-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, K8C3wrCSFUJ0oSW1qF12jh7ID3BNCxrC9ChdryFAVheIoXT7B8CRpLBYWi6n3r7F HmkL0igripCxMc58E+e/9g== /in/edgar/work/20000814/0000929624-00-001175/0000929624-00-001175.txt : 20000921 0000929624-00-001175.hdr.sgml : 20000921 ACCESSION NUMBER: 0000929624-00-001175 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000814 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NORTHPOINT COMMUNICATIONS GROUP INC CENTRAL INDEX KEY: 0001080558 STANDARD INDUSTRIAL CLASSIFICATION: [4813 ] IRS NUMBER: 522147716 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-29828 FILM NUMBER: 700878 BUSINESS ADDRESS: STREET 1: 303 2ND STREET STREET 2: 10TH FLOOR, NORTH TOWER CITY: SAN FRANCISCO STATE: CA ZIP: 94107 BUSINESS PHONE: 415/403-40 MAIL ADDRESS: STREET 1: 222 SUTTER STREET CITY: SAN FRANCISCO STATE: CA ZIP: 94108 FORMER COMPANY: FORMER CONFORMED NAME: NORTHPOINT COMMUNICATIONS HOLDINGS INC DATE OF NAME CHANGE: 19990224 10-Q 1 0001.txt 2ND QUARTER REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2000 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number: 000-29828 NORTHPOINT COMMUNICATIONS GROUP, INC. (Exact name of Registrant as Specified in its Charter) DELAWARE 52-2147716 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.) 303 Second Street, South Tower San Francisco, California 94107 (Address of Principal Executive Offices) Registrant's telephone number, including area code: (415) 403-4003 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [_] No The number of shares of Common Stock, par value $.001 per share, of NorthPoint Communications Group, Inc. outstanding as of August 10, 2000 was 133,031,083. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Consolidated Financial Statements............................................................................ 3 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 11 Item 3. Quantitative and Qualitative Disclosures About Market Risk................................................... 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings............................................................................................ 31 Item 2. Changes in Securities and Use of Proceeds.................................................................... 31 Item 3. Defaults Upon Senior Securities.............................................................................. 31 Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 32 Item 5. Other Information............................................................................................ 32 Item 6. Exhibits and Reports on Form 8-K............................................................................. 33
NorthPoint Communications Group, Inc. and Verizon Communications will file a joint proxy statement/prospectus and other documents regarding the proposed business combination transaction referenced in the following information with the Securities and Exchange Commission. Investors and security holders are urged to read the proxy statement/prospectus, when it becomes available, because it will contain important information. A definitive joint proxy statement/prospectus will be sent to stockholders of NorthPoint Communications Group, Inc. seeking their approval of the proposed transaction. Investors and security holders may obtain a free copy of the definitive joint proxy statement/prospectus (when it is available) and other documents filed by NorthPoint Communications Group, Inc. and Verizon Communications with the Commission at the Commission's web site at www.sec.gov. The definitive joint proxy statement/prospectus and these other documents may also be obtained for free by NorthPoint stockholders by directing a request to: NorthPoint Communications Group, Inc., 303 Second Street, South Tower, San Francisco, CA 94107, Attn: Investor Relations, (415) 403-4003, email: investorrelations@northpoint.net. 2 PART 1. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS. NORTHPOINT COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Amounts in 000's, except share and per share amounts)
(Unaudited) June 30, December 31, ----------- ------------ 2000 1999 ----------- ------------ ASSETS Current assets: Cash and cash equivalents $ 91,679 $ 95,019 Short-term investments 125,383 115,034 Accounts receivable, net of an allowance of $1,434 and $834, respectively 27,492 10,558 Inventories 8,811 4,439 Prepaid expenses and other assets 34,035 19,555 --------- --------- Total current assets 287,400 244,605 Property and equipment: Networking equipment 229,202 117,625 Central office collocation space improvements 89,226 61,637 Computers and software 91,322 40,739 Leasehold improvements 21,281 14,176 Furniture, fixtures and office equipment 12,229 10,192 --------- --------- Total property and equipment 443,260 244,369 Less accumulated depreciation and amortization (45,947) (17,245) --------- --------- Property and equipment, net 397,313 227,124 Long-term investments 49,400 6,740 Deposits 580 691 --------- --------- Total assets $ 734,693 $ 479,160 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable, including related party payables of $7,489 and $6,161, respectively $ 58,560 $ 56,004 Accrued expenses and other liabilities 53,221 26,023 Capital lease obligations, current portion, net of unamortized debt discount of $265 and $265, respectively 2,033 1,027 --------- --------- Total current liabilities 113,814 83,054 Capital lease obligations, long-term portion, net of unamortized debt discount of $200 and $332, respectively 3,103 1,653 Deferred long-term credits 6,717 1,392 Notes payable 400,000 -- Term loan 85,000 85,000 --------- --------- Total liabilities 608,634 171,099 --------- --------- Commitments and contingencies (Note 3) Stockholders' equity: Common stock, $0.001 par value; 281,250,000 shares authorized at June 30, 2000 and December 31, 1999; 132,508,520 and 126,469,210 shares issued and outstanding at June 30, 2000 and December 31, 1999, respectively (the December 31, 1999 shares issued and outstanding includes 2,466,724 shares of Class B common stock that converted into common stock in March 2000) 133 126 Warrants 2,619 8,701 Additional paid-in capital 539,308 525,294 Deferred stock compensation (9,968) (12,405) Accumulated other comprehensive income (49) 330 Accumulated deficit (405,984) (213,985) --------- --------- Total stockholders' equity 126,059 308,061 --------- --------- Total liabilities and stockholders' equity $ 734,693 $ 479,160 ========= =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 3 NORTHPOINT COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Amounts in 000's, except share and per share amounts)
(Unaudited) (Unaudited) Three Months Ended Six Months Ended June 30, June 30, -------- -------- 2000 1999 2000 1999 ---- ---- ---- ---- Revenues $ 24,403 $ 2,504 $ 44,374 $ 3,787 Operating expenses: Network expenses 40,894 7,801 74,432 11,733 Selling, marketing, general and administrative (excludes stock compensation expense of $1,252, $1,215, $2,462 and $2,807, respectively) 62,301 23,910 110,473 38,240 Amortization of deferred stock compensation 1,252 1,215 2,462 2,807 Depreciation and amortization 17,959 2,813 28,702 4,200 ------------ ----------- ------------ ----------- Total operating expenses 122,406 35,739 216,069 56,980 ------------ ----------- ------------ ----------- Loss from operations (98,003) (33,235) (171,695) (53,193) Interest income 4,810 3,026 9,848 3,264 Interest expense (16,602) (7,689) (27,612) (11,271) Equity in net loss of affiliated companies (2,030) -- (2,030) -- Taxes (235) (4) (510) (54) ------------ ----------- ------------ ----------- Net loss $ (112,060) $ (37,902) $ (191,999) $ (61,254) ============ =========== ============ =========== Net loss per common share - basic and diluted $ (0.85) $ (0.44) $ (1.47) $ (1.10) ============ =========== ============ =========== Weighted average shares used in computing net loss per common share - basic and diluted 132,098,858 86,113,944 130,554,664 55,680,075 ============ =========== ============ ===========
The accompanying notes are an integral part of these condensed consolidated financial statements. 4 NORTHPOINT COMMUNICATIONS GROUP, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in 000's)
(Unaudited) Six Months Ended June 30, -------- 2000 1999 ---- ---- Cash flows from operating activities: Net loss $ (191,999) $ (61,254) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 28,702 4,200 Amortization of deferred stock compensation 2,462 2,806 Amortization of debt discount 133 4,347 Equity in net loss of affiliated companies 2,030 -- Changes in assets and liabilities: Accounts receivable (16,934) (908) Inventories (4,372) (616) Prepaid expenses and other assets (14,480) (5,460) Deposits 111 (114) Accounts payable 2,556 (6,695) Accrued expenses and other liabilities 27,198 11,680 Deferred charges 5,325 -- ---------- --------- Net cash used in operating activities (159,268) (52,014) Cash flows from investing activities: Purchase of short-term investments (10,728) (111,097) Purchase of long-term investments (40,190) -- Purchase of property and equipment (195,888) (47,910) ---------- --------- Net cash used by investing activities (246,806) (159,007) Cash flows from financing activities: Proceeds from issuance of common and preferred stock 3,413 482,478 Borrowings on line of credit -- 55,000 Payments on line of credit borrowings -- (50,725) Proceeds from notes payable 400,000 5,600 Principal payments on capital lease obligations (679) (633) ---------- --------- Net cash provided by financing activities 402,734 491,720 ---------- --------- Net increase (decrease) in cash and equivalents (3,340) 280,699 Cash and equivalents at beginning of period 95,019 10,956 ---------- --------- Cash and equivalents at end of period $ 91,679 $ 291,655 ========== ========= Supplemental cash flow information and noncash activities: Fixed assets obtained through capital leases $ 3,003 $ -- ========== ========= Warrants issued for bridge loan, capital lease and with issuance of equity $ -- $ 4,530 ========== ========= Conversion of convertible promissory note to Class B common stock $ -- $ 5,600 ========== ========= Common stock issued for investment $ 4,500 $ -- ========== ========= Income taxes paid $ 1 $ 7 ========== ========= Interest paid $ 5,615 $ 5,795 ========== =========
The accompanying notes are an integral part of these condensed consolidated financial statements. 5 NORTHPOINT COMMUNICATIONS GROUP, INC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Organization and Basis of Presentation The Company NorthPoint Communications, Inc. was formed in May 1997 to provide high speed network and data transport services, allowing Internet Service Providers (ISPs), broadband data service providers and long distance and local phone companies (collectively, network service providers or NSPs) to meet the rapidly increasing information needs of small and medium-sized businesses, people who work in home offices and telecommuters. Basis of Presentation The consolidated financial statements include the accounts of NorthPoint Communications Group, Inc. and its wholly-owned subsidiary NorthPoint Communications, Inc., together with its wholly-owned subsidiary NorthPoint Communications of Virginia, Inc. Effective March 22, 1999, NorthPoint Communications, Inc. consummated a reorganization pursuant to which it became a wholly-owned subsidiary of NorthPoint Communications Group, Inc., a newly created holding company. The reorganization was effected by a merger of NorthPoint Communications, Inc., with and into NorthPoint Merger Sub, Inc., a wholly-owned subsidiary of NorthPoint Communications Group, Inc., with NorthPoint Communications, Inc., as the surviving corporation of such merger. As a result of the reorganization, the stockholders of NorthPoint Communications, Inc. immediately before the reorganization became the only stockholders of NorthPoint Communications Group, Inc. immediately after the reorganization. All material intercompany accounts and transactions have been eliminated. The accompanying financial data as of June 30, 2000 and for the three and six months ended June 30, 2000 and June 30, 1999, have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. The December 31, 1999 balance sheet was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. In the opinion of management, the accompanying condensed consolidated financial statements reflect all adjustments (consisting of only normal recurring adjustments) considered necessary for a fair statement of the Company's financial condition, the results of its operations and its cash flows for the periods indicated. The results of operations for the three and six months ended June 30, 2000 are not necessarily indicative of the operating results for the full year. 2. Summary of Significant Accounting Policies Business risks and credit concentrations The Company's operations are subject to significant risks and uncertainties including competitive, financial, developmental, operational, technological, regulatory and other risks associated with an emerging business. The Company sells its services on a wholesale basis to NSPs. For the three months ended June 30, 2000 and March 31, 2000, two NSP customers accounted for 22% and 34% of revenue, respectively. The Company is dependent upon a small number of major suppliers and service providers. Reclassifications Certain prior year balances have been reclassified to conform with the current year presentation. 6 NORTHPOINT COMMUNICATIONS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) Cash and cash equivalents The Company considers all highly liquid monetary instruments with an original maturity of three months or less at the date of purchase to be cash equivalents. A portion of the Company's cash deposits is restricted since it supports letters of credit that the Company has provided to secure office space. The balance of restricted cash at June 30, 2000 and December 31, 1999 was $4,060,400 and $4,365,400, respectively. Short-term and long-term investments Short-term and long-term investments are accounted for in accordance with Statement of Financial Accounting Standards No. 115 Accounting for Certain Investments in Debt and Equity Securities. This statement requires that securities be classified as "held to maturity," "available-for-sale" or "trading," and the securities in each classification be accounted for at either amortized cost or fair market value, depending upon their classification. The Company classifies its investments as held-to-maturity and available-for- sale. Held-to-maturity securities are reported at amortized cost. Available-for- sale securities are carried at fair value, with the unrealized gains and losses, net of tax, reported as other comprehensive income, a separate component of stockholders' equity. At the time of sale, any gains or losses will be recognized as a component of operating results. The Company recorded other comprehensive income of ($48,768) as of June 30, 2000 related to the net unrealized losses of certain available-for-sale investments. Inventories Inventories consist of communications equipment that will be installed at subscriber locations. Inventories are accounted for using the first-in first-out method at the lower of cost or market. Property and equipment Property and equipment, including property and equipment under capital leases, are recorded at cost and are depreciated using the straight-line method over the shorter of their useful lives or, for leased assets, the remaining lease term. The estimated useful life is three years for software, and five years for all other property and equipment. Maintenance and repairs are charged to expense as incurred, and improvements and betterments are capitalized. When assets are retired or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations in the period in which they are realized. 7 NORTHPOINT COMMUNICATIONS GROUP, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (Unaudited) Revenues Revenues from transport services are recognized when the services are provided. Payments received in advance of providing services are recorded as deferred revenue until the period such services are provided. Revenues related to installation services are recognized when the installation is completed. Earnings (loss) per share The Company computes net loss per share pursuant to Statement of Financial Accounting Standards No. 128, Earnings Per Share. Basic net loss per share is computed by dividing income or loss applicable to common stockholders by the weighted average number of shares of the Company's common stock outstanding during the period after having given consideration to shares subject to repurchase. Diluted net loss per share is determined in the same manner as basic net loss per share except that the number of shares is increased assuming exercise of dilutive stock options and warrants using the treasury stock method and conversion of the Company's convertible preferred stock. See Condensed Consolidated Statements of Operations for computed amounts. The dilutive effect of options and warrants has not been considered as their effect would be antidilutive for all periods presented. Recently issued accounting pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 provides guidance for revenue recognition under certain circumstances. Implementation of SAB 101 has been delayed by the Securities and Exchange Commission until the fourth quarter of the fiscal year beginning after December 15, 1999. The Securities and Exchange Commission is continuing to evaluate the application of SAB 101. Accordingly, the Company will continue to evaluate the impact of SAB 101 on its financial statements and related disclosures. In April 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25". This Interpretation clarifies the application of Opinion 25 for certain stock compensation issues including the definition of employee for purposes of applying Opinion 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000. NorthPoint does not expect the adoption of FASB Interpretation No. 44 to have a significant effect on the financial condition or results of operations. 3. Commitments and Contingencies The Company is subject to state public utilities commission, Federal Communications Commission and court decisions as they relate to the interpretation and implementation of the Telecommunications Act, the interpretation of CLEC interconnection agreements in general and the Company's interconnection agreements in particular. In some cases the Company may be bound by the results of ongoing proceedings of these bodies or the legal outcomes of other contested interconnection agreements that are similar to the Company's agreements. The Company cannot estimate the effect, if any, of these proceedings. The Company together with, in some instances, some of its directors and officers, may from time to time be the subject of claims or named as a defendant or co-defendant in various legal actions involving breach of contract and various other claims incident to the conduct of its businesses. At this time, management does not expect the Company to suffer any material liability by reason of such actions, nor does it expect that such actions will have a material effect on the Company's liquidity or operating results. 8 NORTHPOINT COMMUNICATIONS GROUP, INC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 4. Strategic Joint Ventures During the quarter ended March 31, 2000, the Company formed two international joint ventures. The first is a 50-50 joint venture with a Canadian competitive service provider to deliver wholesale DSL-based broadband services to businesses throughout Canada. The second is a 50-50 joint venture with an alternative broadband local access network operator in the Benelux region and the northwest Rhine region of Germany. This joint venture plans to eventually deliver DSL services across Europe as those markets open. In April 2000, the Company contributed a total of $37,690,604 to the two joint ventures to begin funding their operations. The Company has committed to contribute a total of approximately $75,000,000 to these ventures by the end of the first quarter of 2001. 5. Common Stock From April 1, 2000 to June 30, 2000, the Company granted to employees options to purchase an aggregate of 5,231,505 shares of common stock at an exercise price of $10.00 to $17.9375 per share, some of which were below fair market value. Under the provisions of APB No. 25, deferred compensation of approximately $1,312,500 was recognized in connection with these grants and will be amortized as deferred stock compensation expense over the vesting period of the options. On June 20, 2000, the Company issued an aggregate of 391,304 shares of common stock in a private placement to a company in which it made a strategic investment. The Company received a preferred equity interest in this company in consideration of the Company's issuance of common shares and a cash investment of $2.5 million that the Company made in such company. 6. Stock Warrants Contingent Warrants The Company has issued warrants to purchase up to 212,568 shares of its common stock at a price of $1.5689 per share to one of its shareholders, which are exercisable upon the achievement of certain milestones by the holder of the warrants. The value of the warrants will be determined using a Black-Scholes model and will be recorded once the milestones have been reached and the warrants are no longer contingent. 7. Subsequent Events Business Developments On August 7, 2000, Bell Atlantic Corporation (d/b/a Verizon Communications) ("Verizon"), Verizon Ventures I Inc. ("Parent"), a wholly-owned subsidiary of Verizon, Verizon Ventures II Inc. ("Merger Subsidiary"), a direct, wholly-owned subsidiary of Parent, and NorthPoint Communications Group, Inc. ("NorthPoint") entered into an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to the terms of the Merger Agreement, Verizon will contribute its DSL business to Parent, consisting of the assets, equipment, installed lines, employees and contracts, among other things, used in its digital subscriber line ("DSL") business, and $800 million in cash in exchange for shares of Parent common stock. Of the cash investment, $450 million will be used to fund Parent's capital expenditures and operations and $350 million will be distributed to NorthPoint stockholders. At the effective time of the Merger ("Effective Time"), Merger Subsidiary will merge (the "Merger") with and into NorthPoint. Each share of NorthPoint common stock issued and outstanding immediately prior to the Effective Time will be cancelled and converted into one share of Parent common stock and outstanding NorthPoint warrants and options will be converted into warrants and options of Parent. In addition to the conversion of their shares of NorthPoint common stock into Parent common stock, holders of issued and outstanding NorthPoint common stock at the Effective Time will receive a total of $350 million, payable to such stockholders on a pro rata basis, or approximately $2.50 per share. As a result of these transactions, Verizon will hold 55% of the common stock of Parent and the stockholders of issued and outstanding NorthPoint common stock immediately prior to the Effective Time will hold the remaining 45% of Parent common stock. The transactions contemplated by the Merger Agreement are subject to the approval of the stockholders of NorthPoint and other customary closing conditions, such as regulatory approvals. Parent will use the "NorthPoint" name and brand and will be publicly traded on Nasdaq. Concurrently with entering into the Merger Agreement, Verizon issued to NorthPoint a commitment letter pursuant to which Verizon is obligated to provide to NorthPoint a $200 million senior secured debt facility on January 1, 2001 if the transactions contemplated by the Merger Agreement have not been consummated by that date. In addition, upon the fulfillment of certain conditions, Verizon agreed to purchase $150 million of non-voting 9% Convertible Preferred Stock of NorthPoint ("NorthPoint 9 Preferred Stock"). The sale of the preferred stock to Verizon is expected to occur immediately upon receipt by NorthPoint of necessary approvals under its senior credit facility. Upon termination of the waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Act"), the NorthPoint Preferred Stock will obtain voting rights. The NorthPoint Preferred Stock will automatically convert to NorthPoint common stock at the time of the closing of the Merger and is convertible into NorthPoint common stock at any time following the termination of the waiting period pursuant to the Act at Verizon's option. The Merger Agreement further provides that, following the closing of the Merger, upon the exercise of any NorthPoint option or warrant that was outstanding at the Effective Time (all of which will be converted into Parent options and warrants), Parent will issue to Verizon such number of shares of common stock as are necessary to allow Verizon to maintain its percentage ownership as of the Effective Time. The transactions contemplated by the Merger Agreement are subject to the receipt of regulatory approvals, the satisfaction of all conditions set forth in the Merger Agreement, including termination of the waiting period pursuant to the Act, and compliance with other closing conditions customarily included in similar merger transactions. Common Stock From July 1, 2000 to August 11, 2000, The Company granted to certain employees options to purchase an aggregate of 355,900 shares of common stock at an exercise price of $11.813 per share, which was at fair market value at the time of grant. 