasing popularity and use of the Internet, it is possible
that additional laws and regulations may be adopted with respect to the
Internet, covering issues such as content, privacy, access to certain content
by minors, pricing, bulk e-mail (spam), encryption standards, consumer
protection, electronic commerce, taxation, copyright infringement and other
intellectual property issues. We cannot predict the impact, if any, that future
regulatory changes or developments may have on our business, financial
condition, or results of operation. Changes in the regulatory environment
relating to the Internet access industry, including regulatory changes that
directly or indirectly affect telecommunication costs or increase the
likelihood or scope of competition from regional telephone companies or others,
could have a material adverse effect on our business.
We may not be able to protect our trademarks which could hamper our ability to
market our products and services.
Our success is dependent in part on recognition of our name and trademarks,
such as "CAIS" and "OverVoice", and pending trademarks, such as "DeskJack." We
intend to protect and defend our name, servicemarks and trademarks in the
United States and internationally. We achieved federal registration for several
of our trademarks, including the mark CAIS, and filed for federal trademark
protection for a number of other marks which we use or intend to use, for
example "DeskJack." However, we cannot assure you that:
. our efforts to protect our proprietary rights in the United States or
abroad will be successful;
. our use of our trademarks and servicemarks will be free from legal
challenges; or
. we will have sufficient funds to withstand such challenges or claims,
regardless of their merit.
If we are unable to protect our proprietary rights, it could seriously
affect our ability to market our products and services. In addition, legal
challenges to our proprietary rights could lead to a substantial diversion of
our limited resources. For more information about our intellectual property,
please see "Business--Patents and Other Proprietary Information."
Management will have broad discretion in applying the proceeds of the offering.
Our management will have broad discretion as to the application of the
proceeds of this offering without prior stockholder approval and our
management's failure to apply the funds effectively could cause our
12
business to suffer. Accordingly, you will have to rely on our management to
properly apply the proceeds. Please see "Use of Proceeds" for more information
on how we intend to apply the proceeds.
Our executive officers and directors, as a group, control CAIS Internet.
After giving effect to this offering, our executive officers and directors,
as a group, beneficially owned or controlled approximately 70% of the
outstanding shares of common stock on a fully diluted basis. Consequently, as a
practical matter, even after this offering, our executive officers and
directors, as a group, will be able to control all matters requiring approval
by our stockholders, including the election of our Board of Directors,
management policy and all fundamental corporate actions, including mergers,
substantial acquisitions and dispositions of assets. Please see "Principal
Stockholders" for information about the ownership of common stock by our
executive officers, directors and principal stockholders.
Future sales of our common stock could have a negative impact on the market
price of our common stock.
Sales of a substantial number of shares of common stock in the public market
following this offering, or the appearance that such shares are available for
sale, could adversely affect the market price of our common stock and could
impair our ability to raise funds in future stock offerings. Upon completion of
the offering, we will have outstanding 18,987,959 shares of common stock. In
addition to these shares, upon completion of the offering, 5,016,110 shares
will be issuable upon the exercise of options and warrants.
All of our stockholders, directors and officers have agreed not to dispose
of any common stock, or any options, warrants or other securities convertible
into or exercisable for common stock for 180 days after the date of this
prospectus, subject to limited exceptions. See "Underwriting" and "Shares
Eligible for Future Sale" for a detailed discussion of these arrangements and
stockholders' rights under the Securities Act.
In addition, following the consummation of the offering, we intend to
register 3,860,295 shares of common stock issuable upon the exercise of options
granted to executives and options granted under our Amended and Restated 1998
Equity Incentive Plan and under other compensatory arrangements which could
also adversely affect the market price of our common stock.
There is currently no public market for our common stock and our stock price
may fluctuate significantly in the future.
Before this offering, there was no public market for our common stock. We
have applied to the Nasdaq National Market to list our common stock, but we do
not know whether an active trading market will develop or continue after this
offering. The initial public offering price will be determined by negotiation
between us and the representatives of the underwriters and may not be
indicative of the price that will prevail in the open market. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The stock market has from time to time experienced significant price and
volume fluctuations, which have particularly affected the market prices of the
stocks of Internet-related companies and which may be unrelated to the
operating performance of such companies. Furthermore, our operating results and
prospects may be below the expectations of public market analysts and investors
which could lead to a material decline in the price of our common stock.
In addition, in the past, following periods of volatility in the market
price of a company's securities, class action litigation has often been
instituted against such companies. Such litigation, if instituted, could result
in substantial costs and a diversion of management's attention and resources.
13
You will experience immediate and substantial dilution in the book value of our
common stock.
The price you pay for our common stock will be substantially higher than the
book value of the common stock. As a result, you will experience immediate and
substantial dilution in the pro forma combined net tangible book value of your
shares of $10.83 per share, while our founders and executive officers will
receive a material increase in the pro forma combined net tangible book value
of their shares of common stock. In addition, your common stock will be diluted
because upon completion of this offering:
. 5,016,110 shares will be issuable upon the exercise of options and
warrants;
. 2,827,168 shares of common stock will be issuable upon the conversion of
Series A convertible preferred stock; and
. 103,806 shares of common stock will be issuable upon the conversion of
remaining Series B cumulative mandatory redeemable convertible preferred
stock (based on the midpoint of the offering price range).
We may also grant options for up to 194,200 additional shares of common
stock under our Amended and Restated 1998 Equity Incentive Plan.
The ability of stockholders to effect changes in control of CAIS Internet is
limited.
There are provisions in our certificate of incorporation and by-laws that
make it more difficult for a third party to acquire, or attempt to acquire,
control of CAIS Internet.
These provisions include:
. a classified Board of Directors with staggered, three-year terms;
. the authority to issue "blank check" preferred stock;
. eliminating the ability of stockholders to act by written consent;
. eliminating the ability of stockholders to call a special meeting of the
stockholders;
. an advance notice procedure for stockholder proposals to be brought
before meetings of our stockholders; and
. requiring a super-majority stockholder vote to effect certain
amendments.
In addition, the Delaware General Corporation Law may also discourage
takeover attempts that have not been approved by our Board of Directors.
We do not anticipate that we will pay cash dividends.
We plan to retain future net income, if any, to fund internal growth.
Therefore, we do not anticipate paying any cash dividends on the common stock
in the foreseeable future.
Failure to obtain Year 2000 compliance may have adverse effects on the company.
The term "Year 2000 issue" is a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery as the year 2000 is
approached and reached. Our failure to correct a material Year 2000 problem
could result in an interruption in, or a failure of, certain of our normal
business activities or operations. During 1998, we established a Year 2000
compliance program to coordinate appropriate activity and report to our Board
of Directors with regard to Year 2000 issues. We continue to assess the impact
of Year 2000 issues on our internal computer, operational and financial
systems, and to review with our key vendors and suppliers, the compliance of
their systems with Year 2000 processing requirements. We currently believe that
our most likely worst case scenario related to the Year 2000 is associated with
potential concerns with our customers' and
14
suppliers' Internet operations. The failure of such parties to ensure Year 2000
compliance would lead to decreased Internet usage and the delay or inability to
obtain necessary data communication and telecommunication capacity. These
factors could in turn have a material adverse effect on our business. Please
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Impact of the Year 2000 Issue" for a more detailed discussion of
the impact of the Year 2000 issue.
15
WHERE YOU CAN FIND MORE INFORMATION
Our fiscal year ends on December 31. We will furnish our stockholders annual
reports containing audited financial statements and other appropriate reports.
In addition, we will become a reporting company under the Securities Exchange
Act of 1934 and file annual, quarterly and current reports, proxy statements
and other information with the Securities and Exchange Commission. You may read
and copy any reports, statements or other information we file at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You
can request copies of these documents, upon payment of a duplicating fee, by
writing to the SEC. You may call the SEC at 1-800-SEC-0330 for further
information on the operation of the Public Reference Rooms. Our SEC filings are
also available to the public on the SEC's Internet site at http://www.sec.gov.,
which contains reports, proxy and information statements, and other information
regarding issuers.
We have applied to list our common stock on The Nasdaq National Market under
the symbol "CAIS." Reports, proxy statements and other information concerning
CAIS Internet will also be available to be inspected at the offices of Nasdaq
Operations, 9801 Washingtonian Boulevard, Fifth Floor, Gaithersburg, MD 20879.
If you want more information, write or call us at:
CAIS Internet, Inc.
1255 22nd Street, N.W.
Fourth Floor
Washington, D.C. 20037
Telephone: (202) 715-1300
Facsimile: (202) 463-7190
Internet address: www.cais.com
We have filed a registration statement on Form S-1 with the SEC under the
Securities Act of 1933, covering the common stock being offered by this
prospectus. As permitted by SEC rules, this prospectus omits certain
information that is included in the registration statement. For further
information about us and our common stock, you should refer to the registration
statement and its exhibits. Since the prospectus may not contain all the
information that you may find important, you should review the full text of
these documents. If we have filed a contract, agreement or other document as an
exhibit to the registration statement, you should read the exhibit for a more
complete understanding of the document or matter involved. Information
available on our web site is not part of this prospectus.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this prospectus discuss future
expectations and business strategies or state other "forward-looking"
information. Those statements are subject to known and unknown risks,
uncertainties and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions. We undertake no obligation to publicly update or revise any
forward-looking statements.
Important factors that may cause actual results to differ from projections
include, for example:
. changes in business conditions;
. changes in the Internet services industry and the general economy;
. our limited operating history;
. our ability to manage rapid growth;
. our ability to enter into joint ventures and other strategic
relationships with companies on terms acceptable to us; and
. the impact of computer and related problems that may arise from the Year
2000 problem on our business.
16
USE OF PROCEEDS
We estimate that we will receive net proceeds from this offering of
approximately $81.7 million (approximately $94.3 million if the underwriters'
over-allotment option is exercised in full) after deducting estimated
underwriting discounts and commissions and other fees and expenses. We intend
to use the net proceeds from this offering to expand our business, including
capital expenditures, increased sales and marketing and working capital
associated with the roll-out of our OverVoice technology and digital subscriber
line (DSL) services and to further build-out our network infrastructure
nationwide. Of the total net proceeds, we estimate that we will use
approximately $16 million for capital expenditures, $20 million for sales and
marketing, $18 million for network infrastructure build out, $9 million for
research and development, and $7 million for general corporate purposes. In
addition, we intend to use proceeds from the offering to:
. repay approximately $7 million of outstanding indebtedness under our
credit agreement with ING (U.S.) Capital LLC, which bears interest at
the one-month LIBOR rate plus 5%;
. repay a non-interest bearing account payable in the amount of
approximately $2 million owed to Cleartel Communications, Inc.; and
. redeem shares of Series B cumulative mandatory redeemable convertible
preferred stock with a total face value of $3 million and pay accrued
dividends thereon at a rate of 8% per annum.
We also intend to use proceeds from the offering to finance research and
development of future products and services, as well as for general corporate
purposes. We also from time to time consider the acquisition of, or investments
in, complementary businesses, customer bases, products or technologies, and may
use proceeds of the offering to make such acquisitions or investments. Pending
such uses, we intend to invest the net proceeds of this offering in short-term,
investment grade interest-bearing securities.
We currently intend to allocate substantial proceeds to each of the
foregoing categories. However, the precise allocation of funds among these uses
will depend on future technological, regulatory and other developments in or
affecting our business, the competitive climate in which we operate and the
emergence of future opportunities. Accordingly, our management will retain
broad discretion in the allocation of the net proceeds.
For a further discussion of our capitalization structure and liquidity,
please see "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources." For further information concerning the amounts payable to Cleartel
Communications, Inc. and the redemption of Series B cumulative mandatory
redeemable convertible preferred stock, please see "Certain Relationships and
Related Transactions."
DIVIDEND POLICY
We plan to retain all of our earnings, if any, to finance the expansion of
our business and for general corporate purposes and do not anticipate paying
any cash dividends on the common stock for the foreseeable future. Our future
dividend policy will be determined by the Board of Directors on the basis of
various factors, including our results of operations, financial condition,
capital requirements and investment opportunities.
17
CAPITALIZATION
The following table sets forth our cash, short-term debt and capitalization
as of December 31, 1998, (1) on an actual basis, (2) on a pro forma basis and
(3) on a pro forma as adjusted basis to give effect to the pro forma
adjustments and to give effect to this offering and the application of the
estimated net proceeds of the offering. You should read this table together
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and CAIS Internet's historical financial statements, including
the related notes thereto, included elsewhere in this prospectus.
The column entitled "Pro Forma" gives effect to the following:
. the issuance of Series A convertible preferred stock in February 1999 for
gross proceeds of $11,500,000, less issuance costs of $135,000, the
repayment of $1,500,000 of borrowings from Cleartel Communications
Limited Partnership, and the payment of $210,000 to extend our credit
agreement with ING (U.S.) Capital LLC;
. the spin-off of Cleartel Communications, Inc. to our stockholders in
February 1999 and the related $700,000 of Owners' Deficit as of
December 31, 1998;
. CAIS Internet's assumption of debt in the total principal amount of
$1,450,000 originally payable by Cleartel Communications Limited
Partnership to Ulysses G. Auger, Sr., a director of CAIS Internet, in
exchange for an equal reduction in the account payable by CAIS Internet
to Cleartel Communications Limited Partnership;
. CAIS Internet's issuance of Series B cumulative mandatory redeemable
convertible preferred stock to Ulysses G. Auger, Sr. in exchange for the
retirement of the $1,450,000 of assumed debt;
. CAIS Internet's issuance of additional Series B cumulative mandatory
redeemable convertible preferred stock in exchange for $3,107,000 of
related party debt; and
. the issuance of the warrants in connection with the Series A convertible
preferred stock, which have been valued in the accompanying table
assuming an offering price of $15.00 per share (based on the midpoint of
the offering price range).
The column entitled "Pro Forma As Adjusted" gives effect to the following:
. the issuance of 6,000,000 shares of common stock in this offering and
application of the net offering proceeds;
. the conversion of the Series A convertible preferred stock into 2,827,168
shares of common stock upon the closing of the offering;
. the redemption of $3,000,000 in total face value of Series B cumulative
mandatory redeemable convertible preferred stock, the payment of accrued
dividends at a rate of 8% per annum thereon, and the conversion of the
remaining shares into 103,806 shares of common stock (based upon the
midpoint of the offering price range);
. the repayment of remaining amounts due to Cleartel Communications, Inc.
and amounts outstanding under our credit agreement with ING (U.S.)
Capital LLC;
. the write-off of unamortized debt discount and deferred financing costs
(approximately $1,109,000 as of December 31, 1998) to be recorded upon
the repayment of borrowings outstanding under our credit agreement;
. the grant to an OverVoice customer of warrants to purchase 66,667 shares
of common stock which, upon the effective date of the offering, have a
put option that allows the OverVoice customer to sell all of its warrants
(or shares of common stock issued pursuant to the exercise of the
warrants) back to CAIS Internet at the initial public offering price per
share;
. the issuance of 66,500 shares of CAIS Internet common stock to the
OverVoice customer sub-account within a fund jointly controlled by CAIS
Internet and the OverVoice customer, which will be expensed upon
issuance; and
. the acceleration of deferred compensation expense (approximately
$1,909,000 as of December 31, 1998) upon the acceleration of the vesting
of options to purchase common stock held by our President and Executive
Vice President of Sales and Marketing on the date immediately prior to
the earliest to occur of: (i) the effective date of a registration
statement; or (ii) the pricing of the initial public offering; or (iii)
the execution and delivery of an underwriting agreement related to an
initial public offering.
18
CAPITALIZATION
(continued)
[Download Table]
As of December 31, 1998
-------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(in thousands except share and
per share data)
Cash........................................... $ 95 $ 9,750 $ 78,967
======== ======= ========
Short-term debt:
Payable to discontinued operations............. $ 5,342 $ 2,392 $ --
======== ======= ========
Long-term debt:
Loan, net of unamortized debt discount of
$817......................................... $ 6,183 $ 6,183 $ --
Notes payable to related parties, net of
current portion.............................. 1,983 -- --
Long-term liabilities of discontinued
operations................................... 2,601 -- --
-------- ------- --------
10,767 6,183 --
-------- ------- --------
Series A convertible preferred stock, net of
discount of $6,446, 2,827,168 shares
authorized, issued and outstanding on a pro
forma basis, no shares outstanding as
adjusted...................................... -- 4,919 --
-------- ------- --------
Series B cumulative mandatory redeemable
convertible preferred stock, 1,119,679 shares
authorized, issued and outstanding on a pro
forma basis, no shares outstanding as
adjusted...................................... -- 4,557 --
-------- ------- --------
Put warrants................................... -- -- 1,000
-------- ------- --------
Stockholders' (deficit) equity:
Common stock, $0.01 par value, 100,000,000
shares authorized, 9,965,485 shares issued
and outstanding on an actual basis,
9,990,485 shares on a pro forma basis, and
18,987,959 shares as adjusted(1)............. 100 100 190
Additional paid-in capital(1)................. 7,544 7,794 103,458
Warrants outstanding.......................... 1,226 7,672 7,672
Deferred compensation......................... (2,888) (2,888) (979)
Accumulated deficit........................... (19,586) (18,886) (29,573)
-------- ------- --------
Total stockholders' (deficit) equity........ (13,604) (6,208) 80,768
-------- ------- --------
Total capitalization........................ $ (2,837) $ 9,451 $ 81,768
======== ======= ========
--------
(1) Excludes (i) approximately 2,034,000 and 520,000 shares of common stock
issuable upon the exercise of executive stock options granted in 1997 and
1999, respectively; (ii) 1,500,000 shares of common stock reserved for
issuance under CAIS Internet's Amended and Restated 1998 Equity Incentive
Plan (960,000 of which were granted in 1998, 280,000 of which were granted
in January and February 1999, and 45,000 of which were granted in April
1999); (iii) 390,000 shares of common stock issuable pursuant to the
exercise of certain warrants issued to ING (U.S.) Capital LLC; (iv)
approximately 699,000 shares of common stock issuable pursuant to the
exercise of certain warrants issued to the holders of Series A convertible
preferred stock; (v) 66,667 shares of common stock issuable pursuant to the
exercise of certain warrants issued to an OverVoice customer; and (vi)
153,500 shares of common stock issuable upon the exercise of employee
options to be granted concurrently with this offering at an exercise price
equal to the initial public offering price.
19
DILUTION
CAIS Internet's pro forma net tangible book value as of December 31, 1998
was $1.6 million, or $0.12 per share of common stock. Pro forma net tangible
book value per share is equal to CAIS Internet's total pro forma tangible
assets less its total pro forma liabilities divided by the number of shares of
common stock outstanding after giving effect to the conversion of the Series A
and Series B preferred stock. After giving effect to the sale by CAIS Internet
of the 6,000,000 shares of common stock upon completion of this offering,
assuming an initial public offering price of $15.00 per share, and the
application of the estimated net proceeds of the offering as described under
"Use of Proceeds," CAIS Internet's pro forma net tangible book value at
December 31, 1998, would have been approximately $79.1 million, or
approximately $4.17 per share. This represents an immediate increase of $4.05
per share in the pro forma net tangible book value to existing stockholders and
an immediate dilution of $10.83 per share in pro forma net tangible book value
to new investors purchasing common stock in this offering.
The following table illustrates the per share dilution to new investors:
[Download Table]
Assumed initial public offering price per share................ $15.00
Pro forma net tangible book value per share before the
offering.................................................... $0.12
Increase per share attributable to new investors............. $4.05
Pro forma net tangible book value per share after the
offering...................................................... $ 4.17
------
Dilution per share to new investors............................ $10.83
======
The following table summarizes as of March 31, 1999, after giving effect to
the conversion of the Series A and Series B preferred stock and this offering
(assuming an initial public offering price of $15.00 per share) the number of
shares of common stock purchased from CAIS Internet, the total cash
consideration paid for CAIS Internet's capital stock and the average price per
share paid by existing stockholders and the new investors purchasing shares of
common stock in the offering (before deducting underwriting discounts and
commissions and estimated offering expenses):
[Download Table]
Shares
Purchased Total Cash
-------------- Consideration Average Price
Number Percent Paid Per Share
------ ------- ------------- -------------
Existing stockholders................ 12,988 68% $ 10,688 $ 0.82
New investors........................ 6,000 32 90,000 15.00
------ --- --------
Total................................ 18,988 100% $100,688
====== === ========
The foregoing table assumes no exercise of the underwriters' over-allotment
option and no exercise of options or warrants to purchase additional shares of
common stock. As of the date of this prospectus, the foregoing table excludes
(i) approximately 2,034,000 and 520,000 shares of common stock issuable upon
the exercise of executive stock options granted in 1997 and 1999, respectively;
(ii) 1,500,000 shares of common stock reserved for issuance under CAIS
Internet's Amended and Restated 1998 Equity Incentive Plan (960,000 of which
were granted in 1998, 280,000 of which were granted in January and February
1999, and 45,000 of which were granted in April 1999); (iii) 390,000 shares of
common stock issuable pursuant to the exercise of certain warrants issued to
ING (U.S.) Capital LLC; (iv) approximately 699,000 shares of common stock
issuable pursuant to the exercise of certain warrants issued to the holders of
Series A convertible preferred stock; (v) 66,667 shares of common stock
issuable pursuant to the exercise of certain warrants issued to an OverVoice
customer; and (vi) 153,500 shares of common stock issuable upon the exercise of
employee options to be granted concurrently with this offering at an exercise
price equal to the initial public offering price. To the extent outstanding
options and warrants are exercised, there will be further dilution to new
investors.
20
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with the
Consolidated Financial Statements and Notes to the Consolidated Financial
Statements and "Management's Discussion and Analysis of Financial Condition and
Results of Operations" appearing elsewhere in this prospectus. The selected
financial data for the fiscal years ended December 31, 1996, 1997 and 1998 are
derived from CAIS Internet's financial statements, which have been audited by
Arthur Andersen LLP, independent public accountants and included elsewhere in
this prospectus. The selected financial data for the period from January 1,
1996 through May 10, 1996 are derived from Capital Area Internet Service Inc.'s
financial statements which have been audited by Arthur Andersen LLP,
independent public accountants and are presented separately in this prospectus.
The selected financial data for the fiscal years ended December 31, 1994 and
1995 are derived from unaudited financial statements. The unaudited financial
statements include all adjustments, consisting of normal recurring accruals,
which CAIS Internet considers necessary for a fair presentation of the
financial position and results of operations for these periods. The financial
data set forth for the periods ended, or as of dates, on or prior to May 10,
1996 reflect the results of operations of Capital Area prior to its acquisition
by CAIS, Inc. and are captioned as "predecessor." The historical financial data
subsequent to May 10, 1996 reflect the results of operations of CAIS Internet's
continuing operations. In February 1999, CAIS Internet completed the spin-off
of Cleartel Communications, Inc. and for financial reporting purposes has
accounted for Cleartel Communications, Inc.'s results as discontinued
operations. Accordingly, the results of operations for Cleartel Communications,
Inc. have been excluded from the selected financial data below. See "Certain
Relationships and Related Transactions--Organization of CAIS Internet." The
operating results for the period ended December 31, 1998 are not necessarily
indicative of the results to be expected for any future period. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
[Enlarge/Download Table]
Predecessor Successor
----------------------------- ------------------------------
Period from Period from
Year Ended January 1, 1996 May 11, 1996 Year Ended
December 31, to to December 31,
------------- May 10, December 31, -----------------
1994 1995 1996 1996 1997 1998
------------- --------------- ------------ ------- --------
(unaudited) (in thousands, except per share amounts)
Statements of Operations
Data:
Net revenues............ $ 481 $ 2,240 $1,287 $ 2,410 $ 4,556 $ 5,315
Cost of services........ 124 697 323 834 2,010 3,118
Operating expenses:
Selling, general and
administrative....... 228 514 339 2,126 5,550 10,407
Depreciation and
amortization......... 39 82 42 352 678 831
Non-cash
compensation......... -- -- -- -- 616 1,426
----- ------- ------ ------- ------- --------
Total operating
expenses........... 267 596 381 2,478 6,844 12,664
----- ------- ------ ------- ------- --------
Income (loss) from
operations 90 947 583 (902) (4,298) (10,467)
Interest and other
expense (income)....... 1 3 (2) 212 288 1,101
----- ------- ------ ------- ------- --------
Income (loss) from
continuing operations.. $ 89 $ 944 $ 585 $(1,114) $(4,586) $(11,568)
===== ======= ====== ======= ======= ========
Basic and diluted loss
per common share from
continuing operations.. $ (0.11) $ (0.48) $ (1.17)
======= ======= ========
Weighted-average common
shares outstanding -
basic and diluted...... 9,648 9,648 9,869
======= ======= ========
21
SELECTED FINANCIAL DATA
(continued)
[Enlarge/Download Table]
Predecessor Successor
----------------------------- ------------------------------
Period from Period from
Year Ended January 1, 1996 May 11, 1996 Year Ended
December 31, to to December 31,
------------- May 10, December 31, -----------------
1994 1995 1996 1996 1997 1998
------------- --------------- ------------ ------- --------
(unaudited) (in thousands) (in thousands)
Business Segments:
Net revenues:
Internet services..... $ 481 $ 2,240 $1,287 $ 2,410 $ 4,556 $ 5,278
OverVoice............. -- -- -- -- -- 37
----- ------- ------ ------- ------- --------
Total............... $ 481 $ 2,240 $1,287 $ 2,410 $ 4,556 $ 5,315
----- ------- ------ ------- ------- --------
Income (loss) from
continuing operations:
Internet services..... $ 89 $ 944 $ 585 $(1,114) $(3,807) $ (8,228)
OverVoice............. -- -- -- -- (779) (3,340)
----- ------- ------ ------- ------- --------
Total............... $ 89 $ 944 $ 585 $(1,114) $(4,586) $(11,568)
----- ------- ------ ------- ------- --------
Other Financial Data:
EBITDA, as
adjusted(1)(2): $ 129 $1,029 $ 625 $ (550) $(3,004) $ (8,210)
[Download Table]
Predecessor Successor
------------- --------------------------
December 31, December 31,
------------- --------------------------
1994 1995 1996 1997 1998
------ ------ ------- ------- --------
(unaudited) (in thousands)
Balance Sheet Data:
Cash.................... $ 50 $ 113 $ 73 $ 149 $ 95
Working capital
(deficit).............. 48 454 (3,755) (6,440) (9,374)
Total assets............ 139 997 13,120 15,038 15,678
Long-term debt, net of
current portion........ 23 -- 4,863 4,110 10,767
Stockholders' equity
(deficit).............. 111 748 (3,133) (5,278) (13,604)
--------
(1) EBITDA, as adjusted, represents operating income (loss) before
depreciation, amortization and non-cash compensation. EBITDA, as adjusted,
is presented to enhance understanding of CAIS Internet's operating results
and should not be construed (1) as an alternative to operating income (as
determined in accordance with generally accepted accounting principles
("GAAP"), as an indicator of CAIS Internet's operating performance; or (2)
as an alternative to cash flows from operating activities (as determined in
accordance with GAAP) as a measure of liquidity. EBITDA, as adjusted, as
calculated by CAIS Internet may be calculated differently than EBITDA, as
adjusted, for other companies. See CAIS Internet's Consolidated Financial
Statements and the notes to the financial statements contained elsewhere in
this prospectus.
(2) Net cash provided by (used in) operating activities for continuing
operations for the years ended December 31, 1996, 1997 and 1998 was
approximately $804,000, $(97,000), and $(4,939,000), respectively.
22
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 related notes to the financial
statements appearing elsewhere in this prospectus.
Overview
During the years presented, CAIS Internet has derived most of its revenue
from the sale of various Internet services, including always-on Internet access
services, web hosting and domain registration services and, to a lesser extent,
dial-up Internet access. During this period CAIS Internet has incurred
significant costs and devoted substantial resources associated with the
research, development and trial deployment of its OverVoice technology, all of
which has been expensed as incurred. The costs of these trials include
OverVoice equipment, contract labor for surveys and the actual property
installation, and Internet bandwidth and local loop connection charges. In
addition, CAIS Internet intends to make significant investments in its
nationwide network infrastructure in conjunction with OverVoice and its other
always-on, high-speed Internet services. CAIS Internet also plans to devote
considerable sales and marketing resources to the sale of always-on, high-speed
Internet access using its OverVoice technology in hotels and multiple dwelling
units and digital subscriber line services in the commercial and residential
markets. CAIS Internet plans to continue to expand its research and development
activities to develop new products and services to be offered using the
OverVoice technology.
CAIS Internet's nationwide deployment of OverVoice and other services, and
the expansion of its network, will result in increased cost of services,
selling, general and administrative expenses and capital expenditures. CAIS
Internet's ability to generate positive cash flow from operations and achieve
profitability is dependent upon its ability to successfully expand its customer
base for OverVoice and other services and achieve further operating
efficiencies. CAIS Internet might not be able to achieve or sustain revenue
growth, positive cash flow or profitability in the future.
Statements of Operations
CAIS Internet records revenues for all services, including installation
fees, when the services are provided to customers. Amounts for services billed
in advance of the service period and cash received in advance of revenues
earned are recorded as unearned revenues and recognized as revenue when earned.
Customer contracts for Internet access and web hosting services are typically
for periods ranging from one month to three years. Although net revenues from
OverVoice services, including amounts generated under CAIS Internet's
agreements with OnePoint Communications Corp. and Hilton Hotels, have not been
significant to date, revenue will be recognized when earned. Internet access
services typically require the customer to purchase equipment and the related
installation fees. Revenues from equipment sales are recorded when the related
equipment is shipped to the customer. Dial-up access customers typically
subscribe to service on a monthly or annual basis.
CAIS Internet's costs include:
. cost of services;
. selling, general and administrative expenses;
. research and development;
. depreciation and amortization, which includes the amortization of
goodwill recorded as a result of the acquisition of Capital Area in May
1996;
. non-cash compensation attributable to the grant of options to certain
executives; and
. interest and other expense.
Cost of services represents primarily recurring expenses for the lease of
data facilities from national and local fiber providers. These costs include
long haul bandwidth and local interconnection charges.
23
Selling, general and administrative costs are incurred in the areas of sales
and marketing, customer support, network operations and maintenance,
engineering, accounting and administration. Selling, general and administrative
costs will increase over time as CAIS Internet's operations, including the
nationwide deployment of OverVoice services and the expansion of its HyperDSL
services, increase. In addition, significant levels of marketing activity may
be necessary for CAIS Internet to build or increase its customer base among
multiple dwelling unit residents and hotel guests to a significant enough size
in a particular building or market. Any such increased marketing efforts may
have a negative effect on earnings.
During 1997, CAIS Internet granted options to purchase common stock to
William M. Caldwell, IV, CAIS Internet's President, and Evans K. Anderson, CAIS
Internet's Executive Vice President of Sales and Marketing. As a result of
these grants, CAIS Internet recorded paid-in capital of $4,930,000 and unearned
compensation of $4,930,000. Of this unearned compensation, $616,000 and
$1,426,000 were charged to expense during the fiscal years ended December 31,
1997 and 1998, respectively. In March and April 1999, CAIS Internet granted
options to purchase a total of 380,000 shares of common stock, at an exercise
price of $4.31 per share, to two additional officers. As a result of such
option grants, CAIS Internet expects to record additional paid-in capital and
unearned compensation of approximately $2.2 million, which will be expensed
over the expected vesting periods of three to four years.
On April 23, 1999, in connection with an amendment to CAIS Internet's master
agreement with an OverVoice customer, CAIS Internet issued warrants to the
customer to purchase 66,667 shares of common stock based on an initial public
offering price of $15 per share at an exercise price of $0.01 per share, as an
additional contribution by CAIS Internet in support of the customer's marketing
of OverVoice. If the initial public offering price is less than $15, the number
of warrants to purchase common stock shall be increased such that the total
number of warrants multiplied by the initial public offering price will equal
at least $1 million. In connection with the warrants, the customer received
certain demand and incidental registration rights. Commencing upon the
effective date of the initial public offering, the customer has a put option to
sell all of the warrants (or shares of CAIS Internet issued pursuant to the
exercise of the warrants) back to CAIS Internet at the initial public offering
price per share. The put option expires ninety days following the earlier of:
(1) the effective date of the first registration statement that includes any
warrant shares for resale and (2) the date on which the customer may sell all
of the warrant shares within a three-month period pursuant to Securities Act
Rule 144. As a result of this transaction with the customer, CAIS Internet
expects to record additional paid-in capital and an intangible asset of
approximately $1 million, which will be expensed over the expected benefit
periods.
Also, in connection with the development of future technologies at the
customer's properties, CAIS Internet will contribute 133,000 shares of common
stock to a fund, at a date no later than 10 days following of the initial
public offering. The shares will be jointly owned by CAIS Internet and the
customer, with 50% of the contributed shares allocated to a customer sub-
account within the fund and 50% of the contributed shares allocated to CAIS
Internet's sub-account. The customer's shares will be entitled to the same
registration rights as the shares underlying the customer warrants as discussed
above. Upon issuance of the customer's 66,500 shares of CAIS Internet common
stock, CAIS Internet expects to record approximately $1 million of expense.
For the years ended December 31, 1996, 1997 and 1998, CAIS Internet's
operations generated net losses. As of December 31, 1997 and 1998, CAIS
Internet had negative working capital of approximately $6,440,000 and
$9,374,000, respectively, and a stockholders' deficit of approximately
$5,278,000 and $13,604,000, respectively.
History
CAIS Internet was incorporated in Delaware in December 1997, under the name
CGX Communications, Inc., to serve as a holding company for CAIS, Inc. and
Cleartel Communications Limited Partnership. CAIS, Inc. was formed as a
Virginia corporation by certain current stockholders of CAIS Internet in May
1996, to acquire Capital Area, a tier one Internet service provider that was
owned by persons unaffiliated with CAIS
24
Internet. CAIS, Inc. acquired all of the outstanding capital stock of Capital
Area for approximately $3.07 million. Capital Area merged with and into CAIS,
Inc. in May 1996.
In October 1998, in anticipation of a possible high yield debt offering or
other debt financing, CAIS Internet completed a reorganization in which CAIS,
Inc., Cleartel Communications, Inc. and Cleartel Communications Limited
Partnership became wholly owned subsidiaries of CAIS Internet. CAIS Internet
issued common stock in exchange for the ownership of these entities. The
October 1998 reorganization was accounted for on a basis similar to a pooling-
of-interests, since CAIS Internet, Cleartel Communications, Inc., Cleartel
Communications Limited Partnership and CAIS, Inc. were under common ownership.
In February 1999, CAIS Internet transferred all of its limited partnership
interests in Cleartel Communications Limited Partnership to Cleartel
Communications, Inc. and Cleartel Communications Limited Partnership was
dissolved. CAIS Internet then completed the spin-off of Cleartel
Communications, Inc. by distributing all of its shares in Cleartel
Communications, Inc. to CAIS Internet's stockholders pro rata based on their
percentage ownership of the outstanding shares of CAIS Internet. As a result of
the spin-off of Cleartel Communications, Inc., Cleartel Communications, Inc.
ceased to be a subsidiary of CAIS Internet. CAIS Internet effected the spin-off
to concentrate on its Internet businesses and to position itself for an initial
public offering. In addition, CGX Communications, Inc. changed its name to CAIS
Internet, Inc.
Prior to the October 1998 reorganization, CAIS, Inc. and Cleartel
Communications Limited Partnership were not subject to federal income taxes
since any federal tax effects were passed through to each entity's S
corporation shareholders (as to CAIS, Inc.) or its partners (as to Cleartel
Communications Limited Partnership). Cleartel Communications Limited
Partnership was subject to state unincorporated business franchise taxes on any
profits in the District of Columbia. In addition, Cleartel Communications
Limited Partnership has reimbursed its limited partners for any state tax
liabilities related to allocated taxable income. Since CAIS Internet is a C
corporation, all earnings and losses generated after the October 1998
reorganization are no longer passed through to CAIS Internet's stockholders.
The spin-off of Cleartel Communications, Inc. in February 1999 was a taxable
transaction. Accordingly, CAIS Internet will be subject to income taxes on the
excess of the fair value of the spun-off assets (stock) over CAIS Internet's
basis in the assets distributed. Management believes that the net operating
losses available for carryforward into 1999 together with the losses expected
to be generated in 1999 will offset any potential gain for income tax purposes.
To the extent that net operating losses are used to offset the taxable gain
upon the spin-off of Cleartel Communications, Inc., the related operating
losses will not be available to offset any future operating income. If
carryforward losses are used to offset the gain from the spin-off of Cleartel
Communications, Inc., CAIS Internet may be subject to the Alternative Minimum
Tax. Any Alternative Minimum Tax imposed would be allowed as a credit to offset
future regular tax liability.
The Consolidated Financial Statements include the results of operations of
CAIS Internet, its wholly owned subsidiary, CAIS, Inc., Cleartel
Communications, Inc. and Cleartel Communications Limited Partnership, for the
years ended December 31, 1996, 1997 and 1998 and the balance sheets as of
December 31, 1997 and 1998. CAIS Internet's results of continuing operations
for 1996 only include operating results from May 11, 1996 (the date of CAIS,
Inc.'s acquisition of Capital Area) through December 31, 1996. The results of
Cleartel Communications, Inc. and Cleartel Communications Limited Partnership
for these years and the applicable balance sheets at those dates have been
presented as discontinued operations in accordance with Accounting Principles
Board Opinion No. 30.
Results of Operations
The following table sets forth, for the periods indicated, certain items
from CAIS Internet's Consolidated Statements of Operations and their percentage
of net revenues. Operating results for any period are not necessarily
indicative of results for any future period.
25
[Download Table]
Period from Years Ended December 31,
May 11, 1996 to --------------------------------
December 31, 1996 % 1997 % 1998 %
----------------- --- -------- ---- --------- ----
(in thousands, except for percentages)
Net revenues:
Internet services...... $ 2,410 100% $ 4,556 100% $ 5,278 99%
OverVoice.............. -- -- -- -- 37 1
------- --- -------- ---- --------- ----
Total.................. 2,410 100 4,556 100 5,315 100
------- --- -------- ---- --------- ----
Cost of services:
Internet services...... 834 35 2,010 44 3,016 57
OverVoice.............. -- -- -- -- 102 2
------- --- -------- ---- --------- ----
Total.................. 834 35 2,010 44 3,118 59
------- --- -------- ---- --------- ----
Operating expenses:
Internet services...... 2,381 98 6,110 134 9,677 182
OverVoice.............. 97 4 734 16 2,987 56
------- --- -------- ---- --------- ----
Total.................. 2,478 102 6,844 150 12,664 238
------- --- -------- ---- --------- ----
Loss from operations.... (902) (37) (4,298) (94) (10,467) (197)
Interest and other
expense................ 212 9 288 6 1,101 21
------- --- -------- ---- --------- ----
Loss from continuing
operations............. (1,114) (46) (4,586) (100) (11,568) (218)
Income (loss) from
discontinued
operations............. 799 33 1,923 42 (671) (13)
------- --- -------- ---- --------- ----
Net loss................ $ (315) (13)% $ (2,663) (58)% $ (12,239) (231)%
======= === ======== ==== ========= ====
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net revenues. Net revenues for the year ended December 31, 1998 totaled
approximately $5,315,000, compared to approximately $4,556,000 for the year
ended December 31, 1997. Net revenues increased primarily due to an increase of
$747,000 resulting from the sale of Internet access services and an increase of
$237,000 from the sale of web hosting services. Both of these increases were
due to an increase in the number of customers for these services. This increase
in net revenues was offset by a decrease in consulting revenues from $159,000
in 1997 to zero in 1998.
Cost of services. Cost of services for the year ended December 31, 1998
totaled approximately $3,118,000, compared to approximately $2,010,000 for the
year ended December 31, 1997. This increase resulted primarily from an increase
of $944,000 due to the purchase of additional nationwide bandwidth and the
expansion to new geographic locations. CAIS Internet also incurred bandwidth
and local connection charges of $102,000 in 1998 for the deployment of
OverVoice in trial properties. There was no OverVoice related cost of services
for 1997.
Selling, general and administrative. Selling, general and administrative
expenses for the year ended December 31, 1998 totaled approximately
$10,407,000, compared to approximately $5,550,000 for the year ended December
31, 1997. This increase resulted primarily from increases of $910,000
attributable to Internet services payroll, $1,671,000 related to Internet
services administrative costs, $1,927,000 related to OverVoice costs (e.g.,
payroll, market trials and marketing and professional fees and expenses) and
$347,000 for professional fees relating to the October 1998 reorganization.
Depreciation and amortization. Depreciation and amortization totaled
approximately $831,000 for the year ended December 31, 1998, compared to
approximately $678,000 for the year ended December 31, 1997. This increase was
attributable primarily to the purchase of capital equipment necessary to
support the expansion of CAIS Internet's network.
Non-cash compensation. Non-cash compensation totaled approximately
$1,426,000 for the year ended December 31, 1998, compared to approximately
$616,000 for the year ended December 31, 1997. This increase reflects
amortization of deferred compensation for an entire year in 1998 compared to a
partial year in 1997.
26
Interest and other expense. Interest and other expense totaled approximately
$1,101,000 for the year ended December 31, 1998, compared to approximately
$288,000 for the year ended December 31, 1997. This increase was attributable
primarily to interest on indebtedness incurred, including amortization of
financing costs relating to our credit agreement with ING (U.S.) Capital LLC.
Loss from continuing operations. Loss from continuing operations totaled
approximately $11,568,000 for the year ended December 31, 1998, compared to
approximately $4,586,000 for the year ended December 31, 1997, due to the
foregoing factors.
Income (loss) from discontinued operations. Loss from discontinued
operations totaled $671,000 for the year ended December 31, 1998, compared to
income of approximately $1,923,000 for the year ended December 31, 1997. This
decrease in earnings resulted primarily from a reduction in net revenues
generated from operator assisted telephone calls.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Net revenues. Net revenues for the year ended December 31, 1997 totaled
approximately $4,556,000. Net revenues for the year ended December 31, 1996
consisted of approximately $2,410,000 for the period from May 11, 1996 to
December 31, 1996 and approximately $1,287,000 with respect to Capital Area for
the period from January 1, 1996 to May 10, 1996, for a total of approximately
$3,697,000. Net revenues increased primarily due to a $859,000 increase in
sales of always-on Internet access services and a $60,000 increase resulting
from the sale of web hosting services. Both of these increases were primarily
due to an increase in the number of customers for these services.
Cost of services. Cost of services for the year ended December 31, 1997
totaled approximately $2,010,000. Cost of services for the year ended December
31, 1996 consisted of approximately $834,000 for the period from May 11, 1996
to December 31, 1996 and $323,000 with respect to Capital Area for the period
from January 1, 1996 to May 1996, for a total of $1,157,000. This increase
resulted primarily from building network redundancy and the purchase of
additional nationwide bandwidth for dedicated access customers.
Selling, general and administrative. Selling, general and administrative
expenses for the year ended December 31, 1997 totaled approximately $5,550,000.
Selling, general and administrative expenses for the year ended December 31,
1996 consisted of approximately $2,126,000 for the period from May 11, 1996 to
December 31, 1996 and $339,000 with respect to Capital Area for the period from
January 1, 1996 to May 10, 1996, for a total of $2,465,000. A major portion of
this increase consisted of an additional $1,227,000 in payroll costs related to
new employees in the areas of sales, operations, and engineering and, to a
lesser extent, various expenditures related to the initial payroll, marketing
and development of, and the purchase of $957,000 of market trial equipment for
OverVoice.
Depreciation and amortization. Depreciation and amortization totaled
approximately $678,000 for the year ended December 31, 1997. Depreciation and
amortization for the year ended December 31, 1996 consisted of $352,000 for the
period from May 11, 1996 to December 31, 1996 and $42,000 with respect to
Capital Area for the period from January 1, 1996 to May 10, 1996, for a total
of $394,000. This increase was attributable primarily to the purchase of
capital equipment necessary to support the expansion of CAIS Internet's network
and a full year's amortization of goodwill and interest costs relating to the
acquisition of Capital Area in May 1996.
Non-cash compensation. Non-cash compensation totaled approximately $616,000
for the year ended December 31, 1997, reflecting the amortization of deferred
compensation incurred upon the grant of options to purchase shares of CAIS
Internet's common stock in 1997 to two executive officers. There was no non-
cash compensation for 1996.
Interest and other expense. Interest and other expense totaled approximately
$288,000 for the year ended December 31, 1997, compared to approximately
$212,000 for the period from May 11, 1996 to December 31, 1996. This increase
was attributable primarily to debt incurred by CAIS, Inc. in May 1996 to
finance the acquisition of Capital Area.
27
Loss from continuing operations. Loss from continuing operations totaled
approximately $4,586,000 for the year ended December 31, 1997. Loss from
continuing operations for the year ended December 31, 1996 consisted of
$1,114,000 for the period from May 11, 1996 to December 31, 1996 and income of
$585,000 for the period from January 1, 1996 to May 10, 1996 for a total loss
of $529,000, due to the foregoing factors.
Income from discontinued operations. Income from discontinued operations
totaled $1,923,000 for the year ended December 31, 1997, compared to $799,000
for the year ended December 31, 1996. This was due primarily to rate increases
charged to customers for long distance telephone calls.
Liquidity and Capital Resources
To date, CAIS Internet has satisfied its cash requirements primarily through
borrowings, the sale of capital stock and internally generated funds. CAIS
Internet's continuing operations have been financed in part from operating
profits and cash flows generated from its now discontinued operation (i.e.,
Cleartel Communications, Inc.). Net cash provided by (used in) operating
activities for continuing operations for the years ended December 31, 1996,
1997 and 1998 was approximately $804,000, $(97,000) and ($4,939,000),
respectively. Cash used in operating activities in each period was primarily
affected by the net losses caused by increased costs relating to CAIS
Internet's expansion in infrastructure and personnel for its Internet-related
businesses.
In connection with the acquisition of Capital Area on May 10, 1996, CAIS
Internet obtained a $2,000,000 bank loan from First Union National Bank.
Interest on the loan accrued at a rate of prime plus one and one-half percent,
or 9.75 percent at that date, with payments on a five-year amortization
schedule and a maturity date of May 10, 1999. In October 1996, CAIS Internet
and First Union entered into an interest rate swap agreement in which the
effective interest rate on the remaining principal balance of approximately
$1,833,000 was fixed at 8.65%. In December 1997, CAIS Internet refinanced this
loan. This resulted in an increase in the principal balance outstanding at that
time from $1,400,000 to $2,000,000. In addition, the maturity date of the
refinanced note and the swap agreement was extended to December 2000. This loan
was repaid in full with the proceeds from the credit agreement with ING (U.S.)
Capital LLC discussed below.
In September 1998, CAIS Internet, together with CAIS, Inc. and certain of
their affiliates, entered into a credit agreement, as amended, with ING (U.S.)
Capital LLC to borrow up to $7,000,000 to repay existing debt with First Union,
fund the development of the OverVoice program and for general corporate
purposes. The loans extended under this credit agreement bear interest at the
one-month LIBOR rate plus 5%. The principal, premium and interest on any
outstanding loan will convert to senior secured notes bearing interest at a
rate of 5% over the 5-year U.S. Treasury Securities rate if borrowings under
this credit agreement are not repaid by September 4, 1999. CAIS Internet is in
compliance with the terms of this credit agreement. The current outstanding
principal balance under this credit agreement is $7,000,000, which will be
repaid from the proceeds of this offering.
In February 1999, CAIS Internet converted approximately $4.6 million of
indebtedness owed to Ulysses G. Auger, Sr. and Ulysses G. Auger, II into
1,119,679 shares of CAIS Internet's Series B cumulative mandatory redeemable
convertible preferred stock, par value $.01 per share.
In February 1999, after the spin-off of Cleartel Communications, Inc., CAIS
Internet issued 2,827,168 shares of Series A convertible preferred stock, par
value $0.01 per share, for total gross proceeds of $11.5 million. CAIS Internet
plans to use $10 million of the proceeds for capital expenditures and general
corporate purposes, with the remaining $1.5 million being used to reduce
outstanding debt owed by CAIS Internet to Cleartel Communications, Inc.
On April 13, 1999, CAIS Internet and Cisco Systems Capital Corporation
entered into a letter agreement for a three-year, $50 million equipment
financing facility. Under the facility, $25 million would be available during
the first year of the facility and an additional $25 million would be available
during the second year of the facility, provided CAIS Internet meets certain
financial performance requirements. Borrowings under the facility would be
limited to $12.5 million until completion of this offering. The first $25
million in borrowings
would bear interest at an annual rate equal to three-month LIBOR plus 7.0%
(reducing to 6.0% on the first interest payment after this offering). The
second $25 million in borrowings would bear interest at an annual
28
rate equal to three-month LIBOR plus 6.0%. The facility will require CAIS
Internet to meet certain financial covenants including EBITDA targets, revenue
targets and leverage and debt service ratios. Borrowings under the facility
will be secured by a first priority lien on all Cisco products and services
purchased using the facility and, where permitted, by a second priority lien on
all other assets of CAIS Internet. Closing on the facility is subject to the
execution and delivery of definitive agreements for the facility.
On April 21, 1999, CAIS, Inc. and Nortel Networks entered into a financing
letter agreement for a $30 million equipment financing. The financing would
require CAIS Internet and CAIS, Inc. to meet certain financial covenants
including EBITDA targets, revenue targets and leverage and debt service ratios.
Borrowings under the financing would be secured by a first priority lien on all
Nortel Networks products purchased using the financing. Provision of the
financing is subject to approval and the execution and delivery of definitive
financial and commercial agreements. In connection with the financing letter
agreement, CAIS, Inc. entered into a purchase agreement with Nortel Networks
and committed to purchase $10 million of Nortel equipment by April 1, 2000. In
addition to this commitment, CAIS, Inc. will be subject to a reduction in its
purchase discount percentages after that date if its annual purchases do not
exceed $10 million for the twelve months ended April 1, 2001 and $9.9 million
for the twelve months ended April 1, 2002.
As of March 31, 1999, CAIS Internet had cash on hand of approximately
$5,922,000. CAIS Internet expects that its cash and financing needs for the
next twelve months can be met by cash on hand and additional capital financing
arrangements (including the net proceeds of this offering). If such sources of
financing are insufficient or unavailable, or if CAIS Internet experiences
shortfalls in anticipated revenue or increases in anticipated expenses, CAIS
Internet would curtail the planned roll-out of OverVoice and reduce marketing
and development activities.
Network Capacity. In June 1998, CAIS Internet signed a ten-year fiber
agreement with Qwest Communications Corporation. The agreement calls for a
graduated commitment to purchase $100 million of services over a ten-year
period.
OverVoice License and Royalty Agreement. CAIS Internet entered into a
license agreement with Inline Connection Corporation in November 1996, pursuant
to which Inline granted CAIS Internet an exclusive license to use, make, sub-
license or sell the OverVoice technology in hotels and multiple dwelling units.
We have minimum annual royalty obligations to Inline which began at $100,000 in
1998 and increase to a maximum of $250,000 during the term of the agreement.
Unless terminated by CAIS Internet with thirty days' notice, the agreement
remains in effect through the full life of all existing or future patents
related to the technology or future enhancements. In consideration for meeting
the $750,000 compensation benchmark set forth in the license agreement, in
January 1999, Inline assigned CAIS Internet a 50% ownership interest in the
OverVoice patents and patent applications covered by the Inline agreement.
Terk Litigation Settlement. On or about August 5, 1997, Inline instituted an
arbitration proceeding against Terk Technologies Corp. to terminate Inline's
contract with Terk, based on Terk's failure to perform under the contract's
best efforts clause. On or about September 24, 1998, Terk counterclaimed and
filed a lawsuit against CAIS, Inc., Ulysses G. Auger, II, Inline and others,
for, among other things, patent infringement of U.S. Patent No 5 010 399 and
other patent properties owned by or assigned to Inline and/or a principal of
Inline. On January 24, 1999, CAIS, Inc., Inline and Terk entered into a
settlement agreement pursuant to which the parties agreed to dismiss the case
against all parties with prejudice. As a result of the settlement agreement,
CAIS Internet agreed to pay Terk $500,000. $250,000 of the payment was made in
February 1999, an additional $150,000 is payable on or before July 1, 1999 and
the remaining $100,000 is payable on or before July 1, 2000. CAIS Internet also
agreed to issue Terk 25,000 shares of common stock and to issue additional
shares if the 25,000 shares, multiplied by the price at which shares are issued
in this offering, does not equal or exceed $250,000. CAIS Internet also granted
Terk the right to purchase up to 25,000 additional shares of common stock as
part of this offering in connection with CAIS Internet's directed share
program. In exchange, Terk and Inline modified their contract changing Terk's
license from exclusive to nonexclusive and eliminating Terk's
29
ability to sublicense. As a result, CAIS Internet now has the right to install
the OverVoice technology in single family residences and the exclusive right to
sublicense such technology to third parties.
CAIS Internet from time to time engages in discussions involving potential
business acquisitions. Depending on the circumstances, CAIS Internet may not
disclose material acquisitions until completion of a definitive agreement. CAIS
Internet may determine to raise additional debt or equity capital to finance
potential acquisitions and/or to fund accelerated growth. Any significant
acquisitions or increases in CAIS Internet's growth rate could materially
affect CAIS Internet's operating and financial expectations and results,
liquidity and capital resources.
Impact of the Year 2000 Issue
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may recognize a date using "00" as the year
1900 rather than the year 2000. This, in turn, could result in major system
failures or miscalculations, and is generally referred to as the "Year 2000
issue." CAIS Internet's failure to correct a material Year 2000 problem could
result in an interruption in, or a failure of, certain of CAIS Internet's
normal business activities and operations. CAIS Internet has formulated and, to
a large extent, effected a plan to address Year 2000 issues.
During 1998, CAIS Internet established a Year 2000 compliance program to
coordinate appropriate activity and report to its Board of Directors with
regard to Year 2000 issues. CAIS Internet is addressing the Year 2000 issue
through a comprehensive assessment and resolution of both its internal systems
and the systems of its external partners and suppliers.
CAIS Internet's internal systems assessment and review consists of four-
phases: (1) assessment; (2) analysis and planning; (3) conversion and testing;
and (4) implementation.
CAIS Internet's assessment of the Year 2000 problem has focused on
conducting an inventory of existing systems, performing risk assessment,
prioritizing systems, and determining resource needs and is substantially
complete. The analysis and planning phase of CAIS Internet's Year 2000
compliance program has involved selecting corrective methods, developing
certain standards, determining conversion sequences, and establishing a
detailed time line for correcting Year 2000 issues and is substantially
complete. CAIS Internet's conversion and testing phase which has included
developing codes and purchasing known fixes, documenting the effort made,
conducting unit and system tests, and scheduling data migration is
substantially complete. As part of the implementation of its Year 2000
solution, CAIS Internet has moved various systems into production, installed
third party solutions, updated operational procedures, and trained users. This
implementation phase is substantially complete. CAIS Internet expects
completion of this internal systems assessment and corrective action prior to
the end of the third quarter of 1999.
CAIS Internet likewise has conducted a four-phase review of the systems of
its partners, suppliers, and other third parties (including equipment providers
and other telecommunications service providers) to monitor both the
vulnerability of such parties to the Year 2000 problem and any potential impact
on CAIS Internet. First, CAIS Internet identified its critical partners,
suppliers, and vendors. This phase involved requesting information from
employees, analyzing responses, performing risk assessments, prioritizing
systems, and determining resource needs and is fully complete. Secondly, CAIS
Internet developed Year 2000 contact standards. This phase, which has involved
developing questionnaires, drafting request letters, and gathering contact
addresses and e-mails is substantially complete. Thirdly, CAIS Internet has
begun receiving information through responses to its request letters,
researching web sites, making phone contacts, and summarizing the results of
the information received. Finally, CAIS Internet has begun to focus on
evaluating different systems, reviewing such information with senior
management, and identifying any additional resources needed. CAIS Internet is
commencing work to develop a contingency plan associated with its findings in
this area. CAIS Internet believes these latter phases will be completed prior
to the end of the third quarter.
30
During the year ended December 31, 1998, CAIS Internet spent over $1.4
million for capital expenditures related to the upgrade and continuing build-
out of its technical operations and network. We believe that all of this
equipment is Year 2000 compliant. We expect to incur additional costs in 1999
in connection with our Year 2000 program, which we believe will not be
material. In addition, we expect to acquire a new billing and customer care
system as part of our business strategy, which we believe will also be Year
2000 compliant. These additional costs are based on our best estimates and, in
our opinion, will not have a material adverse effect on our business, financial
condition and results of operations. If the actual costs of implementing our
Year 2000 program significantly exceed our estimates, it may have a material
adverse effect on our business, financial condition or results of operations.
CAIS Internet currently believes that its most likely, worst case scenario
related to the Year 2000 issue is associated with potential concerns with its
partners' and suppliers' Internet operations. To the extent that one or more of
these third parties experience Year 2000 problems, which would lead to
decreased Internet usage and the delay or inability to obtain necessary data
communication and telecommunication capacity, CAIS Internet's network and
services could be adversely affected.
CAIS Internet cannot guarantee that it will be able to timely and
successfully modify its products, services and systems to comply with Year 2000
requirements. Any failure to do so could have a material adverse effect on CAIS
Internet's operating results. Furthermore, despite the aforementioned testing
performed by CAIS Internet and its vendors, CAIS Internet's products, services
and systems may contain undetected errors or defects associated with Year 2000
date functions. In the event any material errors or defects are not detected
and fixed, or third parties cannot timely provide CAIS Internet with products,
services or systems that meet the Year 2000 requirements, CAIS Internet's
operating results could be materially adversely affected. Known or unknown
errors or defects that affect the operation of CAIS Internet's products,
services or systems could result in delay or loss of revenue, interruption of
network services, cancellation of customer contracts, diversion of development
resources, damage to CAIS Internet's reputation and litigation costs. CAIS
Internet cannot guarantee that these or other factors relating to Year 2000
compliance issues will not have a material adverse effect on CAIS Internet's
business.
31
BUSINESS
We provide cost-effective high-speed Internet connections to both commercial
and residential customers, primarily using digital subscriber line technology
(DSL) and our patented OverVoice technology. We currently offer our digital
subscriber line service, "HyperDSL," in conjunction with Covad and Bell
Atlantic. We use our OverVoice technology to simultaneously transmit voice and
data over a single traditional copper telephone line at speeds of up to 175
times those of 56.6k dial-up modems. An OverVoice user is therefore able to
have both always-on, high-speed Internet access and complete use of the
telephone at the same time over one traditional telephone line. Using our
OverVoice technology and existing copper telephone wiring, we are able to
create an Ethernet network connecting multiple computers or web-enabled devices
within a hotel, multiple dwelling unit or single family home. We believe we can
offer always-on, high-speed Internet access simultaneously to multiple users in
hotels and residences more cost-effectively than other technologies available
today.
As of April 16, 1999, we have installed the OverVoice technology in over
1,900 apartment units in 15 multiple dwelling unit buildings and in over 2,100
guest rooms in eight hotels. We have contracts with 11 additional hotel
properties to install OverVoice in more than 2,500 guest rooms. In addition, we
have national contracts with Hilton and with OnePoint.
We have entered into a master agreement with Hilton and a seven-year
contract with OnePoint to offer Internet access service and install our
OverVoice technology. We believe that the demand for high-speed Internet access
in single family homes and the trend toward using more than one personal
computer at home, also make OverVoice a cost-effective solution for providing
dedicated high-speed internet access in single family homes and for "home
networking." We currently offer our HyperDSL services to the residential
market. Furthermore, we are developing a commercially deployable OverVoice
solution for the single family home market, to be offered in conjuction with a
HyperDSL connection.
Industry Background
Internet access and enhanced Internet services represent two of the fastest
growing segments of the telecommunications services marketplace. According to
industry estimates, the number of Internet users in the United States who
access the world wide web reached approximately 70.1 million in 1998 and is
forecasted to grow to approximately 178.7 million by the year 2003. Currently,
individuals most commonly access the Internet through a dial-up service.
However, dial-up access has several drawbacks including:
. delays when down-loading bandwidth intensive information (such as
streaming video and audio);
. loss of the use of the customer's phone line service while accessing the
Internet;
. requiring that a user pay both its Internet service provider for
Internet access and its telephone company for the local call;
. frequent busy signals;
. mid-use cut-offs (drops) from service; and
. long connection delays.
Due to the inconveniences of dial-up Internet service, most businesses that
are large enough to justify the costs opt for a dedicated high-speed Internet
connection, such as a T-1. Smaller businesses are also moving rapidly toward
high-speed access solutions as newer technologies like digital subscriber line
become available. However, until recently, high-speed Internet access has been
unavailable to most single family and multifamily homes and to hotel guests due
to the cost and difficulty of implementing such service.
We believe that business users have grown accustomed to the high-speed
Internet access that they have at work and are increasingly seeking cost-
effective options for high-speed access at home and while traveling. As a
result, we believe demand is ever increasing for cost-effective, high-speed
Internet connectivity in the hotel, business and residential communities.
Further, the increasing use by hotel guests of dial-up Internet access is
overloading many hotels' phone systems. This has resulted in increasing service
problems and heightened
32
concerns for the safety of hotel guests (and the hotel's associated liability)
who may be unable to obtain help promptly in an emergency. As a result, hotels
are increasingly confronted with the expensive option of upgrading their
private branch exchange (PBX) switches to handle the increased traffic.
We believe that increased demand and evolving technology make the hotel and
multiple dwelling unit markets attractive for always-on, high-speed Internet
access. The economies of scale present in the hotel and multiple dwelling unit
markets create the opportunity to price always-on, high-speed Internet access
services at levels comparable to current dial-up services. In addition, many
multiple dwelling unit property owners believe high-speed Internet access is an
attractive building amenity for enhancing rental and occupancy rates.
Major hotel chains and multiple dwelling unit property owners are currently
evaluating alternative solutions to meet the need for faster Internet
connections and simultaneous voice and data transmission. Examples of such
solutions are:
. second phone lines and more powerful telecommunications switching
systems within a building, which are very costly and fail to address the
need for higher connection speeds;
. Category 5 rewiring, which involves the labor and capital intensive
solution of rewiring a building, resulting in significant cost,
construction, disturbance and time; and
. high speed technologies, including digital subscriber line and cable
modems, which are less expensive than comparable T-1 connections, but
require a separate digital subscriber line or cable modem for each
personal computer or laptop connection in a home, apartment unit or
hotel room.
While these and other technologies exist, to date none has been widely deployed
as a solution for high-speed Internet connectivity.
The OverVoice Solution
We believe that our OverVoice technology is the most cost-effective, always-
on, high-speed Internet solution for hotel guests and multiple dwelling unit
residents. We also believe OverVoice to be the most cost-effective solution for
providing always-on, high-speed Internet access in single family homes and for
"home-networking."
We use our OverVoice technology to simultaneously transmit voice and data
over a single copper telephone line at speeds of up to 175 times those of 56.6k
dial-up modems. This enables an OverVoice user to have both always-on, high-
speed Internet access and complete use of the telephone at the same time over
one traditional telephone line. While we believe digital subscriber line
technology is the most cost-effective high-speed Internet solution available to
our commercial customers today, we believe that its point-to-point nature
(i.e., each Internet user requiring an expensive digital subscriber line modem
and therefore his own Internet connection) significantly impedes its widespread
deployment in the residential market. OverVoice's point-to-multipoint
technology enables us to create an Ethernet local area network within a hotel,
multiple dwelling unit building or single family home. By combining our
OverVoice technology with any always-on, high-speed Internet connection, such
as digital subscriber line, T-1 or wireless, we can provide a single high-speed
Internet connection which can be shared simultaneously among many users in a
hotel, multiple dwelling unit building or single family home.
33
Our OverVoice technology allows the coexistence of multiple signals (voice,
data and, in the future, video) on the same wire, by protecting the natural
frequency range of each signal from interference with the other signals. The
pictorial below demonstrates how, through the use of OverVoice technology,
voice, data and video can co-exist simultaneously on a single traditional
copper wire.
[GRAPH APPEARS HERE]
Standard telephone service (Plain Old Telephone Service) operates between 0 and
5KHz, while standard 10BaseT Ethernet (which is the standard for most of the
world's local area networks) operates between 3 and 15MHz. The video signal
will operate between 15 and 30 MHz.
In hotels and multiple dwelling units, the OverVoice solution requires only
a retrofit with OverVoice equipment in the telephone closet and the
installation of our proprietary OverVoice telephone jacks in each hotel guest
room or apartment unit. The OverVoice passive circuitry uses electronic filters
to separate signals at the control unit and at each wall jack. The OverVoice
wall jack has two ports, one which connects to the telephone and the other
which connects to an Ethernet adapter card inside the user's computer.
Ethernet is the standard networking protocol used to create local area
networks. To connect to a local area network, computers require an Ethernet
adapter card, which is a standard supplemental hardware device that can easily
be installed into most computers and typically costs approximately $50. In most
cases, an Ethernet card is required for any high speed Internet connectivity,
including T1, cable modem or digital subscriber line services.
CAIS Internet also expects in the near future to offer a universal serial
bus connectivity option for OverVoice. The universal serial bus is a new
standard plug-in protocol being integrated into most new computers (i.e., a new
port to plug in devices, such as printers). With a universal serial bus
connection, the user will have the ability to connect directly to an Ethernet
network without an Ethernet adapter card.
CAIS Internet has begun to deploy OverVoice DeskJacks in hotel guest rooms.
The OverVoice DeskJack has an Ethernet connection and can have a universal
serial bus connection, thereby allowing hotel guests to choose the connection
method that best suits their needs. Its highly visible, step-by-step
instructions direct the hotel guest through the log-on page to the CAIS
Internet promotional home page.
We can install the OverVoice technology in an average-sized hotel or
multiple dwelling unit building (300 units) for approximately $250 per hotel
guest room or apartment unit, which we believe is significantly less than the
cost of any competing technology. In addition, we can install OverVoice in a
hotel or multiple dwelling unit building with very minimal disruption to the
property owners, hotel guests or multiple dwelling unit residents.
Market Opportunity
We believe that the domestic hotel segment represents a significant market
opportunity for CAIS Internet. Nationwide, we estimate that as of December 31,
1997, there were 49,000 hotel properties with a total of 3.8 million hotel
rooms. In the top twenty-five hotel markets we estimate that there were more
than 7,775
34
properties with a total of 1.25 million rooms. During the initial roll-out of
our OverVoice technology, we will focus on larger hotels and those most likely
to cater to business travelers. According to the American Hotel and Motel
Association, as of December 31, 1997, hotel properties with 300 or more rooms
represented 3.0% of all hotel properties, but 20.8% of total hotel rooms.
Examples of the companies operating within this segment include familiar hotel
chains such as Hilton, Sheraton, Hyatt, Wyndham, Westin and Marriott.
We are also targeting the domestic multiple dwelling unit market which we
believe is a highly promising market for OverVoice. As of 1998, approximately
18% of the U.S. population, or over 48 million people, lived in multiple
dwelling units and there were over nine million apartment units in buildings
with 50 or more units. We intend to initially target Class A and B buildings in
large metropolitan areas, whose residents typically have higher incomes and are
more likely to be Internet users.
An even larger market is the single family home market, which we believe
offers a significant opportunity for OverVoice in the future. According to
industry sources, as of December 1998, 38% of U.S. households with Internet
access have at least two personal computers. We believe that the demand for
simultaneous high-speed Internet access and interoperability between multiple
personal computers in a single family home or multiple dwelling unit will
further increase the demand for OverVoice. Approximately 99% of single family
homes in the United States have standard copper telephone wire that can support
home networking using OverVoice.
Although we intend to initially roll-out our OverVoice technology in the
United States, we believe that international markets represent another
significant opportunity. International demand for Internet access is expected
to increase as a result of a number of factors, including worldwide economic
growth, global deregulation of the telecommunications market, technological
advancements and the introduction of new services.
National Contracts and Long-Term Commitments
Hilton Hotels Corporation. We have entered into a master agreement with
Hilton, under which Hilton agreed to license us the right to offer high-speed
Internet access service in certain guest rooms, meeting rooms and other areas
in specified Hilton hotels throughout the United States. The term of the
agreement is for five years. Under the agreement, we have the right to install
wired high-speed data communication systems for laptop computers on an
exclusive basis in up to 50% (subject to increase with Hilton's consent) of the
rooms in the Hilton hotels covered by the master agreement. In order to
participate, each Hilton hotel must enter into an addendum to the master
agreement. As of April 16, 1999, 153 of these hotels have notified Hilton that
they intend to sign an addendum to participate under the terms of the master
agreement.
Under the agreement, we are responsible for the costs of installing,
maintaining and operating all necessary equipment, and as a result we will
incur significant up-front costs. Under the agreement, Hilton's share of net
revenues varies based on the number of rooms in a particular hotel property. As
a part of the Hilton contract, we have arranged to have a senior account
manager based at Hilton's headquarters to manage the relationship and serve as
Hilton's liaison to CAIS. We are also training front desk personnel and banquet
room staff on the benefits of OverVoice to enable them to better market the
service and create an overall positive experience for the hotel's patrons. For
technical assistance, users are directed to a toll-free number that connects
OverVoice users to our customer service representatives. Finally, Hilton and
CAIS Internet are developing in a joint marketing program to build awareness of
the OverVoice service offering among potential patrons.