10 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis of NorthPoint's financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this report. In the discussion below, we refer to the period from inception (May 16, 1997) to December 31, 1997 as "1997". Certain statements set forth below constitute "forward-looking statements." Such forward-looking statements involve certain risks and uncertainties including, but not limited to, those discussed herein under "Risk Factors" that may cause actual results to differ materially from those expressed or implied in any forward-looking statement. Investors and prospective investors are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update the forward-looking statements contained herein to reflect future events or developments. See "Forward-Looking Statements." Overview We are a national provider of high speed, local data network services. Our networks use digital subscriber line, or DSL, technology to enable data transport over telephone company copper lines at guaranteed speeds up to 25 times faster than common dial-up modems. We market our network and data transport services to internet service providers, long-distance and local telephone companies and data service providers, whom we call network service providers. Our customers can use our fast, secure and reliable data networks to provide continuously connected, economical Internet access and other data- intensive applications to end users. These end users are typically small- and medium-sized businesses with up to 500 employees, people who work in home offices, and telecommuters. We offer, on a limited basis, network and data transport services for residential end users as well. We are currently providing services in 51 metropolitan areas, spanning 99 metropolitan statistical areas, in the United States and intend to offer service in a total of over 60 metropolitan areas, spanning 110 metropolitan statistical areas by the end of 2000. We have been and expect to be the first, or one of the first, to offer DSL services in these markets. Our networks consist principally of digital communications equipment that we own and install in telephone company offices known as "central offices" and existing copper telephone lines that we lease to connect our equipment with end users' premises. We will initially install our equipment in the central offices with the highest density of small- and medium-sized businesses in our targeted markets. As of June 30, 2000, we had secured space in over 1,800 central offices and were providing services from 1,505 of those central offices. We intend to expand the coverage of our networks in these markets over time by installing equipment in additional central offices. We are currently providing or have entered into agreements to provide our services to more than 200 network service providers. As of June 30, 2000, we had connected over 62,000 of their end users to our networks. Upon completion of our planned expansion, our networks will be able to reach approximately 5.5 million businesses and 45 million households, including more than 80% of the small- and medium-sized businesses in our 60 markets. Since inception on May 16, 1997, our principal activities have included: . developing our business plans; . procuring governmental authorizations and space in central offices; . raising capital and hiring management and other key personnel; . working on the design and development of our network architecture and operations support systems; . acquiring equipment and facilities; . negotiating interconnection agreements; and . selling and marketing our services to network service providers. As a result of our development activities, we have experienced operating losses. We expect to experience increasing operating losses as we expand our operations. We introduced our commercial services in March 1998 in the San Francisco Bay Area. We subsequently launched service in 50 additional markets. We intend to offer our services in 9 additional metropolitan areas by year-end 2000. Deployment of our 11 networks will require significant upfront capital expenditures. We were offering service from 1,505 operational central offices at the end of the second quarter of 2000 and plan to offer service from an additional 195 central offices by the year end 2000 to allow us to achieve blanket coverage in our 51 markets as well as 9 additional targeted markets. In addition, we deployed a fully redundant point-to-point national ATM backbone connection between NorthPoint's local DSL networks. The principal capital expenditures we incur when we enter any market include: . the establishment of a metropolitan node-a facility at which we aggregate and disseminate data traffic in each metropolitan area-and the purchase and installation of electronic switching equipment for that node; . the procurement, design and construction of the collocation cage in each central office; . the purchase and installation of the network management and network test equipment in those cages; and . the capitalized cost of the installation of such equipment. In addition, we will incur operations, sales and market development expenses in order to enter a new market. Once we have deployed our network in a market, the majority of our additional capital expenditures will be dependent upon orders to connect new end users. These success-based capital expenditures include DSL line cards, incremental digital subscriber line access multiplexer and network test equipment, and line cards for our electronic switches in our metropolitan node. In addition to the capital expenditures required to enter a market, we will be required to fund each market's cash flow deficit as we build our customer base. Financial performance varies from market to market, and the time when we will achieve positive EBITDA, if at all, will depend on factors such as: . the size of the addressable market; . the level of upfront sales and marketing expenses; . the number and sequencing of central offices built out; . the cost of the necessary infrastructure; . the timing of market entry; . the commercial acceptance of our services; and . the rate at which we can provision lines. EBITDA is a measure of financial performance commonly used in the telecommunications industry. It is defined as earnings before net interest, taxes, amortization of deferred stock compensation, depreciation and amortization. Other companies' definition of EBITDA may differ from ours. You should not construe it as an alternative to operating income as an indicator of our operating performance or as an alternative to cash flows from operating activities as a measure of liquidity. Assuming the closing of the proposed Merger occurred on December 31, 2000, the combined DSL operations of NorthPoint and Verizon are expected to include the following: . a broadband network, comprised of more than 3,000 unique operational central offices, passing approximately 63 million homes and businesses in 163 MSAs; . more than 600,000 DSL lines; . wholesale relationships with Verizon Online, AOL, UUNET and Genuity and strategic marketing relationships with RadioShack, Microsoft, Staples, Blockbuster and other industry leaders; . approximately 3,000 employees; and 12 . broadband ventures in Europe through VersaPoint and Canada through NorthPoint Canada. We expect to consummate the Merger by mid-2001. Factors Affecting Future Operations Revenues. We derive our revenues from monthly recurring and nonrecurring charges to internet service providers, long-distance and local telephone companies and data service providers, whom we call network service providers. Monthly recurring revenues consist of end user line fees, based upon the number of installed lines, for the network service providers' end users connected to our networks and interconnection fees for each connection to our metropolitan node in each market. Nonrecurring revenues include charges for the installation and activation of new end users and in some cases, for end-user modems or other electronic equipment. Prior to the quarter ended September 30, 1999, we had sold only minimal amounts of end-user modems or other electronic equipment. Currently we sell a significant amount of such equipment to support the needs of our growing network service provider partner base. We seek to price our services competitively in relation to those of the traditional telephone companies and other competitive telecommunications companies in each market. Current standard end user line prices that we charge to our network service providers for our business class services generally range from $75 per month for 144 kilobits per second service to $250 per month for 1.5 megabits per second service, before volume discounts. Pricing for residential class service is approximately $40 per month. Although pricing will be an important part of our strategy, we believe that customer relationships, customer care and consistent quality will be the key to generating customer loyalty. During the past several years, market prices for many telecommunications services have been declining, which is a trend that we believe will likely continue. As prices decline for any given speed of service, we expect that the total number of end users and the proportion of our end users purchasing our higher-speed, higher- priced services will increase. The cost to upgrade an end user's speed is generally minimal. We accelerated our deployment during the course of 1999 into additional geographic markets, successfully enabling us to sign more network service provider partners than previously planned. We plan to continue our strategy of rapidly entering new markets to secure key channel partnerships and create awareness of the NorthPoint brand. In addition, as described above, if the proposed merger with Verizon's DSL business is approved and consummated, we believe the proposed merger will allow us access to additional markets and channel partnerships. We believe this strategy leaves us well-positioned to capitalize on the demand for our products. In view of this rapid deployment, we need to continue to enhance our abilities to develop the markets where we offer service, including enhanced training of our employees as well as our existing and new network service provider partners. Continuing future acceleration of line installations is dependent upon our ability to upgrade our provisioning processes and interfaces, the timing and effectiveness of which could affect future quarterly results. Network Expenses. Our network expenses consist of nonrecurring and monthly recurring charges for the commodity transport elements we choose to lease rather than own. Nonrecurring network expenses include transport and loop installation fees. We expect these costs will be largely related to the activation of new central offices and new end users. Monthly recurring network expenses include loop fees, rent, power and other fees charged by traditional telephone companies, competitive telecommunications companies and other providers. As our customer and end user base grows, we expect the largest element of network expenses to be traditional telephone company charges for leased copper lines, which have historically been $3 to $40 per line per month, depending on the identity of the traditional telephone company and the location of the lines. Selling, Marketing, General and Administrative Expenses. Our selling, marketing, general and administrative expenses primarily consist of costs related to selling, marketing, customer care, provisioning, billing, regulatory, corporate administration, network engineering and maintenance. On occasion, we will participate in various sales promotions with our customers by advancing market development funds to assist in their marketing efforts, particularly for new markets. These costs are deferred and amortized over the estimated duration of the promotion's effect in those markets. Additionally, we incur other costs associated with administrative overhead, office leases and bad debt. In general, we reserve for bad debt expense based upon our experience and estimates of collectability. Because our history is limited it is possible that, on occasion, we may have to increase our bad debt reserves in excess of our past experience. The timing of these increases if any, could affect future quarterly results. We expect that our selling, marketing, general and administrative costs will grow significantly as we expand our operations and that administrative overhead will be a large portion of these expenses during the start-up phase of our business. However, we expect these expenses to decline as a percentage of our revenues as we build our customer base and the number of end users connected to our networks increases. We plan to employ a regional sales team in each market we enter. To attract and retain a highly qualified sales force, we plan to offer our sales and customer care personnel a compensation package consisting of commissions and stock options. We expect to incur significant selling and marketing costs as we continue to expand our operations. In addition, we plan to offer sales promotions, 13 especially in the first few years as we establish our market presence. Amortization of Deferred Stock Compensation. Stock compensation arises as a result of the granting of stock options to employees with exercise prices below the fair values at the date of grant. The deferred compensation is being amortized over the vesting period of the associated options. 14 Depreciation and Amortization. We expect depreciation and amortization expense to increase significantly as more of our network becomes operational and as we increase capital expenditures to expand our network. Depreciation and amortization expense includes: . depreciation of network infrastructure equipment; . depreciation of information systems, furniture and fixtures; . amortization of improvements to central offices, network control center facilities and corporate facilities; . amortization of central office collocation space improvements; and . amortization of software. Taxation. We have not generated any taxable income to date and therefore have not paid any federal income taxes since inception. State taxes were limited to nominal amounts. Use of our net operating loss carryforwards, which begin to expire in 2003, may be subject to limitations under Section 382 of the Internal Revenue Code of 1986, as amended. We have recorded a full valuation allowance on the deferred tax asset, consisting primarily of net operating loss carryforwards, because of uncertainty regarding its recoverability. Results of Operations As a result of the development and rapid growth of the Company's business during the periods presented, the period-to-period comparisons of the Company's results of operations are not necessarily meaningful and should not be relied upon as an indication of future performance. Revenues. Revenues for the quarter ended June 30, 2000 were approximately $24,403,000, 60% of which consisted of recurring revenues. For the six months ended June 30, 2000 and June 30, 1999, revenues were $44,374,000 and $3,787,000, respectively, of which 55% consisted of recurring revenues for the six months ended June 30, 2000 and 71% consisted of recurring revenues for the six months ended June 30, 2000. We recognized $2,504,000 in revenues for the quarter ended June 30, 1999, 67% of which consisted of recurring revenues and did not include sales of end user modems or other electronic equipment. The increase in revenues is due to the expansion of our installed end user base that has occurred over the past year. We expect that non-recurring revenues as a percentage of total revenues will decrease over time as we add end users to our networks. Network Expenses. Network expenses were approximately $40,894,000 for the quarter ended June 30, 2000 and $7,801,000 for the quarter ended June 30, 1999. For the six months ended June 30, 2000 and June 30, 1999, network expenses were $74,432,000 and $11,733,000, respectively. These costs consisted primarily of monthly rental costs for lines between end users and central offices, between central offices and our metropolitan nodes, between our metropolitan nodes and our network service providers, end user line installation costs, costs of end user modems, and costs charged to us by the traditional telephone companies. The increase in network expenses reflects the growth in our network as we expand into new markets, connect new end users and interconnect existing partners to our network. Selling, Marketing, General and Administrative Expenses. Selling, marketing, general and administrative expenses were approximately $62,301,000 for the quarter ended June 30, 2000 and $23,910,000 for the quarter ended June 30, 2000. For the six months ended June 30, 2000 and June 30, 1999, selling, marketing, general and administrative expenses were $110,473,000 and $38,240,000, respectively. These expenses consisted primarily of salaries and related expenses for the development of our business, network architecture and software, the establishment of our management team and the development of corporate identification, promotional and advertising materials. As the staffing levels and operations of the Company have expanded over the past year, so have these operating expenses to support such growth. Amortization of Deferred Stock Compensation. Amortization of deferred stock compensation was $1,252,000 for the quarter ended June 30, 2000 and $1,215,000 for the quarter ended June 30, 2000. For the six months ended June 30, 2000 and June 30, 1999, amortization of deferred stock compensation was $2,462,000 and $2,807,000, respectively. This reduction in deferred stock compensation expense is due to the attrition of those employees to whom such options were granted. The unamortized balance of $9,968,000 at June 30, 2000 will be amortized over the remaining vesting period of each grant. Depreciation and Amortization. Depreciation and amortization expenses were approximately $17,959,000 for the quarter ended June 30, 2000 and $2,813,000 for the quarter ended June 30, 1999. For the six months ended June 30, 2000 and June 30, 1999, 15 depreciation and amortization was $28,702,000 and $4,200,000, respectively. Such expenses consisted primarily of depreciation of network equipment, information systems, office equipment, furniture and fixtures and amortization of leasehold improvements. The increase in depreciation and amortization is primarily due to the additional property and equipment that has been acquired and placed into service as we continue to build out our networks. Interest Income and Expense. The interest income for the quarter ended June 30, 2000 was $4,810,000 and was earned primarily from the proceeds raised in the sale of our senior notes in February 2000. Interest income for the quarter ended June 30, 1999 was $3,026,000. This interest income was earned primarily from the proceeds raised in the initial public offering in May 1999. Interest income was $9,848,000 for the six months ended June 30, 2000 and $3,264,000 for the six months ended June 30, 1999. Interest expense for the quarter ended June 30, 2000 was $16,602,000 and primarily represents the interest associated with our senior notes sold in February 2000 and also our senior credit facilities, which we closed in December 1999. Interest expense for the quarter ended June 30, 1999 was approximately $7,689,000. Interest expense for the quarter ended June 30, 1999 includes amortization of $2,862,000 related to debt discount recorded in conjunction with the issuance of bridge loan warrants and equipment lease warrants. The remainder of the interest expense primarily represents the interest associated with our senior credit facility and bridge loan. Interest expense was $27,612,000 for the six months ended June 30, 2000 and $11,271,000 for the six months ended June 30, 1999. Equity in Net Loss of Affiliated Companies. There was no equity in net loss of affiliates during 1999. For the quarter ended June 30, 2000, equity in net loss of affiliates was $2,030,000. For the six months ended June 30, 2000, equity in net loss of affiliates was $2,030,000. This net loss primarily represents our shares of the net losses of the European and Canadian joint ventures that were formed during the first quarter of 2000. Taxes. Taxes were approximately $235,000 for the quarter ended June 30, 2000 and $4,000 for the quarter ended June 30, 1999. For the six months ended June 30, 2000 and June 30, 1999, taxes were $510,000 and $54,000, respectively. These taxes primarily represent state corporation, business and jurisdictional taxes that have been paid. Liquidity and Capital Resources Our operations have required substantial capital investment for the procurement, design and construction of our central office colocation space improvements and cages, the purchase of telecommunications equipment and the design and development of our networks. Capital expenditures were approximately $47,910,000 for the six months ended June 30, 1999 and $195,888,000 for the six months ended June 30, 2000. Although we have no material commitments for capital expenditures during 2000, we plan to make total capital expenditures in 2000 estimated at approximately $325,000,000 to develop our networks. In each market, we will initially target the central offices with the highest density of small-and medium-sized businesses. We will expand into other central offices when we obtain adequate demand or volume commitments from our customers. We will also incur capital expenditures for building a metropolitan node in each market and for expanding our network control center in the San Francisco Bay Area. As of June 30, 2000, we had an accumulated operating deficit of $405,984,000 and cash, cash equivalents and short-term investments of $217,062,000. Net cash used in operating activities was $52,014,000 for the six months ended June 30, 1999 and $159,268,000 for the six months ended June 30, 2000. The net cash used in operations for the six months ended June 30, 1999 was primarily due to net losses, offset in part by increases in accrued expenses and accounts payable. The net cash used in operations for the six months ended June 30, 2000 was primarily due to net losses. The net cash used in investing activities was $159,007,000 for the six months ended June 30, 1999 and $246,806,000 for the six months ended June 30, 2000. Investing activities were principally acquisitions of property and equipment in both years. Net cash provided by financing activities was approximately $491,720,000 for the six months ended June 30, 1999, of which $482,478,000 related to the issuance of common and preferred stock, $55,000,000 related to borrowings, and $5,600,000 related to proceeds from a convertible promissory note, offset primarily by the repayment of a $50,000,000 bridge loan. Net cash provided by financing activities was approximately $402,734,000 for the six months ended June 30, 2000 and relates to the proceeds from the sale of our senior notes, offset by the principal payments on our capital lease obligations totaling approximately $679,000. Concurrently with entering into the Merger Agreement, Verizon issued to NorthPoint a commitment letter pursuant to which Verizon is obligated to provide to NorthPoint a $200 million senior secured debt facility on January 1, 2001 if the transactions contemplated by the Merger Agreement have not been consummated by that date. In addition, upon the fulfillment of certain conditions, Verizon agreed to purchase $150 million of non-voting 9% Convertible Preferred Stock of NorthPoint ("NorthPoint 16 Preferred Stock"). The sale of the preferred stock to Verizon is expected to occur immediately upon receipt by NorthPoint of necessary approvals under its senior credit facility. Upon termination of the waiting period pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "Act"), the NorthPoint Preferred Stock will obtain voting rights. The NorthPoint Preferred Stock will automatically convert to NorthPoint common stock at the time of the closing of the Merger and is convertible into NorthPoint common stock at any time following the termination of the waiting period pursuant to the Act at Verizon's option. Pursuant to the Merger Agreement, at the time of closing of the Merger, Verizon will invest $450 million in NorthPoint. Any amounts previously funded by Verizon pursuant to the commitment letter or the purchase of preferred stock will be offset against the $450 million payable at closing. On February 3, 2000, we issued senior notes in the aggregate principal amount of $400.0 million. These notes bear interest at a fixed annual rate of 12 7/8% to be paid in cash every six months and mature on February 15, 2010. Net proceeds from these notes were approximately $387.5 million. On December 9, 1999 we entered into a secured credit facility with a syndicate of lenders. The secured credit facility consists of the following: . Revolving credit facility in an amount up to $55,000,000. The revolving credit facility is used for general corporate purposes. As of the date of this report, we have not borrowed any amount under the revolving credit facility. . Delayed draw term loan facility in the amount of $110,000,000. As of the date of this report, we have not borrowed any amount of the delayed draw term loan facility but we are required to borrow the entire facility on or before December 9, 2000. . Term loan facility in the amount of $85,000,000. We borrowed the entire term loan facility amount on December 9, 1999. The secured credit facility also provides for the issuance of letters of credit on our behalf by the lenders. Borrowings under the secured credit facility are collateralized by a first priority lien against substantially all of our assets. Our obligations under the secured credit facility are guaranteed by all of our subsidiaries and collateralized by a first priority lien on the assets of those subsidiaries. We further pledged to the lenders under the secured credit facility all of the capital stock of NorthPoint Communications, Inc. held by us. The lenders under the secured credit facility have agreed that the liens collateralizing the secured credit facility may also collateralize an additional $50,000,000 of additional borrowings in the event the secured credit facility is extended, but the lenders have no obligation to provide such additional financing. Loans under the facilities bear interest at floating rates based on the prime rate or the London Offered Interbank Rate (LIBOR) plus, in each case, an additional interest rate margin. In March and April 1999, we issued and sold an aggregate of 3,968,174 shares of Series D-1 preferred stock with total proceeds of approximately $38,800,000. Purchasers of our Series D-1 preferred stock included ICG Services, Inc. (an affiliate of ICG Communications, Inc.), Excite@Home, Verio Inc., Cable & Wireless USA, Inc., Concentric Network Corporation, ALC Communications Corporation (an affiliate of Global Crossing Holdings Limited), Network Plus Corporation and Netopia, Inc. In May 1999, we sold 17,250,000 shares of our common stock at $24 per share in our initial public offering. Net of underwriting discounts and commissions, the proceeds to us were $388,500,000. Microsoft Corporation and Tandy Corporation purchased $30,000,000 and $20,000,000, respectively, of our stock in this offering. We believe that our current capital resources and lines of credit will be sufficient for the funding and working capital requirements needed for the deployment of our networks in our 60 targeted markets and to support operating needs over at least the next 12 months. However, we may decide to seek additional capital depending upon the demand for our services and regulatory, technological and competitive developments, including additional financial market developments and new opportunities, in our industry. We may also need additional financing if: . we alter the schedule, targets or scope of our network rollout plan; . our plans or projections change or prove to be inaccurate; or . we acquire other companies or businesses. 