In addition, on April 23, 1999, CAIS Internet signed an agreement with
Hilton to jointly pursue the development of future guest and meeting room
digital entertainment solutions in Hilton properties. To finance the
development of these solutions, CAIS Internet and Hilton are establishing a
fund which will be initially capitalized through the contribution of 133,000
shares of CAIS Internet's common stock. The shares will be jointly owned by
CAIS Internet and Hilton, with 50% of the contributed shares allocated to a
CAIS Internet sub-account within the fund and 50% of the contributed shares
allocated to a Hilton sub-account. We believe that the continued development of
video and audio applications utilizing the OverVoice platform represents a
significant future business opportunity.
35
OnePoint Communications Corp. In April 1998, we entered into a trial
agreement with OnePoint, a provider of communications and entertainment
services to residents in multiple dwelling units. Under this trial agreement,
we installed OverVoice in 14 buildings within four properties.
We recently entered into a seven-year contract with OnePoint to install our
OverVoice technology. Under this agreement, we anticipate that we will install
OverVoice in a minimum of 30 multiple dwelling unit buildings with
approximately 10,000 units. Additionally, together with OnePoint, we will
market high-speed Internet service to approximately 300 additional multiple
dwelling unit buildings where OnePoint has a preferential right of entry to
provide Internet and other communications services. As part of our agreement
with OnePoint, we are making joint sales calls to property owners to discuss
the benefits of OverVoice.
Under the agreement, CAIS Internet generally bears all of the costs of
providing Internet services to the multiple dwelling units and receives 90% to
98% of the net revenues from the sale of services, with OnePoint receiving the
remaining revenues. OnePoint has the option of contributing 25% of the costs of
providing Internet services to specified multiple dwelling unit buildings. In
those circumstances, OnePoint's share of net revenues would range from 15% to
25%.
OverVoice Properties
As of April 16, 1999, CAIS has either installed OverVoice or has an
agreement for the installation of OverVoice in the hotel and multiple dwelling
unit properties set forth in the following tables.
HOTELS
Hotels which are currently or upon completion of installation will be operating
under trial agreements:
[Enlarge/Download Table]
Target
Property Location Number of Units Installation Date Completion Date
-------- -------- --------------- ----------------- ---------------
Embassy Square.......... Washington, D.C. 232 4/98
Bellevue Courtyard...... Bellevue, WA 131 5/98
La Jolla Marriott....... La Jolla, CA 360 5/98
Washington Marriott..... Washington, D.C. 418 6/98
Sea Tac Marriott........ Seattle, WA 459 6/98
Las Colinas Wyndham..... Irving, TX 185 7/98
Sunnyvale Wyndham....... Sunnyvale, CA 179 7/98
Anaheim Hilton.......... Anaheim, CA 20 12/98
Westin Peachtree Plaza.. Atlanta, GA 200 4/99
Westin Copley Plaza..... Boston, MA 200 5/99
Metro Marriott.......... Washington, D.C. 163 5/99
The Washington Court
Hotel.................. Washington, D.C. 264 5/99
Westin Innisbrook....... Palm Harbor, FL 200 5/99
BWI Airport Marriott.... Baltimore, MD 200 5/99
Sheraton Inner Harbor... Baltimore, MD 289 6/99
We are currently negotiating long-term contracts for all properties which are
operating under trial agreements. The Westin Peachtree Plaza, Westin Innisbrook
and the BWI Airport Marriott are all owned by Starwood Hotels and Resorts
Worldwide, Inc. and are the first of six properties where we will install
OverVoice in accordance with our trial agreement with Starwood.
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Hotels which upon completion of installation will be operating under long-term
contracts:
[Enlarge/Download Table]
Target
Property Location Number of Units Installation Date Completion Date
-------- -------- --------------- ----------------- ---------------
Hotel Lexington......... New York, NY 216 4/99
Club Doubletree Suites.. Palatine, IL 196 4/99
Kutshers Country Club... Monticello, NY 410 4/99
Hilton Pittsburgh &
Towers................. Pittsburgh, PA 200 4/99
Hilton Chicago &
Towers................. Chicago, IL 240 4/99
Palmer House Hilton..... Chicago, IL 239 4/99
Hilton New York &
Towers................. New York, NY 415 4/99
Hilton Washington &
Towers................. Washington, D.C. 200 5/99
Radisson Inn-Tulsa
Airport................ Tulsa, OK 172 5/99
Capital Hilton.......... Washington, DC 200 5/99
Hilton Dallas Parkway... Dallas, TX 200 5/99
Hilton Garden Inn- Las
Colinas................ Irving, TX 174 5/99
Hilton
Lisle/Naperville....... Lisle, IL 160 5/99
Hilton Northbrook....... Northbrook, IL 125 5/99
Hilton Phoenix Airport.. Phoenix, AZ 128 5/99
Hilton Short Hills...... Short Hills, NJ 150 5/99
Hilton Garden Inn-Albany
Airport................ Albany, NY 155 5/99
Hilton North Raleigh.... Raleigh, NC 184 5/99
Hilton Garden Inn-North
Johns Creek............ Atlanta, GA 124 6/99
Hilton Atlanta Airport &
Towers................. Atlanta, GA 204 6/99
Hilton Garden Inn-Green
Bay.................... Green Bay, WI 120 7/99
Hilton Garden Inn-
Saratoga Springs....... Saratoga, NY 112 7/99
Hilton Garden Inn-White
Marsh.................. Baltimore, MD 155 7/99
MULTIPLE DWELLING UNITS
[Download Table]
Number of
Property Location Installed Units Completion Date
-------- -------- --------------- ---------------
Arlington Court House......... Arlington, VA 396 3/98
*Lincoln Towers............... Arlington, VA 673 6/98
*Water Park Towers............ Arlington, VA 323 7/98
*Springfield Station (5
buildings)................... Springfield, VA 280 10/98
*Summit Fair Lakes (7
buildings)................... Fairfax, VA 432 3/99
--------
*OnePoint properties
Business Strategy
Our objective is to become a leading national provider of dedicated high-
speed Internet access. The following are key elements of our business strategy
to achieve this objective:
Offer the Most Cost-Effective, Always-On, High-Speed Internet Access to Our
Customers. We believe that hotel and multiple dwelling unit property owners are
seeking to use high-speed Internet access as a tool to increase their occupancy
and rental rates. In addition, we believe that many members of the single
family home market are seeking cost-effective high-speed Internet access. We
believe our OverVoice technology is a cost-effective, always on, high-speed
Internet solution for hotel guests and multiple dwelling unit residents. In
addition, we believe OverVoice will be a cost-effective "home networking"
solution for single family residences. We use our OverVoice technology to
deliver high-speed Internet access, while allowing the user to
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simultaneously access voice services on the telephone. We also offer our
digital subscriber line service, "HyperDSL," to commercial customers in
conjunction with Covad and Bell Atlantic.
Roll-Out Our OverVoice Technology Nationwide. Our goal is to make our
OverVoice technology the standard for high-speed Internet access in hotels and
multiple dwelling units. We intend to continue to penetrate the hotel and
multiple dwelling unit markets through both direct sales and strategic
relationships. We have signed an agreement for the roll-out of OverVoice with
Hilton hotels throughout the United States. In addition, we are currently
rolling-out OverVoice to multiple dwelling units with OnePoint. We are
developing an OverVoice solution for the single family home market and expect
to offer it with our residential HyperDSL service once OverVoice becomes
commercially deployable in this segment.
Attract End-Users in Hotels and Multiple Dwelling Units. We intend to
stimulate the demand for our OverVoice services through joint marketing
programs and sales calls. For hotel guests we believe that it is important to
make always-on, high-speed Internet access simple and affordable. In hotel
rooms, the OverVoice DeskJack (an access device into which hotel guests plug
their laptop computer), with its highly visible, step-by-step instructions,
makes accessing the Internet quick and easy. We also believe that the use of
OverVoice services in hotel meeting rooms will further increase the awareness
of, and demand for, our services in hotel guest rooms by business travelers who
gain exposure while in the meeting room. For our multiple dwelling units, we
believe that our ability to offer multiple Internet connection speeds at
different price points, utilizing our rate shaper technology, enhances our
ability to attract end users. We are able to offer a multiple dwelling unit
resident dedicated high-speed Internet access at an entry level connection
speed and price and later upgrade the service to meet the user's demand for
faster Internet connection speeds.
Accelerate the Roll-Out of Our HyperDSL Services. We have initiated the
roll-out of a new always-on, high-speed Internet access service using digital
subscriber line technology under the name HyperDSL. Unlike traditional forms of
always-on Internet access, digital subscriber line uses the customer's existing
copper voice telephone wire to deliver high-speed Internet service. We believe
digital subscriber line technology currently represents the most economical
always-on, high-speed Internet solution for commercial customers. In addition,
we believe that digital subscriber line technology, used in conjunction with
OverVoice, provides the most cost-effective Internet solution for single-family
residences requiring multiple points of access.
Expand Our National Network. We operate a nationwide network and have
agreements with most of the major backbone providers to exchange Internet
traffic over their respective networks. We currently maintain six points of
presence in Baltimore, Chicago, McLean, Virginia, New York, San Francisco and
Washington, D.C. We intend to add points of presence in Atlanta, Boston,
Dallas, Houston, Los Angeles, Miami, Orlando, Palo Alto, Philadelphia, Phoenix
and Seattle by the end of 1999, and an additional 15 points of presence by the
end of 2000. In June 1998, we signed a ten-year fiber agreement with Qwest,
under which we have access to all of Qwest's points of presence nationwide,
which totaled 200 as of April 16, 1999. We intend to continue to evaluate
strategic relationships and acquisitions that will allow us to further expand
this network.
Leverage the OverVoice Platform to Deliver Future Services and Products. We
believe that our OverVoice technology provides a platform which enables us to
deliver a variety of broadband services and products to our customers. We are
developing a broad array of services and products including Internet protocol
telephony, video conferencing, traditional video services, high definition
television (HDTV) and digital audio radio. We intend to expand our service and
product offerings through internal research and development, and by acquiring
complementary businesses and technologies.
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Services
CAIS Internet currently offers a variety of services under two brand names
as illustrated by the following table:
[Enlarge/Download Table]
Brand Service Lines Pricing
----- ------------------------------------- ----------------------------
OverVoice............... Hotel Guest Room Service $7.95 to $14.95 per 24 hours
Hotel Meeting Room Service Varies by property
Multiple Dwelling Unit Service $24.95 to $49.95 per month
CAIS Internet........... HyperDSL $47.95 to $399 per month
Web Hosting $69 to $295 per month
Always-On Access
Fractional DS-3 to full DS-3 $5,500 to $30,000 per month
Fractional T-1 to full T-1 $695 to $1,750 per month
Dial-Up and Other Narrowband Services $24.95 to $250 per month
OverVoice Services
Hotel Guest Room Service. We provide OverVoice services to hotel guests by
placing our OverVoice DeskJack (pictured below) beside the telephone. The
OverVoice DeskJack provides simple, step-by-step directions on how to access
the Internet. The guest first connects an ethernet-enabled, or universal serial
bus-enabled, laptop to an ethernet port or universal serial bus port within the
OverVoice DeskJack. Once connected, the guest launches the web browser, logs-on
to the OverVoice server and is launched on to the Internet starting at the CAIS
Internet promotional home page. The guest will have always-on, high-speed
Internet access and may leave the laptop connected to the Internet for the
duration of the stay, all while having the option to simultaneously talk on the
same telephone line. A hotel guest is typically charged between $7.95 and
$14.95 per 24-hour stay in a hotel, comparable to that of in-room hotel
entertainment services.
. Highly visible in-room
marketing
The OverVoice DeskJack
. Ethernet card or
universal serial bus
port connectivity
. Step-by-step simple
instructions
[PICTURE OF OVERVOICE DESK JACK]
Meeting Room Service. Hotels typically have dedicated sales staff to solicit
meeting room business. As corporate and independent meeting planners have
particular needs, hotels offer meeting room customers a menu of facilities,
including Internet services, guest room availability and food services. Once
the planner has selected a particular hotel, that hotel's sales staff books the
meeting room and arranges for the particular add-ons requested. We are
currently training hotel sales staff to assist them in selling OverVoice
Internet access to currently booked and prospective corporate meeting
customers.
Prior to the availability of OverVoice, corporate meeting planners and hotel
facilities generally had only two options for providing Internet services. The
first option is dial-up Internet access, which has several drawbacks including:
. delays when down-loading data and images;
. frequent busy signals;
. dropped connections; and
. long connection delays.
The second option is to make special arrangements for a temporary dedicated
high-speed Internet connection which:
. typically takes up to 60 days to order; and
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. usually requires a minimum 1-month commitment and the payment of
installation fees.
By installing OverVoice in the meeting and conference areas, a cost-
effective and simple to use high-speed Internet solution is immediately
available to the property staff, the corporate meeting planner and meeting room
guests. The user simply connects the ethernet-enabled computer to the OverVoice
wall jack in the room. The user then has always-on high-speed Internet access
at various price points and is able to simply launch the web browser and access
all Internet applications. Once connected, the OverVoice server prompts the
property management system to bill the user for the appropriate Internet
connection charge. We anticipate that hotels will be able to offer this
instantaneous, high-speed Internet connection for corporate meetings at a
fraction of the current cost of establishing a dedicated connection. We believe
that the meeting room program will also increase OverVoice brand recognition
and credibility among business travelers who gain exposure to the technology
while in the meeting room.
MDU Service. Once an apartment or condominium building is installed with the
high-speed OverVoice technology, we can provide Internet access to all of its
residents. Prior to launching OverVoice in a particular building, we generally
pre-market the service to residents through building management, using flyers
and direct mailings. We also typically have a marketing day in the building
during which we distribute marketing materials, demonstrate the system and
answer questions. Once OverVoice is installed, the resident simply connects the
ethernet-enabled computer to the OverVoice wall jack in the apartment unit. The
resident then has always-on high-speed Internet access and is able to launch
the web browser and access all Internet applications. Our rate shaping server
allows us to tailor the speed of the user's Internet connection and to offer
multiple connection speeds at different price points. A multiple dwelling unit
resident is typically charged between $24.95 and $49.95 per month for OverVoice
service, depending upon the transmission speed choice.
We believe that our pricing is extremely competitive with typical $19.95 to
$21.95 per month dial-up services. In order for a resident to enjoy
simultaneous voice and data transmission, a dial-up user must incur the cost of
a second phone line and is limited to the much slower access speeds of
traditional dial-up modems. While cable modems and digital subscriber line
allow high-speed always-on access, both involve equipment costs to the provider
well in excess of those of the OverVoice solution. In addition, unlike cable
modems and digital subscriber line services, OverVoice enables the user to have
multiple points of access within one unit on a cost-effective basis.
CAIS Internet Services
The primary services we offer are HyperDSL, web hosting, always-on access
and dial-up access. As of April 16, 1999, we had over 580 always-on access
subscribers and over 602 web hosting customers.
HyperDSL Services. We have initiated the roll-out of a new always-on, high-
speed Internet access service using digital subscriber line technology under
the name HyperDSL. Unlike traditional forms of always-on Internet access,
digital subscriber line services use the customer's existing copper voice
telephone wire to deliver high-speed Internet access.
HyperLINK DSL is our consumer-grade digital subscriber line service for
the residential, home office and small business markets. We currently
provide the service in conjunction with Bell Atlantic. After a two-year
trial with Bell Atlantic, HyperLINK DSL was introduced in the Washington,
D.C. metro area. In 1999, we intend to enter eight additional major
metropolitan areas, including Baltimore, New York, Philadelphia, Chicago,
Dallas, San Fransisco, Miami and Los Angeles. HyperLINK DSL services
currently range in price from $47.95 to $187.95 per month. Installation
fees are approximately $425, which includes approximately $325 for the
purchase of a required digital subscriber line modem.
HyperLAN DSL is our digital subscriber line service for the small and
medium-sized business markets, which we currently offer jointly with Covad.
We believe that HyperLAN DSL will be attractive to business customers who
traditionally have been unwilling to pay the higher costs of conventional
always-on high-speed Internet access. In addition, we believe that this
service will attract customers who currently incur the cost of high-speed
Internet access and who will now for a comparable cost be able to
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significantly increase their bandwidth. We currently offer this service in
Washington, D.C. In 1999, we intend to enter eight additional major
metropolitan areas, including Baltimore, Chicago, Dallas, Los Angeles,
Miami, New York, Philadelphia and San Fransisco. Under the terms of our
agreement with Covad, we co-develop and implement targeted marketing and
advertising programs to stimulate sales. HyperLAN DSL services range in
price from $129 to $399 per month. Installation fees, including equipment,
generally range from $999 to $1,099.
Web Hosting Service. Web hosting can be defined as housing a customer's web
pages on our servers. Web hosting is an ideal solution for customers who want
to "publish" web pages on the Internet without purchasing, configuring,
maintaining and administering the necessary sophisticated hardware and
software. Due to economies of scale, we can generally offer web hosting
solutions far more sophisticated than customers can provide for themselves. Our
staff of Internet engineers and system administrators enables us to offer
multiple platforms for web hosting. These hosting servers are located within
our points of presence infrastructure and make use of multiple high bandwidth
connections to the Internet backbone. File structure directories, domain name
registration and security privileges are set-up for customers on our hosting
servers, thus enabling customers to remotely "publish" their content for
distribution over the Internet. In addition, we provide network and systems
administration and maintenance, tape back-ups and security. Web hosting
services range in price from $69 to $295 per month.
High-Speed Always-On Access Service. We provide always-on access services to
other Internet service providers and commercial customers. This type of
connectivity is generally used to connect local area networks, wide area
networks or server applications to the Internet, ensuring an always-on
connection. These services include a wide range of connectivity options
tailored to the requirements of the customer, including: T-1 (1.54 Mbps) or
fractional T-1 connections and DS-3 (45 Mbps) or fractional DS-3 connections.
Always-on services range in price from $695 to $30,000 per month depending on
the connection type. Installation fees generally range from $300 to $5,000.
Dial-Up and Other Narrowband Services. We offer high-quality, digital dial-
up, integrated services digital network connections (ISDN) and dedicated
integrated services digital network connections, with Internet access speeds up
to 128 Kbps. These are primarily amenity services provided to always-on access
services customers upon request, but are not marketed generally. Dial-up and
other narrowband services range in price from $24.95 to $250 per month.
New Products and Services
We intend to continue expanding the OverVoice product line as well as
introduce additional integrated communications services that leverage the
convergence of voice and data communications. We are developing a commercially
deployable OverVoice solution for the single family home market to be offered
in conjunction with a HyperDSL connection. Because OverVoice is a point-to-
multipoint distribution technology, we believe that it is particularly well-
suited for a wide array of existing and new applications, including Internet
protocol telephony services, laser disk video services, digital audio radio and
high definition television (HDTV). We will continue to research and develop new
products and services to be offered in the future, using the OverVoice
technology.
Sales and Marketing
OverVoice. We market OverVoice services primarily through our direct sales
group which:
. focuses on securing hotel chains' endorsements of OverVoice as the
preferred Internet infrastructure solution for the chain's properties;
and
. sells directly to hotel properties owned or managed by the hotel chain
and to hotel chain franchisees.
41
In addition, we are continuing to aggressively pursue opportunities to
increase OverVoice awareness within the hospitality and multiple dwelling unit
industries. We participate in major industry trade shows and events such as
HITEC (Hospitality Industry Technology Exposition and Conference), IH/M&RS
(International Hotel, Motel and Restaurant Show), NAREIT (National Association
of Real Estate Investment Trusts) Annual Convention and COMNET (Communications
Network).
We also continue to identify strategic partners that have existing
relationships with hotel chains, multiple dwelling units and multiple dwelling
unit/real estate investment trusts for the installation and maintenance of
various communications services in these properties. This allows us to package
OverVoice in a pre-existing "bundle" of services, thus providing the
opportunity to maximize in-building penetration rates. We believe that by
working directly with hotel chains, real estate investment trusts and carefully
selected strategic partners, OverVoice will become the industry standard
Internet infrastructure solution.
In addition, on March 30, 1999, we entered into a ten-year exclusive
distribution agreement with Overnet, Inc., a Korean corporation. Under the
agreement, Overnet became our exclusive importer and distributor of OverVoice
in North and South Korea, subject to certain limited exceptions, and we became
Overnet's sole supplier.
CAIS Internet. We offer Internet services to Internet service providers,
commercial dedicated accounts and small and medium-sized businesses using a
direct sales force. Direct mail and print advertising is utilized to both
further generate sales leads and to build awareness of CAIS Internet and our
services. In addition, we are regularly featured in the Boardwatch directory of
national Internet backbone providers and exhibit at select trade shows. With
respect to dial-up and other narrowband services, leads are handled on a
"demand only" basis by a technical support division. Finally, public relations
efforts and a routine program of press releases and contacts are conducted to
focus attention on CAIS Internet in the print, on-line and TV media.
Customers
OverVoice. The ultimate customers for our services are individuals in
hotels, multiple dwelling units and single family homes. In the hotel market,
we primarily target the frequent business traveler with a laptop computer who
needs to connect to the Internet. We believe that our OverVoice technology
overcomes the connection problems that these customers currently encounter with
dial-up service while enabling them to use the same telephone line for
conversations and Internet access simultaneously. In the multiple dwelling unit
market, we target individuals in Class A and B apartment buildings who
typically already own a personal computer and have some experience with the
Internet and/or on-line services. For the single family home market, we will
target business people who are connecting to their office's local area network
and families who are seeking home networking solutions.
CAIS Internet. As a tier one Internet service provider, we have historically
offered always-on Internet access to tier two Internet service providers in the
Washington, D.C. metro area and select international markets. As of April 16,
1999, we continue to provide dedicated Internet connections to more than 50
Internet service providers in the Washington, D.C. area and 5 international
Internet service providers in Europe, Latin America and Asia. Over the past
year, we have actively sought to diversify our dedicated customer base to
commercial and other institutional accounts, while maintaining a presence in
the Internet service provider market. As of April 16, 1999, we had 284 business
customers for always-on, high-speed Internet access. We also maintain a base of
over 3,200 dial-up and other narrowband accounts, though this is not a market
we actively pursue. Furthermore, we have developed a base of more than 500
small and medium-sized businesses as web site hosting customers since June
1997.
For the fiscal year ended December 31, 1998, one customer, Hongkong Telecom,
accounted for 15% of CAIS Internet's consolidated net revenues.
Customer Service
Our Customer and Account Management division provides comprehensive customer
support. The division consists of three principal departments: Customer
Support, Technical Support and Account Management. As of
42
April 16, 1999, this division consisted of 26 persons. We intend to continue to
emphasize customer support for the nationwide roll-out of OverVoice and our
HyperDSL services.
The Customer Support and Technical Support departments maintain quality
service standards and respond to customer inquiries 24 hours a day, 365 days a
year. Established standards are continuously monitored and evaluated through
detailed trouble tickets, phone logs, bandwidth utilization reports, server
log-in reports as well as network and service up time reports. Our technical
support representatives are trained in an effort to ensure superior customer
service. The Technical Support department is further strengthened by a network
operations center, located in McLean, Virginia, which continuously monitors our
network and supporting infrastructure. We are currently building a second
network operations center in our corporate headquarters in Washington, D.C. The
new network operations center will utilize state-of-the-art network monitoring
and will include remote capabilities. Once the second network operations center
is complete, we will continue to maintain the McLean, VA network operations
center as a redundant facility. The Account Management department acts as a
single point of contact for major account customers for the coordination,
management and implementation of all of our services.
Network Topology
Our infrastructure is a nationwide clear-channel DS-3, OC-3 and asynchronous
transfer mode network. We provide high-speed Internet access from our points of
presence to commercial and residential customers through always-on high-
capacity leased lines over local exchange facilities. In June 1998, we entered
into a 10-year fiber agreement with Qwest, under which we have access to all of
Qwest's points of presence nationwide, which totaled 200 as of April 16, 1999.
Access to these points of presence enables us to provide OverVoice services to
customers throughout the country. We are migrating our existing asynchronous
transfer mode backbone links to the Qwest fiber network.
We currently maintain six points of presence in Baltimore, Chicago, McLean,
Virginia, New York, San Francisco and Washington, D.C. We intend to add points
of presence in Atlanta, Boston, Dallas, Houston, Los Angeles, Miami, Orlando,
Palo Alto, Philadelphia, Phoenix and Seattle by the end of 1999, and an
additional 15 points of presence by the end of 2000. The network is monitored
24 hours per day, 365 days per year from our network operations center in
McLean, VA.
We maintain private and public arrangements with most major Internet service
providers to exchange Internet traffic over our respective networks. We will
continue to add additional arrangements, as necessary, to deliver the highest
quality of service to our customers.
Suppliers
Equipment Procurement and Manufacturing. Q-TEL, the manufacturing subsidiary
of Compania Dominicana de Telefonos, C. por A. (a wholly owned subsidiary of
GTE) has begun production and delivery of 10,000 OverVoice control units. Q-TEL
is an offshore manufacturing facility that performs functions for major U.S.
telecom equipment providers. Currently, Q-TEL is able to produce the control
units for substantially less than domestic manufacturers.
Equipment Warehousing, Distribution and Installation. We intend to support
the nationwide roll-out of OverVoice through strategic relationships with
warehousing, distribution and installation companies. We have entered into an
agreement with Farnor Enterprises, Inc. to receive, barcode, warehouse and
distribute nationally OverVoice equipment inventory. We have made arrangements
with AmeriLink d/b/a NaCom, Volt Information Sciences, Inc. and MasTec, Inc. to
perform national OverVoice installation functions. All three of these companies
have experience in handling thousands of work orders per week, have attended
OverVoice installation training provided by The Siemon Company and are
designated as Certified Installers of the Siemon Cabling System. We believe
that these relationships will enable us to deploy OverVoice under large
national contracts promptly and on a cost-effective basis.
43
The OverVoice technology is economical, easy to implement and does not
involve a disruptive installation procedure. We can install the OverVoice
technology in an average size hotel or multiple dwelling unit (300 units) in
two to three weeks for approximately $250 per hotel guest room or apartment
unit. Installation can be accomplished at full occupancy, as the in-room
installation time is only 10-15 minutes per room.
Competition
We operate in a highly competitive environment for each of our lines of
business and we believe that competition is increasing. The competitive
environments for our different lines of business are as follows:
OverVoice. We face several major groups of competitors in the business of
providing high-speed Internet access to hotels and multiple dwelling units.
These include local exchange carriers and other digital subscriber line
providers, cable TV companies and other providers using cable modems, and
installation firms that deploy Category 5 rewiring in hotels and multiple
dwelling units. Although we believe OverVoice is the most cost-effective, user-
friendly and easily deployable high-speed Internet infrastructure solution
available, several of our competitors have extensive marketplace presence and
much greater technological and financial resources than we possess.
In addition, the OverVoice technology also competes with technologies using
other transmission media, such as coaxial cable, wireless facilities and fiber
optic cable. To the extent that telecommunications service providers, hotels,
multiple dwelling units or single family residences install any of these
alternative transmission media, demand for OverVoice may decline.
CAIS Internet. Because the Internet services market has no substantial
barriers to entry, we expect that competition will continue to intensify. Our
principal competitors include other tier one national backbone providers such
as UUNET Technologies, Inc., PSINet Inc. and BBN (a GTE subsidiary). To a
lesser extent, we also compete for always-on and dial-up access and web
services business with regional, tier two Internet service providers and cable
companies that operate in the same geographic markets that we serve.
Accordingly, we expect the market for Internet access services to continue to
grow and to be highly competitive with a variety of regional and national
players vying for new business. In many instances, we compete directly with our
downstream tier two Internet service provider customers. Eventually, we expect
some form of a market consolidation to occur, with those Internet service
providers that furnish the most value-added solutions ultimately surviving.
Government Regulation; Potential Taxes
We provide Internet access, in part, through transmissions over public
telephone lines. These transmissions are governed by regulatory policies
establishing charges and terms for communications. As an Internet service
provider we are not currently subject to direct regulation by the Federal
Communications Commission or any other agency, other than regulations
applicable to businesses generally. In a report to Congress adopted on April
10, 1998, the FCC reaffirmed that Internet service providers should be
classified as unregulated "information service providers" rather than regulated
"telecommunications providers" under the terms of the Telecommunications Act of
1996.
This finding is important because it means that we are not subject to
regulations that apply to telephone companies and similar carriers. We also are
not required to contribute a percentage of our gross revenues to support
"universal service" subsidies for local telephone services and other public
policy objectives, such as enhanced communications systems for schools,
libraries and certain health care providers. Although there can be no
assurance, the FCC action may also discourage states from separately regulating
Internet service providers as telecommunications carriers or imposing similar
subsidy obligations.
Nevertheless, Internet-related regulatory policies are continuing to
develop, and it is possible that we could be exposed to regulation in the
future. For example, in the same report to Congress, the FCC stated its
intention to consider whether to regulate voice and fax telephony services
provided over the Internet as "telecommunications" even though Internet access
itself would not be regulated. The FCC is also considering whether such
Internet-based telephone service should be subject to universal service support
obligations, or pay carrier access charges on the same basis as traditional
telecommunications companies.
44
Local telephone companies assess access charges to long distance companies
for the use of the local telephone network to originate and terminate long
distance calls, generally on a per-minute basis. Access charges have been a
matter of continuing dispute, with long distance companies complaining that the
rates are substantially in excess of cost, and local telephone companies
arguing that access rates are justified to subsidize lower local rates for end
users and other purposes. Both local and long distance companies, however,
contend that Internet-based telephony should be subject to these charges. We
have no current plans to install gateway equipment and offer telephony, and so
we do not believe we would be directly affected by these developments. However,
we cannot predict whether these debates will cause the FCC to reconsider its
current policy of not regulating Internet service providers.
In addition, a number of state and local government officials have asserted
the right or indicated a willingness to impose taxes on Internet-related
services and commerce, including sales, use and access taxes. We cannot
accurately predict whether the imposition of any such taxes would have a
material adverse effect on our financial condition.
Patents and Other Proprietary Information
We are a licensee and joint-owner of certain patents and patent applications
of Inline relating to the OverVoice technology. We, together with Inline, have
a total of two U.S. patents and nine U.S. patent applications. Two of these
nine patent applications have recently been allowed and, therefore, are
expected to become patents in the next few months.
We own 50% of all U.S. and foreign (with the exception of Israel) patents
and patent applications relating to the OverVoice technology. We own the patent
applications we filed in Canada, Europe, Mexico, Australia and New Zealand.
The first U.S. patent granted relates to transmission of video over active
voice telephone wires. Related patents have also been obtained in Canada and
from the European Patent Office, covering Germany, France and the United
Kingdom. In addition, a patent was issued in South Korea and a divisional
application was filed in Europe.
The second U.S. patent granted relates to some or all aspects of the
following systems, among others:
. provision of high-speed Internet service through the communication of
Ethernet signals over the active telephone wiring in residences, hotels,
apartment buildings and similar structures;
. provision of video services over the telephone wiring in the same
structures;
. provision of webTV-type services over the telephone wiring in these
structures;
. creation of a standard Ethernet network, using existing telephone
wiring, among all personal computers in a structure; and
. communication of Ethernet signals over 1,000 feet over a single active
telephone line.
Novel ideas are embodied in many of the different parts that make up these
systems. Among these parts are:
. different electronic processes for converting the video and data
signals;
. special connectors that are easy to install, convenient to use and
promote smooth signal flow across the wiring;
. different arrangements of the components to facilitate the operation of
the systems; and
. special "command and control" procedures that help implement the
different applications.
Of the two allowed applications, one is a continuation of the first U.S.
patent and the other describes new features related to communication of video
and data over active telephone wires. These additional features are
45
also embodied in applications filed by Inline in Israel and under the Patent
Cooperation Treaty, and in applications we have filed in Canada, Europe,
Mexico, Australia and New Zealand.
Pursuant to our license agreement with Inline, we have the exclusive right
to make, use and sell the OverVoice technology for all structures in the United
States, except for single family residential units and certain food
establishments, for which we have non-exclusive rights. We further have the
exclusive right to make, use and sell under all foreign patents and patent
applications relating to the OverVoice technology for all structures except for
single family residential units and certain food establishments, for which we
have non-exclusive rights, with the exception of Israel, which Inline reserved
for itself.
Under our license agreement with Inline, we pay royalties generally ranging
from 3.0% to 5.5% of net sales of the OverVoice technology. In the rare cases
where we do not provide the internet access or own the OverVoice equipment
installed, this percentage may be as high as 70.0%. If we sublicense the
patents and pending patent applications relating to the OverVoice technology to
a third party, we are required to pay Inline a percentage of the income
received from the sublicense. Additionally, we have minimum annual royalty
payments starting at $100,000 in 1998 and increasing to $250,000. The license
agreement is self-terminating upon the lapse of the last Inline patent included
in the license agreement, with the list of included patents to be supplemented
in the event that any future patent applications relating to the OverVoice
technology are filed by Inline personnel.
Inline retains the authority to control prosecution and maintenance of
patent rights, except for the patent applications we own. However, if Inline
decides not to:
. file a patent application;
. prevent a patent application from being abandoned; or
. keep a patent or application in force; we may elect to have Inline
assign the patent, application or invention to us. We have the right to
enforce these patent rights against potential infringers, although we
must share any recovery with Inline.
Legal Proceedings
We are not a party to any lawsuit or proceeding which, in the opinion of our
management, is likely to have a material adverse effect on our business,
financial condition or results of operation.
On March 25, 1999, CAIS Internet filed a patent infringement lawsuit against
LodgeNet Entertainment Corp. in the United States District Court for the
District of Maryland, Greenbelt Division. The complaint charges LodgeNet with
infringement of Patent No. 5,844,596, which is directed to the delivery of
high-speed audio and video signals over active telephone wiring. This patent is
jointly owned by CAIS Internet and Inline Connection Corp. We are currently in
discussions with LodgeNet to resolve this issue.
On April 9, 1999, Laura Neuman, a former employee of CAIS Internet, filed a
demand for arbitration against CAIS Internet with the American Arbitration
Association, asserting breach of contract and breach of covenant of good faith
and fair dealing, and requesting damages in the amount of $750,000. In
addition, Ms. Neuman filed a charge of discrimination against CAIS Internet
with the Maryland Commission on Human Relations, alleging gender-based
discrimination and retaliation. Ms. Neuman also filed a complaint against Evans
K. Anderson, Executive Vice President of Sales and Marketing of CAIS Internet,
in the Circuit Court for Montgomery County, alleging defamation and invasion of
privacy, and seeking compensatory damages in the amount of $1 million and
punitive damages in the amount of $1 million. We do not believe that any of the
actions filed by Ms. Neuman has merit, and we intend to vigorously defend these
charges. CAIS Internet will indemnify Evans K. Anderson for any damages
resulting from Ms. Neuman's complaint against Mr. Anderson.
46
Employees
As of April 16, 1999, we employed approximately 128 full-time employees. In
addition to our full-time employees, we also employ part-time personnel from
time to time in various departments. None of our employees are covered by a
collective bargaining agreement. We believe that our employee relations are
satisfactory.
Properties
Our principal executive offices are located in Washington, D.C. In addition
to our corporate headquarters, we lease office space in McLean, Virginia. The
leases expire at various times between December 31, 1999 and February 15, 2009.
[Download Table]
Location Type Square Footage
-------- ------ --------------
McLean, Virginia.......................................... Office 7,033
McLean, Virginia.......................................... Office 1,566
Washington, D.C........................................... Office 32,500
We consider that, in general, our physical properties are well maintained,
in good operating condition and adequate for our purposes.
47
MANAGEMENT
Officers, Directors and Other Key Employees
The officers, directors and other key employees of CAIS Internet, and their
ages as of April 16, 1999 are set forth below.
[Download Table]
Name Age Position
---- --- --------
Ulysses G. Auger, II(2)........... 46 Chairman of the Board and Chief
Executive Officer
William M. Caldwell, IV........... 51 President and Director
Evans K. Anderson................. 51 Executive Vice President of Sales and
Marketing and Chief Operating Officer
Gary H. Rabin..................... 33 Executive Vice President of Finance and
Strategic Planning
Stephen D. Price.................. 27 Vice President of Business Development
Richard W. Durkee................. 43 Vice President of Information Technology
and Operations
Barton R. Groh.................... 46 Vice President, Chief Financial Officer
and Treasurer
Michael G. Plantamura............. 43 Vice President, General Counsel and
Secretary
Duncan M. Fitchet, Jr. ........... 44 Vice President of Marketing
Tara Pierson Dunning.............. 35 Vice President of Customer and Account
Management of CAIS, Inc.
Durand Achee...................... 47 Vice President of Content and Broadcast
Networks of CAIS, Inc.
Frank R. Kent, III................ 46 Vice President of Human Resources of
CAIS, Inc.
Ulysses G. Auger, Sr.............. 77 Director
Richard F. Levin(1)(2)............ 46 Director
Vernon L. Fotheringham(1)(2)...... 50 Director
R. Theodore Ammon................. 49 Director
--------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Ulysses G. Auger, II has served as the Chairman of the Board and Chief
Executive Officer of CAIS Internet since January 1998. Mr. Auger has an
extensive background in the telecommunications industry, and is a three-term
member of the Board of Directors of Comptel, a telecommunications industry
trade association with approximately 225 member companies. Until February 1999,
Mr. Auger chaired Comptel's IP Committee, which was formed to address Internet
issues affecting the telecommunications industry. In 1987, Mr. Auger founded
Cleartel Communications, Inc. and has served as a director since July 1987. Mr.
Auger also served as President of Cleartel from August 1987 to June 1988, and
then again from June 1990 to February 1999. In addition, Mr. Auger has served
as President and a Board Member of CAIS, Inc. since May 1996, and assumed the
roles of Chairman of the Board and Chief Executive Officer of CAIS, Inc. in
January 1998. Mr. Auger is the son of Ulysses G. Auger, Sr., a director of CAIS
Internet.
William M. Caldwell, IV has served as a member of the Board of Directors of
CAIS Internet since January 1998 and of CAIS, Inc. since May 1996, as CAIS
Internet's Vice Chairman from January 1998 to February 1999 and as CAIS
Internet's and CAIS, Inc.'s President since February 1999. Mr. Caldwell also
served as the Vice Chairman of CAIS, Inc. and Cleartel Communications, Inc.
from September 1997 to February 1999. Since June 1995, Mr. Caldwell also has
served as a member of the Board of Directors of Cleartel. Mr. Caldwell has an
extensive background in the areas of marketing, financial management,
investment banking and general corporate management. Prior to joining CAIS,
Inc. and Cleartel, from 1993 to August 1997, Mr. Caldwell
48
served as President of Digital Satellite Broadcasting Corporation. Prior to
1993, Mr. Caldwell founded The Union Jack Group, an investment banking advisory
firm, and served as a Vice President in Corporate Finance at Kidder Peabody. In
addition, Mr. Caldwell also has served as both President and Chief Financial
Officer of Van Vorst Industries, an international home furnishing manufacturer;
as Vice President of Marketing for Flying Tiger Line, Inc., one of the world's
largest all-cargo air carriers before its acquisition by Federal Express
Corporation; and as a consultant with Booz Allen, Hamilton Inc. Mr. Caldwell
currently sits on the Board of directors for both Lee Pharmaceuticals and King
Koil Franchising, Inc.
Evans K. Anderson has served as the Executive Vice President of Sales and
Marketing and Chief Operating Officer of CAIS Internet and CAIS, Inc. since
February 1999. Prior to that, he served as CAIS Internet's and CAIS, Inc.'s
Senior Vice President of Sales and Marketing and the General Manager of CAIS,
Inc. from January 1998 to February 1999. Mr. Anderson also has served as a
member of the Board of Directors of CAIS, Inc. since December 1997. In
addition, from June 1998 to February 1999, Mr. Anderson served as Cleartel
Communications, Inc.'s Senior Vice President of Sales and Marketing. Mr.
Anderson brings 20 years of experience in the telecommunications and related
industries and is currently responsible for all of CAIS Internet's and CAIS,
Inc.'s sales and marketing functions and for CAIS, Inc.'s overall management,
including customer service, technical support, OverVoice operations and account
management. Prior to joining CAIS, Inc., from March 1996 to March 1997, Mr.
Anderson served as Director of Sales for the Northeast region for Advanced
Radio Telecom, a leading provider of advanced 38GHz digital wireless
technology. From January 1993 to February 1996, Mr. Anderson was a principal in
Vitel International, Inc., a nationwide provider of sales and distribution for
Airborne Express and telecommunications products. Prior to 1993, Mr. Anderson
held the position of Executive Vice President of Sales and Marketing at Oncor
Communications, a communications company, where he was responsible for the
sales, marketing and customer service functions. Prior to that, Mr. Anderson
served as Director of Sales with Contel Texocom, a national distributor of
telecommunications equipment, and held various sales and management positions
with ITT U.S.T.S. and Sprint Communications Company, L.P.
Gary H. Rabin has served as the Executive Vice President of Finance and
Strategic Planning since April 1999. Mr. Rabin has approximately 12 years of
investment banking experience including significant capital raising, public
offering and merger advisory work in the telecommunications and Internet
sectors. Prior to joining CAIS Internet, he served as Managing Director, co-
head and founder of the Telecommunications Group at ING Baring Furman Selz LLC
from May 1997 to April 1999. From September 1994 through April 1997, Mr. Rabin
was a founding member of the telecommunications investment banking group at UBS
Securities LLC. From July 1989 through April 1994 he was a principal of Beale
Lynch Partners LLC, a private investment banking boutique specializing in
international financings and general strategic advisory services. He was also
previously with The First Boston Corporation, the Sumitomo Bank Limited and
Manufacturers Hanover Trust Company.
Stephen D. Price has served as CAIS Internet's Vice President of Business
Development since March 1999. Prior to joining CAIS Internet, he served as an
investment banker in the Telecommunications Group of ING Baring Furman Selz LLC
from September 1997 to March 1999. While at ING Baring, Mr. Price specialized
in the financing and advising of Internet service providers and Internet-
related communications companies. Previously, from June 1994 to September 1997,
Mr. Price served as an investment banker at UBS Securities LLC, focusing
primarily on telecommunications, technology and biotechnology.
Richard W. Durkee has served as CAIS Internet's Vice President of
Information Technology and Operations since September 1998. Mr. Durkee also has
served as CAIS, Inc.'s Vice President of Information Technology and Operations
since September 1998, and served in the same capacity at Cleartel from
September 1998 to February 1999. Mr. Durkee has over 20 years of experience in
Systems and Network Development, Operations and Management. Prior to joining
CAIS Internet, from April 1996 to September 1998, Mr. Durkee served as Director
of Information Technology for ORBCOMM Global, L.P., a global messaging and data
communications company. From March 1995 to March 1996, Mr. Durkee served as
Vice President, Information Technology and Network Operations, for GTS/Global
Link, a facilities based provider of
49
telecommunications services. From June 1989 to February 1995, Mr. Durkee served
as Director of Information Systems for Oncor Communications, Inc.
Barton R. Groh has served as CAIS Internet's Vice President, Chief Financial
Officer and Treasurer since January 1998. Mr. Groh also has served as CAIS,
Inc.'s Vice President and Chief Financial Officer since May 1996, as CAIS,
Inc.'s Assistant Secretary since December 1996, and as CAIS, Inc.'s Treasurer
since December 1997. Mr. Groh joined Cleartel Communications, Inc. in July 1989
as Director of Finance and Administration and served as Cleartel's Vice
President and Chief Financial Officer from June 1992 to February 1999. In
addition, Mr. Groh served as Cleartel's Assistant Secretary from June 1993 to
February 1999 and as Cleartel's Treasurer from June 1998 to February 1999.
Prior to joining Cleartel, Mr. Groh held positions as a Senior Auditor with
Price Waterhouse from 1974 to 1979, as an accounting manager with Comsat
Corporation from 1979 to 1987, and as Controller, Franchise Operations with
Entre Computer Centers from 1987 to 1989. Mr. Groh is a Certified Public
Accountant.
Michael G. Plantamura has served as CAIS Internet's Vice President,
Secretary and General Counsel since January 1998. Mr. Plantamura also has
served as Vice President and General Counsel of CAIS, Inc. since September
1996, and as CAIS, Inc.'s Secretary since December 1997. From September 1996 to
February 1999, Mr. Plantamura served as Vice President and General Counsel of
Cleartel Communications, Inc. and as Cleartel's Secretary from June 1998 to
February 1999. Mr. Plantamura is currently responsible for all of CAIS
Internet's and CAIS, Inc.'s legal, regulatory, corporate, contract and
litigation issues. From April 1996 to September 1996, Mr. Plantamura served as
Cleartel's Director of Legal and Regulatory Affairs, and from May 1996 to
September 1996, Mr. Plantamura held the same position at CAIS, Inc. From
December 1986 to March 1996, Mr. Plantamura served as in-house General Counsel
for WBDC-TV50, Washington, D.C. and WUNI-TV27, Worcester/Boston, MA.
Duncan M. Fitchet, Jr. has served as CAIS Internet's Vice President of
Marketing since January 1998. Mr. Fitchet also has served as Vice President of
Marketing for CAIS, Inc. since January 1997, and held the same position at
Cleartel Communications, Inc. from January 1997 to February 1999. Mr. Fitchet's
responsibilities include strategic planning and marketing strategies, product
management, market research, product and service promotions, public relations
and marketing communications activities. From May 1996 to December 1996, Mr.
Fitchet served as Director of Marketing and Business Development for CAIS,
Inc., and from August 1995 to December 1996, Mr. Fitchet held the same position
at Cleartel. Prior to joining Cleartel, from June 1991 to August 1995, Mr.
Fitchet served as Senior Group Product Manager at GTE Telephone Operations.
Tara Pierson Dunning has served as CAIS, Inc.'s Vice President of Customer
and Account Management since September 1998. Previously, Ms. Dunning served as
Director of Marketing for CAIS Internet from January 1998 to September 1998;
Director of Marketing for CAIS, Inc. and Cleartel Communications, Inc. from
October 1997 to September 1998; Director of Business Development for CAIS, Inc.
and Cleartel from January 1997 to October 1997; and as Manager of Business
Development for CAIS, Inc. and Cleartel from September 1996 to December 1996.
Prior to joining CAIS, Inc. and Cleartel, from September 1993 to September
1996, Ms. Dunning founded and served as Vice President of Marketing for New
Vision Communications.
Durand Achee has served as CAIS, Inc.'s Vice President of Content and
Broadcast Networks since April 1999. Prior to joining CAIS Internet, from
October 1993 to April 1, 1999, Mr. Achee was a founder and principal of M3
Group, Inc., a pioneer in representing software developers, and content
providers for the creation of interactive media and Internet content. While at
M3, Mr. Achee also worked actively with companies developing e-commerce and
online advertising initiatives. Prior to founding M3 Group, Mr. Achee served as
Vice President of Business Development for Time Warner Interactive Group
responsible for overseeing interactive media content development with third
party software providers and other Time Warner divisions. Mr. Achee has an
extensive publishing, advertising, and media background and was responsible for
launching the in-house magazine publishing group at Walt Disney Company.
50
Frank R. Kent, III has served as CAIS Inc.'s Vice President of Human
Resources since April 1999. Mr. Kent is responsible for recruiting, employee
relations, training, benefits, organizational development and related areas.
From May 1996 to April 1999, Mr. Kent served as CAIS, Inc.'s Director of
Corporate Human Resources. Mr. Kent joined Cleartel Communications, Inc. in
June 1992 as Manager of Human Resources, and served as Cleartel's Director of
Corporate Human Resources from 1993 to May 1996. From September 1991 through
January 1997, Mr. Kent also served as a human resources management consultant
for Auger Enterprises. Prior to joining Cleartel and CAIS, Inc., Mr. Kent
served as Director of Human Resources for the D.C. Housing Finance Agency.
Ulysses G. Auger, Sr. has served as a member of the Board of Directors of
CAIS Internet since December 1997. Mr. Auger served as Secretary, Treasurer and
a director of Cleartel Communications, Inc. from June 1993 to June 1998. From
April 1996 to December 1997, Mr. Auger served as Secretary, Treasurer and a
director of CAIS, Inc. Mr. Auger is a private investor and entrepreneur who
founded the nationally renowned Blackie's House of Beef in 1946. Mr. Auger's
financial interests include hotels, commercial real estate and Mid-Atlantic
region restaurants. Mr. Auger, Sr. is the father of Ulysses G. Auger, II, the
Chairman of the Board and Chief Executive Officer of CAIS Internet.
Richard F. Levin has served as a member of the Board of Directors of CAIS
Internet since December 1997. Mr. Levin also served as a member of the Board of
Directors of Cleartel Communications, Inc. from June 1995 to June 1998. Mr.
Levin is a partner in the Washington, D.C. law firm of Grossberg, Yochelson,
Fox and Beyda, where he has practiced since 1979.
Vernon L. Fotheringham has served as a member of the Board of Directors of
CAIS Internet since January 1999. Mr. Fotheringham has served as Chairman,
President and Chief Executive Officer of Nutel Corporation since August 1998.
From December 1995 to August 1998, Mr. Fotheringham served as Chairman and
Chief Executive Officer of Advanced Radio Telecom. Prior to that, from April
1993 to December 1995, Mr. Fotheringham served as President and Chief Executive
Officer of Norcom Networks Corporation, a nationwide provider of mobile
satellite services. Over the last ten years, Mr. Fotheringham has advised
several businesses in the telecommunications industry, including American
Mobile Satellite Corporation, ClairCom Communications and McCaw Cellular
Communications, Inc.
R. Theodore Ammon has served as a member of the Board of Directors of CAIS
Internet since February 1999. Mr. Ammon has served as the Chairman of the Board
of Big Flower Holdings, Inc. (and predecessors) since its inception in 1993 and
was the Chief Executive Officer of a Big Flower Holdings, Inc. predecessor from
inception until April 1997. Mr. Ammon is also a director of Big Flower Press
Holdings, Inc., a subsidiary of Big Flower Holdings, Inc. Mr. Ammon was a
General Partner of Kohlberg Kravis Roberts & Co. from 1990 to 1992, and an
executive of such firm prior to 1990. Mr. Ammon is also a member of the Board
of Directors of Host Marriott Corporation and Chairman of the Board of
Directors of 24/7 Media, Inc. In addition, Mr. Ammon serves on the Board of
Directors of the New York YMCA, The Municipal Art Society of New York,
Jazz@Lincoln Center and on the Board of Trustees of Bucknell University.
All officers serve at the discretion of the Board.
Board Committees
The Board has established an Audit Committee and a Compensation Committee.
The Audit Committee will review the results and scope of the audit and other
services provided by CAIS Internet's independent accountants and consists of
Messrs. Auger, II, Levin and Fotheringham. The Compensation Committee will
approve salaries and certain incentive compensation for management and key
employees of CAIS Internet and administer CAIS Internet's Amended and Restated
1998 Equity Incentive Plan and consists of Messrs. Levin and Fotheringham.
51
Executive Compensation
The following table sets forth certain summary information concerning
compensation for services in all capacities awarded to, earned by or paid to,
CAIS Internet's Chief Executive Officer and each of the four other most highly
compensated executive officers, whose total cash and cash equivalent
compensation exceeded $100,000, with respect to the fiscal year ended December
31, 1998. Each of CAIS Internet's officers received perquisites and other
personal benefits in addition to salary and bonuses. The aggregate amount of
these perquisites and other personal benefits, however, did not exceed the
lesser of $50,000 or 10% of the total of the annual salary and bonus reported
for any of the persons listed in this chart for 1998. For a complete discussion
regarding options granted to these persons with respect to the fiscal year
ended December 31, 1998, please see "--Options Granted in Fiscal Year 1998."
Summary Compensation Table
[Enlarge/Download Table]
Long-Term
Compensation
------------
Annual Compensation Awards
------------------------------------------- ------------
Other Securities All
Salary Bonus Annual Underlying Other
Name and Principal Position Year ($) ($) Compensation($) Options(#) Compensation
--------------------------- ----- -------- ------- --------------- ------------ ------------
Ulysses G. Auger, II..... 1998 $280,140 $28,000 -- -- --
Chairman of the Board
and
Chief Executive Officer
William M. Caldwell, IV.. 1998 237,498(/1/) -- -- -- --
President and Director
Evans K. Anderson........ 1998 179,956 -- -- 135,800 --
Executive Vice President
of Sales and Marketing
Laura A. Neuman(/2/) .... 1998 148,076 50,000 -- 60,000 --
Vice President of Sales
Duncan M. Fitchet, Jr. .. 1998 127,961 10,000 -- 40,000 --
Vice President of
Marketing
--------
(1) During 1998, Mr. Caldwell received a base salary of $176,922 for services
performed in 1998 and $60,576 in deferred income for services performed in
1997.
(2) Ms. Neuman ceased to be an employee of CAIS Internet as of April 1, 1999.
The following table sets forth certain information regarding options to
acquire common stock granted to CAIS Internet's Chief Executive Officer and
each of the four other most highly compensated executive officers, whose total
cash and cash equivalent compensation exceeded $100,000 with respect to the
fiscal year ended December 31, 1998. There were no stock appreciation rights
granted in 1998. The assumed rates of growth were selected for illustration
purposes only. They are not intended to forecast possible future appreciation,
if any, of stock prices. No gain to the optionees is possible without an
increase in stock prices, which will benefit all stockholders.
52
Options Granted in Fiscal Year 1998
[Enlarge/Download Table]
Potential
Realizable Value at
Assumed Annual
Rates of Stock
Price Appreciation
Percent of for
Total Options Exercise Option Term(/1/)
Options Granted in Price -------------------
Name Granted Fiscal Year ($/sh) Expiration Date 5%($) 10%($)
---- ------- ------------- -------- ----------------- --------- ---------
Ulysses G. Auger, II..... -- -- -- -- -- --
William M. Caldwell, IV.. -- -- -- -- -- --
Evans K. Anderson........ 100,000(/2/) 10.4 3.07 April 15, 2008 2,136,342 3,583,614
35,800(/2/) 3.7 4.31 December 10, 2008 720,418 1,238,542
Laura A. Neuman(/3/) .... 20,000 2.1 3.07 April 15, 2008 -- --
40,000 4.2 3.07 June 29, 2008 -- --
Duncan M. Fitchet, Jr. .. 40,000 4.2 3.07 April 15, 2008 854,537 1,433,445
--------
(1) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date based upon an assumed initial public offering price
of $15.00 per share. These assumptions are not intended to forecast future
appreciation of our stock price. The potential realizable value computation
does not take into account federal or state income tax consequences of
option exercises or sales of appreciated stock.
(2) Mr. Anderson was awarded options to purchase 100,000 shares of CAIS
Internet's common stock at an exercise price of $3.07 per share on April
15, 1998. On December 10, 1998, pursuant to CAIS Internet's stock option
plan, Mr. Anderson was awarded options to purchase 35,800 shares of CAIS
Internet's common stock, at an exercise price of $4.31 per share.
(3) Ms. Neuman ceased to be an employee of CAIS Internet as of April 1, 1999
and therefore Ms. Neuman's options were forfeited prior to vesting.
Fiscal Year End Option Values
The following table sets forth certain information regarding unexercised
options held by CAIS Internet's Chief Executive Officer and each of the four
other most highly compensated executive officers, whose total cash and cash
equivalent compensation exceeded $100,000 with respect to the fiscal year ended
December 31, 1998. There were no options exercised in 1998. The calculations of
the value of unexercised options are based on the difference between the
assumed initial public offering price of $15.00 per share, and the exercise
price of each option, multiplied by the number of shares covered by the option.
[Download Table]
Number of Securities
Underlying Unexercised Value of Unexercised
Options at Fiscal Year In-the-Money Options
End(#) at Fiscal Year End($)
------------------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------- ----------- -------------
Ulysses G. Auger, II....... -- -- -- --
William M. Caldwell, IV.... -- 1,684,342 -- $23,625,928
Evans K. Anderson.......... -- 437,220 -- 5,737,046
Laura A. Neuman(/1/)....... -- -- -- --
Duncan M. Fitchet, Jr. .... -- 40,000 -- 477,200
--------
(1) Ms. Neuman ceased to be an employee of CAIS Internet as of April 1, 1999.
Employment Agreements; Covenants-not-to-Compete
On September 8, 1997, CAIS Internet entered into an employment agreement
with William M. Caldwell, IV. The agreement, as amended, provides that Mr.
Caldwell will be employed as CAIS Internet's President. The term of the
agreement is for a period of four years commencing on September 8, 1997. The
agreement establishes a base salary of $175,000 per annum. This base salary is
subject to periodic increases as CAIS
53
Internet may determine. If CAIS Internet terminates Mr. Caldwell's employment
without cause, Mr. Caldwell will be entitled to receive nine months of his then
current base salary. The agreement contains non-competition and non-
solicitation covenants which prohibit Mr. Caldwell, during the term of his
employment and for a period of 24 months thereafter, from engaging in
competition with CAIS Internet or from soliciting any of CAIS Internet's
customers. The agreement also prohibits Mr. Caldwell from disclosing
confidential or proprietary information of CAIS Internet. In connection with
his employment agreement, Mr. Caldwell was granted an option to purchase a 14%
limited partnership interest in each of CAIS Limited Partnership and Cleartel
Communications Limited Partnership for a purchase price of $1.68 million. In
connection with the October 1998 reorganization, this option was replaced with
options to purchase 1,635,610 shares of CAIS Internet's common stock at an
exercise price of $.9732 per share. Pursuant to the terms of the employment
agreement, 50% of such options vest after Mr. Caldwell's third employment year
and the remaining 50% of the options vest at the end of Mr. Caldwell's fourth
employment year. As a result of this offering, however, 75% of the options will
vest on the date immediately prior to the earliest to occur of: (i) the
effective date of a registration statement; or (ii) the pricing of the initial
public offering; or (iii) the execution and delivery of an underwriting
agreement related to an initial public offering, and 25% of the options will
vest at the end of Mr. Caldwell's fourth employment year.
On June 3, 1997, CAIS Internet entered into an employment agreement with
Evans K. Anderson. The agreement, as amended, provides that Mr. Anderson will
be employed as CAIS Internet's Executive Vice President of Sales and Marketing.
The term of the agreement is for a period of four years commencing on March 3,
1997. The agreement established an initial base salary of $125,000 per annum,
and as of November 1, 1997, a base salary of $150,000 per annum. This base
salary is subject to periodic increases as CAIS Internet may determine. If CAIS
Internet terminates Mr. Anderson's employment without cause, Mr. Anderson will
be entitled to receive nine months of his then current base salary. The
agreement contains non-competition and non-solicitation covenants which
prohibit Mr. Anderson, during the term of his employment and for a period of
twenty-four months thereafter, from engaging in competition with CAIS Internet
or from soliciting any of CAIS Internet's customers. The agreement also
prohibits Mr. Anderson from disclosing confidential or proprietary information
of CAIS Internet. In connection with his employment agreement, Mr. Anderson was
granted an option to purchase a 3% limited partnership interest in each of CAIS
Limited Partnership and Cleartel Communications Limited Partnership for a
purchase price of $360,000. In connection with the reorganization in October
1998, such option was replaced with options to purchase 301,420 shares of CAIS
Internet's common stock at an exercise price of $1.1942 per share, of which one
third of the options vest after Mr. Anderson's third employment year and the
remaining two-thirds of the options vest at the end of Mr. Anderson's fourth
employment year. As a result of this offering, however, one third of the
options will vest on the date immediately prior to the earliest to occur of:
(i) the effective date of a registration statement; or (ii) the pricing of the
initial public offering; or (iii) the execution and delivery of an underwriting
agreement related to an initial public offering, and two-thirds of the options
will vest at the end of Mr. Anderson's fourth employment year.
On June 29, 1998, CAIS Internet entered into an employment agreement with
Laura A. Neuman. The agreement provided that Ms. Neuman would be employed as
CAIS Internet's Vice President of Sales. The term of the agreement was for a
period of one year commencing on June 29, 1998, with the possibility of an
extension by mutual consent. The agreement established a base salary of
$150,000 per annum, subject to periodic increases as CAIS Internet may have
determined. In addition, the agreement entitled Ms. Neuman to receive cash
incentive compensation of $25,000 per quarter for achieving a minimum of 70% of
CAIS Internet's budgeted performance target. Subject to vesting and forfeiture
provisions, the agreement also granted Ms. Neuman options to purchase 40,000
shares of CAIS Internet's common stock at an exercise price of $3.07 per share.
As a result of this offering, however, one eighth of the options (5,000) would
have vested on the day the underwriting agreement relating to an initial public
offering is signed. Ms. Neuman's employment terminated effective April 1, 1999,
therefore entitling Ms. Neuman to receive six months of her then current base
salary, plus a pro-rated amount equal to six months of the calculated cash
incentive compensation immediately upon the termination. The agreement contains
non-competition and non-solicitation covenants which prohibit Ms. Neuman,
during the term of her employment and for a period of 24 months thereafter,
from
54
engaging in competition with CAIS Internet or from soliciting any of CAIS
Internet's customers. The agreement also prohibits Ms. Neuman from disclosing
confidential or proprietary information of CAIS Internet. On April 9, 1999, Ms.
Neuman filed a demand for arbitration against CAIS Internet alleging, among
other things, breach of contract. For more information, please see "Business--
Legal Proceedings."
Amended and Restated Stock Option Plan
On February 12, 1999, the Board of Directors of CAIS Internet adopted and
the stockholders of CAIS Internet approved the Amended and Restated 1998 Equity
Incentive Plan, which provides for the grant to officers, key employees and
directors of CAIS Internet and its subsidiaries of both "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of
1986, and stock options that are nonqualified for federal income tax purposes.
The total number of shares for which options may be granted pursuant to this
stock option plan and the maximum number of shares for which options may be
granted is 1,500,000 shares, subject to adjustments reflecting changes in CAIS
Internet's capitalization. As of April 28, 1999, options to purchase 1,305,800
shares of CAIS Internet's common stock were outstanding under the stock option
plan. The stock option plan is currently administered by CAIS Internet's Board
of Directors. Upon the completion of this offering, the stock option plan will
be administered by the Compensation Committee. The Compensation Committee will
determine, among other things, which officers, employees and directors will
receive options under the plan, the time when options will be granted, the type
of option (incentive stock options, nonqualified stock options, or both) to be
granted, the number of shares subject to each option, the time or times when
the options will become exercisable, and, subject to certain conditions
discussed below, the option price and duration.
The exercise price of incentive and nonqualified stock options will be
determined by the Compensation Committee, but may not be less than the fair
market value of the common stock on the date of grant and the term of any such
option may not exceed ten years from the date of grant. With respect to any
stock option plan participant who owns stock representing more than 10% of the
voting power of all classes of the outstanding capital stock of CAIS Internet
or of its subsidiaries, the exercise price of any incentive stock option may
not be less than 110% of the fair market value of the shares on the date of
grant and the term of the option may not exceed five years from the date of
grant.
Payment of the option price may be made in cash or, with the approval of the
Compensation Committee, in shares of common stock having a fair market value in
the aggregate equal to the option price. Options granted pursuant to this stock
option plan are not transferable, except by will or the laws of descent and
distribution. During an optionee's lifetime, the option is exercisable only by
the optionee.
The Compensation Committee has the right at any time and from time to time
to amend or modify this stock option plan, without the consent of CAIS
Internet's stockholders or optionees; provided, that no such action may
adversely affect options previously granted without the optionee's consent, and
provided further that no such action, without the approval of a majority of the
stockholders of CAIS Internet, may increase the total number of shares of
common stock which may be purchased pursuant to options under the plan,
increase the total number of shares of common stock which may be purchased
pursuant to options under the plan by any person, expand the class of persons
eligible to receive grants of options under the plan, decrease the minimum
option price, extend the maximum term of options granted under the plan, extend
the term of the plan or change the performance criteria on which the granting
of options is based.
Promptly after the completion of this offering, CAIS Internet expects to
file with the SEC a registration statement on Form S-8 covering the shares of
common stock underlying the options granted under this stock option plan and
other compensatory plans and arrangements.
Directors and Officers Insurance
Upon the closing of this offering, CAIS Internet intends to obtain directors
and officers liability and company reimbursement insurance. Under the policy,
the insurance carrier will pay, on behalf of directors and officers of CAIS
Internet, certain losses incurred as a result of certain wrongful acts by such
persons, for which they would not otherwise be indemnified by CAIS Internet.
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PRINCIPAL STOCKHOLDERS
The following table sets forth certain information as of April 16, 1999
regarding the beneficial ownership of CAIS Internet's capital stock, after
giving effect to the offering, by:
. each person known by CAIS Internet to beneficially own 5% or more of any
class of CAIS Internet's capital stock;
. each director of CAIS Internet;
. CAIS Internet's Chief Executive Officer and each of the four other most
highly compensated executive officers, whose total cash and cash
equivalent compensation exceeded $100,000; and
. all directors and executive officers of CAIS Internet as a group.
Under the SEC's rules, a person is deemed to be the beneficial owner of a
security if such person has or shares the power to vote or direct the voting of
such security or the power to dispose or direct the disposition of such
security. A person is also deemed to be a beneficial owner of a security if
that person has the right to acquire beneficial ownership within 60 days.
Accordingly, more than one person may be deemed to be a beneficial owner of the
same security. Unless otherwise indicated by footnote, the named entities or
individuals have sole voting and investment power with respect to the shares of
common stock which they beneficially own. All persons listed have an address in
care of CAIS Internet's principal executive offices. All information with
respect to beneficial ownership has been furnished to CAIS Internet by the
respective stockholders of CAIS Internet.
This table includes shares issuable upon the conversion of the remaining
outstanding Series A and Series B shares upon consummation of the offering and
shares which may be acquired upon the exercise of options and debt and equity
warrants exercisable within 60 days following the offering.
[Download Table]
Shares Beneficially
Owned after Offering
----------------------------
Common Stock
----------------------------
Name Number Percent
---- ------------ ----------
Ulysses G. Auger, II................................ 4,832,934 25.5%
William M. Caldwell, IV............................. 1,275,440 6.1
Evans K. Anderson................................... 125,473 *
Laura A. Neuman..................................... 0(/1/) *
Duncan M. Fitchet, Jr. ............................. 13,333 *
Ulysses G. Auger, Sr. .............................. 4,821,824 25.5
Richard F. Levin.................................... 15,000 *
Vernon L. Fotheringham.............................. 15,000 *
R. Theodore Ammon................................... 3,376,256 17.4
All executive officers and directors as a group (16
persons)........................................... 14,620,788 70
--------
* Less than 1%
(1) Ms. Neuman ceased to be an employee of CAIS Internet as of April 1, 1999.
On September 4, 1998, Ulysses G. Auger, II and Ulysses G. Auger, Sr. pledged
all of their ownership interests in CAIS Internet to secure the credit
agreement CAIS Internet entered into with ING (U.S.) Capital LLC. We intend to
use proceeds from the offering to repay all of the indebtedness under the
credit agreement. Once the credit agreement is repaid in full, the pledges will
be released.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Organization of CAIS Internet
CAIS Internet is a closely held corporation. It was organized under Delaware
law in December 1997 under the name CGX Communications, Inc., as a holding
company. CAIS Internet changed its name to CAIS Internet, Inc. in February
1999. CAIS, Inc., currently CAIS Internet's only subsidiary, was formed by
certain current stockholders of CAIS Internet to acquire Capital Area, a tier
one Internet service provider that was owned by persons unaffiliated with CAIS
Internet.
In October 1998, CAIS Internet completed a reorganization pursuant to which,
among other things:
. CAIS, Inc. was merged with a newly formed acquisition subsidiary of CAIS
Internet, with CAIS, Inc. surviving as a wholly owned subsidiary of CAIS
Internet;
. Cleartel Communications, Inc. which owns certain telecommunications
authorizations and was the general partner of Cleartel Communications
Limited Partnership, a long distance telecommunications entity owned
substantially by the shareholders of CAIS, Inc., was merged with a
second newly formed acquisition subsidiary of CAIS Internet, with
Cleartel Communications, Inc. surviving as a wholly owned subsidiary of
CAIS Internet;
. the former shareholders of CAIS, Inc. and Cleartel Communications, Inc.
exchanged their shares in such companies for shares of CAIS Internet's
common stock at a rate of 62,938 shares of CAIS Internet's common stock
for each share of Cleartel Communications, Inc. common stock and at a
rate of 500 shares of CAIS Internet's common stock for each share of
CAIS, Inc.'s common stock;
. the limited partners of Cleartel Communications Limited Partnership, who
were substantially the shareholders of Cleartel Communications, Inc.,
exchanged their limited partnership interests in Cleartel Communications
Limited Partnership at a rate of 5,350 shares of CAIS Internet's common
stock for each 1% limited partnership interest in Cleartel
Communications Limited Partnership; and
. CAIS Internet acquired all of the limited partnership interests in
Cleartel Communications Limited Partnership and Cleartel became the sole
general partner of Cleartel Communications Limited Partnership with a 1%
general partnership interest.