17 We may obtain additional financing through commercial bank borrowings, equipment financing or the private or public sale of equity or debt securities. We may be unsuccessful in raising sufficient additional capital. In particular, we may be unable to raise additional capital on terms that we consider acceptable, that are within the limitations contained in our financing agreements and that will not impair our ability to develop our business. If we fail to raise sufficient funds, we may need to modify, delay or abandon some of our planned future expansion or expenditures, which could have a material adverse effect on our business, prospects, financial condition and results of operations. Year 2000 Compliance We believe that our computer systems and software are year 2000 compliant. We have inventoried and tested our enterprise application systems, including internally-developed and vendor-developed applications and off-the- shelf software and hardware relating to our internal information systems, and believe that such systems are year 2000 compliant. We requested assurances regarding year 2000 compliance from our equipment and software vendors and the traditional telephone companies. We have also learned that the traditional telephone companies have informed the Federal Communications Commission that they are year 2000 compliant. We requested that they provide assurances of their year 2000 compliance directly to us. Furthermore, we have not experienced any year 2000 problems and we have not been informed of any material year 2000 problems by our customers and vendors. Our aggregate historical costs for year 2000 analysis, planning and remediation have not been material to date and, based on the tests we have performed on our computer systems and software and assurances received from our vendors and the traditional telephone companies, we do not expect to incur material costs to resolve year 2000 issues in the future. Recently Issued Accounting Pronouncements In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101 (SAB 101), Revenue Recognition in Financial Statements. SAB 101 provides guidance for revenue recognition under certain circumstances. Implementation of SAB 101 has been delayed by the Securities and Exchange Commission until the fourth quarter of the fiscal year beginning after December 15, 1999. The Securities and Exchange Commission is continuing to evaluate the application of SAB 101. Accordingly, the Company will continue to evaluate the impact of SAB 101 on its financial statements and related disclosures. In April 2000, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an interpretation of APB Opinion No. 25". This Interpretation clarifies the application of Opinion 25 for certain stock compensation issues including the definition of employee for purposes of applying Opinion 25, the criteria for determining whether a plan qualifies as a noncompensatory plan, the accounting consequence of various modifications to the terms of a previously fixed stock option, and the accounting for an exchange of stock compensation awards in a business combination. This Interpretation is effective July 1, 2000. NorthPoint does not expect the adoption of FASB Interpretation No. 44 to have a significant effect on the financial condition or results of operations. Forward Looking Statements The statements contained in this report which are not historical facts may be deemed to contain forward-looking statements, including but not limited to deployment of the company's network in new and existing regions and the timing and breadth of coverage in each region. Actual results may differ materially from those anticipated in any forward-looking statements as a result of certain risks and uncertainties. Some of these risks and uncertainties include, without limitation: NorthPoint's dependence on strategic third parties to market and resell its services, intense competition for NorthPoint's service offerings, dependence on growth in demand for DSL-based services, ability to raise additional capital, the inability to obtain, or meet conditions imposed for, governmental approvals for the proposed merger with Verizon Communications' DSL business, the failure of NorthPoint's stockholders to approve the merger, costs related to the merger, the risk that NorthPoint's and Verizon's DSL businesses will not be integrated successfully, the failure of NorthPoint to realize anticipated benefits of the merger and other economic, business, competitive and/or regulatory risks and uncertainties detailed herein and in the company's Securities and Exchange Commission filings. All written and oral forward-looking statements made in connection with this report on Form 10-Q which are attributable to us or persons acting on our behalf are expressly qualified in their entirety by the "Risk Factors" and other cautionary statements set forth herein and included in our Securities and Exchange Commission filings. Prospective investors are cautioned not to place undue reliance on such forward-looking statements. We disclaim any obligation to update information contained in any forward-looking statement. 18 Risk Factors In addition to the other information contained herein, you should carefully consider the following risk factors in evaluating our company. Because We Have a Limited Operating History, It Is Difficult to Evaluate Our Business We were formed in May 1997 and began offering commercial services in the San Francisco Bay Area in March 1998. Because of our limited operating history, you have limited operating and financial data about our company upon which to base an evaluation of our performance and an investment in our company. You should consider the risks, expenses and difficulties we may encounter, including those frequently encountered by early stage companies in new and rapidly evolving industries. As a result, we may be unable to: . develop our operational support systems and other information technology systems; . obtain central office space and suitable copper wire loops; . expand our customer base; . raise additional capital; . maintain adequate control of our expenses; . attract and retain qualified personnel; . enter into and implement interconnection agreements with traditional telephone companies, some of which are our competitors or potential competitors; . expand the geographic coverage of our network; . obtain governmental authorizations to operate as a competitive telecommunications company in new markets; . continue to upgrade our technologies and enhance our product features; and . respond to technological changes and competitive industry conditions. We Expect Our Losses and Negative Cash Flow to Continue To date, we have incurred substantial operating losses, net losses and negative cash flow on both an annual and quarterly basis. For the year ended December 31, 1999, we had operating losses of approximately $168,426,000, net losses of $183,698,000, and negative cash flow from operating and investing activities of $439,571,000. For the six months ended June 30, 2000, we had operating losses of approximately $98,003,000, net losses of $112,060,000, and negative cash flow from operating and investing activities of $406,074,000. We cannot assure our investors that we will ever achieve profitability or generate positive cash flow. We expect our operating expenses will increase, especially in the areas of operations, sales and marketing, as we develop and expand our business and, as a result, we will need to increase our revenue to become profitable. If our revenue does not grow as expected or increases in our expenses are not in line with our plans, there could be a material adverse effect on our business, prospects, financial condition and results of operations. 19 We Cannot Predict Whether We Will be Successful Because Our Business Model Is Unproven and Our Industry Is Developing Our business strategy is unproven. To be successful, we must, among other things, develop and market data networks and services that are widely accepted by our customers and their end users at prices that will yield a profit. Because our business and the overall demand for high speed data communications services are in the early stages of development, we are unsure whether or when our DSL services will achieve commercial acceptance. Our Failure to Achieve or Sustain Market Acceptance at Desired Pricing Levels Could Impair Our Ability to Achieve Profitability or Positive Cash Flow Prices for digital communication services have fallen historically, a trend we expect will continue. Accordingly, we cannot predict to what extent we may need to reduce our prices to remain competitive or whether we will be able to sustain future pricing levels as our competitors introduce competing services or similar services at lower prices. Our failure to achieve or sustain acceptance at desired pricing levels could impair our ability to achieve profitability or positive cash flow, which would have a material adverse effect on our business, prospects, financial condition and results of operations. Our Quarterly Operating Results Are Likely to Fluctuate Significantly, Causing Our Stock Price to be Volatile or to Decline We cannot accurately forecast our revenue because of our limited operating history and the emerging nature of the data communications industry in our markets. Our revenue could fall short of our expectations if we experience delays or cancellations by even a small number of our customers. A number of factors are likely to cause fluctuations in our operating results, including: . the rate at which we are able to attract and retain customers, and whether larger customers fulfill their volume commitments to us; . the ability of our customers to generate significant end user demand; . the timing and willingness of traditional telephone companies to provide and construct the required central office facilities; . the timing and willingness of traditional telephone companies to provide suitable copper wire loops at favorable prices; . the prices our customers and, in turn, their end users pay for our services; . availability of financing to continue to fund our expansion; . our ability to deploy our services on a timely basis to satisfy end user demand; . the mix of line orders between lower priced and higher priced lines; . the amount and timing of capital expenditures and operating costs as we expand our network; . the announcement or introduction of new or enhanced services by our competitors; and . technical difficulties or network downtime. 20 As a result, it is likely that in some future quarters our operating results will be below the expectations of securities analysts and investors. If this happens, the trading price of our common stock would likely be materially adversely affected. We May Be Unable to Meet Conditions to the Closing of the Proposed Merger of Our Business with the DSL Business of Verizon Communications Our proposed merger with Verizon's DSL business has been approved by the boards of directors of both Northpoint and Verizon. However, the merger agreement is subject to numerous conditions, including approval by the stockholders of Northpoint, expiration or termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and FCC and state regulatory approvals. There can be no assurance that Northpoint will be able to obtain, or to meet conditions imposed for, these governmental approvals or that Northpoint's stockholders will approve the merger and that the merger will be consummated. Our Merger with the DSL Business of Verizon Communications May Result in Unanticipated Costs and We May Face Difficulties in Successfully Integrating the Business and Realizing Anticipated Benefits of the Merger Our merger with the DSL business of Verizon Communications will result in substantial integration costs, including costs that we do not currently anticipate or are unable accurately to estimate. Furthermore, the realization of anticipated benefits from the merger is uncertain and we could face substantial difficulties in integrating our business with Verizon's DSL business. Accordingly, there can be no assurance that we will be able to successfully integrate our businesses or realize the anticipated benefits of the merger. A Limited Number of Customers Account for a High Percentage of Our Revenues and the Loss of a Significant Customer Could Harm Our Business We currently provide or have agreements to provide data transport solutions to more than 200 network service providers. For the year ended December 31, 1999, our two largest customers accounted for 32% of our revenues. For the three months ended June 30, 2000, our two largest customers accounted for 22% of our revenues. We anticipate that, as we expand our business, we will continue to rely upon a limited number of customers for a high percentage of our revenue and end-user lines. As a result of this concentration of our customer base, a loss of or decrease in business from one or more of our customers could have a material adverse effect on our business, prospects, financial condition and results of operations. Similarly, if our customers are unsuccessful in competing for end users in their own intensely competitive markets or experience other financial or operating difficulties, our business, prospects, financial condition and results of operations would be materially adversely affected. Many of our agreements with our customers are non-exclusive, and many of our customers are also customers of, or have invested in, our competitors. To the extent our significant customers strengthen their commercial relationships with our competitors, our business would be materially adversely affected. We May Not Be Able to Continue to Grow Our Business If We Do Not Obtain Significant Additional Funds We believe our current capital resources will be sufficient for the funding and working capital requirements needed for the deployment of our networks in our 60 targeted markets. If we decide to accelerate the timing of the buildout of our networks or target additional markets, we may need significant additional funds. We expect that the actual amount and timing of our future capital requirements, if any, will depend upon the demand for our services and regulatory, technological and competitive developments, including additional developments and new opportunities in our industry. These future capital requirements may be substantial. In addition, we may seek additional financing if: . our plans or projections change or prove to be inaccurate; . we acquire other companies or businesses; or . financial market conditions allow us to raise public or privately financed capital on attractive terms. We may be unsuccessful in raising sufficient additional capital at all or on terms that we consider acceptable. If we are unable to obtain adequate funds on acceptable terms, our ability to deploy and operate our networks, fund our expansion or respond to competitive pressures could be significantly impaired. Such limitation could have a material adverse effect on our business, prospects, financial condition or results of operations. 21 Our Business Activities and Our Ability to Raise Additional Funds Are Limited by Covenants Contained in Our Financing Agreements and the Indenture Our debt agreements, including our secured credit facility, the indenture governing our senior notes and other financing agreements contain and will contain restrictions on our activities and financial covenants with which we will be required to comply. If we fail to comply with these requirements, we would be in default and our debt could be declared immediately due and payable. We may be unable to make such required payments, or to raise sufficient funds from other sources. In addition, the terms of proposed new indebtedness or other funding may not be permitted by the terms of our current financing agreements, including our secured credit facility and the indenture. This may impair our ability to develop our business. If we fail to raise sufficient funds, we may be required to modify, delay or abandon some of our expansion plans, which could have a material adverse effect on our business, prospects, financial condition and results of operations. We Need to Make Significant Capital Expenditures, and the Amounts, Timing and Returns are Uncertain In 2000, we will have to make significant capital expenditures, estimated at approximately $325,000,000, to develop our business and deploy our services and systems. We may also need to make additional capital expenditures in connection with the acquisition of other companies. In addition, the amount and timing of these expenditures are uncertain and will depend upon our ability to execute our plans in a timely and cost-effective manner. We will need to increase our revenue in order to earn a return from our capital expenditures. If our revenue does not grow as expected, or capital expenditures exceed our estimates, there could be a material adverse effect on our business, prospects, financial condition and results of operations. Our Failure to Manage Our Growth Effectively Could Impair Our Business If we are successful in implementing our business plan, our operations will expand rapidly. This rapid expansion could place a significant strain on our management, financial and other resources. Our ability to manage future growth, if it occurs, will depend upon our ability to: . control costs; . maintain regulatory compliance; . implement and significantly expand our financial and operating systems; . maintain our operations support systems; and . expand, train and manage our employee base. We may be unable to do these things successfully. In addition, we may not successfully obtain, integrate and use our employees and management, operating and financial resources. Our business, prospects, financial condition and results of operations will be materially adversely affected if we are unable to manage our growth effectively. The Data Communications Industry Is Undergoing Rapid Technological Changes and New Technologies May Be Superior to the Technology We Use The data communications industry is subject to rapid and significant technological change, including continuing developments in DSL technology, which does not presently have widely accepted standards, and alternative technologies for providing high speed data communications such as cable modem technology. As a consequence: . we will rely on third parties, including some of our competitors and potential competitors, to develop and provide us with access to communications and networking technology; . our success will depend on our ability to anticipate or adapt to new technology on a timely basis; and . we expect that new products and technologies will emerge that may be superior to, or may not be compatible with, our products and technologies. If we fail to adapt successfully to technological changes or obsolescence or fail to obtain access to important technologies, 22 our business, prospects, financial condition and results of operations could be materially adversely affected. Our Success in Attracting and Retaining Customers Significantly Depends on Our Ability to Obtain Central Office Space from Traditional Telephone Companies We believe the growth and success of our business will depend upon securing physical central office space for our equipment in the central offices of traditional telephone companies in our target markets. We have experienced initial rejections of our applications to obtain space in some central offices. We believe we will continue to receive rejections of requested physical central office space as we expand our existing and planned networks. Although to date a majority of our applications to obtain physical central office space that were initially rejected have subsequently been accepted, we cannot assure you that we will be successful in reversing the pending rejections or any other rejected applications for space in desired central offices. Nor can we predict the extent of these rejections or their impact on our ability to provide service in our target markets. The rejection of our applications for central office space has in the past and could in the future result in delays and increased costs as we expand our services in our target markets. This may materially adversely affect our business, prospects, financial condition and results of operations. As we grow, we may be unable to secure central office space on a timely basis or at all. In some cases, although physical central office space is available, traditional telephone companies have claimed that they must refurbish space to make it suitable for our equipment--for example, by adding separate entrances, removing asbestos or obsolete machinery, or increasing power supply and air conditioning--which in some cases has made the cost to obtain that physical central office space prohibitively expensive. We expect physical central office space to become increasingly scarce due to increasing demand from a growing number of competitive telecommunications companies. Even when space is available, we may face delays ranging from four months to more than a year after we place an order before space for our equipment is made available. If our applications for physical central office space are rejected, or the costs or delays associated with obtaining central office space become too expensive, our expansion plans could be adversely affected, which could have a material adverse effect on our business, prospects, financial condition and results of operations. Broad service availability is also important to our customers and potential customers that want to provide Internet access or other data services on a national or regional basis. Our inability to obtain physical central office space in a timely manner could have a material adverse effect on our ability to attract and retain customers. Any disputes with traditional telephone companies over the types of equipment we seek to install in the central office space could also delay our installation and even impair our ability to provide service in the manner we deem appropriate. These delays or refusals could have a material adverse effect on our business, prospects, financial condition and results of operations. Our Success Depends on Interconnection Agreements With Traditional Telephone Companies in Each of Our Markets The success of our strategy depends on our ability to enter into and renew interconnection agreements with traditional telephone companies in each of our target markets on a timely basis. Delays in obtaining additional interconnection agreements would postpone our entry into a market, which could have a material adverse effect on our business, prospects, financial condition and results of operations. Interconnection agreements have limited terms of two to three years and we cannot assure you that existing or new agreements will be extended or negotiated on terms favorable to us. Interconnection agreements are also subject to state commission, FCC and judicial oversight. These government bodies may modify the terms or prices of our interconnection agreements in ways that adversely affect our business, prospects, financial condition and results of operations. Our Business Could Suffer if High Quality Copper Lines Are Not Available or Cost Us More Than We Expect We significantly depend on the quality of the copper lines and the traditional telephone companies' maintenance of such lines. We cannot assure you that we will be able to obtain the copper lines and the services we require from the traditional telephone companies at quality levels, prices, terms and conditions satisfactory to us. Our failure to do so would have a material adverse effect on our business, prospects, financial condition and results of operations. Under federal law, traditional telephone companies have an obligation to negotiate with us in good faith to enter into interconnection agreements, including agreements on the price at which we can obtain suitable lines from these telephone companies. If no agreement can be reached, either side may petition the applicable state commission to arbitrate remaining disagreements. These arbitration proceedings can last up to nine months. Moreover, the state commission must approve any interconnection agreement resulting from negotiation or arbitration, and any party may appeal an adverse decision by the state commission to federal district 23 court. The potential cost in resources and delay from this process could harm our ability to compete in certain markets, and there is no guarantee that a state commission would resolve disputes, including pricing disputes, regarding our access to suitable lines in our favor. Moreover, the FCC rules governing pricing standards for access to the networks of the traditional telephone companies are currently being challenged in federal court. If the courts overturn the FCC's pricing rules, the FCC may adopt a new pricing methodology that would require us to pay a higher price to traditional telephone companies for access to suitable lines. This could have a detrimental effect on our business. We have not yet established a history of ordering and obtaining the provisioning and repair of very large volumes of lines from any traditional telephone company. We also depend on cooperation from traditional telephone companies for repair of transmission facilities. The traditional telephone companies in turn rely significantly on unionized labor. Labor-related issues and actions on the part of the traditional telephone companies have in the past, and may in the future, adversely affect traditional telephone companies' provision of services and network components that we order. Our dependence on the traditional telephone companies has caused and could continue to cause us to encounter delays in establishing our networks, provisioning lines and upgrading our services. These delays could adversely affect our relationships with our customers, harm our reputation or otherwise have a material adverse effect on our business, prospects, financial condition and results of operations. We Depend on Market Acceptance for DSL-Based Services The demand for small- and medium-sized business, telecommuter and residential Internet access is in the early stages of development. Because we offer services to a new and evolving market and because current and future competitors are likely to introduce competing services, it is difficult for us to predict the rate at which the demand for our services will grow. Various providers of high-speed digital communications services are testing products from various suppliers for various applications, and it is unclear if DSL will offer the same or more attractive price-performance characteristics. If the demand for our services fail to develop, grow more slowly than anticipated or become saturated with competitors, our business, prospects, financial condition and results of operations could be materially adversely affected. We Depend on Our Billing, Customer Service and Information Support Systems, Which Need Further Development Sophisticated information and processing systems are vital to our growth and ability to monitor costs, bill customers, process customer orders and achieve operating efficiencies. Our plans for the development and implementation of our operations support systems rely, for the most part, on acquiring products and services offered by third-party vendors and integrating those products and services in-house to produce efficient operational solutions. However, we may not successfully identify all of our information and processing needs or implement these systems on a timely basis or at all, and these systems may not perform as expected. If our plans for the development and implementation of our operations support systems do not proceed as expected, or if these systems, once implemented, fail to perform as expected, our business prospects, financial condition and results of operations could be materially adversely affected. In addition, our right to use these systems is dependent upon license agreements with third-party vendors. Some of those agreements may be cancelable by the vendor and the cancellation or nonrenewal of these agreements may have a material adverse effect on our business, prospects, financial condition and results of operations. Similar issues are applicable to the operations support systems and other systems of our customers, and to the interface between our systems and those of our customers. Therefore, failures at our customers could also have a material adverse effect on our business, prospects, financial condition and results of operations. We May Be Unable to Expand Our Network Services Effectively and Provide High Performance to a Substantial Number of End Users Due to the limited deployment of our services, the ability of our DSL network to connect and manage a substantial number of end users at high transmission speeds is still unknown. While peak digital data transmission speeds across our DSL network to and from the central office and the end user