Prior to the reorganization, all of CAIS Internet, Inc.'s outstanding common
stock was held by Ulysses G. Auger, Sr., who held 4,220,982 shares of common
stock; Ulysses G. Auger, II, who held 4,306,730 shares of common stock; the ten
Auger Trusts, each holding 8,577 shares of common stock; and R. Theodore Ammon,
who held 317,073 shares of common stock. In addition, Ulysses G. Auger, Sr.,
Ulysses G. Auger, II, and the ten Auger Trusts held all of the interests in
CAIS, Inc., Cleartel Communications, Inc. and Cleartel Communications Limited
Partnership.
Following the reorganization, in exchange for their interests in CAIS, Inc.,
Cleartel Communications, Inc. and Cleartel Communications Limited Partnership,
Ulysses G. Auger, Sr., Ulysses G. Auger, II, and the ten Auger Trusts were
given the following shares of CAIS Internet's common stock:
. Ulysses G. Auger, Sr., received 258,101 shares of CAIS Internet's common
stock for his 49% limited partnership interest in Cleartel LP, 2,675
shares of CAIS Internet's common stock for his 42.5 shares of Cleartel,
and 245,000 shares of CAIS Internet's common stock for his 490 shares of
CAIS, Inc;
. Ulysses G. Auger, II, received 266,147 shares of CAIS Internet's common
stock for his 50% limited partnership interest in Cleartel
Communications Limited Partnership, 1,337 shares of CAIS Internet's
common stock for his 21.3 shares of Cleartel Communications, Inc. and
250,000 shares of CAIS Internet's common stock for his 500 shares of
CAIS, Inc; and
57
. Each of the ten Auger Trusts received 535 shares of CAIS Internet's
common stock for their .10% limited partnership interest in Cleartel
Communications Limited Partnership, 134 shares of CAIS Internet's common
stock for their 2.1 shares of Cleartel Communications, Inc.and 500
shares of CAIS Internet's common stock for their 50 shares of CAIS, Inc.
R. Theodore Ammon's holdings did not change as a result of the
reorganization.
In February 1999, CAIS Internet transferred all of its limited partnership
interests in Cleartel Communications Limited Partnership to Cleartel
Communications, Inc. and Cleartel Communications Limited Partnership was
dissolved. CAIS Internet then completed the spin-off of Cleartel
Communications, Inc. by means of a distribution of all of its shares in
Cleartel Communications, Inc. to CAIS Internet's stockholders pro rata based on
their percentage ownership of the outstanding shares of CAIS Internet. As a
result of the spin-off of Cleartel Communications, Inc., Cleartel
Communications, Inc. ceased to be a subsidiary of CAIS Internet.
As a result of the spin-off of Cleartel Communications, Inc., Ulysses G.
Auger, Sr. and Ulysses G. Auger, II received 31,512 and 32,161 shares of the
common stock of Cleartel Communications, Inc., respectively.
Intercompany Relationships
Prior to and after the October 1998 reorganization, CAIS Internet, Cleartel
Communications Limited Partnership, Cleartel Communications, Inc. and CAIS,
Inc. were all under common ownership and management. During that time, all of
these companies purchased goods, services and facilities from each other.
As of December 31, 1996, 1997 and 1998, CAIS Internet owed Cleartel
Communications Limited Partnership approximately $980,000, $3,735,000 and
$5,342,000, respectively, for monies advanced from Cleartel Communications
Limited Partnership to CAIS Internet. As of the date of the spin-off of
Cleartel Communications, Inc., the total amount of the loan from Cleartel
Communications Limited Partnership was $4,941,000. This balance was reduced by
$1,450,000 as a result of CAIS Internet's assumption of a note payable by
Cleartel Communications Limited Partnership to Ulysses G. Auger, Sr., a
director of CAIS Internet. For a further discussion of the terms of the
transaction, please see "--Loans to and from Executive Officers and
Affiliates." The loan balance of Cleartel Communications Limited Partnership
was further reduced by an additional $1,500,000 with a portion of the proceeds
from CAIS Internet's issuance of Series A shares. As a result of these
reductions, the total principal amount of the loan from Cleartel Communications
Limited Partnership was reduced to $1,991,000 in February 1999. No interest is
payable in respect of the loan from Cleartel Communications Limited
Partnership.
CAIS Internet will provide certain administrative and other support services
to Cleartel Communications, Inc. pursuant to a services agreement, at cost plus
five percent, until Cleartel Communications, Inc. replaces this arrangement
with its own services or outsources such support from third parties, which is
expected to occur by the end of 1999. In addition, Cleartel will sublease
certain office space from CAIS Internet at CAIS Internet's headquarters in
Washington, D.C., according to a sublease agreement between CAIS Internet and
Cleartel Communications, Inc. The sublease provides that Cleartel
Communications, Inc. is responsible for the percentage of the rent as it
relates to the square footage that Cleartel Communications, Inc. utilizes. The
standard five percent mark up on goods and services is not applied because
Cleartel Communications, Inc. did not share in the build-out credits for the
new office space. Cleartel Communications, Inc. may also purchase dedicated
Internet connections from CAIS, Inc. CAIS Internet believes that these
arrangements are at least as favorable to CAIS Internet as those which could
have been negotiated with an unaffiliated third party.
CAIS Internet may purchase certain services from Cleartel Communications,
Inc. including, but not limited to:
. the license of certain co-location space at Cleartel Communications,
Inc.'s switch site facilities in Washington, D.C.;
. the purchase of certain long distance telephone and other
telecommunications services; and
58
. the purchase of certain private branch exchange, telephone and other
telecommunications equipment and computer equipment.
Real Property Leases
Until February 25, 1999, Cleartel Communications Limited Partnership leased
its corporate headquarters office space from Ulysses G. Auger, Sr., a director
of CAIS Internet, and Lulu H. Auger, his wife. The lease for the space expired
on February 28, 1996; however, the parties verbally agreed to extend the lease
until February 25, 1999. Cleartel Communications Limited Partnership paid total
annual rents of $180,000 for the space during each of the years ended December
31, 1996, 1997 and 1998. CAIS Internet believes that the terms of the lease,
including the rental rate, were at least as favorable to CAIS Internet as those
which could have been negotiated with an unaffiliated third party.
On November 21, 1998, CAIS Internet entered into a ten-year lease for its
corporate headquarters office space commencing February 15, 1999. Ulysses G.
Auger, Sr. and Lulu H. Auger hold a 44.8% limited partnership interest in the
entity which owns the building. Annual base rent is $861,250, subject to annual
adjustments. CAIS Internet believes that the terms of the lease, including the
rental rate, are at least as favorable to CAIS Internet as those which could
have been negotiated with an unaffiliated third party.
Indemnification Agreements
CAIS Internet has entered into indemnification agreements with its directors
and certain of its senior executive officers. Pursuant to the terms of the
indemnification agreements, each of the senior executive officers and directors
of CAIS Internet will be indemnified by CAIS Internet to the fullest extent
permitted by Delaware law in the event such officer is made or threatened to be
made a party to a claim arising out of such person acting in his capacity as an
officer or director of CAIS Internet.
Loans to and from Executive Officers and Affiliates
CAIS, Inc. had a note payable due to Ulysses G. Auger, II, CAIS Internet's
Chairman and Chief Executive Officer, in the principal amount of $100,000,
dated as of March 15, 1996. The note bore interest at a rate of 10% per annum,
and was payable as follows: accrued interest due monthly on the 15th day of
each month, and the $100,000 in principal due on March 15, 1999.
CAIS, Inc. had a note payable due to Ulysses G. Auger, II in the principal
amount of $250,000, dated as of October 31, 1997. The note bore interest at a
rate of 10% per annum, and was payable as follows: accrued interest due monthly
on the last day of each month, and the $250,000 in principal due on April 30,
1999.
CAIS, Inc. had a note payable due to Ulysses G. Auger, Sr., a director of
CAIS Internet, in the principal amount of $1,000,000, dated as of May 8, 1996.
The note bore interest at a rate of 13% per annum, and was payable as follows:
monthly installments of $10,000 plus interest commencing on June 8, 1996, and
continuing thereafter on the 8th of each month, until May 8, 1999, whereupon
the remaining outstanding principal balance and any accrued and unpaid interest
are due.
CAIS Internet had a note payable due to Ulysses G. Auger, Sr. in the
principal amount of $500,000, dated as of February 27, 1998. The note bore
interest at a rate of 10% per annum, and was payable as follows: accrued
interest due monthly on the 27th day of each month, and the $500,000 in
principal due on February 27, 1999.
CAIS Internet had a note payable due to Ulysses G. Auger, Sr. in the amount
of $500,000, dated as of July 9, 1998. The note bore interest at a rate of 10%
per annum, and was payable as follows: accrued interest due quarterly on the
9th day of each month, and the $500,000 in principal due on July 9, 1999.
CAIS Internet had a note payable due to Ulysses G. Auger, Sr. in the
principal amount of $1,000,000, dated as of January 6, 1999. The note bore
interest at a rate of 10% per annum, and was payable as follows:
59
accrued interest due quarterly on the 6th day of each quarter, and the
$1,000,000 in principal due on demand upon thirty days advance written notice
by the holder of the note to CAIS Internet.
All of the foregoing promissory notes were subordinated to the loans made to
these companies by ING (U.S.) Capital LLC, pursuant to the credit agreement
CAIS Internet entered into with ING (U.S.) Capital LLC.
Cleartel Communications Limited Partnership had a note payable due to
Ulysses G. Auger, Sr. in the principal amount of $2.1 million, dated as of
January 2, 1994. The note bore interest at a rate of 1% per annum, plus the
prime rate, and was payable as follows: accrued interest in arrears due monthly
on the first day of each month, and the principal balance, together with all
interest accrued and unpaid, due on August 1, 2001.
Immediately prior to the spin-off of Cleartel Communications, Inc.:
. Mr. Auger, Sr. contributed $650,000 of such principal to the capital of
Cleartel Communications, Inc. and forgave accrued interest of $434,123;
. in consideration of indebtedness in the total principal amount of
$4,941,000 owed by CAIS, Inc. to Cleartel Communications Limited
Partnership, CAIS Internet assumed the remaining obligations on this
note in the total principal amount of $1,450,000;
. all of the foregoing remaining indebtedness owed by CAIS Internet and
CAIS, Inc. to Ulysses G. Auger, Sr., in the total principal amount of
$4,083,000, plus accrued interest totaling $89,757, was exchanged for a
total of 1,025,247 Series B shares; and
. all of the foregoing indebtedness owed by CAIS, Inc. to Ulysses G. Auger,
II, in the total principal amount of $350,000, plus accrued interest
totaling $34,339, was exchanged for a total of 94,432 Series B shares.
CAIS Internet has committed to advance a $400,000 unsecured loan to Gary H.
Rabin, Executive Vice President of CAIS Internet, within 30 days following the
closing of this offering. The loan will bear interest at the rate of 7% per
annum, with the interest payable quarterly, and the principal amount due three
years from the date of the loan.
The Credit Agreement with ING (U.S.) Capital LLC
In September 1998, CAIS Internet, together with CAIS, Inc. and all of CAIS
Internet's holders of common stock, other than R. Theodore Ammon, entered into
a credit agreement with ING (U.S.) Capital LLC to borrow up to $7,000,000 to
repay existing debt, fund the development and roll-out of the OverVoice program
and for general corporate purposes. The loans extended under this credit
agreement bear interest at the one-month LIBOR rate plus 5%. The principal,
premium and interest on any outstanding loan will convert to senior secured
notes bearing interest at a rate of 5% over the 5-year U.S. Treasury Securities
rate if borrowings under the credit agreement are not repaid by September 4,
1999. Pursuant to the credit agreement, ING (U.S.) Capital LLC was granted
warrants to purchase 390,000 shares of CAIS Internet's common stock at an
exercise price of $0.01 per share and was paid fees totaling $345,000. In
addition, if the credit agreement is not paid in full by September 4, 1999, ING
(U.S.) Capital LLC will receive warrants to purchase an additional 3.0% of CAIS
Internet's outstanding shares on a fully diluted basis. In connection with an
amendment to the credit agreement, CAIS Internet paid a $210,000 extension fee.
CAIS Internet is in compliance with the terms of the credit agreement. The
current outstanding principal balance under the credit agreement is $7,000,000.
Substantially all of the assets of CAIS Internet have been pledged to ING
(U.S.) Capital LLC to secure the obligations under this credit agreement.
Other Transactions
For the past several years, Richard F. Levin, a director of CAIS Internet,
has performed legal services on CAIS Internet's behalf in his capacity as a
partner in the Washington, D.C., law firm of Grossberg, Yochelson,
60
Fox & Beyda. However, at no time were the fees paid by CAIS Internet to the
law firm in excess of 5% of the law firm's gross revenues. CAIS Internet
believes that the costs of such services are at least as favorable to CAIS
Internet as those which could have been negotiated with an unaffiliated third
party.
Issuances of Securities
On April 22, 1998, 317,073 shares of common stock were issued to R.
Theodore Ammon at $3.15378 per share for a total price of $1,000,000.
On October 2, 1998, in connection with the reorganization, CAIS Internet
exchanged 5,350 shares of common stock for each 1.0% limited partnership
interest in Cleartel Communications Limited Partnership, 62,938 shares of
common stock for each share of Cleartel Communications, Inc. common stock and
500 shares of common stock for each share of CAIS, Inc. common stock. As a
result, CAIS Internet issued an aggregate of 1,034,970 shares of common stock
as follows:
Ulysses G. Auger, Sr., 245,000 shares of common stock in exchange for his
shares of CAIS, Inc. and 267,483 shares of common stock in exchange for
his shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
Ulysses G. Auger, II, 250,000 shares of common stock in exchange for his
shares of CAIS, Inc. and 259,527 shares of common stock in exchange for
his shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
The Constandinos Ulysses Francisco Auger Economides Trust, 500 shares of
common stock in exchange for its shares of CAIS, Inc. and 796 shares of
common stock in exchange for its shares of Cleartel Communications, Inc.
and limited partnership interest in Cleartel Communications Limited
Partnership;
The Constandina Francisca Auger Economides Trust, 500 shares of common
stock in exchange for its shares of CAIS, Inc. and 796 shares of common
stock in exchange for its shares of Cleartel Communications, Inc. and
limited partnership interest in Cleartel Communications Limited
Partnership;
The Vassiliki Illias Auger Economides Trust, 500 shares of common stock
in exchange for its shares of CAIS, Inc. and 796 shares of common stock
in exchange for its shares of Cleartel Communications, Inc. and limited
partnership interest in Cleartel Communications Limited Partnership;
The Annabel-Rose Auger Trust, 500 shares of common stock in exchange for
its shares of CAIS, Inc. and 796 shares of common stock in exchange for
its shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
The James Frederick Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
The Ulysses George Hawthorne Auger, III Trust, 500 shares of common stock
in exchange for its shares of CAIS, Inc. and 796 shares of common stock
in exchange for its shares of Cleartel Communications, Inc. and limited
partnership interest in Cleartel Communications Limited Partnership;
The Alexander Robert Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership;
The Gregory Ulysses Auger, II Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel Communications, Inc. and limited
partnership interest in Cleartel Communications Limited Partnership;
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The Bridgette Kathryn Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel Communications, Inc. and limited partnership
interest in Cleartel Communications Limited Partnership; and
The Nicholas William Randolph Auger Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel Communications, Inc. and limited
partnership interest in Cleartel Communications Limited Partnership.
On February 19, 1999, pursuant to a private placement and in exchange for
approximately $4.6 million of indebtedness owed by CAIS Internet or CAIS, Inc.
to Ulysses G. Auger, Sr. and Ulysses G. Auger, II, CAIS Internet issued
1,119,679 Series B shares to Ulysses G. Auger, Sr. and Ulysses G. Auger, II.
On February 19, 1999, pursuant to a private placement, CAIS Internet issued:
2,458,407 Series A shares and warrants to purchase an aggregate of 2.61%
of the total outstanding shares of common stock upon completion of this
offering on a fully diluted basis (except for shares issued upon the
conversion of the Series B shares), at an exercise price of the initial
public offering price per share to Chancery Lane, L.P. for the total
consideration of $10,000,000; and
368,761 Series A shares and warrants to purchase an aggregate of .39% of
the total outstanding shares of common stock upon completion of this
offering on a fully diluted basis (except for shares issued upon the
conversion of the Series B shares), at an exercise price of the initial
public offering price per share to CAIS-Sandler Partners, L.P. for the
total consideration of $1,500,000.
The Series A shares and the Series B shares were issued pursuant to a
private placement exemption under Regulation D of the Securities Act. CAIS
Internet filed a Form D pertaining to these shares with the Commission on
February 25, 1999, and amended the filing on March 9, 1999.
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DESCRIPTION OF CAPITAL STOCK
The following is a summary of the terms of our capital stock and does not
purport to be complete. For more information, please review our certificate of
incorporation.
General
Our authorized capital stock consists of 100,000,000 shares of common stock,
par value $.01 per share, and 25,000,000 shares of preferred stock, par value
$.01 per share, of which 2,827,168 shares are designated as Series A shares,
and 1,119,679 shares are designated as Series B shares.
Common Stock
Holders of common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of stockholders. Subject to
preferences that may be applicable to any outstanding preferred stock,
including the Series B shares, the holders of common stock are entitled to
receive ratably the dividends, if any, that may be declared from time to time
by the Board of Directors out of funds legally available for such dividends. We
have never declared a dividend and do not anticipate doing so in the
foreseeable future. In the event of a liquidation, dissolution or winding up of
CAIS Internet, subject to the prior rights of the preferred stock, the holders
of common stock are entitled to share ratably in any remaining assets after
payment of liabilities. The common stock has no preemptive or other
subscription rights and is not subject to any future calls or assessments.
There are no conversion rights or redemption or sinking fund provisions
applicable to shares of common stock. All of the outstanding shares of common
stock are fully paid and nonassessable.
Preferred Stock
The preferred stock may be issued from time to time by the Board as shares
of one or more classes or series. Subject to the provisions of our amended and
restated certificate of incorporation and limitations prescribed by law, the
Board is expressly authorized to issue the shares, fix the number of shares,
change the number of shares constituting any series, and provide for or change
the voting powers, designations, preferences and relative, participating,
optional or other special rights, qualifications, limitations or restrictions
thereof, including dividend rights (including whether dividends are
cumulative), dividend rates, terms of redemption (including sinking fund
provisions), redemption prices, conversion rights, and liquidation preferences
of the shares constituting any class or series of the preferred stock, in each
case without any further action or vote by the stockholders.
One of the effects of undesignated preferred stock may be to enable the
Board to render more difficult or to discourage an attempt to obtain control of
CAIS Internet by means of a tender offer, proxy contest, merger or otherwise,
and thereby to protect the continuity of CAIS Internet's management. The
issuance of shares of the preferred stock pursuant to the Board's authority
described above may adversely affect the rights of the holders of common stock.
For example, preferred stock issued by CAIS Internet may rank prior to common
stock as to dividend rights, liquidation preference or both, may have full or
limited voting rights and may be convertible into shares of common stock.
Accordingly, the issuance of shares of preferred stock may discourage bids for
common stock or may otherwise adversely affect the market price of common
stock.
Series A Shares. The following summarizes the terms of the Series A shares:
Conversion. Holders of Series A shares can convert shares at any time
into common stock, initially on a one-for-one basis. The conversion
ratio will be adjusted for stock reclassifications, stock dividends,
stock splits, stock issuances and other similar events.
Series A shares automatically convert into common stock if any of the
following occurs:
. an initial public offering for total gross proceeds of at least $35
million at a price per shares of at least $8.14;
. an initial public offering that does not satisfy the requirements of
the first clause if the closing price of the common stock equals at
least $16.28 per share for 20 consecutive days; and
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. the affirmative vote of the holders of at least 75% of the Series A
shares.
Ranking. The Series A shares rank senior to the common stock and the
Series B shares upon the liquidation of CAIS Internet.
Liquidation Preference. The Series A shares are entitled to a
liquidation preference equal to the conversion price per share, an 8%
cumulative return and all accumulated but unpaid dividends.
Redemption. At any time after February 1, 2004, the holders of a
majority of the Series A shares may require CAIS Internet to redeem
shares at a price equal to the greater of: (1) the conversion price per
share plus accumulated but unpaid dividends and an 8% cumulative return
or (2) the fair market value of the shares.
Voting. The Series A shares vote with the common stock on an as-
converted basis.
The consent of the holders of 75% of the Series A shares is required
for actions that:
. materially and adversely affect the Series A shares' rights;
. increase the number of shares designated as Series A shares;
. pay or declare dividends or redeem, repurchase or acquire shares of
junior stock;
. enter into certain employment agreements;
. enter into an acquisition, merger, reorganization or re-
capitalization transaction;
. transfer shares of CAIS Internet's common stock to a third party
enabling him to elect a majority of CAIS Internet's Board of
Directors;
. enter into financial commitments in excess of $250,000;
. dismiss or hire certain executive officers;
. approve CAIS Internet's annual budget;
. permit the existence of certain liens;
. incur certain debt; or
. liquidate or dissolve CAIS Internet.
Dividends. The Series A shares rank pari-passu with the common stock
and the Series B shares on any declared dividends. The Series A shares
shall participate on an as-if converted basis on all dividends paid on
common stock.
Registration Rights. The Series A shares are entitled to unlimited pro
rata piggy back registration rights. Once CAIS Internet is public,
Chancery Lane, L.P., will be entitled to demand and piggy back
registration rights under certain circumstances.
Board Representation. Until the Series A shares convert into common
stock, Chancery Lane, L.P. will have the right to designate one
director to CAIS Internet's Board of Directors.
Series B Shares. The following summarizes the terms of the Series B shares:
Conversion. Holders do not have the right to convert Series B shares at
their option. However, any outstanding Series B shares will
automatically convert into common stock on the earlier of:
. an initial public offering for total gross proceeds of at least $35
million at a price per share of at least $8.14; and
. an initial public offering that does not satisfy the requirements of
the first clause if the closing price of the common stock equals at
least $16.28 per share for 20 consecutive days. The conversion price
in either event will be the initial public offering price.
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Redemption. If CAIS Internet completes an initial public offering that
meets the criteria of the first clause under "Conversion," CAIS
Internet will be required to redeem for cash Series B shares having a
total face amount of $3.0 million, plus accrued but unpaid dividends.
Of this amount, $2.65 million of Series B shares will be redeemed from
Ulysses G. Auger, Sr. and $350,000 will be redeemed from Ulysses G.
Auger, II.
Ranking. The Series B shares rank junior to the Series A shares, but
senior to the common stock, upon the liquidation of CAIS Internet.
Liquidation Preference. The Series B shares are entitled to a
liquidation preference equal to $4,557,096, interest thereon at the
rate of 8% per annum and all accumulated but unpaid dividends.
Voting. The Series B shares will vote with the common stock on an as-
converted basis. However, the consent of the holders of 75% of the
Series B shares is required to:
. materially and adversely affect the rights of the Series B shares;
. increase the number of Series B shares;
. pay or declare dividends or redeem, repurchase or acquire shares
ranking junior to the Series B shares; or
. liquidate or dissolve CAIS Internet.
Dividends. The Series B shares rank pari-passu with the common stock
and the Series A shares on any declared dividends.
If CAIS Internet completes the offering at a price to the public within the
range set forth on the cover page of this prospectus and for the number of
shares on the cover page, then:
. all of the Series A shares will convert automatically into 2,827,168
shares of common stock;
. CAIS Internet will redeem 737,101 Series B shares (which have a total face
value of approximately $3.0 million); and
. the remaining Series B shares will convert automatically into the number
of shares of common stock determined by dividing $1,557,096 by the
initial public offering price (103,806 shares of common stock based on
the midpoint of the price range appearing on the cover page of this
prospectus.)
Debt Warrants
Pursuant to a credit agreement, on September 4, 1998, CAIS Internet granted
ING (U.S.) Capital LLC warrants to purchase 390,000 shares of CAIS Internet's
common stock at an exercise price of $0.01 per share. In connection with the
warrants, ING (U.S.) Capital LLC received both demand and piggyback
registration rights and is entitled to anti-dilution protection. The warrants
expire September 4, 2008. In the event the credit agreement is not paid in full
by September 4, 1999, ING (U.S.) Capital LLC will receive warrants to purchase
an additional 3.0% of CAIS Internet's outstanding shares on a fully diluted
basis.
Equity Warrants
The holders of Series A shares (Chancery Lane, L.P. and CAIS-Sandler
Partners, L.P.) will receive, on a pro rata basis, warrants for shares of
common stock equal to 3.0% of the total number of shares of common stock
outstanding on a fully diluted basis at the close of this offering. The
warrants will have an exercise price equal to the price per share of the common
stock in this offering. The holders of Series A shares will receive
registration rights and are entitled to anti-dilution protection. The warrants
expire February 19, 2009.
Hilton Warrants and Shares
In connection with CAIS Internet's master agreement with Hilton, Hilton
received warrants to purchase 66,667 shares of our common stock at an exercise
price of $.01 per share as an additional contribution by CAIS Internet in
support of Hilton's marketing of OverVoice services. In connection with the
warrants, Hilton received certain demand and incidental registration rights.
The warrants expire on April 23, 2004. Additionally, commencing upon the
effective date of this initial public offering, Hilton shall have a put option
to sell all of
its warrants (or shares of CAIS Internet resulting from the exercise of the
above-mentioned warrants) back to us at a share price equal to the initial
public offering share price. The put option expires ninety days following
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the earlier of: (1) the effective date of the first registration statement that
includes any warrant shares for resale and (2) the date on which Hilton may
sell all of the warrant shares within a three-month period pursuant to
Securities Act Rule 144.
In connection with the development of future digital entertainment solutions
at Hilton properties, CAIS Internet will contribute 133,000 shares of common
stock to a fund. The shares will be jointly owned by CAIS Internet and Hilton,
with 50% of the contributed shares allocated to a Hilton sub-account within the
fund and 50% of the contributed shares allocated to a CAIS Internet sub-
account. The Hilton shares will be entitled to the same registration rights as
the shares underlying the Hilton warrants as discussed above.
Statutory Business Combination Provision
Upon consummation of the offering, CAIS Internet will be subject to the
provisions of section 203 of the Delaware General Corporation Law. Section 203
provides, with certain exceptions, that a Delaware corporation may not engage
in any of a broad range of business combinations with a person or an affiliate
or associate of such person, who is an "interested stockholder" for a period of
three years from the date that such person became an interested stockholder
unless:
. the transaction resulting in a person becoming an interested
stockholder, or the business combination, is approved by the Board of
Directors of the corporation before the person becomes an interested
stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the voting stock of the corporation outstanding at the time
the transaction is commenced, excluding for purposes of determining the
number of shares outstanding those shares owned:
. by persons who are directors and officers; and
. by employee stock plans in which employee participants do not have the
right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or
. on or after the date the person becomes an interested stockholder, the
business combination is approved by the corporation's board of directors
and by the holders of at least 66 2/3% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by
the interested stockholder. Under section 203, an "interested
stockholder" is defined as any person who is:
. the owner of 15% or more of the outstanding voting stock of the
corporation; or
. an affiliate or associate of the corporation and who was the owner of
15% or more of the outstanding voting stock of the corporation at
any time within the three-year period immediately prior to the date
on which it is sought to be determined whether such person is an
interested stockholder.
The provisions of section 203 could delay or frustrate a change in control
of CAIS Internet, deny stockholders the receipt of a premium on their common
stock and have an adverse effect on the common stock. The provisions also could
discourage, impede or prevent a merger or tender offer, even if such event
would be favorable to the interests of stockholders. CAIS Internet's
stockholders, by adopting an amendment to the certificate of incorporation, may
elect not to be governed by section 203, which election would be effective
12 months after adoption.
Limitations on Directors' Liability
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of directors' fiduciary duty of care. This duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors could be accountable to corporations and their stockholders for
monetary damages for conduct that does not satisfy their duty of care. Although
Delaware law does not change directors' duty of care, it enables corporations
to limit available relief to equitable remedies such as injunction or
rescission. CAIS Internet's certificate of incorporation limits the liability
of CAIS Internet's directors to CAIS Internet and its stockholders to the
fullest extent permitted by Delaware law. Specifically, directors of CAIS
Internet will not be personally liable for monetary damages for breach of a
director's fiduciary duty as a director, except for liability for:
. any breach of the director's duty of loyalty to CAIS Internet or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
66
. unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Delaware General Corporation Law section 174;
or
. any transaction from which the director derived an improper personal
benefit.
The inclusion of this provision in CAIS Internet's certificate of
incorporation may have the effect of reducing the likelihood of derivative
litigation against directors, and may discourage or deter stockholders or
management from bringing a lawsuit against directors for breach of their duty
of care, even though such an action, if successful, might otherwise have
benefitted CAIS Internet and its stockholders.
Potential Anti-takeover Effect of Certain Provisions of the Certificate of
Incorporation and By-Laws
CAIS Internet's certificate of incorporation and by-laws contain other
provisions that could have an anti-takeover effect. The provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board and in the policies formulated by the Board. These provisions also are
intended to help ensure that the Board, if confronted by an unsolicited
proposal from a third party which has acquired a block of stock of CAIS
Internet, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to be the best
interest of the stockholders. The following is a summary of such provisions
included in CAIS Internet's certificate of incorporation and by-laws.
CAIS Internet's certificate of incorporation divides the Board of Directors
into three classes of directors, serving staggered three-year terms. The
certificate of incorporation also provides that stockholder action can be taken
only at an annual or special meeting of stockholders and cannot be taken by
written consent in lieu of a meeting. The certificate of incorporation and the
by-laws also provide that, except as otherwise required by law, special
meetings of the stockholders can only be called pursuant to a resolution
adopted by a majority of the Board or by the chief executive officer of CAIS
Internet. Stockholders will not be permitted to call a special meeting or to
require the Board to call a special meeting.
The by-laws establish an advance notice procedure for stockholder proposals
to be brought before an annual meeting of stockholders of CAIS Internet,
including proposed nominations of persons for election to the Board.
Stockholders at an annual meeting may only consider proposals or nominations
specified in the notice of meeting or brought before the meeting by or at the
direction of the Board or by a stockholder who was a stockholder of record on
the record date for the meeting, who is entitled to vote at the meeting and who
has given CAIS Internet's secretary timely written notice, in proper form, of
the stockholder's intention to bring that business before the meeting. Although
the by-laws do not give the Board the power to approve or disapprove
stockholder nominations of candidates or proposals regarding other business to
be conducted at an annual meeting, these procedures may have the effect of
prohibiting stockholders from raising proposals at annual meetings if the
proper procedures are not followed or may discourage or deter a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of CAIS Internet.
CAIS Internet's certificate of incorporation and by-laws provide that the
affirmative vote of holders of at least 66 2/3% of the total votes eligible to
be cast in the election of directors is required to amend, alter, change or
repeal certain of their provisions. This requirement of a super-majority vote
to approve amendments to the certificate of incorporation and by-laws could
enable a minority of CAIS Internet's stockholders to exercise veto power over
any such amendments. The Board has no current plans to formulate or effect
additional measures that could have an anti-takeover effect.
Transfer Agent and Registrar
The Transfer Agent and Registrar for the common stock will be American
Securities Transfer & Trust, Inc.
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SHARES ELIGIBLE FOR FUTURE SALE
The market price of the common stock may be adversely affected by the sale,
or availability for sale, of substantial amounts of the common stock in the
public market following the offering. The 6,000,000 shares being sold in the
offering will be freely tradable unless held by affiliates of CAIS Internet.
Upon completion of the offering:
. executive officers and directors of CAIS Internet will own a total of:
. 12,448,676 shares of common stock including 2,476,845 shares
converted from Series A shares and 103,806 shares converted from
Series B shares;
. options to acquire 3,057,562 shares of common stock;
. warrants exercisable for 612,798 shares of common stock;
. ING (U.S.) Capital LLC will hold warrants exercisable for 390,000 shares
of common stock; and
. Hilton Hotels Corporation will hold 66,500 shares of common stock and
warrants exercisable for 66,667 shares of common stock.
The securities issued prior to the offering have not been registered under the
Securities Act, and, therefore, may not be sold unless registered under the
Securities Act or sold pursuant to an exemption from registration, such as the
exemption provided by Rule 144.
In general, under Rule 144, if one year has elapsed since the later of the
date of the acquisition of restricted shares of common stock from CAIS Internet
or from any affiliate of CAIS Internet, the acquiror or subsequent holder of
the shares may sell, within any three-month period commencing 90 days after the
date of this prospectus, a number of shares that does not exceed the greater of
1.0% of the then outstanding shares of the common stock, or the average weekly
trading volume of the common stock on the Nasdaq National Market during the
four calendar weeks preceding the date on which notice of the proposed sale is
sent to the SEC. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about CAIS Internet. If two years have elapsed since the later of
the date of the acquisition of restricted shares of common stock from CAIS
Internet or any affiliate of CAIS Internet, a person who is not deemed to have
been an affiliate of CAIS Internet at any time for 90 days preceding a sale
would be entitled to sell such shares under Rule 144 without regard to the
volume imitations, manner of sale provisions or notice requirements.
CAIS Internet and certain stockholders of CAIS Internet (including Chancery
Lane, L.P. and all directors and officers of CAIS Internet) owning a total of
9,868,025 shares of common stock, options and warrants exercisable for
3,670,360 shares of common stock and preferred stock convertible into 2,580,651
shares of common stock, have agreed not to offer, sell, contract to sell or
otherwise dispose of any shares of common stock, options or warrants to acquire
shares of common stock or securities convertible into or exchangeable for, any
rights to purchase or acquire, shares of common stock during the 180 days after
the date of this prospectus, subject to certain limited exceptions. CAIS
Internet has agreed to provide registration rights with respect to shares of
common stock issued to Terk Technologies Corp. and Hilton Hotels Corporation,
and shares of common stock issuable to ING (U.S.) Capital LLC, Hilton and the
holders of Series A shares upon the conversion or exercise of warrants and
convertible preferred stock.
CAIS Internet intends to register the 3,860,295 shares of common stock
reserved for issuance upon exercise of stock options granted pursuant to its
stock option plan and under other compensatory arrangements as soon as
practicable after the date of this prospectus.
Prior to the offering, there has been no public market for the common stock,
and no prediction can be made as to the effect, if any, that the sale of shares
or the availability of shares for sale will have on the market price for the
common stock prevailing from time to time. Nevertheless, sales, or the
availability for sale, of substantial amounts of the common stock in the public
market could adversely affect prevailing market prices and the ability of CAIS
Internet to raise equity capital in the future.
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UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement,
dated , 1999, the underwriters named below, who are represented by Bear,
Stearns & Co. Inc., Volpe Brown Whelan & Company, LLC, First Union Capital
Markets Corp., Friedman, Billings, Ramsey & Co., Inc. and Wit Capital
Corporation, have severally agreed to purchase from CAIS Internet the number of
shares of common stock set forth opposite their names below.
[Download Table]
Underwriters Number of Shares
------------ ----------------
Bear, Stearns & Co. Inc. ..................................
Volpe Brown Whelan & Company, LLC...........................
First Union Capital Markets Corp. ..........................
Friedman, Billings, Ramsey & Co., Inc. .....................
Wit Capital Corporation.....................................
---------
Total..................................................... 6,000,000
=========
The underwriting agreement provides that the obligations of the several
underwriters to purchase and accept delivery of the shares of common stock of
this offering are subject to approval by their counsel of certain legal matters
and to certain other conditions. The underwriters are obligated to purchase and
accept delivery of all the shares of common stock (other than those shares
covered by the over-allotment option described below) if any are purchased.
The underwriters propose initially to offer the shares of common stock in
part directly to the public at the initial public offering price set forth on
the cover page of this prospectus and in part to certain dealers (including the
underwriters) at such price less a concession not in excess of $ per share.
The underwriters may allow, and such dealers may re-allow, to certain other
dealers, a concession not in excess of $ per share. After the initial offering
of the shares of common stock, the public offering price and other selling
terms may be changed by Bear, Stearns & Co. Inc. at any time without notice.
The following table shows the underwriting fees to be paid to the
underwriters by CAIS Internet 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.
[Download Table]
No Exercise Full Exercise
----------- -------------
Per share.......................................... $ $
Total.............................................. $ $
Other expenses of this offering (including the registration fees and the
fees of financial printers, counsel and accountants) payable by CAIS Internet
are expected to be approximately $2 million.
CAIS Internet has granted to the underwriters an option, exercisable within
30 days after the date of this prospectus, to purchase, from time to time, in
whole or in part, up to a total of 900,000 additional shares of common stock at
the public offering price less the underwriting discounts and commissions. The
underwriters may exercise this option solely to cover over-allotments, if any,
made in connection with this offering. To the
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extent that the underwriters exercise this option, each underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such underwriter's percentage underwriting
commitment as indicated in the table above.
CAIS Internet has agreed to indemnify the underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute
to payments that the underwriters may be required to make in respect of any of
those liabilities.
Each of CAIS Internet, its executive officers, directors and stockholders
has agreed, subject to certain exceptions, not to: (1) issue, offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase or
otherwise transfer or dispose of, directly or indirectly, any shares of common
stock or any securities convertible into, exercisable or exchangeable for, or
represent the right to receive common stock, except CAIS Internet may grant
options and issue and sell common stock pursuant to (A) any employee stock
plan, stock ownership plan or dividend reinvestment plan of CAIS Internet or
(B) this offering or (2) grant any options or warrants to purchase common stock
or enter into any swap or other arrangement that transfers all or a portion of
the economic consequences associated with the ownership of any common stock
(regardless of whether any of the transactions described in the first or second
clause is to be settled by the delivery of common stock, or such other
securities, in cash or otherwise) for a period of 180 days after the date of
this prospectus without the prior written consent of Bear, Stearns & Co. Inc.
In addition, during such period, CAIS Internet has also agreed not to file any
registration statement with respect to (other than a Form S-8 registration
statement in connection with shares received under a CAIS Internet stock plan,
stock ownership plan, employment agreement or dividend reinvestment plan), and
each of its executive officers, directors and certain stockholders of CAIS
Internet has agreed not to make any demand for, or exercise any right with
respect to, the registration of any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock without the
prior written consent of Bear, Stearns & Co. Inc.
At the request of CAIS Internet, the underwriters have reserved for sale, at
the initial public offering price, 300,000 shares of common stock offered
hereby to be sold to certain directors, officers and employees of CAIS Internet
and other persons who have expressed an interest in purchasing such shares. The
number of shares of common stock available for sale to the general public will
be reduced to the extent such persons purchase such reserved shares. Any
reserved shares which are not orally confirmed for purchase within one day of
the pricing of this offering will be offered by the underwriters to the general
public on the same terms as the other shares offered by this prospectus.
A prospectus in electronic format is being made available on an Internet web
site maintained by Wit Capital Corporation. In addition, all dealers purchasing
shares from Wit Capital Corporation in this offering have agreed to make a
prospectus in electronic format available on web sites maintained by each of
them. Other than the prospectus in electronic format, the information on Wit
Capital Corporation's web site and any information contained on any other web
site maintained by Wit Capital Corporation or any dealer purchasing shares from
it is not to be part of this prospectus or the registration statement of which
this prospectus forms a part, has not been approved and/or endorsed by CAIS
Internet or any underwriter in its capacity as underwriter and should not be
relied upon by investors.
Other than in the United States, no action has been taken by CAIS Internet
or the underwriters that would permit a public offering of the shares of common
stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of common stock offered hereby may not be offered or sold,
directly or indirectly, nor may this prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
common stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this prospectus
comes are advised to inform themselves about, and to observe, any restrictions
relating to the offering of the common stock and the distribution of this
prospectus. This
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prospectus is not an offer to sell or a solicitation of an offer to buy any
shares of common stock offered hereby in any jurisdiction in which such an
offer or solicitation is unlawful.
We have been informed that the underwriters do not intend to confirm sales
to any accounts over which they exercise discretionary authority without the
prior written approval of the customer.
Prior to this offering, there has been no public market for our common
stock. Consequently, the initial public offering price has been determined by
negotiations between CAIS Internet and the representatives of the underwriters.
Among the factors considered in determining the initial public offering price
were the history of and prospects for CAIS Internet's business and the industry
in which it competes, an assessment of CAIS Internet's management and the
present state of CAIS Internet's development, the past and present revenues,
earnings and cash flows of CAIS Internet, the prospects for growth of CAIS
Internet's revenues, earnings and cash flows, the current state of the economy
in the United States and the current level of economic activity in the industry
in which CAIS Internet competes and in related or comparable industries, and
currently prevailing conditions in the securities markets, including current
market valuations of publicly traded companies which are comparable to CAIS
Internet.
CAIS Internet has applied to list the common stock on The Nasdaq National
Market, under the symbol "CAIS."
Until the distribution of CAIS Internet's common stock is completed, rules
of the SEC may limit the ability of the underwriters and certain selling group
members to bid for and purchase the common stock. As an exception to these
rules, the representatives of the underwriters are permitted to engage in
certain transactions that stabilize the price of the common stock. Such
transactions consist of bids or purchases for the purpose of pegging, fixing or
maintaining the price of the common stock.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares of the common
stock than are set forth on the cover pages of this prospectus, the
representatives of the underwriters may reduce that short position by
purchasing the common stock in the open market. The representatives of the
underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The representatives of the underwriters may also impose a penalty bid on
certain underwriters and selling group members. This means that if the
representatives purchase shares of the common stock in the open market to
reduce the underwriters' short position or to stabilize the price of the common
stock, it may reclaim the amount of the selling concession from the
underwriters and selling group members who sold those shares as part of the
offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of the common stock to the extent that
it were to discourage resales of the common stock.
Neither CAIS Internet nor any of the underwriters makes any representation
or prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the common stock. In
addition, neither CAIS Internet nor any of the underwriters makes any
representation that the representatives of the underwriters will engage in such
transactions or that such transactions, once commenced, will not be
discontinued without notice.
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CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Index to Financial Statements
[Download Table]
Page
----
CAIS Internet, Inc., Consolidated Financial Statements
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998............. F-3
Consolidated Statements of Operations for the Years Ended December 31,
1996, 1997 and 1998..................................................... F-5
Consolidated Statements of Changes in Stockholders' Deficit for the Years
Ended December 31, 1996, 1997 and 1998.................................. F-6
Consolidated Statements of Cash Flows for the Years Ended December 31,
1996, 1997 and 1998..................................................... F-7
Notes to Consolidated Financial Statements............................... F-8
Capital Area Internet Service, Inc. (Predecessor Company)
Report of Independent Public Accountants................................. F-27
Statement of Operations for the Period from January 1, 1996 to May 10,
1996.................................................................... F-28
Statement of Changes in Stockholders' Equity for the Period from January
1, 1996 to May 10, 1996............................................... F-29
Statement of Cash Flows for the Period from January 1, 1996 to May 10,
1996.................................................................... F-30
Notes to Financial Statements............................................ F-31
F-1
Report of Independent Public Accountants
To CAIS Internet, Inc. and subsidiaries
(formerly CGX Communications, Inc.):
We have audited the accompanying consolidated balance sheets of CAIS Internet,
Inc. (a Delaware corporation, formerly CGX Communications, Inc.) and
subsidiaries, as of December 31, 1997 and 1998, and the related consolidated
statements of operations, changes in stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an 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 consolidated financial position of CAIS
Internet, Inc. and subsidiaries, as of December 31, 1997 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with generally
accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
February 19, 1999
(except with respect to the matters
discussed
in Note 15 to the consolidated
financial statements,
as to which the date is April 23,
1999)
F-2
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Balance Sheets
(in thousands)
Assets
[Download Table]
December 31
---------------
1997 1998
------- -------
Current assets:
Cash......................................................... $ 149 $ 95
Accounts receivable, net of allowance for doubtful accounts
of $179 and $137, respectively.............................. 466 648
Prepaid expenses and other current assets.................... 79 228
Net current assets of discontinued operations (Note 3)....... 9,072 8,170
------- -------
Total current assets...................................... 9,766 9,141
------- -------
Property and equipment, net................................... 1,149 2,638
Deferred debt financing and offering costs, net............... -- 529
Intangible assets, net of accumulated amortization of
approximately $586 and $968, respectively.................... 1,816 1,434
Noncurrent assets of discontinued operations (Note 3)......... 2,307 1,936
------- -------
Total noncurrent assets................................... 5,272 6,537
------- -------
Total assets.............................................. $15,038 $15,678
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
F-3
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Balance Sheets
(in thousands except share and per share data)
Liabilities and Stockholders' Deficit
[Download Table]
December 31,
----------------
1997 1998
------- -------
Current liabilities:
Accounts payable and accrued expenses ...................... $ 1,038 $ 4,396
Current portion of long-term debt........................... 2,000 --
Payable to discontinued operations.......................... 3,735 5,342
Notes payable to related parties ........................... 173 --
Unearned revenues........................................... 456 572
Net current liabilities of discontinued operations (Note
3)......................................................... 8,804 8,205
------- -------
Total current liabilities................................ 16,206 18,515
------- -------
Loan, net of unamortized debt discount of $817............... -- 6,183
Notes payable to related parties, net of current portion
(Note 9).................................................... 1,342 1,983
Long-term liabilities of discontinued operations (Note 3).... 2,768 2,601
------- -------
Total liabilities........................................ 20,316 29,282
------- -------
Commitments and contingencies (Notes 1, 6, 7, 8, 9, 10, 12,
and 15)
Stockholders' deficit (Note 10):
Common stock, $0.01 par value; 100,000,000 shares
authorized; 9,648,000 and
9,965,000 shares issued and outstanding, respectively...... 97 100
Additional paid-in capital.................................. 6,230 7,544
Warrants outstanding........................................ -- 1,226
Deferred compensation....................................... (4,314) (2,888)
Accumulated deficit......................................... (7,291) (19,586)
------- -------
Total stockholders' deficit.............................. (5,278) (13,604)
------- -------
Total liabilities and stockholders' deficit.............. $15,038 $15,678
======= =======
The accompanying notes are an integral part of these consolidated balance
sheets.
F-4
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Statements of Operations
(in thousands, except per share amounts)
[Download Table]
Years Ended December 31,
-------------------------
1996 1997 1998
------ ------- --------
Net revenues........................................ $2,410 $ 4,556 $ 5,315
Cost of services.................................... 834 2,010 3,118
Operating expenses:
Selling, general and administrative................ 2,126 5,550 10,407
Depreciation and amortization...................... 352 678 831
Non-cash compensation.............................. -- 616 1,426
------ ------- --------
Total operating expenses.......................... 2,478 6,844 12,664
------ ------- --------
Loss from operations................................ (902) (4,298) (10,467)
Interest and other (income) expense:
Interest income.................................... (1) (2) --
Interest expense................................... 213 283 1,090
Other expense, net................................. -- 7 11
------ ------- --------
Total interest and other expense.................. 212 288 1,101
------ ------- --------
Loss from continuing operations before income
taxes.............................................. (1,114) (4,586) (11,568)
Provision for income taxes.......................... -- -- --
------ ------- --------
Loss from continuing operations................... (1,114) (4,586) (11,568)
Income (loss) from discontinued operations of
Cleartel (less applicable state (taxes) benefit of
$(30), $(108), and $34, respectively).............. 799 1,923 (671)
------ ------- --------
Net loss.......................................... $ (315) $(2,663) $(12,239)
====== ======= ========
Basic and diluted earnings (loss) per share:
Continuing operations.............................. $(0.11) $ (0.48) $ (1.17)
Discontinued operations............................ 0.08 0.20 (0.07)
------ ------- --------
Total............................................. $(0.03) $ (0.28) $ (1.24)
====== ======= ========
Weighted-average common shares outstanding--basic
and diluted........................................ 9,648 9,648 9,869
====== ======= ========
Supplemental basic and diluted loss per share
(unaudited):
Continuing operations.............................. $ (0.79)
Discontinued operations............................ (0.04)
--------
Total............................................. $ (0.83)
========
Supplemental weighted-average common shares
outstanding--
basic and diluted (unaudited)...................... 13,517
========
The accompanying notes are an integral part of these consolidated statements.
F-5
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Statements of Changes in Stockholders' Deficit
For the Years Ended December 31, 1996, 1997, and 1998
(in thousands)
[Enlarge/Download Table]
Common Stock
------------ Additional
Paid-In Warrants Deferred Accumulated
Shares Par Capital Outstanding Compensation Deficit Total
------ ---- ---------- ----------- ------------ ----------- --------
December 31, 1995....... 9,648 $ 97 $ -- $ -- $ -- $ (4,139) $ (4,042)
Capital contribution... -- -- 1,300 -- -- -- 1,300
Distributions declared
to equity holders..... -- -- -- -- -- (76) (76)
Net loss............... -- -- -- -- -- (315) (315)
------ ----- ------ ------ ------- -------- --------
December 31, 1996....... 9,648 $ 97 1,300 -- -- (4,530) (3,133)
Unearned compensation
pursuant to issuance
of stock options...... -- -- 4,930 -- (4,930) -- --
Amortization of
unearned
compensation.......... -- -- -- -- 616 -- 616
Distributions declared
to equity holders..... -- -- -- -- -- (98) (98)
Net loss............... -- -- -- -- -- (2,663) (2,663)
------ ----- ------ ------ ------- -------- --------
December 31, 1997....... 9,648 97 6,230 -- (4,314) (7,291) (5,278)
Capital contribution... -- -- 317 -- -- -- 317
Distributions declared
to equity holders..... -- -- -- -- -- (56) (56)
Issuance of common
stock................. 317 3 997 -- -- -- 1,000
Amortization of
unearned
compensation.......... -- -- -- -- 1,426 -- 1,426
Warrants issued in
connection with Loan
(Note 7).............. -- -- -- 1,226 -- -- 1,226
Net loss............... -- -- -- -- -- (12,239) (12,239)
------ ----- ------ ------ ------- -------- --------
December 31, 1998....... 9,965 $ 100 $7,544 $1,226 $(2,888) $(19,586) $(13,604)
====== ===== ====== ====== ======= ======== ========
The accompanying notes are an integral part of these consolidated statements.
F-6
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
Consolidated Statements of Cash Flows
(in thousands)
[Download Table]
Years Ended December 31,
--------------------------
1996 1997 1998
------- ------- --------
Cash flows from operating activities:
Net loss.......................................... $ (315) $(2,663) $(12,239)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Compensation pursuant to stock options.......... -- 616 1,426
Amortization of debt discount and deferred
financing costs................................ -- -- 555
Loss on disposal of fixed assets................ -- 63 --
Depreciation and amortization................... 352 678 831
Depreciation and amortization of discontinued
operations..................................... 684 668 520
Changes in operating assets and liabilities, net
of Capital Area acquisition:
Accounts receivable, net....................... 67 (104) (182)
Prepaid expenses and other current assets...... (18) (46) (148)
Accounts payable and accrued expenses.......... 424 380 2,984
Payable to discontinued operations............. 980 2,755 1,047
Unearned revenues.............................. 113 147 116
Changes in operating assets and liabilities of
discontinued operations....................... (888) (1,802) 1,882
------- ------- --------
Net cash provided by (used in) operating
activities................................... 1,399 692 (3,208)
------- ------- --------
Cash flows from investing activities:
Purchases of property and equipment............... (542) (556) (1,435)
Purchases of property and equipment of
discontinued operations.......................... (623) (551) (387)
Payment for Capital Area acquisition.............. (3,068) -- --
Net payments received on notes receivable......... 13 129 (265)
Net payments received on related party accounts
receivable....................................... 190 180 317
------- ------- --------
Net cash used in investing activities......... (4,030) (798) (1,770)
------- ------- --------
Cash flows from financing activities:
Net (repayments) borrowings under receivables-
based credit facility of discontinued
operations....................................... 38 (211) (1,451)
Borrowings under Loan............................. -- -- 7,000
Borrowings under long-term debt................... 2,000 600 --
Repayments under long-term debt................... (233) (367) (2,000)
Borrowings under notes payable--related parties... 1,100 675 1,000
Repayments under notes payable--related parties... (114) (162) (107)
Principal payments under capital lease
obligations...................................... (250) (337) (173)
Payment of loan commitment, debt financing and
offering costs................................... (82) (16) (345)
Proceeds from issuance of common stock............ -- -- 1,000
Distribution to equity holders.................... (43) -- --
------- ------- --------
Net cash provided by financing activities..... 2,416 182 4,924
------- ------- --------
Net (decrease) increase in cash.................... (215) 76 (54)
Cash, beginning of year............................ 288 73 149
------- ------- --------
Cash, end of year.................................. $ 73 $ 149 $ 95
======= ======= ========
Supplemental disclosure of cash flow information:
Cash paid for interest of continuing operations... $ 190 $ 246 $ 412
======= ======= ========
Cash paid for interest of discontinued
operations....................................... $ 832 $ 870 $ 791
======= ======= ========
Supplemental disclosure of noncash activities:
Equipment acquired under capital lease of
discontinued operations.......................... $ 80 $ -- $ 228
======= ======= ========
In 1996, the Company paid $43 of declared distributions to equity holders, with
theremainder of approximately $187 of distributions declared in 1996, 1997, and
1998,converted to capital in 1998.
The accompanying notes are an integral part of these consolidated statements.
F-7
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Business Description:
Organization
CAIS Internet, Inc. (the "Company") was incorporated under the name CGX
Communications, Inc. ("CGX") as a "C" corporation in Delaware in December 1997
to serve as a holding company for two operating entities, CAIS, Inc. ("CAIS"),
a Virginia "S" Corporation, and Cleartel Communications Limited Partnership
("Cleartel"), a District of Columbia partnership. The Company completed a
reorganization in October 1998 such that CAIS and Cleartel became wholly owned
subsidiaries of the Company. The reorganization has been accounted for similar
to a pooling-of-interests as CAIS and Cleartel were under common ownership. The
Company changed its name from CGX Communications, Inc. to CAIS Internet, Inc.
in February 1999.
CAIS was formed in May 1996 by the owners of Cleartel to acquire Capital
Area Internet Service, Inc. ("Capital Area") from its founders. It is a tier
one Internet Service Provider ("ISP"), connecting with other major internet
providers at various equipment locations in the United States. CAIS sells full-
time, dedicated connections to the Internet to commercial customers, dial-up
connections to the Internet to residential and smaller commercial customers,
and various ancillary Internet services, including hosting of web sites. It is
also a licensee and joint-owner of a new Internet technology that allows high-
speed data and voice traffic to travel simultaneously over one standard
telephone line. CAIS is marketing this technology under the name of OverVoice
for use primarily in hotels and apartment buildings (multiple dwelling units,
or "MDU's").
Cleartel began operations in 1987 to provide operator-assisted long-distance
telephone services to hotels and payphones, and provides commercial and
residential long-distance services, mainly in the eastern United States.
Cleartel's corporate headquarters and telephone switch equipment are located in
Washington, D.C. Operator services are provided as part of a contractual
relationship with a subsidiary of GTE International, located in the Dominican
Republic. A second operator center has been maintained in the corporate offices
in Washington for overflow traffic and redundancy. In February 1999, the
Company spun-off Cleartel to the Company's stockholders (see Notes 2 and 3).
Risks and Other Important Factors
The Company's net loss from continuing operations has increased from
$1,114,000 in 1996 to $11,568,000 in 1998. As of December 31, 1998, the Company
had negative working capital of approximately $9,374,000, and an accumulated
deficit of approximately $19,586,000. The Company has financed its operations
with various debt and equity placements. The Company's continuing operations
have also been financed in part from operating profits and cash flows generated
from its now discontinued operation (Cleartel). As more fully described in Note
7, the Company obtained a $7,000,000 loan in September 1998, which has been
fully drawn by the Company as of December 1998. In January 1999 the Company
borrowed $1,000,000 from a stockholder (See Note 9). As described in Note 10,
the Company issued $11,500,000 of convertible preferred stock in February 1999
after the spin-off of Cleartel. The Company received $3,500,000 in cash,
$1,500,000 of which was used to repay amounts due to Cleartel in February 1999,
and an unconditional promissory note due in March 1999 for the remaining
$8,000,000 (see Note 15). In addition to this preferred stock issuance,
management intends to obtain equipment financing to help fund the roll-out of
OverVoice (see Note 15). Management believes that without additional financing
such as the equipment financing or the Company's anticipated initial public
offering (the "IPO") in 1999, the Company would curtail the planned roll-out of
OverVoice and reduce marketing and development activities. There can be no
assurance that additional capital will be available to the Company or that the
terms of such capital will be acceptable to
F-8
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
management. Further, there can be no assurance that the Company will generate
positive cash flows or income from operations in the future.
The Company is subject to various risks in connection with the operation of
its business. These risks include, but are not limited to, regulations,
dependence on effective billing and information systems, intense competition,
rapid technological change, and any effects on the Company or its suppliers
relating to the Year 2000 issue. The Company's future plans are substantially
dependent on the successful roll-out of OverVoice. Net revenues generated from
OverVoice through December 31, 1998 were approximately $37,000. There can be no
assurance that the Company will be successful in its roll-out of OverVoice nor
can there be any assurance that the Company will be successful in defending its
related patent rights. Many of the Company's competitors are significantly
larger and have substantially greater financial, technical, and marketing
resources than the Company.
Year 2000
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. The effects of the Year 2000 Issue may be
experienced before, on, or after January 1, 2000, and, if not addressed, the
impact on operations and financial reporting may range from minor errors to
significant systems failure, which could affect the Company's ability to
conduct normal business operations. It is not possible to be certain that all
aspects of the Year 2000 Issue affecting the Company, including those related
to the efforts of customers, suppliers, or other third parties will be fully
resolved.
2. Summary of Significant Accounting Principles:
Consolidated Financial Statements
The consolidated financial statements include the results of CAIS, Inc.
after its acquisition of Capital Area on May 11, 1996 through December 31, 1996
and for the years ended December 31, 1997 and 1998. They also include the
results of Cleartel, presented as discontinued operations, for the years ended
December 31, 1996, 1997 and 1998.
In February 1999, the Company spun-off its operator and long-distance
services subsidiary, Cleartel, to its stockholders as a noncash distribution.
The spin-off has been presented as discontinued operations and, accordingly,
the Company has presented its financial statements for all periods prior to
that date in accordance with Accounting Principles Board ("APB") Opinion No.
30. All expenses related to members of senior management that will be
continuing with the Company are included within income from continuing
operations.
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company records revenues for all services, including installation fees,
when the services are provided to customers. Amounts for services billed in
advance of the service period and cash received in advance of
F-9
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
revenues earned are recorded as unearned revenues and recognized as revenue
when earned. Customer contracts for internet access and web hosting services
are typically for periods ranging from one month to three years. Internet
access services typically require the customer to purchase equipment and the
related installation fees. Revenues from equipment sales are recorded when the
related equipment is shipped to the customer. Dial-up access customers
typically subscribe to service on a monthly or annual basis.
Cost of Services
Cost of services represent primarily recurring expenses for the lease of
data facilities from national and local fiber providers. These direct charges
include long haul bandwidth and local interconnection charges.
Fair Value of Financial Instruments
The carrying amounts for current assets and liabilities, other than the
current portion of notes payable to related parties, approximate their fair
value due to their short maturity. The fair value of notes payable to related
parties cannot be reasonably and practicably estimated due to the unique nature
of the related underlying transactions and terms (see Note 9). However, given
the terms and conditions of these instruments, if these financial instruments
were with unrelated parties, interest rates and payment terms could be
substantially different than the currently stated rates and terms.
Property and Equipment
Property and equipment are stated at historical cost less accumulated
depreciation and amortization. Depreciation is provided using the straight-line
method over the estimated useful lives of the assets ranging from three to five
years, or for leasehold improvements, the life of the lease, if shorter. Costs
of additions and improvements are capitalized and repairs and maintenance are
charged to expense as incurred. Upon sale or retirement of property and
equipment, the costs and related accumulated depreciation are eliminated from
the accompanying consolidated balance sheets, and any resulting gain or loss is
reflected in the accompanying consolidated statements of operations.
Debt Discount and Deferred Debt Financing and Offering Costs
As more fully discussed in Note 7, in September 1998, the Company entered
into a loan facility (the "Loan") with an investment banking firm. Debt
discount costs of $1,226,000 represent amounts attributable to the redeemable
warrants issued in connection with the Loan. The unamortized debt discount as
of December 31, 1998, was approximately $817,000. These costs are reflected as
an offset to the related Loan in the accompanying consolidated balance sheets
as of December 31, 1998. Unamortized deferred debt financing costs of
approximately $292,000 represent other direct financing costs incurred in
connection with the placement of the Loan. Both the debt discount and the
deferred financing costs are being amortized over the extended one-year term of
the Loan using the effective interest method.
In connection with the Company's anticipated IPO, the Company also has
incurred direct costs of $237,000 associated with the offering. These costs are
reflected as deferred offering costs and will be offset against the proceeds
from the anticipated IPO or expensed if the IPO is unsuccessful.
Excess of Cost over Net Assets Acquired (Goodwill)
Goodwill recorded as a result of the acquisition of Capital Area by CAIS in
1996 (see Note 4) is being amortized over seven years. The Company continually
evaluates whether events and circumstances have
F-10
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
occurred which indicate that the remaining estimated useful life of goodwill
may warrant revision or that the remaining balance of goodwill may not be
recoverable. Management believes that no such impairment existed as of December
31, 1998. Goodwill for all periods presented is included in intangible assets
in the accompanying consolidated balance sheets, net of accumulated
amortization.
Amortization of goodwill was approximately $212,000, $329,000, and $382,000
for the years ended December 31, 1996, 1997, and 1998, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations
of credit risk consist principally of trade accounts receivable. For trade
accounts receivable, the risk is limited due to the large number of customers,
the dispersion of those customers across many industries and geographic
regions, and the ability to terminate access on delinquent accounts.
Recently Adopted Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income." SFAS No. 130 requires "comprehensive income" and the
components of "other comprehensive income," to be reported in the financial
statements and/or notes thereto. There was no difference between the Company's
net loss and its total comprehensive loss for the years ended December 31,
1996, 1997, and 1998.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information" requires an entity to disclose financial and descriptive
information about its reportable operating segments. It also establishes
standards for related disclosures about products and services, geographic
areas, and major customers. The Company has adopted SFAS No. 131 for the year
ended December 31, 1998 (see Note 13).
In July 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999, and its purpose is to replace existing
pronouncements with a single, integrated accounting framework for derivatives
and hedging activities. The Company has not yet evaluated the effect of this
standard on the financial statements. The Company will adopt this standard in
its December 31, 1999 financial statements.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued SOP 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." It provides guidance on accounting for
costs of computer software developed or obtained for internal use. It is
effective for fiscal years beginning after December 15, 1998, for projects in
progress and prospectively, with earlier application encouraged. The Company
has not yet evaluated the effect of this standard on the financial statements.
The Company will adopt this standard in its December 31, 1999 financial
statements.
Stock Compensation
The Company accounts for its stock option plan under APB Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has adopted SFAS No.
123, "Accounting for Stock-Based Compensation," for disclosure purposes. The
Company has recognized non-cash compensation expense on certain stock options
granted to management (see Note 10).
F-11
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Interest Rate Swaps
In late 1996, the Company entered into a forward interest rate swap
agreement to hedge its interest rate exposure. The Company was the fixed rate
payor and the lender was the floating rate payor. The swap, which did not
involve any exchange of the underlying principal amount, had been designated as
a hedge. As discussed in Note 8, the swap agreement was terminated in September
1998 upon repayment of the related bank loan. The net settlement amount under
the swap agreement resulted in a charge to interest expense of $39,000 in the
accompanying statements of operations.
Income Taxes
Until the Company's reorganization in October 1998, the federal income tax
obligations of CAIS and Cleartel were passed through to their respective
subchapter S shareholders and partners. Cleartel was subject to state
unincorporated business franchise taxes on any profits in the District of
Columbia.
The Company accounts for federal, state and local income taxes in accordance
with SFAS No. 109, "Accounting for Income Taxes." Under SFAS No. 109, deferred
tax assets and liabilities are computed based on the difference between the
financial statement and income tax bases of assets and liabilities using the
enacted marginal tax rate. SFAS No. 109 requires that a net deferred tax asset
be reduced by a valuation allowance if, based on the weight of available
evidence, it is more likely than not that some portion or all of the net
deferred tax asset will not be realized.
Net Loss Per Share
SFAS No. 128, "Earnings Per Share," requires dual presentation of basic and
diluted earnings per share on the face of the statements of operations. Basic
earnings per share excludes dilution and is computed by dividing income or loss
available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock or resulted in the
issuance of common stock that then shared in the earnings of the entity.
Options to purchase approximately 2,034,000 and 2,946,000 shares of common
stock were excluded from the computation of diluted loss per share in 1997 and
1998, respectively, and warrants to purchase approximately 390,000 shares of
common stock were excluded from the computation of diluted loss per share in
1998, because inclusion of these options and warrants would have an anti-
dilutive effect on loss per share.
Supplemental basic and diluted net loss per share gives effect to the
assumed conversion of 2,827,168 shares and approximately 104,000 shares of
Series A and Series B Convertible Preferred Stock, respectively, (see Note 10)
to the Company's common stock upon the IPO, the anticipated repayment of
$7,000,000 in debt with proceeds from the IPO, and the redemption of certain
related party indebtedness converted into Series B Redeemable Preferred Stock
subsequent to year-end (see Note 10). Supplemental net loss per share has been
computed by dividing net loss, after adjustment for applicable interest expense
and debt discount, by the weighted average common shares outstanding adjusted
for the assumed conversion of the Series A and Series B Convertible Preferred
Stock to the Company's common stock, and the estimated number of shares that
the Company would need to issue in the IPO to repay the debt and redeem certain
of the Series B Redeemable Preferred Stock.
F- 12
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Spin-off/Discontinued Operations:
On February 12, 1999, the Company completed a spin-off of Cleartel, its
operator and long-distance services subsidiary, pursuant to which ownership of
Cleartel was transferred to the Company's stockholders. The Company distributed
all of the shares of common stock to its stockholders on a pro rata basis, and
the holders of options to acquire the Company's stock and warrants were granted
stapled rights to acquire shares in Cleartel. For financial reporting purposes,
the Company has presented the results of operations for Cleartel as
discontinued operations. A summary of the statement of the assets and
liabilities of discontinued operations are as follows (in thousands):
[Download Table]
December 31, Date of Spin-Off
1998 February 12, 1999
------------ -----------------
Balance Sheets
Cash......................................... $ 21 $ 1
Accounts receivable, net of allowance for
doubtful accounts of $1,450 and $1,395,
respectively................................ 2,224 2,129
Notes receivable, current.................... 530 437
Advances receivable from CAIS................ 5,342 4,941
Prepaid expenses and other assets............ 53 59
------- ------
Total current assets....................... 8,170 7,567
------- ------
Property and equipment, net of accumulated
depreciation of $3,142 and $3,201,
respectively................................ 1,305 1,260
Notes receivable, net of current portion..... 607 632
Other noncurrent assets...................... 24 27
------- ------
Total noncurrent assets.................... 1,936 1,919
------- ------
Total assets............................... $10,106 $9,486
======= ======
Accounts payable and accrued liabilities..... $ 5,410 $4,827
Borrowings under receivable-based financing.. 2,714 3,027
Capital leases, current...................... 81 77
------- ------
Total current liabilities.................. 8,205 7,931
------- ------
Notes payable to related party............... 2,100 1,450
Accrued interest to related party............ 411 --
Capital leases, net of current portion....... 69 62
Other liabilities............................ 21 --
------- ------
Total liabilities.......................... 10,806 9,443
------- ------
Owners' (deficit) equity..................... (700) 43
------- ------
Total liabilities and owners' deficit...... $10,106 $9,486
======= ======
Statement of Changes in Owners' Deficit
Beginning owners' deficit, December 31,
1998........................................ $ (700)
Conversion of related party debt to equity... 1,083
Net loss..................................... (340)
------
Ending owners' equity, February 12, 1999..... $ 43
======
F-13
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
A summary of results for the discontinued operations for the years ended
December 31, 1996, 1997, and 1998 are as follows (in thousands):
[Download Table]
1996 1997 1998
------- ------- -------
Statements of Operations:
Net revenues..................................... $32,484 $33,959 $27,424
Operating expenses:
Cost of services............................... 19,685 19,319 17,880
Selling, general, and administrative........... 10,475 11,158 8,996
Depreciation and amortization.................. 684 668 519
------- ------- -------
Total operating expenses..................... 30,844 31,145 27,395
------- ------- -------
Income from operations........................... 1,640 2,814 29
Interest expense, net of interest income......... 811 783 734
------- ------- -------
Income (loss) before taxes....................... 829 2,031 (705)
(Provision) benefit for state taxes.............. (30) (108) 34
------- ------- -------
Net income (loss)................................ $ 799 $ 1,923 $ (671)
======= ======= =======
Income (loss) related to discontinued operations reflect those revenues and
expenses directly incurred by Cleartel and allocations of shared corporate
costs based primarily on methodologies established by management between the
Company and Cleartel to reflect the cost sharing agreement between both
companies.