can exceed 1.5 megabits per second, the actual data transmission speeds over our network could be significantly slower due to: . the type of DSL technology deployed; . the distance an end user is located from a central office; 24 . the configuration of the telecommunications line being used; . the gauge of the copper lines; and . the presence and severity of interfering transmissions on nearby lines. For example, we are not certain whether we can successfully deploy higher DSL speeds through digital loop carrier systems which, because they connect copper lines to a fiber link, currently limit DSL service to a maximum speed of 144 kilobits per second. Because we rely on traditional telephone companies to overcome technical limitations associated with loop carrier systems, we cannot assure you that we will be able to successfully deploy high speed DSL service to all areas in which we provide service. As a result, our network may not be able to achieve and maintain the highest possible digital transmission speed. Our failure to achieve or maintain high speed digital transmissions would have a material adverse effect on our business, prospects, financial condition and results of operations. Our Success Depends on Our Retention of Executive Officers and Other Key Personnel and Our Ability to Hire Additional Key Personnel We are managed by a small number of executive officers. Competition for qualified executives in the data communications services industry is intense, and there are a limited number of persons with comparable experience. We depend upon our executive officers because we believe there are few managerial personnel with qualifications to swiftly implement a business plan integrating DSL technology with the existing telephone infrastructure. Any of our executive officers may terminate his or her employment with us at any time. We do not have "key person" life insurance policies on any of our executive officers. The loss of these key individuals could have a material adverse effect on our business, prospects, financial condition and results of operations. We believe that our success will depend in large part on our ability to retain and attract qualified technical, marketing, managerial and other personnel. Additionally, we believe an effective sales force is critical to our success. The industry in which we compete is characterized by a high level of employee mobility and aggressive recruiting of skilled personnel. We may be unable to hire or retain necessary personnel in the future. Our inability to attract and retain key personnel would have a material adverse effect on our business, prospects, financial condition and results of operations. The Industry in Which We Operate is Highly Competitive, and We May Not Be Able to Compete Effectively, Especially Against Established Competitors With Significantly Greater Financial Resources We face competition from many competitors with significantly greater financial resources, well-established brand names and larger customer bases. We also expect competition to intensify in the future. We expect significant competition from traditional and new telephone and telecommunications companies, including national long distance carriers, cable modem service providers, Internet service providers, on-line service providers, and wireless and satellite data service providers. Other Competitive Telecommunications Companies, Some With Greater Financial Resources, Compete in the Same Areas for the Same Customers. Other competitive telecommunications companies have entered and may continue to enter the industry and offer high speed data services using a business strategy similar to ours. Some competitors, including those focusing on data transport such as Rhythms NetConnections Inc., HarvardNet Inc., @Link Networks L.L.C., New Edge Networks, Covad Communications Group, Inc., BlueStar Communications, JATO, Telocity, Vitts Network, DSL.net and Network Access Solutions Corporation, have begun to offer DSL-based access services, and others are likely to do so in the future. Finally, traditional voice-based telephone companies such as BTI Telecom, Hyperion, MCG, McLeod Communications, Allegiance and Network Plus, are starting to offer high speed data services. Certain of our customers have made investments in our competitors, which may enhance their relationships with these competitors at our expense. The Telecommunications Act of 1996 specifically grants any competitive local exchange carrier, or competitive telecommunications company, the right to negotiate interconnection agreements with traditional telephone companies, or incumbent local exchange carriers. The Telecommunications Act also allows competitive telecommunications companies to enter into interconnection agreements which are identical in all respects to ours. In addition, some competitive telecommunications companies have extensive fiber networks in many metropolitan areas primarily providing high speed digital and voice circuits to large corporations, and have interconnection agreements with traditional telephone companies pursuant to which they have acquired space in traditional telephone companies' central offices in many of our markets. As a result, our customers may contract with other competitive telecommunications companies, which may decrease our customers' demand for our services. Traditional Telephone Companies With Greater Resources Than Ours May Directly Compete in Our Service Areas. The 25 traditional telephone companies have an established brand name and reputation for high quality in their service areas, possess significant capital to deploy DSL equipment rapidly, have their own copper lines and can bundle digital data services with their existing analog voice services to achieve economies of scale in serving customers. In addition, most traditional telephone companies have established or are establishing their own Internet service provider businesses, and all of the largest traditional telephone companies that are present in our target markets are conducting market trials of or have commenced offering DSL- based access services. For example, Verizon Communications, BellSouth, Cincinnati Bell, Pacific Bell and Southwestern Bell are offering commercial services in some territories in which we offer services, U S WEST is offering commercial DSL services and Ameritech has announced commercial DSL services in some areas of Michigan and Illinois. We recognize that the traditional telephone companies have the potential to quickly deploy DSL services and are in a position to offer service from central offices where we may be unable to secure space in traditional telephone companies' central offices. In addition, the FCC is considering establishing requirements for separate subsidiaries through which the traditional telephone companies could provide DSL service on a largely deregulated basis. As a result, we expect traditional telephone companies to be strong competitors in each of our target markets. National Long Distance Carriers May Begin to Compete for Our Small- and Medium-Sized Business Customers. Many of the leading traditional national long distance carriers, including MCI WorldCom, Inc., AT&T Corp. and Sprint Corporation, are expanding their capabilities to support high speed, end-to-end data networking services. They also have interconnection agreements with many of the traditional telephone companies and a number of spaces in traditional telephone companies' central offices from which they could begin to offer competitive DSL services. The newer national long distance carriers, such as Level 3 Communications, Inc., The Williams Companies, Inc. and Qwest Communications International, Inc. are building and managing high speed fiber- based national data networks and partnering with Internet service providers to offer services directly to the public. These companies could modify their current business focus to include small- and medium-sized business customers using DSL or other technologies in combination with their current fiber networks. Sprint has already launched services in Las Vegas and Charlotte. Cable Modem Service Providers May Offer High Speed Internet Access at More Competitive Rates Than Ours, Forcing Us to Lower Our Prices. Cable modem service providers, such as At Home Corporation and Road Runner, Inc. (with their cable partners), are deploying high speed internet access services over hybrid fiber coaxial cable networks. Where deployed, these networks provide similar and in some cases higher speed Internet access than we provide. They also offer these services at lower price points than our services. Actual or prospective cable modem service provider competition may have a significant negative effect on our ability to secure customers and may create downward pressure on the prices we can charge for our services. Internet Service Providers, Our Targeted Customers, May Begin to Provide DSL Services Directly. Internet service providers, such as Verio Inc., Genuity, UUNET (a subsidiary of MCI WorldCom, Inc.), Sprint, Concentric Network Corporation, MindSpring Enterprises, Inc. and PSINet, Inc., provide Internet access to residential and business customers, generally using the existing telephone system. Some regional Internet service providers, such as HarvardNet Inc., BlueStar Communications, New Edge Networks, @Link Networks L.L.C., InterAccess Co., Vitts Networks Inc. and Prism Solutions, Inc., have begun offering DSL-based services. Internet service providers could become competing high speed data service providers if they attain certification as competitive telecommunications companies in the states in which they planned to operate. On-line Service Providers, Our Targeted Customers, May Begin to Provide DSL Services Directly. On-line service providers, such as America Online, Inc., Compuserve (a subsidiary of America Online), Microsoft Network, Prodigy, Inc., and WebTV Networks, Inc. (a subsidiary of Microsoft), provide, over the Internet and on proprietary on-line services, content and applications ranging from news and sports to consumer video conferencing. These services are designed for broad consumer access over telecommunications-based transmission media, which enable digital services to be provided to the significant number of consumers who have personal computers with modems. In addition, on-line service providers provide Internet connectivity, ease-of-use and consistency of environment. Many of these on-line service providers have developed their own access networks for modem connections. AOL has announced that it will purchase DSL services from Verizon Communications and SBC Communications. If these on-line service providers were to extend their owned access networks to DSL, they would be our competitors. Wireless and Satellite Data Service Providers May Begin to Offer Wireless and Satellite-Based Internet Connectivity, Also Competing Against Us. Wireless and satellite data service providers are developing wireless and satellite-based Internet connectivity. We may face competition from terrestrial wireless services, including multi-channel multipoint distribution systems, local multipoint distribution systems, wireless communication service and point-to- point microwave systems. The FCC recently adopted new rules to permit multi- channel multipoint distribution system licensees to use their systems to offer two-way services, including high speed data, rather than solely to provide one- way video services. The FCC also has auctioned local multipoint distribution system licenses in all markets for wireless systems, which can be used for high speed data services. In addition, companies such as Teligent, Inc., Advanced Radio Telecom Corp., NEXTLINK and WinStar Communications, Inc. hold point-to- point and/or point-to-multipoint microwave licenses to provide fixed wireless services such as voice, data and video conferencing. We also may face competition from satellite-based systems. Motorola Satellite Systems, Inc., Hughes Communications, Inc. 26 (a subsidiary of General Motors Corporation), Teledesic LLC and others have filed applications with the FCC for global satellite networks which can be used to provide broadband voice and data services. In January 1997, the FCC allocated 300 MHz of spectrum in the 5 GHz band for unlicensed devices to provide short-range, high speed wireless digital communications. These frequencies must be shared with incumbent users without causing interference. Although the allocation is designed to facilitate the creation of new wireless local area networks, it is too early to predict what kind of equipment might ultimately be manufactured and for what purposes it might be used. The telecommunications industry is subject to rapid and significant changes in technology, and we cannot predict the effect of technological changes on our business, such as continuing developments in DSL technology and alternative technologies for providing high speed data communications. These technological developments in the telecommunications industry could have a material adverse effect on our competitive position and therefore on our business, prospects, financial condition and results of operations. Industry Consolidation Could Make Competing More Difficult Consolidation of companies offering high speed local data transport is occurring through acquisitions, joint ventures and licensing arrangements involving our competitors and our customers' competitors. As a company with limited operating history, we cannot assure that we will be able to compete successfully in an increasingly consolidated industry. Any heightened competitive pressures that we may face may have a material adverse effect on our business, prospects, financial condition and results of operations. Additionally, because we rely on our customers' marketing channels to provide our services to business and residential end users, if our customers are adversely affected by consolidation and integration in the market, our business, prospects, financial condition and results of operations could be materially adversely affected. Our Services Are Subject to Uncertain Government Regulation, and Changes in Current or Future Laws or Regulations Could Restrict the Way We Operate Our Business We are subject to federal, state and local regulation of our telecommunications business. With the passage of the Telecommunications Act in 1996, Congress sought to foster competition in the telecommunications industry and to promote the deployment of advanced telecommunications technology. Implementation of the Telecommunications Act is the subject of ongoing administrative proceedings at the federal and state levels, litigation in federal and state courts, and legislation in federal and state legislatures. We cannot predict the outcome of the various proceedings, litigation and legislation or whether or to what extent these proceedings, litigation and legislation may adversely affect our business, prospects, financial condition and results of operations. As a competitive telecommunications company, we are subject to FCC regulation for our contractual, or interconnection, arrangements with the traditional telephone companies, or incumbent local exchange carriers, in our markets, but the scope of this regulation is uncertain because it is the subject of ongoing court and administrative proceedings. Several parties have brought court challenges to the FCC's interconnection rules, including the rules that establish the terms under which a competitive telecommunications company may use portions of a traditional telephone company's network. Although the Supreme Court recently held that the FCC has the authority to adopt interconnection rules and specifically upheld several of these rules, other rules are still being considered by the courts. If a rule that is beneficial to our business is struck down, it could harm our ability to compete. In particular, the courts have not yet resolved the lawfulness of the methodology that the FCC established to determine the price that competitive telecommunications companies would have to pay traditional telephone companies for use of the traditional telephone companies' networks. The courts may determine that the FCC's pricing rules are unlawful, which would require the FCC to establish a new pricing methodology. If this occurs, the new pricing methodology that the FCC adopts may result in our having to pay a higher price to traditional telephone companies if we were to use a portion of their networks in providing our services, and this could have a detrimental effect on our business. In response to the Supreme Court's decision vacating certain portions of the FCC's rules implementing provisions of the Telecommunications Act, the FCC revisited the requirements imposed upon traditional telephone companies that they make available certain network elements for use by competitive telephone companies such as NorthPoint. In its decision in September 1999, the FCC reaffirmed and strengthened the requirements imposed upon traditional telephone companies to make available unbundled network elements and affirmed the availability of those network elements utilized by NorthPoint in the provision of its services. The FCC's decision is subject to review by the courts and further consideration by the FCC in subsequent proceedings. Any reversal or material change in the unbundling rules with regard to those elements used by NorthPoint would have a material adverse effect on NorthPoint's ability to provide its services. Recently, various traditional telephone companies have requested the FCC to grant them regulatory relief in the provision of data transmission services, including DSL services, which would allow the traditional telephone companies to compete more directly 27 with DSL providers such as NorthPoint. In response, the FCC initiated a comprehensive proceeding to review Advanced Services, including DSL issues. That proceeding has resulted in a number of rulemakings and orders that enhance the ability of competitive DSL companies like NorthPoint to, among other things, access DSL-capable unbundled copper loops, access and utilize various forms of central office collocation space, provide a variety of DSL services to end-users by setting open rules for spectrum compatibility, and access "shared-lines" by requiring the traditional telephone companies to provide access to the high- frequency portion of existing voice service lines to DSL competitive companies like NorthPoint for the provision of high speed DSL services. The decision with respect to shared-lines is not final, is subject to review by the courts and the FCC, and is subject to implementation on a state-by-state basis. We anticipate the traditional telephone companies will require six to nine months to implement the requirements (including technical trials) of the FCC decision. The benefits of this decision may be diluted or delayed if the implementation processes are protracted or frustrated through legal challenges, arbitrations, or other actions in any given state. Our Debt Creates Financial and Operating Risk That Could Limit the Growth of Our Business As of June 30, 2000, we had approximately $490,601,000 of indebtedness and $126,059,000 of stockholders' equity. The degree to which we are leveraged could have important consequences to holders of our common stock, including, but not limited to, the following: . our ability to obtain additional financing or refinancing in the future for capital expenditures, repayment of outstanding indebtedness, working capital, acquisitions, general corporate or other purposes may be materially limited or impaired; . our cash flow, if any, may be unavailable for building our business, as a substantial portion of our cash flow may be dedicated to the payment of principal and interest on our indebtedness or other indebtedness that we may incur in the future, and our failure to generate sufficient cash flow to service such indebtedness could result in a default; . our debt agreements will contain restrictions and financial covenants which, if we fail to meet them, could result in our indebtedness being declared due prematurely, at a time when we could not make the required payments; . our leverage may make us more vulnerable to economic downturns, may limit our ability to withstand competitive pressures and may reduce our flexibility in responding to changing business and economic conditions; and . we may from time to time be more highly leveraged than many of our competitors, which may place us at a competitive disadvantage. We Rely on Our Intellectual Property Which We May Be Unable to Protect, or We May Be Found to Infringe the Rights of Others Our success depends in part on our ability to protect our proprietary intellectual property. In addition, we may be sued over intellectual property rights. These lawsuits, or our inability to protect our intellectual property rights, could have a material adverse effect on our business, prospects, financial condition and results of operations. In April 1999, we received a letter from one of our competitors, Covad Communications Group, Inc., indicating that it had been informed of allowance of a United States patent application. According to Covad's letter, their patent application related to digital subscriber loop implementations supporting (a) a bandwidth of 128 kbps or 144 kbps combined with (b) a bandwidth greater than 128 or 144 kbps. The patent described in Covad's letter has now issued. We have received a copy of the patent. We have not yet evaluated fully the validity or relevance of the patent to our business. If the patent is valid, and if we infringe this patent, we could be required to obtain a license under the patent. While Covad has indicated that we may be interested in obtaining a license from them at the appropriate time, we cannot be certain that such a license, if needed, would be available on commercially acceptable terms. A System Failure or Breach of Network Security Could Delay or Interrupt Service to Our Customers The reliability of our transmission services in our markets would be impaired by a natural disaster or other unanticipated interruption of service or damage at any of our facilities. Additionally, failure of a traditional telephone company or other service provider to provide communications capacity required by us, as a result of a natural disaster, operational disruption or for any other reason, could cause interruptions in our services. Damage or failure that causes interruptions in our services could have a material adverse effect on our business, prospects, financial condition and results of operations. Our network may be vulnerable to unauthorized access, computer viruses and other disruptive problems. Unauthorized 28 access could also potentially jeopardize the security of confidential information stored in the computer systems of our customers, which might result in liability to our customers, and also might deter potential customers. Although we intend to implement security measures that are standard within the telecommunications industry, we may be unable to implement such measures in a timely manner or, if and when implemented, our security measures may be circumvented. Eliminating computer viruses and alleviating other security problems may require interruptions, delays or cessation of service to our customers and these customers' end users. Any of the foregoing factors relating to network security could have a material adverse effect on our business, prospects, financial condition and results of operations. 29 Our Business Could Suffer from a Reduction or Interruption from Our Equipment Suppliers or Other Third Parties on Whom We Rely for Installation and Provision of Field Service We plan to purchase all of our equipment from various vendors and outsource the installation and field service of our networks to third parties. We also depend on the availability of fiber optic transmission facilities from third parties to connect our equipment within and between metropolitan areas. Any reduction of or interruption from our equipment suppliers, such as Copper Mountain Network, Inc., from which we purchase most of our digital subscriber line access equipment, or interruption in service from any significant installer or field service provider, such as Lucent Technologies, Inc., which has installed and maintained our equipment in all of our markets, could have a disruptive effect on our business, prospects, financial condition and results of operations. In addition, the pricing of the equipment we purchase may substantially increase over time, increasing the costs we pay in the future, or decrease over time, providing later entrants to our industry with a cost advantage over us. The availability and pricing of the equipment we purchase would be adversely affected if our suppliers were to compete with us, or if our competitors enter into exclusive or restrictive arrangements with our suppliers. It could take a significant period of time to establish relationships with alternative suppliers for each of our technologies and substitute their technologies into our network. Uncertain Federal and State Tax and Other Surcharges on Our Services May Increase Our Payment Obligations Telecommunications providers are subject to a variety of complex federal and state surcharges and fees on their gross revenues from interstate and intrastate services, including regulatory fees, and surcharges related to the support of universal service. A finding that we misjudged the applicability of the surcharges and fees could increase our payment obligations and have a material adverse effect on our business, prospects, financial condition and results of operations. Claims of Interference Could Harm Our Ability to Deploy Our Services Certain technical laboratory tests and field experience indicate that some types of DSL, in particular, asymmetrical DSL-in which data transport to the end user is faster than transport from the end user-may cause interference with and be interfered with by other signals present in a traditional telephone company copper plant. Citing this potential interference, some traditional telephone companies have imposed restrictions on the use of DSL technology over their copper lines. However, we do not believe that our symmetrical DSL technology equipment, which permits the same speed of data transport to and from the end user, poses interference risks. If traditional telephone companies were to restrict our use of our technology or equipment in the future, our business, prospects, financial condition and results of operations could be materially adversely affected. Our Stock Price May Be Volatile The trading price of our common stock has been and is likely to continue to be highly volatile. Our stock price is likely to be volatile and may fluctuate substantially due to factors such as: . our historical and anticipated quarterly and annual operating results; . variations between our actual results and analyst and investor expectations; . announcements by us or others and developments affecting our business; . investor perceptions of our company and comparable public companies; and . conditions and trends in the data communications and Internet-related industries. In particular, the stock market has from time to time experienced significant price and volume fluctuations affecting the common stocks of technology companies, which may include data communications and Internet-related companies. These fluctuations may result in a material decline in the market price of our common stock. The Sale of Shares or the Perception of Future Sales Could Depress Our Stock Price Sales of a large number of shares of common stock in the market or the perception that sales may occur could cause the market price of our common stock to drop. As of June 30, 2000, we had 132,508,520 shares of common stock outstanding. Of these common shares, substantially all are freely tradeable, except for any such shares held at any time by an "affiliate" of NorthPoint, as 30 defined under Rule 144 under the Securities Act. These shares may be sold in the future without registration under the Securities Act to the extent permitted by Rule 144 or an exemption under the Securities Act. In addition, holders of shares of common stock representing approximately 48% of the currently outstanding shares of common stock have agreed to vote their shares in support of the merger with Verizon Communications' DSL business and not to sell any shares, subject to limited exceptions, until the closing. Our Principal Stockholders and Management Own a Significant Percentage of NorthPoint, and Will Be Able to Exercise Significant Influence Our executive officers and directors and principal stockholders together beneficially own approximately 50% of our common stock. These stockholders, if they vote together, will be able to exercise significant influence over all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. Upon consummation of the proposed merger with Verizon's DSL business, Verizon will own 55% of the common stock of the new NorthPoint. This concentration of ownership may also delay or prevent a change in control of NorthPoint. Our Certificate of Incorporation and Bylaws Contain Provisions That Could Delay or Prevent a Change In Control of NorthPoint Certain provisions of our certificate of incorporation and bylaws could make it more difficult for a third party to acquire control of NorthPoint, even if a change in control would be beneficial to stockholders. Our certificate of incorporation allows our board of directors to issue, without stockholder approval, preferred stock with terms set by the board of directors. The preferred stock could be issued quickly with terms that delay or prevent a change in control of NorthPoint or make removal of management more difficult. Also, the issuance of preferred stock may cause the market price of the common stock to decrease. If Unexpected Year 2000 Issues Arise, We May Incur Significant Costs and Our Business Could Suffer The year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. Although we have not experienced any year 2000 problems and have not been informed of any material year 2000 problems by our customers and vendors, we cannot assure you that our systems or the systems of other companies on whose services we depend or with whom our systems interconnect will not experience unexpected year 2000 problems during the course of the year. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices or engage in similar normal business activities. This could, in turn, have a material adverse effect on our business, prospects, financial condition and results of operations. 31 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. We are currently exposed to the impact of interest rate changes and changes in market values of investments through our investment portfolio. The majority of our debt is in the form of fixed interest rate obligations. Our principal exposure to financial market fluctuations relates to our secured credit facility, which is floating rate debt. We do not believe a hypothetical 10% adverse rate change in our variable rate debt obligations would be material to our results of operations. We believe our market risk exposure with regard to marketable debt securities in our investment portfolio is limited to changes in quoted market prices for such securities. Based upon the composition of our marketable debt securities at June 30, 2000, we do not believe a hypothetical 10% adverse change in quoted market prices would be material to our results of operations. 32 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. We are not currently involved in any pending legal proceedings that individually, or in the aggregate, are material to us. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (c) Recent Sales of Unregistered Securities: During the three month period ended June 30, 2000, we have issued and sold unregistered securities as follows: We issued an aggregate of 391,304 shares of common stock in a private placement on June 20, 2000 to a company in which we made a strategic investment. The shares we issued were subject to certain restrictions on transfer and constitute restricted securities within the meaning of Rule 144 promulgated under the Securities Act of 1933. We received a preferred equity interest in this company in consideration of our issuance of common shares and a cash investment of $2.5 million that we made in such company. No underwriters were used in connection with these sales and issuances. The issuance of these securities was exempt from registration under the Securities Act pursuant to Section 4(2) thereof, on the basis that the transaction did not involve a public offering. (d) Report of Offering of Securities and Use of Proceeds Therefrom: In May 1999, we commenced and completed a firm commitment underwritten initial public offering of 17,250,000 shares of our common stock, including 2,250,000 shares related to the underwriters' overallotment option, at a price of $24.00 per share. The shares were registered with the Securities and Exchange Commission pursuant to a Registration Statement on Form S-1 (File No. 333- 73065), which was declared effective on May 5, 1999. The public offering was underwritten by a syndicate of underwriters led by Goldman, Sachs & Co., Morgan Stanley Dean Witter and Credit Suisse First Boston as their representatives. After deducting underwriting discounts and commissions of $25,500,000 and expenses of $2,000,000, we received net proceeds of $386,500,000. As of June 30, 2000, we had used all of the estimated aggregate net proceeds of $386,500,000 from our initial public offering as follows: Purchase and installation of machinery and equipment $359,756,000 Purchases of real estate $ 0 Acquisition of other business(es) $ 0 Repayment of indebtedness $ 0 Working capital and other purposes $ 26,744,000 Temporary Investments $ 0 ------------ Total $386,500,000 ============
The foregoing amounts represent our best estimate of our use of proceeds for the period indicated. The use of proceeds from the offering does not represent a material change in the use of proceeds described in our Registration Statement on Form S- 1, as amended (File No. 333-73065). None of the net proceeds of the offering were paid directly or indirectly to any director or officer of NorthPoint Communications Group, Inc., persons owning 10% or more of any class of our equity securities or any of our affiliates. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. None. 33 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. On May 9, 2000, we held an Annual Meeting of Stockholders at which the following proposals were voted on by the stockholders: 1. Election of three directors to Class I of the board of directors to serve for a three-year term to expire at the 2003 Annual Meeting of Stockholders. The votes cast for or withheld as to each nominee are set forth below. NOMINEE FOR WITHHELD - ------- --- -------- Elizabeth A. Fetter 118,775,787 184,356 Reed E. Hundt 118,828,095 132,048 Michael W. Malaga 118,831,077 129,066 2. To approve amendments to our certificate of incorporation to (1) reduce the number of authorized shares of capital stock from 382,500,000 to 305,526,843, (2) reduce the number of authorized shares of preferred stock from 101,250,000 to 24,276,843, (3) declassify all such authorized shares of preferred stock so as to make them available for future issuance, in one or more series of preferred stock, the rights, preferences and privileges of which will be determined by the board of directors from time to time in the future, and (4) amend Article IV of our certificate of incorporation to eliminate all provisions applicable to the previously designated series of preferred stock, of which no shares remain outstanding. VOTES ----- For 89,489,601 Against 7,523,099 Abstentions 190,949 Broker Non-Votes 21,756,494 3. To approve two amendments to the NorthPoint Communications Group, Inc. Amended and Restated 1999 Stock Plan which will (1) increase the number of shares of common stock reserved for issuance under the 1999 Plan by an additional 10,000,000 shares, and (2) revise the automatic share increase provisions of the 1999 Plan so that the number of shares of common stock reserved under the 1999 Plan will be automatically increased on March 22 of each year during the term of the 1999 Plan, commencing with March 22, 2001, by an amount equal to 5% of the total number of shares of common stock outstanding on the day of such increase. VOTES ----- For 82,002,500 Against 15,004,648 Abstentions 201,201 Broker Non-Votes 21,756,494 4. To ratify the appointment of PricewaterhouseCoopers LLP as our independent accountants for the year ending December 31, 2000. VOTES ----- For 118,762,862 Against 153,229 Abstentions 44,052 Broker Non-Votes 0 ITEM 5. OTHER INFORMATION. None. 34 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits: The following exhibits are included as part of this Report: Exhibit No. Description of Exhibit --- ---------------------- 3.2 Amended and Restated Bylaws of NorthPoint Communications Group, Inc. 10.38 Employment Agreement dated June 1, 2000, between NorthPoint Communications, Inc. and Michael W. Malaga. 10.39 Employment Agreement dated June 27, 2000, between NorthPoint Communications, Inc. and Shellye Archambeau. 10.40 Amendment No. 2 to Employment Agreement dated June 1, 2000, between NorthPoint Communications, Inc. and Nancy J. Hemmenway. 10.41 Amendment No. 1 to Employment Agreement dated June 1, 2000, between NorthPoint Communications, Inc. and Michael Parks. 10.42 Amendment No. 2 to Employment Agreement dated June 1, 2000, between NorthPoint Communications, Inc. and Steven J. Gorosh. 27.1 Financial Data Schedule for the three months ended June 30, 2000. (b) Reports on Form 8-K: Form 8-K filed August 8, 2000, Item Nos. 5 and 7, announcement of entering into an Agreement and Plan of Merger dated as of August 8, 2000, among Bell Atlantic Corporation (d/b/a Verizon Communications), Verizon Ventures I Inc., Verizon Ventures II, Inc. and NorthPoint Communications Group, Inc. 35 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized. NORTHPOINT COMMUNICATIONS GROUP, INC. Registrant Dated: August 14, 2000 By: /s/ ELIZABETH A. FETTER -------------------------------------- Elizabeth A. Fetter Chief Executive Officer and President Dated: August 14, 2000 By: /s/ MICHAEL P. GLINSKY -------------------------------------- Michael P. Glinsky Executive Vice President and Chief Financial Officer 36 EX-3.2 2 0002.txt AMENDED & RESTATED BYLAWS EXHIBIT 3.2 AMENDED AND RESTATED BYLAWS OF NORTHPOINT COMMUNICATIONS GROUP, INC. ARTICLE I CORPORATE OFFICES ----------------- 1.1 Registered Office. ----------------- The registered office of the corporation shall be in the City of Wilmington, County of New Castle, State of Delaware. The name of the registered agent of the corporation at such location is The Corporation Trust Company. 1.2 Other Offices. ------------- The board of directors may at any time establish other offices at any place or places where the corporation is qualified to do business. ARTICLE II MEETINGS OF STOCKHOLDERS ------------------------ 2.1 Place of Meetings. ----------------- Meetings of stockholders shall be held at any place, within or outside the State of Delaware, designated by the Board of Directors. In the absence of any such designation, stockholders' meetings shall be held at the registered office of the corporation. 2.2 Annual Meeting. -------------- The annual meeting of stockholders shall be held each year on a date and at a time designated by the board of directors. At the meeting, directors shall be elected and any other proper business may be transacted. 2.3 Special Meeting. --------------- A special meeting of the stockholders may be called at any time by the board of directors, or by the chairman of the board, or by the chief executive officer or the president or vice president of the corporation. 2.4 Notice of Stockholders' Meetings. -------------------------------- All notices of meetings with stockholders shall be in writing and shall be sent or otherwise given in accordance with Section 2.7 of these bylaws not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote at such meeting. The notice shall specify the place, date, and hour of the meeting, 2 and, in the case of a special meeting, the purpose or purposes for which the meeting is called. 2.5 Advance Notice of Stockholder Nominees. -------------------------------------- Only persons who are nominated in accordance with the procedures set forth in this Section 2.5 shall be eligible for election as directors. Nominations of persons for election to the board of directors of the corporation may be made at a meeting of stockholders by or at the direction of the board of directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.5. Such nominations, other than those made by or at the direction of the board of directors, shall be made pursuant to timely notice in writing to the secretary of the corporation. To be timely, a stockholder's notice shall be delivered to or mailed and received at the principal executive offices of the corporation (a) in the case of an annual meeting, not less than sixty (60) days nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the annual meeting is changed by more than thirty (30) days from such anniversary date, notice by the stockholders to be timely must be so received not later than the close of business on the tenth (10th) day following the earlier of the day on which such notice of the date of the meeting was mailed or public disclosure was made and (b) in the case of a special meeting at which directors are to be elected, not later than the close of business on the tenth (10th) day following the earlier of the day on which notice of the date of the meeting was mailed or public disclosure was made. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the corporation which are beneficially owned by such person and (iv) any other information relating to such person that is required to be disclosed in solicitations of proxies for election of directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (including, without limitation, such person's written consent to being named in the proxy statement as a nominee and to serving as a director if elected, and (b) as to the stockholder giving the notice, (i) the name and address, as they appear on the corporation's books, of such stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by such stockholder and also which are owned of record by such stockholder. At the request of the board of directors, any person nominated by the board of directors for election as a director shall furnish to the secretary of the corporation that information required to be set forth in a stockholder's notice of nomination which pertains to the nominee. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth in this Section 2.5. The chairman of the meeting shall, if the facts warrant, determine and 3 declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the bylaws, and, if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. 2.6 Advance Notice of Stockholder Business. -------------------------------------- At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the annual meeting. To be properly brought before an annual meeting, business must be (a) pursuant to the corporation's notice of meeting (or any supplement thereto), (b) by or at the direction of the board of directors or (c) by any stockholder of the corporation who is a stockholder of record at the time of giving of the notice provided for in this Section 2.6, who shall be entitled to vote at such meeting and who complies with the notice procedures set forth in this Section 2.6. Business to be brought before an annual meeting by a stockholder shall not be considered properly brought if the stockholder has not given timely notice thereof in writing to the secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation not less than sixty (60) nor more than ninety (90) days prior to the first anniversary of the preceding year's annual meeting; provided, however, that in the event that the date of the meeting is changed by more than thirty (30) days from such anniversary date, notice by the stockholder to be timely must be so received not later than the close of business on the tenth (10th) day following the earlier of the day on which such notice of the date of the meeting was mailed or such public disclosure was made. A stockholder's notice to the secretary shall set forth as to each matter the stockholder proposes to bring before the meeting: (i) a brief description of the business desired to be brought before the meeting and the reasons for conducting such business at the meeting, (ii) the name and address, as they appear on the corporation's books, of the stockholder proposing such business, and the name and address of the beneficial owner, if any, on whose behalf the proposal is made, (iii) the class and number of shares of the corporation, which are owned by the stockholder of record and by the beneficial owner, if any, on whose behalf the proposal is made, (iv) any material interest of the stockholder of record and the beneficial owner, if any, on whose behalf the proposal is made in such business, and (v) any other information that is required by law to be provided by the stockholder in his or her capacity as a proponent of a stockholder proposal. Notwithstanding anything in these bylaws to the contrary, no business shall be conducted at an annual meeting except in accordance with the procedures set forth in this Section 2.6. The chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the procedures prescribed by the bylaws, and, if he or she should so determine, he or she shall so declare to the meeting and the defective nomination shall be disregarded. Notwithstanding the 4 foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. 2.7 Manner of Giving Notice; Affidavit of Notice. -------------------------------------------- Written notice of any meeting of stockholders, if mailed, is given when deposited in the United States mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. An affidavit of the secretary or an assistant secretary or of the transfer agent of the corporation that the notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. If mailed, such notice shall be deemed to be given when deposited in the mail, postage prepaid, directed to the stockholder at his address as it appears on the records of the corporation. 2.8 Quorum. ------ The holders of a majority of the stock issued and outstanding and entitled to vote thereat, present in person or represented by proxy, shall constitute a quorum at all meetings of the stockholders for the transaction of business except as otherwise provided by statute or by the certificate of incorporation. If, however, such quorum is not present or represented at any meeting of the stockholders, then either (a) the chairman of the meeting or (b) the stockholders entitled to vote thereat, present in person or represented by proxy, shall have power to adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present or represented. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. 2.9 Adjourned Meeting; Notice. ------------------------- When a meeting is adjourned to another time or place, unless these bylaws otherwise require, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the corporation may transact any business that might have been transacted at the original meeting. If the adjournment is for more than thirty (30) days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. 2.10 Conduct of Business. ------------------- The chairman of any meeting of stockholders shall determine the order of business and the procedure at the meeting, including such regulation of the manner of voting and the conduct of business. 5 2.11 Voting. ------ The stockholders entitled to vote at any meeting of stockholders shall be determined in accordance with the provisions of Section 2.14 of these bylaws, subject to the provisions of Sections 217 and 218 of the General Corporation Law of Delaware (relating to voting rights of fiduciaries, pledgors and joint owners of stock and to voting trusts and other voting agreements). Except as provided in the certificate of incorporation, each stockholder shall be entitled to one vote for each share of capital stock held by such stockholder. 2.12 Waiver of Notice. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in any written waiver of notice unless so required by the certificate of incorporation or these bylaws. 2.13 No Stockholder Action by Written Consent Without a Meeting Following --------------------------------------------------------------------- Initial Public Offering. ------- --------------- Any action required to be taken at any annual or special meeting of stockholders of the corporation, or any action that may be taken at any annual or special meeting of such stockholders, must be taken at an annual or special meeting of stockholders of the corporation, with prior notice and with a vote, and may not be taken by a consent in writing. 2.14 Record Date for Stockholder Notice; Voting. ------------------------------------------ In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than sixty (60) nor less than ten (10) days before the date of such meeting, nor more than sixty (60) days prior to any other action. If the board of directors does not so fix a record date: 6 (i) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. (ii) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board of directors adopts the resolution relating thereto. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the board of directors may fix a new record date for the adjourned meeting. 2.15 Proxies. ------- Each stockholder entitled to vote at a meeting of stockholders may authorize another person or persons to act for him by a written proxy, signed by the stockholder and filed with the secretary of the corporation, but no such proxy shall be voted or acted upon after three (3) years from its date, unless the proxy provides for a longer period. A proxy shall be deemed signed if the stockholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder's attorney-in-fact. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of Section 212(c) of the General Corporation Law of Delaware. ARTICLE III DIRECTORS --------- 3.1 Powers. ------ Subject to the provisions of the General Corporation Law of Delaware and any limitations in the certificate of incorporation or these bylaws relating to action required to be approved by the stockholders or by the outstanding shares, the business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of the board of directors. 3.2 Number of Directors. ------------------- The authorized number of directors shall consist of nine (9) persons until changed by a proper amendment of this Section 3.2. No reduction of the authorized number of directors shall have the effect of removing any director before that director's term of office expires. 7 3.3 Election, Qualification and Term of Office of Directors. ------------------------------------------------------- The board of directors shall be divided into three classes, as nearly equal in number as possible with the term of office of the first class to expire at the 2000 annual meeting of stockholders or any special meeting in lieu thereof, the term of office of the second class to expire at the 2001 annual meeting of stockholders or any special meeting in lieu thereof and the term of office of the third class to expire at the 2002 annual meeting of stockholders or any special meeting in lieu thereof. At each annual meeting of stockholders or special meeting in lieu thereof following such initial classification, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of the stockholders or special meeting in lieu thereof after their election and until their successors are duly elected and qualified. The foregoing provisions shall become effective only when the corporation becomes a listed corporation within the meaning of Section 301.5 of the California Corporations Code. Directors need not be stockholders unless so required by the certificate of incorporation or these bylaws, wherein other qualifications for directors may be prescribed. Subject to the rights of the holders of any series of Preferred Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies in the board of directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled only by a majority vote of the directors then in office even though less than a quorum, or by a sole remaining director. In the event of any increase or decrease in the authorized number of directors, (a) each director then serving as such shall nevertheless continue as a director of the class of which he or she is a member until the expiration of his or her current term or his or her prior death, retirement, removal or resignation and (b) the newly created or eliminated directorships resulting from such increase or decrease shall if reasonably possible be apportioned by the board of directors among the three classes of directors so as to ensure that no one class has more than one director more than any other class. To the extent reasonably possible, consistent with the foregoing rule, any newly created directorships shall be added to those classes whose terms of office are to expire at the latest dates following such allocation and newly eliminated directorships shall be subtracted from those classes whose terms of office are to expire at the earliest dates following such allocation, unless otherwise provided for from time to time by resolution adopted by a majority of the directors then in office, although less than a quorum. In the event of a vacancy in the board of directors, the remaining directors, except as otherwise provided by law, may exercise the powers of the full board of directors until the vacancy is filled. Notwithstanding the foregoing, each director shall serve until his or her successor is duly elected and qualified or until his or her death, resignation or removal. No decrease in the number of directors constituting the board of directors shall shorten the term of any incumbent director. Elections of directors need not be by written ballot. 8 There shall be no right with respect to shares of stock of the corporation to cumulate votes in the election of directors. Any director may resign at any time upon notice given in writing or by electronic transmission to the corporation. For purposes of these bylaws, the term "electronic transmission" means any form of communication, not directly involving the physical transmission of paper, that creates a record that may be retained, retrieved and reviewed by a recipient thereof, and that may be directly reproduced in paper form by such a recipient through an automated process. 