During the years ended December 31, 1996, 1997, and 1998, CAIS and Cleartel
shared certain support services such as bookkeeping, information systems, and
advertising and marketing support. After the spin-off, the Company will provide
these services at cost plus a fixed percentage until Cleartel replaces this
arrangement with its own services in 1999. Amounts charged for services are
included as an offset to the respective operating expenses in the accompanying
statements of operations. A summary of these transactions for the years ended
December 31, 1996, 1997, and 1998, are as follows (in thousands):
[Download Table]
December 31,
--------------
1996 1997 1998
---- ---- ----
Bookkeeping, MIS, advertising, and marketing support......... $272 $302 $227
Office lease................................................. $159 $161 $164
Through December 31, 1998, profits and cash flows from Cleartel were used to
finance operating losses at CAIS. This obligation of the Company as of February
12, 1999, was approximately $4,941,000 and was reduced to $1,991,000 in
February 1999 upon cash payments of $1,500,000 and the Company's assumption of
related party debt totaling $1,450,000 from Cleartel. The remaining balance is
due at the earlier of thirty days after the closing date of the anticipated IPO
or June 30, 2000.
4. Acquisition:
CAIS purchased the capital stock and operations of Capital Area on May 10,
1996 for a purchase price of approximately $3,100,000, including penalties
related to closing delays. The purchase price (plus the closing delay
penalties) was paid to the sellers at closing and was financed through loans of
$2,000,000 from a bank (Note 8), $1,000,000 from a stockholder and $100,000
from another stockholder (Note 9). The purchase price was allocated as follows:
tangible assets, principally cash, accounts receivable and property and
equipment of approximately $1,143,000; assumed liabilities of $(445,000); and
goodwill of approximately $2,402,000.
F-14
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The goodwill is being amortized over seven years. The Company accounted for
the acquisition under purchase accounting.
5. Property and Equipment:
Property and equipment consists of the following (in thousands):
[Download Table]
December 31,
--------------
1997 1998
------ ------
Internet equipment........................................ $ 660 $1,287
OverVoice equipment....................................... -- 802
Computer hardware and software............................ 154 384
Office furniture and fixtures............................. 662 747
Leasehold improvements.................................... 46 207
------ ------
1,522 3,427
Less Accumulated depreciation............................. (373) (789)
------ ------
$1,149 $2,638
====== ======
6. Accounts Payable and Accrued Expenses:
Accounts payable and accrued expenses consist of the following (in
thousands):
[Download Table]
December 31,
-------------
1997 1998
------ ------
Accounts payable........................................... $ 823 $2,917
Accrued salaries and vacation.............................. 69 186
Accrued legal settlement (Note 12)......................... -- 500
Accrued professional fees.................................. 60 495
Accrued interest........................................... 27 150
Other...................................................... 59 148
------ ------
$1,038 $4,396
====== ======
7. Loan:
On September 4, 1998, the Company signed an agreement for a $7 million Loan
with an investment banking firm. The Loan required a commitment fee and a
facility fee totaling $345,000. The Loan was for a six-month term, converting
to a five-year Senior Note if not repaid prior to expiration of the initial
term. In February 1999, the initial term was extended to September 1999 for an
additional fee of $210,000. Borrowings bear interest at a rate of LIBOR plus 5
percent (10.625 percent as of December 31, 1998). The Loan was secured by
substantially all of the assets of the Company and Cleartel. The Loan contains
certain covenants and restrictions, including, but not limited to, limitations
on additional indebtedness, acquisition or transfer of assets, payment of
dividends, new ventures or mergers, and issuance of additional equity. In
February 1999, the agreement was revised such that Cleartel is no longer a
borrower and Cleartel's assets no longer serve as security for the loan. In
addition, the revised agreement allows specific indebtedness and specific
equity issuances. The use of proceeds is limited to repayment of the Bank Loan,
funding for OverVoice expenditures, and general corporate purposes. The
weighted-average interest rate under the Loan during 1998 was
F-15
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
approximately 10 percent. The amount of interest expense incurred related to
the Loan, including amortization of the debt discount and deferred debt
financing costs totaled approximately $747,000 during 1998.
In connection with the Loan, the Company issued the investment banking firm
warrants to acquire 3 percent of the fully diluted outstanding shares of common
stock of the Company or 390,000 shares at September 4, 1998. The warrants have
an exercise price of $0.01 per share and expire on the tenth anniversary after
issuance, or September 4, 2008. The warrants fully vested upon closing of the
Loan and include certain anti-dilution provisions. The fair value of the
warrants, totaling approximately $1,226,000, or $3.14 per share, is classified
as a component of additional paid-in capital as of December 31, 1998. During
1998, the Company recorded approximately $409,000 of debt discount amortization
expense related to these warrants.
8. Bank Loan and Interest Rate Swap
In connection with the acquisition of Capital Area on May 10, 1996, the
Company obtained a $2,000,000 loan from a bank (the "Bank Loan"). Interest on
the Bank Loan accrued at a rate of prime plus one and one-half percent (9.75
percent at that date), with payments on a five-year amortization schedule and a
maturity date of May 10, 1999. The Bank Loan was guaranteed by one of the
principal stockholders of the Company and was secured by investments from
another principal stockholder of the Company.
On October 17, 1996, CAIS entered into an interest rate swap transaction
with the bank, and refinanced the remaining principal balance of approximately
$1,833,000 at that time into a new promissory note. Interest on the refinanced
note was based on the LIBOR rate, plus 2 percent. The bank also entered into a
hedging transaction to control fluctuation in the LIBOR rate, which had the
effect of converting the variable interest rate on the Bank Loan into a fixed
rate of 8.65 percent as of December 31, 1996.
On December 5, 1997, CAIS again refinanced the Bank Loan to increase the
principal balance outstanding at that time of $1,400,000 to the original
$2,000,000, thus netting CAIS $600,000 in cash proceeds. In addition, the
maturity date of the refinanced Bank Loan and the swap agreement was extended
to December 10, 2000.
On September 4, 1998, the entire Bank Loan principal and interest and
interest rate swap totaling $1,782,000 was paid off with proceeds from the Loan
(see Note 7). The amount of interest expense incurred related to the Bank Loan
was $115,000, $137,000, and $151,000 for the years ended December 31, 1996,
1997, and 1998, respectively.
9. Transactions with Related-Parties:
Notes Payable to Related Parties
Notes payable to related parties of $1,515,000 and $1,983,000 as of December
31, 1997 and 1998, respectively, consist of notes payable to stockholders with
interest accruing at annual rates of 10 to 13 percent. In February 1999,
related party notes totaling $4,433,000, including the $1,983,000 outstanding
as of December 31, 1998, the $1,450,000 assumed from Cleartel, and the
$1,000,000 borrowed in 1999, were converted into Series B Cumulative Mandatory
Redeemable Convertible Preferred Stock (see Note 10).
Interest expense of approximately $97,000, $131,000, and $128,000 was
accrued during the years ended December 31, 1996, 1997, and 1998, respectively,
related to related party loans.
In January 1999, a principal stockholder lent $1,000,000 to the Company
under a note which accrues interest quarterly at 10 percent with principal due
on the earlier of thirty days after the closing date of the
F-16
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
anticipated IPO or March 31, 2000. As described above, the note was converted
into cumulative mandatory redeemable convertible preferred stock in February
1999.
Related Party Lease
During the years ended December 31, 1996, 1997 and 1998, the Company leased
a building in Washington D.C. for their corporate headquarters from a
stockholder. Rent expense of $180,000 was incurred for this lease during the
years ended December 31, 1996, 1997, and 1998. Beginning in February 1999, the
Company will be relocating to a new building in Washington, D.C. that is
approximately 45 percent owned by the same stockholder and his spouse.
10.Stockholders' Deficit:
Common Stock
On April 22, 1998, an individual invested $1,000,000 in the Company in
exchange for approximately 317,000 shares of common stock. Since the Company
had not yet been reorganized, the investor received a 2.439 percent equity
interest in CAIS and Cleartel, subject to any future corporate restructurings.
In February 1999, the Company increased its authorized common stock from
25,000,000 to 100,000,000 shares of common stock.
Convertible Preferred Stock
In February 1999, the Company authorized the issuance of up to 25,000,000
shares of preferred stock, par value $0.01 per share. Of these authorized
shares, 2,827,168 shares have been designated as Series A Convertible Preferred
Stock, par value $0.01 per share (the "Series A Shares") and 1,119,679 shares
have been designated as Series B Cumulative Mandatory Redeemable Convertible
Preferred Stock, par value $0.01 per share (the "Series B Shares").
In February 1999, after the Spin-off, the Company issued 2,827,168 Series A
Shares to an entity controlled by a director of the Company and to a related
party to the investment banking firm that provided the Loan to the Company for
total gross proceeds of $11,500,000. The Company received $3,500,000 in cash,
$1,500,000 of which was used to pay amounts due to Cleartel, and an
unconditional promissory note due in March 1999 for the remaining $8,000,000.
The Series A Shares are convertible at the option of the holder, initially on a
one-to-one basis into common stock. The shares automatically convert into
common stock upon certain events including a qualified IPO as defined in the
certificate of incorporation. The Series A Shares are entitled to a liquidation
preference equal to $11,500,000, plus a return of 8 percent per annum thereon,
and all accrued but unpaid dividends thereon. The Series A Shares vote with the
common stock on an as converted basis. The Series A Shares contain certain
protective provisions regarding significant business decisions affecting the
Company's future operations such as to increase the number of shares designated
as Series A; pay or declare dividends or redeem, repurchase or acquire shares
of junior stock; enter into certain employment agreements; enter into an
acquisition, merger, reorganization or re-capitalization transaction; enter
into financial commitments in excess of $250,000; and, liquidate or dissolve
the Company, among other protective provisions. The holders of the Series A
Shares may require the Company to redeem the shares on February 1, 2004 at a
price equal to the greater of the liquidation preference or the fair market
value. The Company also issued to the purchasers of the Series A Shares,
warrants to purchase a number of shares of common stock equal to 3.0% of the
total number of shares outstanding on a fully diluted basis at the close of the
IPO. The
F-17
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
warrants will have an exercise price equal to the price per share of common
stock at the IPO, and will vest upon the earlier of the closing of an IPO, or a
change of ownership or insolvency as defined in the certificate of
incorporation. The warrants expire on the earlier of February 19, 2009, or the
date five years after the warrants are first exercisable. The fair value of the
warrants will be estimated using the Black-Scholes option pricing model based
upon the price per share of common stock at the IPO.
In February 1999, after the Spin-off, the Company issued 1,119,679 Series B
Shares to certain stockholders of the Company, in exchange for indebtedness,
including accrued interest, totaling $4,557,000 payable by the Company to the
Stockholders. Upon consummation of a qualified IPO, as defined, the Company is
required to redeem for cash $3,000,000 of the face amount of the Series B
Shares, plus a return of 8 percent per annum thereon, and all accrued but
unpaid dividends thereon. Any remaining Series B Shares convert into common
stock at the IPO on the earlier of a qualified IPO at the IPO price or the
conversion of the Series A Shares upon a nonqualified IPO. The Series B Shares
are entitled to a liquidation preference of $4,557,000, a return of 8 percent
per annum thereon, plus all accumulated but unpaid dividends thereon. The
Series B Shares vote with the common stock on a one-for-one basis. The Series B
Shares also contain certain protective provisions regarding significant
business decisions affecting the Company's future operations, including voting
rights with respect to increasing the number of shares designated as Series B
Shares, paying or declaring dividends to redeem, repurchase or acquire shares
of junior stock, and liquidating or dissolving the Company.
Executive Stock Options
During 1997, the Company issued stock options to two members of executive
management as part of their four-year employment contracts. Since the Company
had not yet been reorganized at the time of the grants, the executives received
options to purchase equal interests in CAIS, Inc. and Cleartel. In February
1997, one of the members of executive management received options to acquire
approximately 301,000 shares of common stock at an exercise price of $1.19 per
share. One-third of these options vest on the earlier of the end of year three
of the employment contract or the date immediately prior to the earliest to
occur of: (i) the effective date of a registration statement; or (ii) the
pricing of the IPO; or (iii) the execution and delivery of an underwriting
agreement related to an IPO, and the remainder at the end of year four of the
employment contract. In September 1997, another member of executive management
received options to acquire approximately 1,733,000 shares of common stock at
an exercise price of $0.9732 per share. Approximately 97,000 options fully vest
on April 1, 1999. Of the remaining 1,636,000 options, 50 percent vest at the
end of employment years three and four, respectively. If the Company completes
an IPO prior to the end of employment year two, 75 percent of these remaining
options will vest on the date immediately prior to the earliest to occur of:
(i) the effective date of a registration statement; or (ii) the pricing of the
IPO; or (iii) the execution and delivery of an underwriting agreement related
to an IPO or the end of year three of the employment contract, whichever is
earlier, with the remaining 25 percent vesting at the end of employment year
four.
As a result of these grants, the Company recorded deferred compensation of
$4,930,000 to be amortized over the vesting period relating to these options.
The amount of deferred compensation was based upon the difference between the
estimated fair market value of the Company at the date of the grants and the
applicable exercise prices. Accordingly, the Company amortized $616,000 and
$1,426,000 for the years ended December 31, 1997 and 1998, respectively, in the
consolidated statements of operations.
Employee Stock Option Plan
On March 24, 1998, the Company's stockholders approved the 1998 Equity
Incentive Plan (the "Stock Option Plan"). In February 1999, the Stock Option
Plan was amended and currently provides for the grant of both incentive and
nonstatutory stock options to eligible employees and consultants of the Company
and reserves 1,500,000 shares of common stock for issuance under the Stock
Option Plan. Options granted under the Stock Option Plan must have an exercise
price of no less than fair market value of the Company's common
F-18
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
stock at the date of grant and expire ten years after grant date. As of
December 31, 1998, approximately 912,000 shares were outstanding under the
Stock Option Plan. The stock options outstanding under the Stock Option Plan
generally vest over three to four year periods.
A summary of the Company's aggregate stock option activity and related
information under the Stock Option Plan, including the Executive Stock Options,
is as follows (in thousands, except per share prices):
[Download Table]
Year Ended Year Ended
December 31, December 31,
1997 1998
----------------- -----------------
Weighted- Weighted-
Average Average
Exercise Exercise
Options Price Options Price
------- --------- ------- ---------
Options outstanding at beginning of
period................................... -- $ -- 2,034 $1.00
Granted................................... 2,034 1.00 960 3.13
Exercised ................................ -- -- -- --
Forfeited................................. -- -- 48 3.07
----- ----- ----- -----
Options outstanding at end of period...... 2,034 $1.00 2,946 $1.66
===== ===== ===== =====
Options exercisable at end of period...... -- $-- -- $ --
===== ===== ===== =====
Exercise prices for options outstanding under the Stock Option Plan and for
the Executive Stock Options as of December 31, 1998, are as follows:
[Download Table]
Number of Options Weighted-Average
Range of Exercise Outstanding Remaining Contractual Weighted-Average
Prices (in thousands) Life in Years Exercise Price
----------------- ----------------- --------------------- ----------------
$0.97 1,733 8.67 $0.97
$1.19 301 8.42 $1.19
$3.07 866 9.31 $3.07
$4.31 46 9.96 $4.31
----------- ----- ---- -----
$0.97-$4.31 2,946 8.85 $1.66
=========== ===== ==== =====
The Company has elected to account for stock and stock rights in accordance
with APB Opinion No. 25, "Accounting for Stock Issued to Employees" and has
adopted the disclosure-only provisions of SFAS No. 123, "Accounting for Stock-
Based Compensation."
Had compensation cost for the Company's employee stock options been
determined based on fair value at the grant date, consistent with the
provisions of SFAS No. 123, the Company's net loss from continuing operations
and loss per share from continuing operations would have been (in thousands,
except per share data):
[Download Table]
1997 1998
------- --------
Loss from continuing operations pro forma............... $(4,859) $(12,125)
Basic and diluted loss per share from continuing
operations pro forma................................... $ (0.50) $ (1.23)
The fair value of options granted in the years ended December 31, 1997 and
1998, were estimated at the date of grant using a Black-Scholes option pricing
model with the following weighted-average assumptions: risk-free interest rates
of 5.68 and 4.55 percent, respectively, no dividend yield, weighted-average
expected lives of the options of 4 years, and expected volatility of 70
percent. There were no options granted in 1996.
F-19
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The weighted-average fair value of options granted during the year ended
December 31, 1997 and 1998, were $2.64, and $1.75, respectively. For purposes
of pro forma disclosures, the estimated fair value of the options are amortized
to expense over the estimated service period. The options granted in 1997 were
granted below fair market value, while options granted in 1998 were granted at
fair market value.
In January and February 1999, under the 1998 Equity Incentive Plan, the
Company granted 280,000 incentive stock options to employees with an exercise
price of $4.31 per share. The stock options expire ten years after grant and
vest over three to four years.
11. Income Taxes:
Until the Company's Reorganization in October 1998, all earnings and losses
were passed through to the individual equity holders. At December 31, 1998, the
Company had net operating loss carryforwards of approximately $3,954,000 for
income tax purposes that expire in 2018. Net operating loss carryforwards are
subject to review and possible adjustment by the Internal Revenue Service and
may be limited in the event of changes in ownership pursuant to Section 382 of
the Internal Revenue Code.
The Spin-off of Cleartel in February 1999 was a taxable transaction.
Accordingly, the Company will be subject to income taxes on the excess of the
fair value of the spun-off assets (stock) over the Company's basis in the
assets distributed. Management believes that the net operating losses available
for carryforward into 1999 together with the losses expected to be generated in
1999 will offset any potential gain for income tax purposes. To the extent that
net operating losses are used to offset the taxable gain upon the Spin-off,
such operating losses will not be available to offset any future operating
income. If carryforward losses are used to offset the gain from the Spin-off,
the Company may be subject to the Alternative Minimum Tax ("AMT"). Any AMT
imposed would be allowed as a credit to offset future regular tax liability.
Significant components of the Company's net deferred tax asset as of
December 31, 1998 are as follows (in thousands):
[Download Table]
Deferred tax assets:
Net operating loss carryforwards.................................. $ 1,582
Unearned stock compensation....................................... 817
Allowance for doubtful accounts................................... 635
Book over tax goodwill............................................ 190
Accrued vacation.................................................. 56
Other deferred tax assets......................................... 154
-------
Total deferred tax assets....................................... 3,434
Deferred tax liabilities:
Tax over book depreciation........................................ (84)
-------
Net deferred tax asset.............................................. 3,350
Valuation allowance for net deferred tax assets..................... (3,350)
-------
$ --
=======
The Company has determined that the net deferred tax assets as of December
31, 1998 do not satisfy the recognition criteria set forth in SFAS No. 109.
Accordingly a valuation allowance was recorded against the applicable net
deferred tax assets.
F-20
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
12. Commitments and Contingencies:
Leases
The Company leases office space under noncancellable operating leases, one
of which was from a related party (see Note 9). The Company entered into a new
lease in 1999 for office space for its corporate headquarters. The lease term
will commence in February 1999 for a period of ten years. The initial base
annual rent will be approximately $861,000 per year with annual rent
escalations of 2 percent each year thereafter. The Company recognizes rental
expense on a straight-line basis over the lease term based on the total lease
commitment, including escalations. The Company will have no remaining lease
obligation in its existing corporate headquarters office space, after it has
completed the office move.
The new building is approximately 45% owned by one of the principal
stockholders of the Company and his wife. The Company believes that the terms
of the lease, including the rental rate, are at least as favorable to the
Company as those which could have been negotiated with an unaffiliated third
party.
Total rental expense for operating leases, including related party rent, was
approximately $241,000, $300,000, and $329,000 for the years ended December 31,
1996, 1997, and 1998, respectively.
Minimum future lease payments at December 31, 1998 are as follows (in
thousands):
[Download Table]
Operating
Leases
---------
1999............................................................... $ 910
2000............................................................... 1,042
2001............................................................... 1,008
2002............................................................... 914
2003............................................................... 932
2004 and thereafter................................................ 5,080
------
$9,886
======
OverVoice Litigation
The Company, one of its principal officers and the corporate inventor of
OverVoice (the "Corporate Inventor") were named as defendants in a federal
civil action filed in the Eastern District of New York in September 1998. The
plaintiff alleged patent infringement, unfair competition, breach of contract
and related claims. On January 24, 1999, the parties in this litigation signed
a Settlement Agreement (the "Settlement"). Under the terms of the Settlement,
the Company agreed to pay the plaintiff $500,000 as follows: $250,000 upon
dismissal of this action, $150,000 on or before July 1, 1999, and $100,000 on
or before July 1, 2000. The Company also agreed to issue the plaintiff 25,000
shares of common stock and to issue additional shares if the 25,000 shares,
multiplied by the price at which shares are issued in this offering, does not
equal or exceed $250,000. In exchange, the plaintiff also agreed to modify
their exclusive license agreement with the Corporate Inventor to a nonexclusive
agreement. As a result, the Company now has the right to install the OverVoice
technology in single family residences and food establishments. The Company has
valued the issuance of these 25,000 shares, together with the fair value
guarantee, at $250,000 and will account for the license rights received as an
intangible asset. The Company also granted the plaintiff the right to purchase
an additional 25,000 shares of common stock at the offering price in any IPO.
F-21
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
From time to time, certain other claims and suits have been filed or are
pending against the Company and senior management. In management's opinion,
resolution of these matters will not have a material adverse effect on the
Company's financial position or results of operations (see Note 15).
Network Capacity
In June 1998, CAIS signed a Memorandum of Understanding ("MOU") with Qwest
Communications, Inc. This agreement provides the basis for a long-term
contractual relationship to provide considerable nationwide bandwidth capacity
at prices which are significantly below the Company's current cost structures.
Although the agreement calls for a commitment to purchase $100 million of
services over a ten-year period, the commitment for the first three years of
the agreement only totals $5 million.
License and Royalty Agreement
In November 1996, the Company and the Corporate Inventor entered into a
license agreement that provided the Company with an option to acquire an
exclusive license to use, make, sub-license or sell the OverVoice technology,
subject only to certain geographical and pre-existing contract limitations
described in the license agreement. The Company paid $50,000 for this option
and an additional $50,000 when it exercised its option to acquire the license
in April 1997. Unless the Company terminates the license agreement, it will
remain in effect until the lapse of the last patent existing at the time of the
agreement or any additional patents filed during the term. Following the
exercise of the option, the Company agreed to expend up to $200,000 for
research and development efforts to design and build a system that incorporated
the patented technology, and to hire the individual inventor of OverVoice
("Individual Inventor") for a two year consulting contract.
The license agreement calls for royalties to be paid to the Corporate
Inventor equal to a variable percentage of net revenues, depending both upon
the specific type of service provided and the total annual revenue from all
services. The royalty percentage for services in which the Company is an active
participant either by selling proprietary equipment or by selling Internet
services ranges up to 5.5%. In cases where the Company is an inactive
participant and merely sub-licenses its rights, the Corporate Inventor receives
a royalty percentage that ranges from 40-70%. Management plans to remain an
active participant in all or substantially all OverVoice activities at this
time.
The Company has annual royalty obligations to the Corporate Inventor of
$100,000 for 1998 and increasing to a maximum of $250,000 per year during the
term of the agreement, unless the license agreement is terminated at the
Company's option.
In August 1997, the Corporate Inventor and the Company signed an amendment
that states that the Company would advance funds for approved expenses related
to patent applications. As of December 31, 1997 and 1998, respectively, the
Company has recorded notes receivables for patent fund advances totaling
$38,000 and $82,000. These notes receivable balances have been fully reserved
in the accompanying consolidated balance sheets.
In a January 1999 amendment, the Company and the Corporate Inventor agreed
to transfer 50% of the patent ownership to the Company.
F-22
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
13. Segment Reporting
The Company has two reportable segments: "Internet Services" and
"OverVoice." During the years presented, the Company derived most of its
revenue from the sale of dedicated Internet access services, Web hosting and
dial-up Internet access ("Internet Services"). During 1998, the Company began
to market dedicated high-speed Internet access to hotels and multiple dwelling
units ("MDUs") using OverVoice.
The accounting policies of the segments are the same as those described in
the summary of significant accounting policies. Since OverVoice is a new
product, its revenues and costs are being reported on an incremental basis
without any allocations of corporate overhead. Interest is allocated based upon
the respective percentage of losses before interest of the two segments. The
evaluation of the OverVoice segment's performance is only based on the
accumulation of revenues and specific costs identified to OverVoice operations.
The following is a summary of information about each of the Company's
reportable segments that are used by the Company to measure the segment's
operations (in thousands):
[Download Table]
1998
--------------------------------
Internet
Services OverVoice Consolidated
-------- --------- ------------
Revenues....................................... $ 5,278 $ 37 $ 5,315
Depreciation and amortization.................. 824 7 831
Interest expense............................... 802 288 1,090
Segment losses................................. (8,228) (3,340) (11,568)
Segment assets................................. 2,404 882 3,286
Expenditures for segment assets................ 623 812 1,435
[Download Table]
1997
--------------------------------
Internet
Services OverVoice Consolidated
-------- --------- ------------
Revenues....................................... $ 4,556 $ -- $ 4,556
Depreciation and amortization.................. 678 -- 678
Interest expense............................... 238 45 283
Segment losses................................. (3,807) (779) (4,586)
Segment assets................................. 1,615 -- 1,615
Expenditures for segment assets................ 556 -- 556
All 1996 results relate to the Internet Services segment except for $97,000
of research and development expenses.
F-23
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following is a reconciliation of the reportable segments' losses and
assets to the Company's consolidated totals (in thousands):
[Download Table]
December 31,
-----------------
1997 1998
------- --------
Losses
Total losses for reportable segments........................ $(4,586) $(11,568)
Income (loss) from discontinued operations.................. 1,923 (671)
------- --------
Consolidated net loss....................................... $(2,663) $(12,239)
======= ========
Assets
Total assets for reportable segments........................ $ 1,615 $ 3,286
Total current assets, excluding reportable segment assets... 9,300 8,493
Deferred financing and offering costs, net.................. -- 529
Intangible assets, net...................................... 1,816 1,434
Noncurrent assets of discontinued operations................ 2,307 1,936
------- --------
Consolidated total assets................................... $15,038 $ 15,678
======= ========
Major Customer and Geographical Information
During the year ended December 31, 1998, one customer in Hong Kong
represented 15 percent of the Company's consolidated net revenues.
Substantially all other net revenues were earned from customers in the United
States.
14. Regulatory Matters
At the present time, ISPs like the Company are not subject to direct
regulation by the Federal Communications Commission ("FCC") even though they
provide Internet access through transmission over public telephone lines.
However, as the growth of the Internet industry continues, there has been
considerable discussion and debate about whether the industry should be
subjected to regulation. This regulation could include universal service
subsidies for local telephone services and enhanced communications systems for
schools, libraries and certain health care providers. Local telephone companies
could be allowed to charge ISPs for the use of their local telephone network to
originate calls, similar to charges currently assessed on long distance
telecommunications companies. In addition, many state and local government
officials have asserted the right or indicated a willingness to impose taxes on
Internet-related services and commerce, including sales, use and excise taxes.
15. Subsequent Events
Collection of Promissory Note
In March 1999, the Company collected the $8,000,000 unconditional promissory
note from the February 1999 issuance of the Series A shares.
Litigation
On April 1, 1999, the Company terminated the employment of one of its
executives, and on April 9, 1999, the former executive filed a Demand for
Arbitration with the American Arbitration Association against the Company,
asserting breach of contract and breach of covenant of good faith and fair
dealing, and requested damages in the amount of $750,000. The former employee
also filed a charge of discrimination with the
F-24
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Maryland Commission on Human Relations, complaining of alleged gender-based
discrimination and retaliation. In addition, a complaint against one of the
Company's indemnified executive officers was filed in Montgomery County Circuit
Court, alleging defamation and invasion of privacy, and seeking compensatory
damages of $1 million and punitive damages of $1 million. Management intends to
vigorously defend these claims. Although the ultimate outcome of this matter
cannot be predicted, management believes the resolution of these matters will
not have a material impact on the Company's financial position or results of
operations.
Upon the employee's termination, the Company became liable for severance
payments equal to six months of the base salary plus a prorated amount equal to
six months of cash incentive compensation, totaling approximately $125,000,
which was expensed upon termination.
On March 25, 1999, the Company filed a patent infringement lawsuit against
LodgeNet Entertainment Corp. ("LodgeNet") in Maryland U.S. District Court. The
complaint charges LodgeNet with infringement of one of the OverVoice patents,
which is directed to the delivery of high-speed audio and video signals over
active telephone wiring. The Company and the OverVoice Corporate Inventor
jointly own the patent. The Company is in discussions with LodgeNet in an
attempt to resolve the matter.
Executive Stock Options and Loan Commitment
In March and April 1999, the Company issued stock options to two new members
of management as part of their three-year employment contracts. The Company
granted these executives non-qualified options to acquire 380,000 shares of
common stock at an exercise price of $4.31 per share and non-qualified options
to acquire 140,000 shares of common stock at an exercise price of $12.00 per
share. The options expire ten years after the grant date and vest at a rate of
one-third each year of employment. As defined in the stock option agreements,
the options will accelerate and fully vest one day prior to a change in
control. In the event of an IPO prior to the end of the executives' first year
of employment, one-third of the options will vest six months after the
effective date of the IPO, and then one-third after each of the second and
third years of employment.
The Company will record compensation for these option grants based upon the
difference between the estimated fair market value of the Company's stock at
the date of grant and the respective exercise price. The compensation expense
will be recognized over the respective vesting periods.
The Company also committed to advance a $400,000 unsecured loan to one of
the executives within 30 days following the closing of an IPO. The loan will
bear interest at a rate of 7% per annum, with the interest payable quarterly,
and the principal amount due 3 years from the date of the loan.
In April 1999, as part of a third employment agreement and under the 1998
Equity Incentive Plan, the Company issued incentive stock options to a new
employee to acquire 45,000 shares of common stock at an exercise price of
$12.00 per share. The options vest at a rate of 20,000 options after one year
of employment and 12,500 options after each of the second and third employment
years, and expire at the end of ten years. As defined in the stock option
certificate, the options will fully vest one day prior to the occurrence of a
change in control.
Equipment Financing
On April 13, 1999, the Company and Cisco Systems Capital Corporation entered
into a letter agreement for a three-year, $50 million equipment financing
facility. Under the facility, $25 million would be available during the first
year of the facility and an additional $25 million would be available during
the second year of the facility provided the Company meets certain financial
performance requirements. Borrowings under the facility would be limited to
$12.5 million until completion of the IPO. The first $25 million in borrowings
F-25
CAIS INTERNET, INC.
(formerly CGX Communications, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Concluded)
would bear interest at an annual rate equal to three-month LIBOR plus 7.0%
(reducing to 6.0% on the first interest payment after this offering). The
second $25 million in borrowings would bear interest at an annual rate equal to
three-month LIBOR plus 6.0%. The facility will require the Company to meet
certain financial covenants including EBITDA targets, revenue targets and
leverage and debt service ratios. Borrowings under the facility will be secured
by a first priority lien in all Cisco products and services purchased using the
facility and, where permitted, by a second priority lien in all other assets of
the Company. Closing on the facility is subject to the execution and delivery
of definitive agreements for the facility, and there can be no assurance that
the facility will be consummated.
On April 21, 1999, the Company and Nortel Networks entered into a financing
letter agreement for a five-year, $30 million equipment financing. The
financing would require the Company to meet certain financial covenants
including EBITDA targets, revenue targets and leverage and debt service ratios.
Borrowings under the financing would be secured by a first priority lien on all
Nortel Networks products purchased using the financing. Provision of the
financing is subject to approval and the execution and delivery of definitive
financial and commercial agreements. In connection with the financing letter
agreement, the Company entered into a purchase agreement with Nortel Networks
and committed to purchase $10 million of Nortel equipment by April 1, 2000. In
addition to this commitment, the Company will be subject to a reduction in its
purchase discount percentages after that date if its annual purchases do not
exceed $10 million for the year ended April 1, 2001 and $9.9 million for the
year ended April 1, 2002.
Warrants and Shares
On April 23, 1999, in connection with an amendment to the Company's master
agreement with an OverVoice customer (the "Customer"), the Company issued
warrants to the Customer to purchase 66,667 shares of common stock at an
exercise price of $0.01 per share, as an additional contribution by the Company
in support of the Customer's marketing of OverVoice. If the IPO price is less
than $15, the number of warrants to purchase common stock shall be increased
such that the total number of warrants multiplied by the IPO price will equal
at least $1 million. In connection with the warrants, the Customer received
certain demand and incidental registration rights. The warrants expire on April
23, 2004. Commencing upon the effective date of the IPO, the Customer has a put
option to sell all of the warrants (or shares of the Company issued pursuant to
the exercise of the warrants) back to the Company at the IPO price per share.
The put option expires ninety days following the earlier of: (1) the effective
date of the first registration statement that includes any warrant shares for
resale and (2) the date on which the Customer may sell all of the warrant
shares within a three-month period pursuant to Securities Act Rule 144.
Also, in connection with the development of future technologies at the
Customer's properties, the Company will contribute 133,000 shares of common
stock to a fund, within 10 days of the IPO. The shares will be jointly owned by
the Company and the Customer, with 50% of the contributed shares allocated to a
Customer sub-account within the fund and 50% of the contributed shares
allocated to the Company's sub-account. The Customer's shares will be entitled
to the same registration rights as the shares underlying the Customer warrants
as discussed above.
F-26
Report of Independent Public Accountants
To Capital Area Internet Service, Inc.:
We have audited the accompanying statements of operations, changes in
stockholders' equity and cash flows of Capital Area Internet Service, Inc. (a
Virginia S corporation), for the period from January 1, 1996, to May 10, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of Capital Area Internet
Service, Inc. and its cash flows for the period from January 1, 1996, to
May 10, 1996, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Washington, D.C.
February 19, 1999
F-27
CAPITAL AREA INTERNET SERVICE, INC.
(Predecessor Company)
STATEMENT OF OPERATIONS
For the Period From January 1, 1996 to May 10, 1996
(In Thousands)
[Download Table]
Net revenues............................................................ $1,287
Cost of services........................................................ 323
Operating expenses:
Selling, general and administrative................................... 339
Depreciation.......................................................... 42
------
Total operating expenses.......................................... 381
------
Income from operations.................................................. 583
Other income.......................................................... 2
------
Net income.............................................................. $ 585
======
The accompanying notes are an integral part of these statements.
F-28
CAPITAL AREA INTERNET SERVICE, INC.