3.4 Place of Meetings; Meetings by Telephone. ---------------------------------------- The board of directors of the corporation may hold meetings, both regular and special, either within or outside the State of Delaware. Unless otherwise restricted by the certificate of incorporation or these bylaws, members of the board of directors, or any committee designated by the board of directors, may participate in a meeting of the board of directors, or any committee, by means of conference telephone or other communications equipment by means of which all persons participating in the meeting can hear each other, and such participation in a meeting shall constitute presence in person at the meeting. 3.5 Regular Meetings. ---------------- Regular meetings of the board of directors may be held without notice at such time and at such place as shall from time to time be determined by the board. 3.6 Special Meetings; Notice. ------------------------ Special meetings of the board for any purpose or purposes may be called at any time by the chairman of the board, the president, any vice president, the secretary or any two (2) directors. Notice of the time and place of special meetings shall be delivered personally or by telephone to each director or sent by first-class mail or telegram, charges prepaid, addressed to each director at that director's address as it is shown on the records of the corporation. If the notice is mailed, it shall be deposited in the United States mail at lest four (4) days before the time of the holding of the meeting. If the notice is delivered personally or by telephone or by telegram, it shall be delivered personally or by telephone or to the telegraph company at least forty-eight (48) hours before the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated either to the director or to a person at the office of the director who the person giving the notice has reason to believe will promptly communicate it to the director. The notice need not specify the purpose or the place of the meeting, if the meeting is to be held at the principal executive office of the corporation. 9 3.7 Quorum. ------ At all meetings of the board of directors, a majority of the authorized number of directors shall constitute a quorum for the transaction of business and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board of directors, except as may be otherwise specifically provided by statute or by the certificate of incorporation. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for that meeting. 3.8 Waiver of Notice. ---------------- Whenever notice is required to be given under any provision of the General Corporation Law of Delaware or of the certificate of incorporation or these bylaws, a written waiver thereof, signed by the person entitled to notice, or a waiver by electronic transmission by the person entitled to notice, whether before or after the time stated therein, shall be deemed equivalent to notice. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the directors, or members of a committee of directors, need be specified in any written waiver of notice or any waiver by electronic transmission unless so required by the certificate of incorporation or these bylaws. If a quorum is not present at any meeting of the board of directors, then the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. 3.9 Board Action by Written Consent Without a Meeting. ------------------------------------------------- Unless otherwise restricted by the certificate of incorporation or these bylaws, any action required or permitted to be taken at any meeting of the board of directors, or of any committee thereof, may be taken without a meeting if all members of the board or committee, as the case may be, consent thereto in writing or by electronic transmission and the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the board or committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form. Written consents representing actions taken by the board or committee may be executed by telex, telecopy or other facsimile transmission, and such facsimile shall be valid and binding to the same extent as if it were an original. 10 3.10 Fees and Compensation of Directors. ---------------------------------- Unless otherwise restricted by the certificate of incorporation or these bylaws, the board of directors shall have the authority to fix the compensation of directors. No such compensation shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. 3.11 Approval of Loans to Officers. ----------------------------- The corporation may lend money to, or guarantee any obligation of, or otherwise assist any officer or other employee of the corporation or of its subsidiary, including any officer or employee who is a director of the corporation or its subsidiary, whenever, in the judgment of the directors, such loan, guaranty or assistance may reasonably be expected to benefit the corporation. The loan, guaranty or other assistance may be with or without interest and may be unsecured, or secured in such manner as the board of directors shall approve, including, without limitation, a pledge of shares of stock of the corporation. Nothing in this section contained shall be deemed to deny, limit or restrict the powers of guaranty or warranty of the corporation at common law or under any statute. 3.12 Removal of Directors. -------------------- The holders of a majority of the shares then entitled to vote at an election of directors may remove, only with cause, a director or directors of the corporation. No reduction in the authorized number of directors shall have the effect of removing any director prior to the expiration of such director's term of office. 3.13 Chairman of the Board of Directors. ---------------------------------- The corporation may also have, at the discretion of the board of directors, a chairman of the board of directors who shall not be considered an officer of the corporation. ARTICLE IV COMMITTEES ---------- 4.1 Committees of Directors. ----------------------- The board of directors may, by resolution passed by a majority of the whole board, designate one or more committees, with each committee to consist of one or more of the directors of the corporation. The board may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. In the absence or disqualification of a member of a committee, the member or members thereof present at any meeting and not disqualified 11 from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in the place of any such absent or disqualified member. Any such committee, to the extent provided in the resolution of the board of directors or in the bylaws of the corporation, shall have and may exercise all the powers and authority of the board of directors in the management of the business and affairs of the corporation, and may authorize the seal of the corporation to be affixed to all papers that may require it; but no such committee shall have the power or authority to (i) amend the certificate of incorporation (except that a committee may, to the extent authorized in the resolution or resolutions providing for the issuance of shares of stock adopted by the board of directors as provided in Section 151(a) of the General Corporation Law of Delaware, fix the designations and any of the preferences or rights of such shares relating to dividends, redemption, dissolution, any distribution of assets of the corporation or the conversion into, or the exchange of such shares for, shares of any other class or classes or any other series of the same or any other class or classes of stock of the corporation), (ii) adopt an agreement of merger or consolidation under Sections 251 or 252 of the General Corporation Law of Delaware, (iii) recommend to the stockholders the sale, lease or exchange of all or substantially all of the corporation's property and assets, (iv) recommend to the stockholders a dissolution of the corporation or a revocation of a dissolution, or (v) amend the bylaws of the corporation; and, unless the board resolution establishing the committee, the bylaws or the certificate of incorporation expressly so provide, no such committee shall have the power or authority to declare a dividend, to authorize the issuance of stock, or to adopt a certificate of ownership and merger pursuant to Section 253 of the General Corporation Law of Delaware. 4.2 Committee Minutes. ----------------- Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. 4.3 Meetings and Action of Committees. --------------------------------- Meetings and actions of committees shall be governed by, and held and taken in accordance with, the provisions of Article III of these bylaws, Section 3.4 (place of meetings and meetings by telephone), Section 3.5 (regular meetings), Section 3.6 (special meetings and notice), Section 3.7 (quorum), Section 3.8 (waiver of notice) and Section 3.10 (action without a meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the board of directors and its members; provided, however, that the time of regular meetings of committees may also be called by resolution of the board of directors and that notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The board of directors may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. ARTICLE V 12 OFFICERS -------- 5.1 Officers. -------- The officers of the corporation shall be a chief executive officer, a president, a secretary, and a chief financial officer. The corporation may also have, at the discretion of the board of directors, one or more vice presidents, one or more assistant secretaries, one or more assistant treasurers, and any such other officers as may be appointed in accordance with the provisions of Section 5.3 of these bylaws. Any number of offices may be held by the same person. 5.2 Appointment of Officers. ----------------------- The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Sections 5.3 or 5.5 of these bylaws, shall be chosen by the board of directors, subject to the rights, if any, of an officer under any contract of employment. 5.3 Subordinate Officers. -------------------- The board of directors may appoint, or empower the chief executive officer or the president to appoint, such other officers and agents as the business of the corporation may require, each of whom shall hold office for such period, have such authority, and perform such duties as are provided in these bylaws or as the board of directors may from time to time determine. 5.4 Removal and Resignation of Officers. ----------------------------------- Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by an affirmative vote of the majority of the board of directors at any regular or special meeting of the board or, except in the case of an officer chosen by the board of directors, by any officer upon whom such power of removal may be conferred by the board of directors. Any officer may resign at any time by giving written notice to the corporation. Any resignation shall take effect at the date of the receipt of that notice or at any later time specified in that notice; and, unless otherwise specified in that notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the corporation under any contract to which the officer is a party. 5.5 Vacancies in Offices. -------------------- 13 Any vacancy occurring in any office of the corporation shall be filled by the board of directors. 5.6 Chief Executive Officer. ----------------------- Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board, the chief executive officer of the corporation shall, subject to the control of the board of directors, have general supervision, direction and control of the business and officers of the corporation. The chief executive officer shall preside at all meetings of the stockholders and, in the absence or nonexistence of a chairman of the board, at all meetings of the board of directors. The chief executive officer shall have the general powers and duties of management usually vested in the office of chief executive officer of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.7 President. --------- Subject to such supervisory powers, if any, as may be given by the board of directors to the chairman of the board or the chief executive officer, the president of the corporation shall have general supervision, direction and control of the business and officers of the corporation. The president shall have the general powers and duties of management usually vested in the office of president of a corporation and shall have such other powers and duties as may be prescribed by the board of directors or these bylaws. 5.8 Vice Presidents. --------------- In the absence or disability of the chief executive officer and president, the vice presidents, if any, in order of their rank as fixed by the board of directors or, if not ranked, a vice president designated by the board of directors, shall perform all the duties of the president and when so acting shall have all the powers of, and be subject to all the restrictions upon, the president. The vice presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the board of directors, these bylaws, the president or the chairman of the board. 5.9 Secretary. --------- The secretary shall keep or cause to be kept, at the principal executive office of the corporation or at such other place as the board of directors may direct, a book of minutes of all meetings and actions of directors, committees of directors, and stockholders. The minutes shall show the time and place of each meeting, the names of those present at directors' meetings or committee meetings, the number of shares present or represented at stockholders' meetings, and the proceedings thereof. The secretary shall keep, or cause to be kept, at the principal executive office of the corporation or at the office of the corporation's transfer agent or registrar, as 14 determined by resolution of the board of directors, a share register, or a duplicate share register, showing the names of all stockholders and their addresses, the number and classes of shares held by each, the number and date of certificates evidencing such shares, and the number and date of cancellation of every certificate surrendered for cancellation. The secretary shall give, or cause to be given, notice of all meetings of the stockholders and of the board of directors required to be given by law or by these bylaws. The secretary shall keep the seal of the corporation, if one be adopted, in safe custody and shall have such other powers and perform such other duties as may be prescribed by the board of directors or by these bylaws. 5.10 Chief Financial Officer. ----------------------- The chief financial officer shall keep and maintain, or cause to be kept and maintained, adequate and correct books and records of accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings, and shares. The books of account shall at all reasonable times be open to inspection by any director. The chief financial officer shall deposit all moneys and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the board of directors. The chief financial officer shall disburse the funds of the corporation as may be ordered by the board of directors, shall render to the president and directors, whenever they request it, an account of all his or her transactions as chief financial officer and of the financial condition of the corporation, and shall have other powers and perform such other duties as may be prescribed by the board of directors or by the bylaws. 5.11 Representation of Shares of Other Corporations. ---------------------------------------------- The chairman of the board, the chief executive officer, the president, any vice president, the chief financial officer, the secretary or any assistant secretary of this corporation, or any other person authorized by the board of directors or the chief executive officer or the president or a vice president, is authorized to vote, represent, and exercise on behalf of this corporation all rights incident to any and all shares of any other corporation or corporations standing in the name of this corporation. The authority granted herein may be exercised either by such person directly or by any other person authorized to do so by proxy or power of attorney duly executed by such person having the authority. 15 5.12 Authority and Duties of Officers. -------------------------------- In addition to the foregoing authority and duties, all officers of the corporation shall respectively have such authority and perform such duties in the management of the business of the corporation as may be designated from time to time by the board of directors or the stockholders. ARTICLE VI INDEMNIFICATION OF DIRECTORS, OFFICERS, --------------------------------------- EMPLOYEES AND OTHER AGENTS -------------------------- 6.1 Indemnification of Directors and Officers. ----------------------------------------- The corporation shall, to the maximum extent and in the manner permitted by the General Corporation Law of Delaware, indemnify each of its directors and officers against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.1, a "director" or "officer" of the corporation includes any person (i) who is or was a director or officer of the corporation, (ii) who is or was serving at the request of the corporation as a director or officer of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was a director or officer of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.2 Indemnification of Others. ------------------------- The corporation shall have the power, to the extent and in the manner permitted by the General Corporation Law of Delaware, to indemnify each of its employees and agents (other than directors and officers) against expenses (including attorneys' fees), judgments, fines, settlements, and other amounts actually and reasonably incurred in connection with any proceeding, arising by reason of the fact that such person is or was an agent of the corporation. For purposes of this Section 6.2, an "employee" or "agent" of the corporation (other than a director or officer) includes any person (i) who is or was an employee or agent of the corporation, (ii) who is or was serving at the request of the corporation as an employee or agent of another corporation, partnership, joint venture, trust or other enterprise, or (iii) who was an employee or agent of a corporation which was a predecessor corporation of the corporation or of another enterprise at the request of such predecessor corporation. 6.3 Payment of Expenses in Advance. ------------------------------ Expenses incurred in defending any action or proceeding for which indemnification is required pursuant to Section 6.1 or for which indemnification is 16 permitted pursuant to Section 6.2 following authorization thereof by the board of directors shall be paid by the corporation in advance of the final disposition of such action or proceeding upon receipt of an undertaking by or on behalf of the indemnified party to repay such amount if it shall ultimately be determined that the indemnified party is not entitled to be indemnified as authorized in this Article 6. 6.4 Indemnity Not Exclusive. ----------------------- The indemnification provided by this Article 6 shall not be deemed exclusive of any other rights which those seeking indemnification may be entitled under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office, to the extent that additional rights to indemnification are authorized in the certificate of incorporation. 6.5 Insurance. --------- The corporation may purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of the General Corporation Law of Delaware. 6.6 Conflicts. --------- No indemnification or advance shall be made under this Article 6, except where such indemnification or advance is mandated by law or the order, judgment or decree of any court of competent jurisdiction, in any circumstance where it appears: (i) That it would be inconsistent with a provision of the certificate of incorporation, these bylaws, a resolution of the stockholders or an agreement in effect at the time of the accrual of the alleged cause of the action asserted in the proceeding in which the expenses were incurred or other amounts were paid, which prohibits or otherwise limited indemnification; or (ii) That it would be inconsistent with any condition expressly imposed by a court in approving a settlement. 17 ARTICLE VII RECORDS AND REPORTS ------------------- 7.1 Maintenance and Inspection of Records. ------------------------------------- The corporation shall, either at its principal executive office or at such place or places as designated by the board of directors, keep a record of its shareholders listing their names and addresses and the number and class of shares held by each shareholder, a copy of these bylaws as amended to date, accounting books, and other records. Any stockholder of record, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose the corporation's stock ledger, a list of its stockholders, and its other books and records and to make copies or extracts therefrom. A proper purpose shall mean a purpose reasonably related to such person's interest as a stockholder. In every instance where an attorney or other agent is the person who seeks the right to inspection, the demand under oath shall be accompanied by a power of attorney or such other writing that authorizes the attorney or other agent to so act on behalf of the stockholder. The demand under oath shall be directed to the corporation at its registered office in Delaware or at its principal place of business. 7.2 Inspection by Directors. ----------------------- Any director shall have the right to examine the corporation's stock ledger, a list of its stockholders, and its other books and records for a purpose reasonably related to his position as a director. The Court of Chancery is hereby vested with the exclusive jurisdiction to determine whether a director is entitled to the inspection sought. The Court may summarily order the corporation to permit the director to inspect any and all books and records, the stock ledger, and the stock list and to make copies or extracts therefrom. The Court may, in its discretion, prescribe any limitations or conditions with reference to the inspection, or award such other and further relief as the Court may deem just and proper. 7.3 Annual Statement to Stockholders. -------------------------------- The board of directors shall present at each annual meeting, and at any special meeting of the stockholders when called for by the vote of the stockholders, a full and clear statement of the business and condition of the corporation. 18 ARTICLE VII GENERAL MATTERS --------------- 8.1 Checks. ------ From time to time, the board of directors shall determine by resolution which person or persons may sign or endorse all checks, drafts, other orders for payment of money, notes or other evidences of indebtedness that are issued in the name of or payable to the corporation, and only the persons so authorized shall sign or endorse those instruments. 8.2 Execution of Corporate Contracts and Instruments. ------------------------------------------------ The board of directors, except as otherwise provided in these bylaws, may authorize any officer or officers, or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation; such authority may be general or confined to specific instances. Unless so authorized or ratified by the board of directors or within the agency power of an officer, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or for any amount. 8.3 Stock Certificates; Partly Paid Shares. -------------------------------------- The shares of a corporation shall be represented by certificates, provided that the board of directors of the corporation may provide by resolution or resolutions that some or all of any or all classes or series of its stock shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the corporation. Notwithstanding the adoption of such a resolution by the board of directors, every holder of stock represented by certificates and upon request every holder of uncertificated shares shall be entitled to have a certificate signed by, or in the name of the corporation by the chairman or vice-chairman of the board of directors, or the chief executive officer or the president or vice- president, and by the chief financial officer or an assistant treasurer, or the secretary or an assistant secretary of such corporation representing the number of shares registered in certificate form. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if he were such officer, transfer agent or registrar at the date of issue. The corporation may issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor. Upon the face or back of each stock certificate issued to represent any such partly paid shares, upon the books and records of the corporation in the case of uncertificated partly paid shares, the 19 total amount of the consideration to be paid therefor and the amount paid thereon shall be stated. Upon the declaration of any dividend on fully paid shares, the corporation shall declare a dividend upon partly paid shares of the same class, but only upon the basis of the percentage of the consideration actually paid thereon. 8.4 Special Designation on Certificates. ----------------------------------- If the corporation is authorized to issue more than one class of stock or more than one series of any class, then the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate that the corporation shall issue to represent such class or series of stock; provided, however, that, except as otherwise provided in Section 202 of the General Corporation Law of Delaware, in lieu of the foregoing requirements there may be set forth on the face or back of the certificate that the corporation shall issue to represent such class or series of stock a statement that the corporation will furnish without charge to each stockholder who so requests the powers, the designations, the preferences, and the relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. 8.5 Lost Certificates. ----------------- Except as provided in this Section 8.5, no new certificates for shares shall be issued to replace a previously issued certificate unless the latter is surrendered to the corporation and canceled at the same time. The corporation may issue a new certificate of stock or uncertificated shares in the place of any certificate theretofore issued by it, alleged to have been lost, stolen or destroyed, and the corporation may require the owner of the lost, stolen or destroyed certificate, or his legal representative, to give the corporation a bond sufficient to indemnify it against any claim that may be made against it on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate or uncertificated shares. 8.6 Construction; Definitions. ------------------------- Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the Delaware General Corporation Law shall govern the construction of these bylaws. Without limiting the generality of this provision, the singular number includes the plural, the plural number includes the singular, and the term "person" includes both a corporation and a natural person. 8.7 Dividends. --------- The directors of the corporation, subject to any restrictions contained in the certificate of incorporation, may declare and pay dividends upon the shares of its capital 20 stock pursuant to the General Corporation Law of Delaware. Dividends may be paid in cash, in property, or in shares of the corporation's capital stock. The directors of the corporation may set apart out of any of the funds of the corporation available for dividends a reserve or reserves for any proper purpose and may abolish any such reserve. Such purposes shall include but not be limited to equalizing dividends, repairing or maintaining any property of the corporation, and meeting contingencies. 8.8 Fiscal Year. ----------- The fiscal year of the corporation shall be fixed by resolution of the board of directors and may be changed by the board of directors. 8.9 Seal. ---- The corporation may have a corporate seal, which shall be adopted and which may be altered by the board of directors, and may use the same by causing it or a facsimile thereof, to be impressed or affixed or in any other manner reproduced. 8.10 Transfer of Stock. ----------------- Upon surrender to the corporation or the transfer agent of the corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignation or authority to transfer, it shall be the duty of the corporation to issue a new certificate to the person entitled thereto, cancel the old certificate, and record the transaction in its books. 8.11 Stock Transfer Agreements. ------------------------- The corporation shall have power to enter into and perform any agreement with any number of shareholders of any one or more classes of stock of the corporation to restrict the transfer of shares of stock of the corporation of any one or more classes owned by such stockholders in any manner not prohibited by the General Corporation Law of Delaware. 8.12 Registered Stockholders. ----------------------- The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, shall be entitled to hold liable for calls and assessments the person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of another person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. 21 ARTICLE IX AMENDMENTS ---------- The bylaws of the corporation may be adopted, amended or repealed by the stockholders entitled to vote; provided, however, that the corporation may, in its certificate of incorporation, confer the power to adopt, amend or repeal bylaws upon the directors. The fact that such power has been so conferred upon the directors shall not divest the stockholders of the power, nor limit their power to adopt, amend or repeal bylaws. 22 CERTIFICATE OF ADOPTION OF AMENDED AND RESTATED BYLAWS OF NORTHPOINT COMMUNICATIONS GROUP, INC. The undersigned hereby certifies that he is the duly elected, qualified, and acting Secretary of NorthPoint Communications Group, Inc. (the "Corporation") and that the foregoing Amended and Restated Bylaws, comprising twenty-one (21) pages, were adopted as the Amended and Restated Bylaws of the Corporation on July 31, 2000, by the Board of Directors of the Corporation by a unanimous written consent dated July 31, 2000. IN WITNESS WHEREOF, the undersigned has hereunto set his hand and affixed the corporate seal this 31st day of July, 2000. /s/ Steven J. Gorosh -------------------- Steven J. Gorosh, Secretary EX-10.38 3 0003.txt EMPLOYMENT AGREEMENT EXHIBIT 10.38 EMPLOYMENT AGREEMENT -------------------- This EMPLOYMENT AGREEMENT, made as of June 1, 2000 (the "Effective Date"), is entered into by and between NorthPoint Communications, Inc. (the "Company") and Michael Malaga (the "Executive"). WHEREAS, the Company and Executive wish to enter into a formal employment agreement that shall govern the terms and conditions of Executive's employment with the Company and shall provide certain severance and other benefits for Executive in the event that his employment should terminate. WHEREAS, the Executive is agreeing to abide by the restrictive covenants contained herein and is foregoing other career opportunities in reliance on this Employment Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. Definitions A. Target Bonus. "Target Bonus" means the target annual bonus for Executive ------------ during in any year or, if Executive is entitled to a bonus under an individual written agreement with the Company, the annual bonus to which Executive is entitled thereunder. B. Base Salary. "Base Salary" means the greater of the annual rate of base ----------- salary in effect for Executive at the time of Executive's Qualifying Termination or the annual rate of base salary in effect for Executive immediately before the Change in Control. C. Cause. Termination for "Cause" means the following: (i) Executive's ------ conviction of a felony or any crime of dishonesty; (ii) Executive's commission of any act of fraud with respect to the Company; (iii) any intentional misconduct by Executive intended to have a materially adverse effect upon the Company's business; (iv) Executive's repeated failure to satisfactorily perform his job duties; (v) an intentional breach by Executive of any of Executive's fiduciary obligations as an officer or director of the Company or a breach of this Employment Agreement or any other agreement with the Company that has a materially adverse effect upon the Company; or (vi) Executive's death or Permanent Disability. D. Change in Control. "Change in Control" shall have the meaning set forth ----------------- in the Common Stock Purchase Agreement and Amendment to Common Stock Purchase Agreement attached as Exhibit A hereto. --------- E. Change of Employment Circumstances. "Change of Employment Circumstances" ---------------------------------- means (i) a material reduction in Executive's level of duties or responsibilities or the nature or scope of Executive's functions, or (ii) a reduction in Executive's base salary or a reduction in Executive's total cash compensation (consisting of base salary and target bonus), or (iii) the failure to provide Executive with employee benefits (including medical/dental, disability and life insurance) that are substantially equivalent to the benefits provided to Executive immediately before a Change in Control, or (iv) a relocation of Executive's principal place of employment by more than thirty-five miles away (or any requirement that Executive spend more than two days a week at any location more than thirty- five miles away), or (v) the breach of the terms of any compensation agreement or arrangement between the Company and Executive, or (vi) the repudiation or failure by the Company or its successor to acknowledge (upon Executive's written request) or to comply with any of its obligations under this Employment Agreement. F. Comparable Position. A "Comparable Position" means a position with a ------------------- successor to part or all of the business of the Company, if the terms of such position do not differ from Executive's prior position with the Company in any manner that would constitute a Change of Employment Circumstances, assuming that the terms of such new position with the successor remained materially the same as the terms of Executive's employment with the Company. G. Final Determination. "Final Determination" means an audit adjustment by ------------------- the Internal Revenue Service that is either (i) agreed to by both Executive (or his estate) and the Company (such agreement by the Company to be not unreasonably withheld) or (ii) sustained by a court of competent jurisdiction in a decision with which Executive and the Company concur (such concurrence by the Company to be not unreasonably withheld) or with respect to which the period within which an appeal may be filed has lapsed without a notice of appeal being filed. H. Period of Coverage. The "Period of Coverage" means the period commencing ------------------ on the Effective Date and ending upon the date of termination of this Employment Agreement. I. Permanent Disability. "Permanent Disability" shall mean the inability of --------------------- Executive to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. J. Qualifying Termination. "Qualifying Termination" shall mean a termination of Executive's employment with the Company either (i) by the Company for any reason other than for Cause, or (ii) by Executive, following the occurrence of a Change in Control that occurs during the Period of Coverage which results in a Change of Employment Circumstances, provided that Executive properly executes, and does not revoke or attempt to revoke, a Release of claims against the Company, its affiliates and their employees and agents in the form attached as Exhibit B (the "Release"). A Qualifying --------- Termination shall be deemed not to have occurred where Executive is offered a Comparable Position with the new corporate entity subsequent to a Change in Control, whether or not Executive accepts such position. If Executive is offered a position which is not a Comparable Position and accepts such position, then Executive will be treated as if he had been offered and accepted a Comparable Position. 2 2. Job Duties. Executive shall serve as the Chief International Officer of the Company. In such position, Executive's duties shall include serving as the Chief Executive Officer of VersaPoint N.V. 3. Current Stock and Benefits. A. Founder's Stock. Executive purchased common stock of the Company on --------------- June 4, 1997 (the "Initial Purchase"). The Common Stock Purchase Agreement between the Company and Executive dated June 4, 1997 and the Amendment to Common Stock Purchase Agreement between the Company and Executive dated August 13, 1997 that underlie the Initial Purchase (collectively, the "Purchase Agreement") are attached hereto as Exhibit A. --------- B. Cash Compensation. Executive is paid a base salary at the annual ----------------- rate of Four Hundred Thousand Dollars ($400,000.00), to be paid in accordance with the Company's standard payroll policy. Such base salary may be increased by the Board of Directors in its sole discretion. C. Bonus. Executive shall be eligible to receive an annual target ----- bonus of up to a maximum of one hundred percent (100%) of his annual base salary. Payment of the bonus shall be at the discretion of the Compensation Committee of the Company's Board of Directors and shall be based on the achievement of objectives agreed to by the Compensation Committee of the Board of Directors. In future years, payment of the bonus shall be at the discretion of the Compensation Committee of the Company's Board of Directors and shall be based on the achievement of objectives as determined by such Committee. D. Other Employee Benefits. Executive shall, throughout the Period of ----------------------- Coverage, be eligible to participate in all group term life insurance plans, group health plans, accidental death and dismemberment plans and short-term and long-term disability programs, sick leave, vacation leave and other executive perquisites which are made available to the Company's executive and/or other Company employees. 4. Additional Compensation. In addition to the compensation enumerated above, ----------------------- and in return for the consideration contained herein, the Company has agreed to provide the Executive with the compensation set forth in subsections A, B and C below. A. Supplemental Life Insurance. The Company will provide Executive with --------------------------- supplemental group term life insurance coverage of $500,000 during the Period of Coverage. B. Financial Counseling Assistance. The Company will provide Executive ------------------------------- with annual financial counseling during the Period of Coverage by a provider selected by the Executive. In no event, however, shall the Company provide Executive with financial counseling in an amount in excess of $10,000 per year. 3 C. Change in Control. ----------------- (1) Change in Control Protection. Notwithstanding anything to the contrary in the Initial Purchase or Purchase Agreement, upon (i) a Change in Control of the Company, and (ii) a Qualifying Termination of --- the Executive, the Executive shall be entitled to the following benefits: a) Release of Restrictions. The restrictions in Sections 3(a) and ----------------------- 3(b) of the Purchase Agreement (the "Restrictions"), to the extent not otherwise released for the shares of Company common stock underlying the Initial Purchase, will immediately be released for all the shares of Company common stock underlying the Initial Purchase. b) Installment Sum Payment of Salary and Bonus. Beginning within ------------------------------------------- ten (10) business days after Qualifying Termination (or, if later, the last day of any period during which the Release may be revoked by Executive), the Company shall make twelve (12) equal monthly cash payments to Executive, subject to any mandatory tax withholding, equal to one-twelfth (1/12) times the sum of Executive's Annual Base Salary and Executive's Target Bonus. c) Continuing Benefit Coverage. The Company will, at normal --------------------------- employee rates, provide Executive and, to the extent available before the Qualifying Termination, Executive's eligible dependents with coverage under the Company's medical/dental plan, life insurance and accident plan and disability plan until the earlier of (i) one (1) year after the date of Executive's Qualifying Termination or (ii) the first date that Executive is covered under another employer's program which provides substantially the same level of benefit coverage without exclusion for pre-existing conditions. After this period of coverage, Executive (and, if applicable, Executive's eligible dependents) may elect to continue coverage under the Company's group medical/dental plan at Executive's own expense in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and, for purposes of determining the maximum period of COBRA coverage, such maximum period will begin immediately following the end of Company- subsidized coverage. d) Excess Tax Gross-Up Payment. If any compensation payable --------------------------- hereunder, either alone or when aggregated with other compensation payable to Executive, would constitute a parachute payment that would subject Executive to an excise tax under Section 4999 of the Internal Revenue Code, Executive shall be entitled to receive an additional lump sum cash payment, subject to mandatory tax withholding, which, when added to all compensation payable to Executive that constitutes a parachute payment, provides Executive with the same after tax-compensation that he would have received from such parachute payments 4 had none of such compensation constituted a parachute payment (a "Tax Gross-Up"). The procedures for making such payment are set forth in Section 6. (2) Limitation on Release of Restrictions. Notwithstanding anything else ------------------------------------- set forth in this Section 4, if it is reasonably determined by the Company's Board of Directors in good faith, upon consultation with Company management and the Company's independent auditors, that the release of Restrictions on unvested stock upon a Change in Control (to the extent that those Sections provide for acceleration or cash-out that would not otherwise occur under the terms of the instruments evidencing such restricted stock) would preclude accounting for any proposed business combination of the Company as a pooling of interests, and the Board of Directors otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, then, solely to the extent necessary to permit such accounting, such release of Restrictions shall not occur. The previous sentence shall not limit any release of Restrictions of Company common stock that would occur, in absence of this Employment Agreement, under the terms of the Purchase Agreement. (3) Offset of Benefits. The compensation and benefits payable hereunder ------------------ shall not be reduced or offset by any amounts that Executive earns or could earn from any other sources following Executive's Qualifying Termination. However, except to the extent the Company expressly agrees otherwise in writing, if the Company becomes obligated to pay Executive any severance pay or severance benefits under a separate employment or severance agreement or arrangement, the benefits payable hereunder shall be reduced by the amount of benefits payable under such other agreement or arrangement. 5. Restrictive Covenants. A. In return for the consideration contained herein, Executive has agreed to certain restrictive covenants set forth below. During the Period of Coverage, Executive agrees that he shall: (1) devote substantially all of his time and energy to the performance of Executive's duties described herein, except during periods of illness or vacation. (2) not directly or indirectly provide services to or through any person, firm or other entity except the Company, unless otherwise authorized by the Company in writing. (3) not render any services of any kind or character for Executive's own account or for any other person, firm or entity without first obtaining the Company's written consent. 5 B. Notwithstanding the foregoing, Executive shall have the right to perform such incidental services as are necessary in connection with (i) his private, passive investments, but only if Executive is not obligated or required to (and shall not in fact) devote any managerial efforts which interfere with the services required to be performed by him hereunder, (ii) his charitable or community activities or (iii) participation in trade or professional organizations, but only if such incidental services do not significantly interfere with the performance of Executive's services hereunder. 6. Excise Tax Gross-Up Procedures. A. The amount of any such Tax Gross-Up to which Executive becomes entitled under Section 4.C(1)(d), will be determined pursuant to the following: X = Y / (1 - (A + B + C)), where X is the total dollar amount of the Tax Gross-Up payable to Executive; Y is the total Excise Tax (as defined in Internal revenue Code Section 4999) imposed on Executive; A is the Excise Tax rate in effect at the time; B is the highest combined marginal federal income and applicable state income tax rate in effect for Executive, after taking into account the deductibility of state income taxes against federal income taxes to the extent allowable, for the calendar year in which the Tax Gross-Up is paid; and C is the applicable Hospital Insurance (Medicare) Tax Rate in effect for Executive for the calendar year in which the Tax Gross-Up is paid; provided if there is a change in the tax laws after the date hereof that would render the amount determined above insufficient to fully reimburse Executive on an after-tax basis for the amount of any Excise Tax, Executive shall be entitled to such additional amount as may be necessary to provide him with such reimbursement. B. Within ninety (90) days after a determination is made by the Internal Revenue Service or Executive's tax advisor that an item of compensation or benefit payable hereunder constitutes a parachute payment under Code Section 280G for which Executive is liable for an Excise Tax, Executive shall identify the nature of the payment to the Company and submit to the Company the calculation of the Excise Tax attributable to that payment and the Tax Gross-Up to which Executive is entitled with respect to such tax liability. The Company will pay such Tax Gross-Up to Executive (net of all applicable withholding taxes, including any taxes required to be withheld under Code 6 Section 4999) within ten (10) business days after Executive's submission of the calculation of such Excise Tax and the resulting Tax Gross-Up, provided such calculations represent a reasonable interpretation of the applicable law and regulations. C. In the event that Executive's actual Excise Tax liability is determined by a Final Determination to be greater than the Excise Tax liability previously taken into account for purposes of the Tax Gross-Up paid to Executive pursuant to this Section 6, then within ninety (90) days following the Final Determination, Executive shall submit to the Company a new Excise Tax calculation based upon the Final Determination. Within ten (10) business days after receipt of such calculation, the Company shall pay Executive the additional Tax Gross-Up attributable to such excess Excise Tax liability. D. In the event that Executive's actual Excise Tax liability is determined by a Final Determination to be less than the Excise Tax liability previously taken into account for purposes of the Tax Gross-Up paid to Executive pursuant to this Section 6, then Executive shall refund to the Company, promptly upon receipt, any federal or state tax refund attributable to the Excise Tax overpayment. 7. Termination of Employment. A. By Company. The Company may terminate Executive's employment under this ---------- Employment Agreement at any time for any reason, with or without Cause. B. By Executive. Executive may terminate his employment under this ------------ Employment Agreement at any time, for any reason, with or without Cause, by giving the Company at least thirty (30) days prior written notice of such termination. However, such thirty (30) day notice requirement shall not apply if Executive terminates his employment due to a Change in Control. 8. Release of Claims. All compensation and benefits under Section 4 above are in consideration for Executive's execution of the Release, which Release Executive does not subsequently revoke or attempt to revoke. If Executive does not execute such a Release or if Executive attempts to revoke such Release, Executive will not be entitled to any of the benefits provided under this Employment Agreement. 9. Successors and Assigns. The provisions of this Employment Agreement shall inure to the benefit of, and shall be binding upon, the Company, its successors and assigns, and the Executive, the personal representative of his estate and his heirs and legatees; provided, however, Executive may not assign, transfer or delegate his rights or obligations hereunder and any attempt to do so shall be void. 10. Notices. A. Any and all notices, demands or other communications required or desired to be given hereunder by any party shall be in writing and shall be validly given or made to another party if served either personally or, if deposited in the United States mail, 7 certified or registered, postage prepaid, return receipt requested. If such notice, demand or other communication shall be served personally, service shall be conclusively deemed made at the time of such personal service. If such notice, demand or other communication is given by mail, service shall be conclusively deemed made at the time of the receipt by the party to whom such notice, demand or other communication is sent. Any and all notices, demands or other communications shall be delivered to the following address: To the Company: NorthPoint Communications 303 2nd Street San Francisco, CA 94107 Fax: (415) 403-4004 To Executive: Michael W. Malaga 2300 NorthPoint, #105 San Francisco CA 94123 B. Any party hereto may change its address for the purpose of receiving notices, demands and other communications as herein provided by a written notice given in the manner aforesaid to the other party hereto. 11. Waivers. No waiver of any term or provision of this Employment Agreement shall be valid unless such waiver is in writing signed by the party against whom enforcement of the waiver is sought. In the case of the Company, such waiver shall be signed by at least one (1) member of the Company's Board. The waiver of any term or provision of this Employment Agreement shall not apply to any subsequent breach of this Employment Agreement. 12. Governing Document. This Employment Agreement and the Purchase Agreement, and all other exhibits and attachments hereto constitute the entire agreement and understanding of the Company and Executive with respect to the terms and conditions of Executive's employment with the Company and the payment of severance and other benefits, and supersedes all prior and contemporaneous written or verbal agreements and understandings between Executive and the Company relating to such subject matter. Where the terms of the Purchase Agreement conflict with the terms of this Employment Agreement, the terms of this Employment Agreement shall control. Any and all prior agreements, understandings or representations relating to Executive's employment with the Company are hereby terminated and cancelled in their entirety and are of no further force or effect. 13. Governing Law. The provisions of this Employment Agreement shall be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. If any provision of this Employment Agreement as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permitted by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this Employment Agreement, or the enforceability or invalidity of this Employment 8 Agreement as a whole. Should any provision of this Employment Agreement become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Employment Agreement shall continue in full force and effect. 14. Deductions. All amounts paid to Executive hereunder are subject to all withholdings and deductions required by law. 15. Amendment and Termination. This Employment Agreement may be modified, amended or terminated only by a written agreement signed by Executive and an authorized member of the Company's Board. 16. Remedies. All rights and remedies provided pursuant to this Employment Agreement or by law shall be cumulative, and no such right or remedy shall be exclusive of any other. A party may pursue any one or more rights or remedies hereunder or may seek damages or specific performance in the event of another party's breach hereunder or may pursue any other remedy by law or equity, whether or not stated in this Employment Agreement. 17. Arbitration. Executive agrees that any and all disputes that he has with the Company, or any of its employees, which arise out of his employment or under the terms of his employment, shall be resolved through final and binding arbitration, as specified herein. This shall include, without limitation, disputes relating to this Employment Agreement, his employment by the Company or the termination thereof, claims for breach of contract or breach of the covenant of good faith and fair dealing, and any claims of discrimination or other claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the California Fair Employment and Housing Act, the Employee Retirement Income Securities Act, the Racketeer Influenced and Corrupt Organizations Act, or any other federal, state or local law or regulation now in existence or hereinafter enacted and as amended from time to time concerning in any way the subject of his employment with the Company or its termination. The only disputes not covered by this Employment Agreement are the following: (i) claims for benefits under the unemployment insurance or workers' compensation laws, and (ii) claims concerning the validity, infringement or enforceability of any trade secret, patent right, copyright, trademark or any other intellectual property held or sought by the Company or which the Company could otherwise seek; in each of these instances such disputes or claims shall not be subject to arbitration, but rather, shall be resolved pursuant to applicable law. Binding arbitration shall be conducted in the county in which the Company's principal place of business is then located in accordance with the rules and regulations of the American Arbitration Association (AAA). One arbitrator shall be chosen by mutual agreement of the Company and Executive from the AAA Employment Advisory Panel. Each side shall bear its own attorneys' 9 fees; that is, the arbitrator shall not have authority to award attorneys' fees unless a statutory section at issue in the dispute authorizes the award of - ------ attorneys' fees to the prevailing party, in which case the arbitrator has authority to make such award as permitted by the statute in question. Executive understands and agrees that the arbitration shall be instead of any jury trial and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. 