(Predecessor Company)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For the Period From January 1, 1996 to May 10, 1996
(In Thousands)
[Download Table]
Common Stock Additional
-------------- Paid-In Retained
Shares Par Capital Earnings Total
------- ----- ---------- -------- -----
Balance, January 1, 1996............... 1,000 $ 1 $474 $ 273 $ 748
Distribution to stockholders......... -- -- -- (500) (500)
Net income........................... -- -- -- 585 585
------- ----- ---- ----- -----
Balance, May 10, 1996.................. 1,000 $ 1 $474 $ 358 $ 833
======= ===== ==== ===== =====
The accompanying notes are an integral part of these statements.
F-29
CAPITAL AREA INTERNET SERVICE, INC.
(Predecessor Company)
STATEMENT OF CASH FLOWS
For the Period From January 1, 1996 to May 10, 1996
(In Thousands)
[Download Table]
Cash flows from operating activities:
Net income............................................................ $ 585
Adjustments to reconcile net income to net cash provided by operating
activities-
Depreciation........................................................ 42
Changes in operating assets and liabilities:
Accounts receivable, net.......................................... (11)
Inventory......................................................... 57
Other current assets.............................................. (15)
Accounts payable.................................................. 85
Accrued liabilities............................................... 95
Unearned revenues................................................. 62
-----
Net cash provided by operating activities....................... 900
-----
Cash flows from investing activities:
Purchases of property and equipment................................... (225)
-----
Net cash used in investing activities........................... (225)
-----
Cash flows from financing activities:
Distribution to shareholders.......................................... (500)
-----
Net cash used in financing activities........................... (500)
-----
Net increase in cash.................................................... 175
Cash at January 1, 1996................................................. 113
-----
Cash at May 10, 1996.................................................... $ 288
=====
The accompanying notes are an integral part of these statements.
F-30
CAPITAL AREA INTERNET SERVICE, INC.
(Predecessor Company)
NOTES TO FINANCIAL STATEMENTS
For the Period From January 1, 1996 to May 10, 1996
1. Business Description:
Capital Area Internet Service, Inc. ("Capital Area"), a Virginia S
corporation, was formed in October 1995 as a tier one Internet services
provider connecting with other major Internet providers at various equipment
locations in the United States.
Capital Area was formerly known as Pimmit Run Research, a sole
proprietorship, from 1993 until its name and structure change in 1995.
Capital Area was acquired on May 10, 1996, by the owners of Cleartel through
their commonly-controlled Virginia "S" corporation, CAIS. CAIS purchased the
capital stock and operations of Capital Area for a purchase price of
approximately $3,100,000. The purchase was accounted for under purchase
accounting.
2. Significant Accounting Principles:
Use of Estimates in Preparation of Financial Statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
The Company records revenues for all telecommunications services when the
services are provided to customers. Amounts for services billed in advance of
the service period are recorded as unearned revenues.
Cost of Services
Cost of services represents primarily recurring expenses for the lease of
data facilities from national and local fiber providers. These direct charges
include long haul bandwidth and local interconnection charges.
Income Taxes
Capital Area was not subject to federal income taxes for the period from
January 1 through May 10, 1996. Any federal tax effects on Capital Area were
passed through to the Subchapter S shareholders.
3. Stockholders' Equity:
As of May 10, 1996, prior to the acquisition, Capital Area had 5,000 shares
of no par common stock authorized for issuance. Of these authorized shares,
1,000 shares were issued and outstanding to two individuals. In April 1996, the
shareholders received a distribution totaling $500,000 for taxes related to the
period prior to May 10, 1996.
4. Commitments and Contingencies:
Leases
Capital Area leased office space for their headquarters. Total rental
expense for operating leases was approximately $36,000 for the period from
January 1 through May 10, 1996.
F-31
[NATIONAL NETWORK MAP APPEARS HERE]
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No dealer, salesperson or other person is authorized to give any informa-
tion or to represent anything not contained in this prospectus. You must not
rely on any unauthorized information or representations. This prospectus is an
offer to sell or a solicitation of an offer to buy only the shares offered
hereby, but only under circumstances and in jurisdictions where it is lawful
to do so. The information contained in this prospectus is current only as of
its date.
Until , 1999 (25 days after the date of this prospectus), all dealers
effecting transactions in the shares of common stock, whether or not partici-
pating in this distribution, may be required to deliver a prospectus. This 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.
---------------------
TABLE OF
CONTENTS
---------------------
[Download Table]
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 7
Where You Can Find More Information...................................... 16
Cautionary Note Regarding Forward-Looking Statements..................... 16
Use of Proceeds.......................................................... 17
Dividend Policy.......................................................... 17
Capitalization........................................................... 18
Dilution................................................................. 20
Selected Financial Data.................................................. 21
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 23
Business................................................................. 32
Management............................................................... 48
Principal Stockholders................................................... 56
Certain Relationships and Related Transactions........................... 57
Description of Capital Stock............................................. 63
Shares Eligible for Future Sale.......................................... 68
Underwriting............................................................. 69
Legal Matters............................................................ 72
Experts.................................................................. 72
Index to Consolidated Financial Statements............................... F-1
Report of Independent Public Accountants................................. S-1
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[CAIS INTERNET LOGO]
6,000,000 Shares
Common Stock
---------------
PROSPECTUS
---------------
Bear, Stearns & Co. Inc.
Volpe Brown Whelan & Company
First Union Capital Markets Corp.
Friedman Billings Ramsey
Wit Capital Corporation
as e-Manager(TM)
, 1999
-------------------------------------------------------------------------------
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PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The table below sets forth the expenses to be incurred by the Company in
connection with the issuance and distribution of the shares registered for
offer and sale hereby, other than underwriting discounts and commissions. All
amounts shown represent estimates except the Securities Act of 1933, as amended
(the "Securities Act"), registration fee and the NASD filing fee.
[Download Table]
Registration fee under the Securities Act of 1933................ $ 36,140
NASD filing fee.................................................. 13,500
Nasdaq National Market fee....................................... 1,000
Printing expenses................................................ 750,000
Registrar and Transfer Agent's fees and expenses................. 750
Accountants' fees and expenses................................... 400,000
Legal fees and expenses (not including Blue Sky)................. 500,000
Blue Sky fees and expenses....................................... 3,000
Miscellaneous.................................................... 295,610
----------
Total.......................................................... $2,000,000
==========
Item 14. Indemnification of Directors and Officers.
Under Section 145 of the Delaware General Corporation Law (the "DGCL"), a
corporation may indemnify its directors, officers, employees and agents and its
former directors, officers, employees and agents and those who serve, at the
corporation's request, in such capacities with another enterprise, against
expenses (including attorney's fees), as well as judgement, fines and
settlements in nonderivative lawsuits, actually and reasonably incurred in
connection with the defense of any action, suit or proceeding in which they or
any of them were or are made parties or are threatened to be made parties by
reason of their serving or having served in such capacity. The DGCL provides,
however, that such person must have acted in good faith and in a manner such
person reasonably believed to be in (or not opposed to) the best interests of
the corporation and, in the case of a criminal action, such person must have
had no reasonable cause to believe his or her conduct was unlawful. In
addition, the DGCL does not permit indemnification in an action or suit by or
in the right of the corporation, where such person has been adjudged liable to
the corporation, unless, and only to the extent that, a court determines that
such person fairly and reasonably is entitled to indemnity for costs the court
deems proper in light of liability adjudication. Indemnity is mandatory to the
extent a claim, issue or matter has been successfully defended.
The Company's Certificate of Incorporation and By-Laws provide that, to the
extent permitted by law, the Company shall fully 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, by reason of the fact that such person is or
was or has agreed to become a director, officer, employee, or agent of the
Company, or is or was serving at the request of the Company as a director,
officer, employee, or agent of another corporation, partnership, joint venture,
trust, employee benefit, plan or other enterprise, or by reason of any action
alleged to have been taken or omitted in such capacity, and may indemnify any
person who was or is a party or is threatened to be made a party to such an
action, suit or proceeding by reason of the fact that the person is or was or
has agreed to become an employee or agent of the Company, or is or was serving
or has agreed to serve at the request of the Company as an employee or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by the person in connection with
such action, suit or proceeding and any appeal therefrom, if the person acted
in good faith and in a manner reasonably believed to be in or not opposed to
the best interests of the Company, and, with respect
II-1
to any criminal action or proceeding had no reasonable cause to believe the
person's conduct was unlawful; except that in the case of an action or suit by
or in the right of the Company to procure a judgment in its favor (1) such
indemnification shall be limited to expenses (including attorneys' fees)
actually and reasonably incurred by such person in the defense or settlement of
such proceeding, and (2) 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 Company unless and only to the extent that the Delaware Court of
Chancery 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 Delaware Court of Chancery or such other
court shall deem proper.
The Certificate of Incorporation and By-Laws further provide that the
Company shall advance expenses incurred by a director or officer in defending
any such action if the director or officer undertakes to repay such amount if
it is determined that the director or officer is not entitled to
indemnification. The Company also shall purchase and maintain insurance to
protect itself and any such director, officer, or other person against any
liability asserted against him and incurred by him in respect of such service
whether or not the Company would have the power to indemnify him against such
liability by law or under the provisions of the Company's Certificate of
Incorporation or By-Laws.
Further, the Company has entered into indemnification agreements with its
directors and certain of its senior executive officers. Pursuant to the terms
of the indemnification agreements, each of the senior executive officers and
directors of the Company will be indemnified by the Company to the fullest
extent permitted by Delaware law in the event such officer is made or
threatened to be made a party to a claim arising out of such person acting in
his capacity as an officer or director of the Company.
Additionally, the Underwriting Agreement provides for indemnification by the
Underwriters of the directors, officers and controlling persons of the Company
against certain liabilities, including liabilities under the Securities Act,
under certain circumstances.
Item 15. Recent Sales of Unregistered Securities.
The following paragraphs of this Item 15 describe all sales of securities by
the Company within the past three years which were not registered under the
Securities Act.
On January 1, 1998, the Company issued:
4,214,275 shares of common stock to Ulysses G. Auger, Sr. for the
aggregate consideration of $42,142.75.
4,314,687 shares of common stock to Ulysses G. Auger, II for the
aggregate consideration of $43,146.87.
8,450 shares of common stock to The Constandinos Ulysses Francisco
Auger Economides Trust for the aggregate consideration of $84.50.
8,450 shares of common stock to The Constandina Francisca Auger
Economides Trust for the aggregate consideration of $84.50.
8,450 shares of common stock to The Vassiliki Illias Auger Economides
Trust for the aggregate consideration of $84.50.
8,450 shares of common stock to The Annabel-Rose Auger Trust for the
aggregate consideration of $84.50.
8,450 shares of common stock to The James Frederick Auger Trust for the
aggregate consideration of $84.50.
II-2
8,450 shares of common stock to The Ulysses George Hawthorne Auger, III
Trust for the aggregate consideration of $84.50;
8,450 shares of common stock to The Alexander Robert Auger Trust for
the aggregate consideration of $84.50;
8,450 shares of common stock to The Gregory Ulysses Auger, II Trust for
the aggregate consideration of $84.50;
8,450 shares of common stock to The Bridgette Kathryn Auger Trust for
the aggregate consideration of $84.50; and
8,450 shares of common stock to The Nicholas William Randolph Auger
Trust for the aggregate consideration of $84.50.
On April 22, 1998, 317,073 shares of common stock were issued to R. Theodore
Ammon at a price of $3.15378 per share for an aggregate price of $1,000,000.
On October 2, 1998, in connection with the Reorganization, the Company
exchanged 5,350 shares of common stock for each 1% limited partnership interest
in Cleartel LP, 62,938 shares of common stock for each share of Cleartel common
stock and 500 shares of common stock for each share of CAIS, Inc. common stock.
As a result, the Company issued an aggregate of 1,034,970 shares of common
stock as follows:
Ulysses G. Auger, Sr., 245,000 shares of common stock in exchange for
his shares of CAIS, Inc. and 267,483 shares of common stock in exchange
for his shares of Cleartel and limited partnership interest in Cleartel
LP;
Ulysses G. Auger, II, 250,000 shares of common stock in exchange for
his shares of CAIS, Inc. and 259,527 shares of common stock in exchange
for his shares of Cleartel and limited partnership interest in Cleartel
LP;
The Constandinos Ulysses Francisco Auger Economides Trust, 500 shares
of common stock in exchange for its shares of CAIS, Inc. and 796 shares
of common stock in exchange for its shares of Cleartel and limited
partnership interest in Cleartel LP;
The Constandina Francisca Auger Economides Trust, 500 shares of common
stock in exchange for its shares of CAIS, Inc. and 796 shares of common
stock in exchange for its shares of Cleartel and limited partnership
interest in Cleartel LP;
The Vassiliki Illias Auger Economides Trust, 500 shares of common stock
in exchange for its shares of CAIS, Inc. and 796 shares of common stock
in exchange for its shares of Cleartel and limited partnership interest
in Cleartel LP;
The Annabel-Rose Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel and limited partnership interest in Cleartel
LP;
The James Frederick Auger Trust, 500 shares of common stock in exchange
for its shares of CAIS, Inc. and 796 shares of common stock in exchange
for its shares of Cleartel and limited partnership interest in Cleartel
LP;
The Ulysses George Hawthorne Auger, III Trust, 500 shares of common
stock in exchange for its shares of CAIS, Inc. and 796 shares of common
stock in exchange for its shares of Cleartel and limited partnership
interest in Cleartel LP;
The Alexander Robert Auger Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel and limited partnership interest in
Cleartel LP;
II-3
The Gregory Ulysses Auger, II Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel and limited partnership interest in
Cleartel LP;
The Bridgette Kathryn Auger Trust, 500 shares of common stock in
exchange for its shares of CAIS, Inc. and 796 shares of common stock in
exchange for its shares of Cleartel and limited partnership interest in
Cleartel LP; and
The Nicholas William Randolph Auger Trust, 500 shares of common stock
in exchange for its shares of CAIS, Inc. and 796 shares of common stock
in exchange for its shares of Cleartel and limited partnership interest
in Cleartel LP.
On October 2, 1998, the Company granted options for 97,465 shares of common
stock to William M. Caldwell, IV, at an exercise price of $.9732 per share in
exchange for Mr. Caldwell's ownership interest in CAIS, Inc.
In connection with their respective employment agreements, on October 2,
1998, Messrs. Caldwell and Anderson were issued replacement options as follows:
Options for 1,635,610 shares of common stock were granted to William M.
Caldwell, IV, at an exercise price of $.9732 per share.
Options for 301,420 shares of common stock were granted to Evans K.
Anderson, at an exercise price of $1.1942 per share.
On October 2, 1998, pursuant to the credit agreement with ING (U.S) Capital
LLC dated September 4, 1998, the Company executed a Warrant Certificate issuing
warrants to purchase an aggregate of 390,000 shares of common stock, at an
exercise price of $.01 per share, to ING (U.S.) Capital LLC, or its registered
assigns.
On January 24, 1999 pursuant to a Settlement Agreement, the Company agreed
to issue 25,000 shares of common stock to Terk Technologies Corp. ("Terk") and,
if necessary, such additional shares of common stock such that the total shares
delivered to Terk multiplied by the initial public offering price equals
$250,000. The Company also granted Terk the right to purchase up to 25,000
additional shares of common stock as part of this initial public offering in
connection with the Company's directed share program.
On February 19, 1999, pursuant to a private placement and in exchange for
approximately $4.6 million of indebtedness owed by the Company or CAIS, Inc. to
Ulysses G. Auger, Sr. and Ulysses G. Auger, II, the Company issued 1,119,679
Series B Shares to Ulysses G. Auger, Sr. and Ulysses G. Auger, II.
On February 19, 1999, pursuant to a private placement, the Company issued:
2,458,407 Series A Shares and warrants to purchase an aggregate of 2.61% of
the total outstanding shares of common stock upon completion of this
offering on a fully diluted basis (except for shares issued upon the
conversion of the Series B Shares), at an exercise price of the initial
public offering price per share to Chancery Lane, L.P. for the aggregate
consideration of $10,000,000; and
368,761 Series A Shares and warrants to purchase an aggregate of .39% of the
total outstanding shares of common stock upon completion of this offering on
a fully diluted basis (except for shares issued upon the conversion of the
Series B Shares), at an exercise price of the initial public offering price
per share to CAIS-Sandler Partners, L.P. for the aggregate consideration of
$1,500,000.
On April 23, 1999, pursuant to a first amendment to the master license
agreement with Hilton Hotels Corporation dated April 23, 1999, the Company
executed a Common Stock Warrant issuing warrants to purchase an aggregate of
66,667 shares of common stock, at an exercise price of $.01 per share, to
Hilton Hotels Corporation, or its registered assigns.
Amended and Restated Stock Option Plan. See "Management--Amended and
Restated Stock Option Plan," which is incorporated by reference herein from the
prospectus included in Part I of this registration statement.
II-4
Each issuance of securities described above was made in reliance on the
exemption from registration provided by Section 4(2) of the Securities Act as a
transaction by an issuer not involving any public offering. The recipients of
securities in each such transaction represented their intention to acquire the
securities for investment only and not with a view to or for sale in connection
with any distribution thereof and appropriate legends were affixed to the share
certificates issued in such transactions. All recipients had adequate access,
through their relationships with the Company, to information about the Company.
Item 16. Exhibits and Financial Statement Schedules
(A) Exhibits.
[Download Table]
Exhibit Exhibit
Number Description
------- -----------
1.1 Form of Underwriting Agreement.
*3.1 Restated Certificate of Incorporation of CAIS Internet, Inc.
*3.2 Amended and Restated By-Laws of CAIS Internet, Inc.
*4.1 Specimen Common Stock Certificate.
*4.2 Warrant Agreement, dated September 4, 1998.
*4.3 Common Stock Warrant, among CAIS Internet, Inc. and Chancery Lane,
L.P., dated February 19, 1999.
*4.4 Common Stock Warrant, among CAIS Internet, Inc. and CAIS-Sandler
Partners, L.P., dated February 19, 1999.
*4.5 Stockholders Agreement, dated February 19, 1999.
4.6 Common Stock Warrant, among CAIS Internet, Inc. and Hilton Hotels
Corporation, dated April 22, 1999.
4.7 Warrant Agreement, among CAIS Internet, Inc. and Hilton Hotels
Corporation, dated April 22, 1999.
*5.1 Opinion of Swidler Berlin Shereff Friedman, LLP.
*10.1 Investment Agreement, among the Company, CAIS, Inc. and R. Theodore
Ammon, dated April 22, 1998.
10.2 Credit Agreement by ING (U.S.) Capital LLC to the Company, CAIS, Inc.
and certain of the Company's affiliates, dated September 4, 1998.
10.2.1 Amendment No. 1 to the Credit Agreement by ING (U.S.) Capital LLC to
the Company, CAIS, Inc. and certain of the Company's affiliates for
$7,000,000, dated February 12, 1999.
*10.3 Series A Preferred Stock and Warrant Purchase Agreement, among the
Company, Chancery Lane, L.P. and CAIS-Sandler Partners, L.P., dated
February 19, 1999.
*10.4 Exchange Agreement, among the Company, the limited partners of
Cleartel LP, Cleartel, Inc. and the shareholders of Cleartel, Inc.,
dated October 2, 1998.
*10.5 Agreement of Merger among the Company, CAIS, Inc. and CGX2 Merger
Corp., dated October 2, 1998.
10.6 Amended and Restated Employment Agreement, among CAIS, Inc. and Evans
K. Anderson, dated June 3, 1997.
*10.7 Assignment and Assumption Agreement and Release, among the Company,
CAIS, Inc. and Evans K. Anderson, dated October 2, 1998.
10.8 Amendment to Amended and Restated Employment Agreement, among the
Company, CAIS, Inc. and Evans K. Anderson, dated February 22, 1999.
10.9 Amended and Restated Employment Agreement, among CAIS, Inc. and
William M. Caldwell, IV, dated September 8, 1997.
II-5
[Download Table]
Exhibit Exhibit
Number Description
------- -----------
*10.10 Assignment and Assumption Agreement and Release, among the Company,
CAIS, Inc. and William M. Caldwell, IV, dated October 2, 1998.
10.11 Amendment to Amended and Restated Employment Agreement, among the
Company, CAIS, Inc. and William M. Caldwell, IV, dated February 22,
1999.
*10.12 Employment Agreement, among the Company and Laura Neuman, dated June
29, 1998.
p*10.13 Agreement for Cooperative Use of Communication Patents, Purchase of
an Option to Obtain Intellectual Property Rights, among Inline
Connection Corporation and CAIS, Inc., dated November 5, 1996.
*10.14 Letter Agreement Extending Option Period provided in the Agreement
for Cooperative Use of Communication Patents, among Inline
Connection Corporation and CAIS, Inc., dated February 28, 1997.
*10.15 Letter Exercising Option Pursuant to Agreement for Cooperative Use
of Communication Patents, among Inline Connection Corporation and
CAIS, Inc., dated April 4, 1997.
*10.16 Letter Amendment Agreement to Agreement for Cooperative Use of
Communication Patents, among Inline Connection Corporation and CAIS,
Inc., dated August 1, 1997.
*10.17 Letter Amendment Agreement to Agreement for Cooperative Use of
Communication Patents, among Inline Connection Corporation and CAIS,
Inc., dated October 21, 1997.
*10.18 Application Transfer for Inline PCT Serial No. PCT/US97/12045, among
Inline Connection Corporation and CAIS, Inc., dated January 6, 1999.
*10.19 Assignment of USSN 08/893,403 and PCT/US97/12045, among Inline
Connection Corporation and CAIS, Inc., dated January 6, 1999.
*10.20 Letter Amendment Agreement to Agreement for Cooperative Use of
Communication Patents among Inline Connection Corporation and CAIS,
Inc., dated January 26, 1999.
*10.21 Assignment of 50% of Certain Patent Properties, among Inline
Connection Corporation and CAIS, Inc., dated January 26, 1999.
*10.22 Assignment of Certain Trademarks, among Cleartel Communications,
Inc. and CAIS, Inc., dated February 9, 1999.
*10.23 CAIS Internet Services Agreement, among CAIS, Inc. and Hongkong
Telecom, dated October 24, 1997.
*10.24 Collaboration on IPORT Market Trial Agreement, among CAIS, Inc. and
Microsoft Corporation, dated February 18, 1998.
p*10.25 CAIS IPORT Integrator License Agreement, among CAIS and ATCOM, Inc.
d/b/a ATCOM/INFO dated September 10, 1998.
p*10.26 Marketing Associate Solution Alliance Agreement, among CAIS, Inc.
and Unisys Corporation, dated November 11, 1998.
p10.27 Master License Agreement for High Speed Internet Service, among
Hilton Hotels Corporation and CAIS, Inc., dated December 23, 1998.
p10.27.1 First Amendment to Master License Agreement, among Hilton Hotels
Corporation, CAIS Internet, Inc. and CAIS, Inc., dated April 23,
1999.
p10.27.2 Marketing/Administration Fund and Incentive Agreement, among Hilton
Hotels Corporation and CAIS, Inc., dated December 23, 1998.
p10.27.3 First Amendment to Marketing/Administration Fund and Incentive
Agreement, among Hilton Hotels Corporation and CAIS, Inc., dated
April 23, 1999.
p*10.28 Agreement for High Speed Internet Access Service in Multiple
Dwelling Units, among CAIS, Inc. and OnePoint Communications Corp.,
dated February 19, 1999.
II-6
[Download Table]
Exhibit Exhibit
Number Description
------- -----------
*10.29 Deed of Lease, among Ramay Family Partnership and CAIS, Inc., dated
July 28, 1997.
*10.30 Deed of Lease, among Ramay Family Partnership and CAIS, Inc., dated
May 28, 1998.
*10.31 Office Building Lease for 1255 22nd Street, among 1255 22nd Street
Associates Limited Partnership and the Company, dated November 21,
1998.
*10.32 Settlement Agreement, among CAIS, Inc. and Terk Technologies Corp.,
dated January 24, 1999.
*10.33 The Company's Amended and Restated 1998 Equity Incentive Plan, dated
February 12, 1999.
11.1 Statement re computation of per share earnings.
*21.1 List of Subsidiaries.
*23.1 Consent of Swidler Berlin Shereff Friedman, LLP (filed as part of
Exhibit 5.1).
23.2 Consent of Arthur Andersen, LLP.
*24.1 Power of Attorney (set forth on signature page).
27.1 Financial Data Schedule.
--------
* Previously filed.
p Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the SEC.
(B) Financial Statement Schedules.
Item 17. Undertakings.
The undersigned Registrant hereby undertakes 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the SEC such indemnification is against
public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
The undersigned Registrant hereby further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in Washington D.C., on
April 28, 1999.
CAIS INTERNET, INC.
/s/ Ulysses G. Auger, II
By: _________________________________
Ulysses G. Auger, II
Chairman of the Board and Chief
Executive Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 28, 1999.
[Enlarge/Download Table]
Name Title Date
/s/ Ulysses G. Auger, II Chairman of the Board and Chief Executive April 28, 1999
----------------------------- Officer (Principal Executive Officer)
Ulysses G. Auger, II
*
----------------------------- President and Director April 28, 1999
William M. Caldwell, IV
* Vice President, Treasurer and Chief Financial April 28, 1999
----------------------------- Officer (Principal Financial and Accounting
Barton R. Groh Officer)
*
----------------------------- Director April 28, 1999
Ulysses G. Auger, Sr.
*
----------------------------- Director April 28, 1999
Richard F. Levin
*
----------------------------- Director April 28, 1999
Vernon L. Fotheringham
----------------------------- Director
R. Theodore Ammon
--------
* Ulysses G. Auger, II, by signing his name hereto, signs this document on
behalf of each of the persons so indicated above pursuant to powers of attorney
duly executed by such person and filed with the Securities and Exchange
Commission.
II-8
Report of Independent Public Accountants
To CAIS Internet, Inc. and subsidiaries
(formerly CGX Communications, Inc.):
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements of CAIS Internet, Inc. (a Delaware
corporation, formerly CGX Communications, Inc.) and subsidiaries, included in
this Registration Statement and have issued our report thereon dated February
19, 1999 (except with respect to the matters discussed in Note 15 to the
consolidated financial statements, as to which the date is April 23, 1999). Our
audits were made for the purpose of forming an opinion on the basic financial
statements taken as a whole. The Schedule II--Valuation and Qualifying Accounts
is the responsibility of the Company's management and is presented for purposes
of complying with the Securities and Exchange Commission's rules and is not
part of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements
and, in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
Arthur Andersen LLP
Washington, D.C.
February 19, 1999
S-1
CAIS Internet, Inc.
(formerly CGX Communications, Inc.)
Schedule II--Valuation and Qualifying Accounts
For the Years Ended December 31, 1996, 1997 and 1998
(amounts in thousands)
[Download Table]
Balance at Charged to Balance at
Beginning Costs End of
Description of Period and Expenses Deductions(a) Period
----------- ---------- ------------ ------------- ----------
Deduction on the Balance
Sheet from the asset to
which it applies:
Allowance for doubtful
accounts
Year ended December 31,
1996...................... $ 52 $173 $ (88) $137
Year ended December 31,
1997...................... 137 106 (64) 179
Year ended December 31,
1998...................... 179 80 (122) 137
--------
(a) Represents amounts written off as uncollectible.
S-2
EXHIBIT INDEX
[Download Table]
Exhibit Exhibit
Number Description Page
------- ----------- ----
1.1 Form of Underwriting Agreement.
*3.1 Restated Certificate of Incorporation of CAIS Internet, Inc.
*3.2 Amended and Restated By-Laws of CAIS Internet, Inc.
*4.1 Specimen Common Stock Certificate.
*4.2 Warrant Agreement, dated September 4, 1998.
*4.3 Common Stock Warrant, among CAIS Internet, Inc. and Chancery
Lane, L.P., dated February 19, 1999.
*4.4 Common Stock Warrant, among CAIS Internet, Inc. and CAIS-
Sandler Partners, L.P., dated February 19, 1999.
*4.5 Stockholders Agreement, dated February 19, 1999.
4.6 Common Stock Warrant, among CAIS Internet, Inc. and Hilton
Hotels Corporation, dated April 22, 1999.
4.7 Warrant Agreement, among CAIS Internet, Inc. and Hilton
Hotels Corporation, dated April 22, 1999.
*5.1 Opinion of Swidler Berlin Shereff Friedman, LLP.
*10.1 Investment Agreement, among the Company, CAIS, Inc. and R.
Theodore Ammon, dated April 22, 1998.
10.2 Credit Agreement by ING (U.S.) Capital LLC to the Company,
CAIS, Inc. and certain of the Company's affiliates, dated
September 4, 1998.
10.2.1 Amendment No. 1 to Credit Agreement by ING (U.S.) Capital LLC
to the Company, CAIS, Inc. and certain of the Company's
affiliates for $7,000,000, dated February 12, 1999.
*10.3 Series A Preferred Stock and Warrant Purchase Agreement,
among the Company, Chancery Lane, L.P. and CAIS-Sandler
Partners, L.P., dated February 19, 1999.
*10.4 Exchange Agreement, among the Company, the limited partners
of Cleartel LP, Cleartel, Inc. and the shareholders of
Cleartel, Inc., dated October 2, 1998.
*10.5 Agreement of Merger among the Company, CAIS, Inc. and CGX2
Merger Corp., dated October 2, 1998.
10.6 Amended and Restated Employment Agreement, among CAIS, Inc.
and Evans K. Anderson, dated June 3, 1997.
*10.7 Assignment and Assumption Agreement and Release, among the
Company, CAIS, Inc. and Evans K. Anderson, dated October 2,
1998.
10.8 Amendment to Amended and Restated Employment Agreement, among
the Company, CAIS, Inc. and Evans K. Anderson, dated February
22, 1999.
10.9 Amended and Restated Employment Agreement, among CAIS, Inc.
and William M. Caldwell, IV, dated September 8, 1997.
*10.10 Assignment and Assumption Agreement and Release, among the
Company, CAIS, Inc. and William M. Caldwell, IV, dated
October 2, 1998.
10.11 Amendment to Amended and Restated Employment Agreement, among
the Company, CAIS, Inc. and William M. Caldwell, IV, dated
February 22, 1999.
*10.12 Employment Agreement, among the Company and Laura Neuman,
dated June 29, 1998.
p*10.13 Agreement for Cooperative Use of Communication Patents,
Purchase of an Option to Obtain Intellectual Property Rights,
among Inline Connection Corporation and CAIS, Inc., dated
November 5, 1996.
[Download Table]
Exhibit Exhibit
Number Description Page
------- ----------- ----
*10.14 Letter Agreement Extending Option Period provided in the
Agreement for Cooperative Use of Communication Patents, among
Inline Connection Corporation and CAIS, Inc., dated February
28, 1997.
*10.15 Letter Exercising Option Pursuant to Agreement for
Cooperative Use of Communication Patents, among Inline
Connection Corporation and CAIS, Inc., dated April 4, 1997.
*10.16 Letter Amendment Agreement to Agreement for Cooperative Use
of Communication Patents, among Inline Connection Corporation
and CAIS, Inc., dated August 1, 1997.
*10.17 Letter Amendment Agreement to Agreement for Cooperative Use
of Communication Patents, among Inline Connection Corporation
and CAIS, Inc., dated October 21, 1997.
*10.18 Application Transfer for Inline PCT Serial No.
PCT/US97/12045, among Inline Connection Corporation and CAIS,
Inc., dated January 6, 1999.
*10.19 Assignment of USSN 08/893,403 and PCT/US97/12045, among
Inline Connection Corporation and CAIS, Inc., dated January
6, 1999.
*10.20 Letter Amendment Agreement to Agreement for Cooperative Use
of Communication Patents among Inline Connection Corporation
and CAIS, Inc., dated January 26, 1999.
*10.21 Assignment of 50% of Certain Patent Properties, among Inline
Connection Corporation and CAIS, Inc., dated January 26,
1999.
*10.22 Assignment of Certain Trademarks, among Cleartel
Communications, Inc. and CAIS, Inc., dated February 9, 1999.
*10.23 CAIS Internet Services Agreement, among CAIS, Inc. and
Hongkong Telecom, dated October 24, 1997.
*10.24 Collaboration on IPORT Market Trial Agreement, among CAIS,
Inc. and Microsoft Corporation, dated February 18, 1998.
p*10.25 CAIS IPORT Integrator License Agreement, among CAIS and
ATCOM, Inc. d/b/a ATCOM/INFO dated September 10, 1998.
p*10.26 Marketing Associate Solution Alliance Agreement, among CAIS,
Inc. and Unisys Corporation, dated November 11, 1998.
p 10.27 Master License Agreement for High Speed Internet Service,
among Hilton Hotels Corporation and CAIS, Inc., dated
December 23, 1998.
p 10.27.1 First Amendment to Master License Agreement, among Hilton
Hotels Corporation, CAIS Internet, Inc. and CAIS, Inc. dated
April 23, 1999.
p10.27.2 Marketing/Administration Fund and Incentive Agreement, among
Hilton Hotels Corporation and CAIS, Inc., dated December 23,
1998.
p10.27.3 First Amendment to Marketing/Administration Fund and
Incentive Agreement, among Hilton Hotels Corporation and
CAIS, Inc., dated April 23, 1999.
p*10.28 Agreement for High Speed Internet Access Service in Multiple
Dwelling Units, among CAIS, Inc. and OnePoint Communications
Corp., dated February 19, 1999.
*10.29 Deed of Lease, among Ramay Family Partnership and CAIS, Inc.,
dated July 28, 1997.
*10.30 Deed of Lease, among Ramay Family Partnership and CAIS, Inc.,
dated May 28, 1998.
*10.31 Office Building Lease for 1255 22nd Street, among 1255 22nd
Street Associates Limited Partnership and the Company, dated
November 21, 1998.
*10.32 Settlement Agreement, among CAIS, Inc. and Terk Technologies
Corp., dated January 24, 1999.
*10.33 The Company's Amended and Restated 1998 Equity Incentive
Plan, dated February 12, 1999.
11.1 Statement regarding computation of per share earnings.
[Download Table]
Exhibit Exhibit
Number Description Page
------- ----------- ----
*21.1 List of Subsidiaries.
*23.1 Consent of Swidler Berlin Shereff Friedman, LLP (filed as part
of Exhibit 5.1).
23.2 Consent of Arthur Andersen, LLP.
*24.1 Power of Attorney (set forth on signature page).
27.1 Financial Data Schedule.
--------
* Previously filed.
p Portions of this Exhibit have been omitted pursuant to a request for
confidential treatment and filed separately with the SEC.
Dates Referenced Herein and Documents Incorporated by Reference
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