18. Counterparts. This Employment Agreement may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first above written. NORTH POINT COMMUNICATIONS, INC. By /s/ J. Peter Wagner -------------------------- Name: J. Peter Wagner Title: Chair of the Compensation Committee of the Board of Directors EXECUTIVE: /s/ Michael W. Malaga ------------------------------ (Signature) Michael W. Malaga ------------------------------ (Print Name) 10 EXHIBIT A 11 EXHIBIT B Dear Mr. Malaga: This letter is provided to confirm the agreement we have reached regarding your separation from employment with NorthPoint Communications, Inc., (the "Company"). We have agreed that your employment with the Company will terminate effective _________________, 200__. In consideration of the benefits to be provided to you pursuant to that certain in Employment Agreement between you and the Company dated May 16, 2000, you agree to the following: A. You fully and forever release and promise not to institute or participate in any legal proceeding against the Company or any of its directors, officers, or employees with respect to any and all claims and causes of action of any nature or kind, which are or may be claimed to exist, through and including the date on which this Agreement is executed by you, including but not limited to, any proceeding arising out of or relating in any way to your employment with the Company or your separation from employment. You should understand that you are forever waiving any rights you may have to pursue any remedies available to you against the Company, including, but not limited to, any employment-related cause of action, any tort or contract claims, any claim for violation of any state, federal or local statute, ordinance or regulation relating to employment or employment discrimination. B. You have agreed to maintain in confidence all information you have regarding the Company, its clients, the circumstances leading to your separation from the Company and the terms of this Agreement, except to the extent you are required by law to make any such disclosure. C. This Agreement between us shall be deemed to have been entered into in the State of California and shall be construed and interpreted in accordance with the laws of this State. It supersedes any and all prior agreements between you and the Company and contains the entire agreement between us. D. You and the Company hereby expressly waive any and all rights and benefits conferred by the provisions of Section 1542 of the Civil Code of the State of California, which states as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. You may have up to ____________ (___) days in which to consider this Agreement and you should review it with an attorney if you so desire. By your signature below, you acknowledge that you have read and understand the terms of this Agreement, and that you are signing it voluntarily and without coercion. You further acknowledge that the waivers you 12 have made in this Agreement are knowing, conscious and made with full appreciation that you are forever foreclosed from pursuing any of the rights so waived. Very truly yours, __________________________ Dated:____________________ By:________________________________ (Name, Title) I hereby accept and agree to the terms and conditions set forth in the above agreement. Dated:_____________________ ___________________________________ (Executive Name) 13 EX-10.39 4 0004.txt ARCHAMBEAU EMPLOYMENT AGREEMENT EXHIBIT 10.39 EMPLOYMENT AGREEMENT -------------------- This EMPLOYMENT AGREEMENT, made as of June 27, 2000 (the "Effective Date"), is entered into by and between NorthPoint Communications, Inc. (the "Company") and Shellye Archambeau (the "Executive"). WHEREAS, the Company and Executive wish to enter into a formal employment agreement that shall govern the terms and conditions of Executive's employment with the Company and shall provide certain severance, stock option and other benefits for Executive in the event that her employment should terminate. WHEREAS, the Executive is agreeing to abide by the restrictive covenants contained herein and is foregoing other career opportunities in reliance on this Employment Agreement, NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. Definitions A. Target Bonus. "Target Bonus" means the target annual bonus for ------------ Executive during in any year or, if Executive is entitled to a bonus under an individual written agreement with the Company, the annual bonus to which Executive is entitled thereunder. B. Base Salary. "Base Salary" means the greater of the annual rate of ----------- base salary in effect for Executive at the time of Executive's Qualifying Termination or the annual rate of base salary in effect for Executive immediately before the Change in Control. C. Cause. Termination for "Cause" means the following: (i) Executive's ------ conviction of a felony or any crime of dishonesty; (ii) Executive's commission of any act of fraud with respect to the Company; (iii) any intentional misconduct by Executive intended to have a materially adverse effect upon the Company's business; (iv) Executive's repeated failure to satisfactorily perform her job duties; (v) an intentional breach by Executive of any of Executive's fiduciary obligations as an officer or director of the Company or a breach of this Employment Agreement or any other agreement with the Company that has a materially adverse effect upon the Company; or (vi) Executive's death or Permanent Disability. D. Change in Control. "Change in Control" shall mean the occurrence of ----------------- any of the following events: (a) Any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 is or becomes the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly or indirectly, of securities of the Company representing 50% or more of the total voting power represented by the Company's then outstanding voting securities; or (b) The stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior thereto continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) at least 50% of the total voting power represented by the voting securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets. E. Change of Employment Circumstances. "Change of Employment ---------------------------------- Circumstances" means (i) a material reduction in Executive's level of duties or responsibilities or the nature or scope of Executive's functions, or (ii) a reduction in Executive's base salary or a reduction in Executive's total cash compensation (consisting of base salary and target bonus), or (iii) the failure to provide Executive with employee benefits (including medical/dental, disability and life insurance) that are substantially equivalent to the benefits provided to Executive immediately before a Change in Control, or (iv) a relocation of Executive's principal place of employment by more than thirty-five miles away (or any requirement that Executive spend more than two days a week at any location more than thirty-five miles away), or (v) the breach of the terms of any compensation agreement or arrangement between the Company and Executive, or (vi) the repudiation or failure by the Company or its successor to acknowledge (upon Executive's written request) or to comply with any of its obligations under this Employment Agreement. F. Comparable Position. A "Comparable Position" means a position with a ------------------- successor to part or all of the business of the Company, if the terms of such position do not differ from Executive's prior position with the Company in any manner that would constitute a Change of Employment Circumstances, assuming that the terms of such new position with the successor remained materially the same as the terms of Executive's employment with the Company. G. Final Determination. "Final Determination" means an audit adjustment ------------------- by the Internal Revenue Service that is either (i) agreed to by both Executive (or her estate) and the Company (such agreement by the Company to be not unreasonably withheld) or (ii) sustained by a court of competent jurisdiction in a decision with which Executive and the Company concur (such concurrence by the Company to be not unreasonably withheld) or with respect to which the period within which an appeal may be filed has lapsed without a notice of appeal being filed. H. Period of Coverage. The "Period of Coverage" means the period ------------------ commencing on the Effective Date and ending upon the date of termination of this Employment Agreement. 2 I. Permanent Disability. "Permanent Disability" shall mean the inability --------------------- of Executive to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment that is expected to result in death or has lasted or can be expected to last for a continuous period of twelve (12) months or more. J. Qualifying Termination. "Qualifying Termination" shall mean a ---------------------- termination of Executive's employment with the Company either (i) by the Company for any reason other than for Cause, or (ii) by Executive, following the occurrence of a Change in Control that occurs during the Period of Coverage which results in a Change of Employment Circumstances, provided that Executive properly executes, and does not revoke or attempt to revoke, a Release of claims against the Company, its affiliates and their employees and agents in the form attached as Exhibit B (the --------- "Release"). A Qualifying Termination shall be deemed not to have occurred where Executive is offered a Comparable Position with the new corporate entity subsequent to a Change in Control, whether or not Executive accepts such position. If Executive is offered a position which is not a Comparable Position and accepts such position, then Executive will be treated as if she had been offered and accepted a Comparable Position. 2. Job Duties. Executive shall serve as the Chief Marketing Officer of the Company and shall, in such capacity, report directly to the Chief Executive Officer. In her capacity as Chief Marketing Officer of the Company, Executive shall devote substantially all of her time and attention to the business and affairs of the Company. 3. Current Stock Options and Benefits. A. Initial Grant. Pursuant to the Amended and Restated NorthPoint ------------- Communications Group, Inc. 1999 Stock Plan (the "Option Plan"), Executive received a grant of stock options on June 27, 2000 (the "Initial Grant"). The Option Agreement between the Company and Executive Agreement that underlies the Initial Grant (the "Option Agreement") is attached hereto as Exhibit A. --------- B. Cash Compensation. Executive is paid a base salary at the annual ----------------- rate of Two Hundred Forty Thousand Dollars ($240,000.00), to be paid in accordance with the Company's standard payroll policy. Such base salary may be increased by the Board of Directors in its sole discretion. C. Bonus. Executive shall be eligible to receive an annual target ----- bonus of up to a maximum of fifty percent (50%) of her annual base salary. Payment of the bonus shall be at the discretion of the Compensation Committee of the Company's Board of Directors and shall be based on the achievement of objectives agreed to by the Compensation Committee of the Board of Directors. In future years, payment of the bonus shall be at the discretion of the Compensation Committee of the Company's Board of Directors and shall be based on the achievement of objectives as determined by such Committee. 3 D. Other Employee Benefits. Executive shall, throughout the Period ----------------------- of Coverage, be eligible to participate in all group term life insurance plans, group health plans, accidental death and dismemberment plans and short-term and long-term disability programs, sick leave, vacation leave and other executive perquisites which are made available to the Company's executive and/or other Company employees. 4. Additional Compensation. In addition to the compensation enumerated above, ----------------------- and in return for the consideration contained herein, the Company has agreed to provide the Executive with the compensation set forth in subsections A, B and C below. A. Supplemental Life Insurance. The Company will provide Executive with --------------------------- supplemental group term life insurance coverage of $500,000 during the Period of Coverage. B. Financial Counseling Assistance. The Company will provide Executive ------------------------------- with annual financial counseling during the Period of Coverage by a provider selected by the Executive. In no event, however, shall the Company provide Executive with financial counseling in an amount in excess of $10,000 per year. C. Change in Control. ----------------- (1) Change in Control Protection. Notwithstanding anything to the ---------------------------- contrary in the Initial Grant or Option Agreement, upon (i) a Change in Control of the Company, and (ii) a Qualifying Termination of the --- Executive, the Executive shall be entitled to the following benefits: a) Acceleration. Executive's Initial Grant, to the extent not ------------- otherwise exercisable for all the shares of Company common stock underlying the Initial Grant, will immediately become exercisable for all the shares of Company common stock underlying the Initial Grant, and may be exercised for any or all of those shares as fully vested shares. All options must be exercised within ninety (90) days of the date of the Qualifying Termination. b) Installment Sum Payment of Salary and Bonus. Beginning ------------------------------------------- within ten (10) business days after a Qualifying Termination (or, if later, the last day of any period during which the Release may be revoked by Executive), the Company shall make twelve (12) equal monthly cash payments to Executive, subject to any mandatory tax withholding, equal to one-twelfth (1/12) times the sum of Executive's Annual Base Salary and Executive's Target Bonus. c) Continuing Benefit Coverage. The Company will, at normal --------------------------- employee rates, provide Executive and, to the extent available before the Qualifying Termination, Executive's eligible dependents with coverage under the Company's medical/dental plan, life insurance and accident plan and 4 disability plan until the earlier of (i) one (1) year after the date of Executive's Qualifying Termination or (ii) the first date that Executive is covered under another employer's program which provides substantially the same level of benefit coverage without exclusion for pre-existing conditions. After this period of coverage, Executive (and, if applicable, Executive's eligible dependents) may elect to continue coverage under the Company's group medical/dental plan at Executive's own expense in accordance with the Consolidated Omnibus Budget Reconciliation Act of 1985, as amended ("COBRA") and, for purposes of determining the maximum period of COBRA coverage, such maximum period will begin immediately following the end of Company- subsidized coverage. d) Excess Tax Gross-Up Payment. If any compensation payable --------------------------- hereunder, either alone or when aggregated with other compensation payable to Executive, would constitute a parachute payment that would subject Executive to an excise tax under Section 4999 of the Internal Revenue Code, Executive shall be entitled to receive an additional lump sum cash payment, subject to mandatory tax withholding, which, when added to all compensation payable to Executive that constitutes a parachute payment, provides Executive with the same after tax-compensation that she would have received from such parachute payments had none of such compensation constituted a parachute payment (a "Tax Gross-Up"). The procedures for making such payment are set forth in Section 6. (2) Limitation on Acceleration. Notwithstanding anything else set -------------------------- forth in this Section 4, if it is reasonably determined by the Company's Board of Directors in good faith, upon consultation with Company management and the Company's independent auditors, that the acceleration of vesting of stock options or restricted stock or the acceleration and cash-out of affiliate options upon a Change in Control (to the extent that those Sections provide for acceleration or cash-out that would not otherwise occur under the terms of the instruments evidencing such options or restricted stock) would preclude accounting for any proposed business combination of the Company as a pooling of interests, and the Board of Directors otherwise desires to approve such a proposed business transaction which requires as a condition to the closing of such transaction that it be accounted for as a pooling of interests, then, solely to the extent necessary to permit such accounting, such acceleration or cash- out shall not occur. The previous sentence shall not limit any acceleration of vesting or cash-out of any option or restricted stock that would occur, in absence of this Employment Agreement, under the terms of the Option Agreement or Option Plan. (3) Offset of Benefits. The compensation and benefits payable ------------------- hereunder shall not be reduced or offset by any amounts that Executive earns or could earn from any other sources following Executive's Qualifying Termination. However, 5 except to the extent the Company expressly agrees otherwise in writing, if the Company becomes obligated to pay Executive any severance pay or severance benefits under a separate employment or severance agreement or arrangement, the benefits payable hereunder shall be reduced by the amount of benefits payable under such other agreement or arrangement. 5. Restrictive Covenants. A. In return for the consideration contained herein, Executive has agreed to certain restrictive covenants set forth below. During the Period of Coverage, Executive agrees that she shall: (1) devote substantially all of her time and energy to the performance of Executive's duties described herein, except during periods of illness or vacation. (2) not directly or indirectly provide services to or through any person, firm or other entity except the Company, unless otherwise authorized by the Company in writing. (3) not render any services of any kind or character for Executive's own account or for any other person, firm or entity without first obtaining the Company's written consent. B. Notwithstanding the foregoing, Executive shall have the right to perform such incidental services as are necessary in connection with (i) her private, passive investments, but only if Executive is not obligated or required to (and shall not in fact) devote any managerial efforts which interfere with the services required to be performed by her hereunder, (ii) her charitable or community activities or (iii) participation in trade or professional organizations, but only if such incidental services do not significantly interfere with the performance of Executive's services hereunder. 6. Excise Tax Gross-Up Procedures. A. The amount of any such Tax Gross-Up to which Executive becomes entitled under Section 4.C(1)(d), will be determined pursuant to the following: X = Y / (1 - (A + B + C)), where X is the total dollar amount of the Tax Gross-Up payable to Executive; Y is the total Excise Tax (as defined in Internal revenue Code Section 4999) imposed on Executive; A is the Excise Tax rate in effect at the time; 6 B is the highest combined marginal federal income and applicable state income tax rate in effect for Executive, after taking into account the deductibility of state income taxes against federal income taxes to the extent allowable, for the calendar year in which the Tax Gross-Up is paid; and C is the applicable Hospital Insurance (Medicare) Tax Rate in effect for Executive for the calendar year in which the Tax Gross-Up is paid; provided if there is a change in the tax laws after the date hereof that would render the amount determined above insufficient to fully reimburse Executive on an after-tax basis for the amount of any Excise Tax, Executive shall be entitled to such additional amount as may be necessary to provide her with such reimbursement B. Within ninety (90) days after a determination is made by the Internal Revenue Service or Executive's tax advisor that an item of compensation or benefit payable hereunder constitutes a parachute payment under Code Section 280G for which Executive is liable for an Excise Tax, Executive shall identify the nature of the payment to the Company and submit to the Company the calculation of the Excise Tax attributable to that payment and the Tax Gross-Up to which Executive is entitled with respect to such tax liability. The Company will pay such Tax Gross-Up to Executive (net of all applicable withholding taxes, including any taxes required to be withheld under Code Section 4999) within ten (10) business days after Executive's submission of the calculation of such Excise Tax and the resulting Tax Gross-Up, provided such calculations represent a reasonable interpretation of the applicable law and regulations. C. In the event that Executive's actual Excise Tax liability is determined by a Final Determination to be greater than the Excise Tax liability previously taken into account for purposes of the Tax Gross-Up paid to Executive pursuant to this Section 6, then within ninety (90) days following the Final Determination, Executive shall submit to the Company a new Excise Tax calculation based upon the Final Determination. Within ten (10) business days after receipt of such calculation, the Company shall pay Executive the additional Tax Gross-Up attributable to such excess Excise Tax liability. D. In the event that Executive's actual Excise Tax liability is determined by a Final Determination to be less than the Excise Tax liability previously taken into account for purposes of the Tax Gross-Up paid to Executive pursuant to this Section 6, then Executive shall refund to the Company, promptly upon receipt, any federal or state tax refund attributable to the Excise Tax overpayment. 7. Termination of Employment. A. By Company. The Company may terminate Executive's employment under ---------- this Employment Agreement at any time for any reason, with or without Cause. 7 B. By Executive. Executive may terminate her employment under this ------------ Employment Agreement at any time, for any reason, with or without Cause, by giving the Company at least thirty (30) days prior written notice of such termination. However, such thirty (30) day notice requirement shall not apply if Executive terminates her employment due to a Change in Control. 8. Release of Claims. All compensation and benefits under Section 4 above are in consideration for Executive's execution of the Release, which Release Executive does not subsequently revoke or attempt to revoke. If Executive does not execute such a Release or if Executive attempts to revoke such Release, Executive will not be entitled to any of the benefits provided under this Employment Agreement. 9. Successors and Assigns. The provisions of this Employment Agreement shall inure to the benefit of, and shall be binding upon, the Company, its successors and assigns, and the Executive, the personal representative of her estate and her heirs and legatees; provided, however, Executive may not assign, transfer or delegate her rights or obligations hereunder and any attempt to do so shall be void. 10. Notices. A. Any and all notices, demands or other communications required or desired to be given hereunder by any party shall be in writing and shall be validly given or made to another party if served either personally or, if deposited in the United States mail, certified or registered, postage prepaid, return receipt requested. If such notice, demand or other communication shall be served personally, service shall be conclusively deemed made at the time of such personal service. If such notice, demand or other communication is given by mail, service shall be conclusively deemed made at the time of the receipt by the party to whom such notice, demand or other communication is sent. Any and all notices, demands or other communications shall be delivered to the following address: To the Company: NorthPoint Communications 303 2nd Street San Francisco, CA 94107 Fax: (415) 403-4004 To Executive: Shellye Archambeau 4016 Purdue Street Dallas, TX 75225 B. Any party hereto may change its address for the purpose of receiving notices, demands and other communications as herein provided by a written notice given in the manner aforesaid to the other party hereto. 8 11. Waivers. No waiver of any term or provision of this Employment Agreement shall be valid unless such waiver is in writing signed by the party against whom enforcement of the waiver is sought. In the case of the Company, such waiver shall be signed by at least one (1) member of the Company's Board. The waiver of any term or provision of this Employment Agreement shall not apply to any subsequent breach of this Employment Agreement. 12. Governing Document. This Employment Agreement, the Option Agreement, the Option Plan, and all other exhibits and attachments hereto constitute the entire agreement and understanding of the Company and Executive with respect to the terms and conditions of Executive's employment with the Company and the payment of severance and other benefits, and supersedes all prior and contemporaneous written or verbal agreements and understandings between Executive and the Company relating to such subject matter. Where the terms of the Option Agreement or Option Plan conflict with the terms of this Employment Agreement, the terms of this Employment Agreement shall control. Any and all prior agreements, understandings or representations relating to Executive's employment with the Company are hereby terminated and cancelled in their entirety and are of no further force or effect. 13. Governing Law. The provisions of this Employment Agreement shall be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. If any provision of this Employment Agreement as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permitted by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this Employment Agreement, or the enforceability or invalidity of this Employment Agreement as a whole. Should any provision of this Employment Agreement become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Employment Agreement shall continue in full force and effect. 14. Deductions. All amounts paid to Executive hereunder are subject to all withholdings and deductions required by law. 15. Amendment and Termination. This Employment Agreement may be modified, amended or terminated only by a written agreement signed by Executive and an authorized member of the Company's Board. 16. Remedies. All rights and remedies provided pursuant to this Employment Agreement or by law shall be cumulative, and no such right or remedy shall be exclusive of any other. A party may pursue any one or more rights or remedies hereunder or may seek damages or specific performance in the event of another party's breach hereunder or may pursue any other remedy by law or equity, whether or not stated in this Employment Agreement. 9 17. Arbitration. Executive agrees that any and all disputes that she has with the Company, or any of its employees, which arise out of her employment or under the terms of her employment, shall be resolved through final and binding arbitration, as specified herein. This shall include, without limitation, disputes relating to this Employment Agreement, her employment by the Company or the termination thereof, claims for breach of contract or breach of the covenant of good faith and fair dealing, and any claims of discrimination or other claims under Title VII of the Civil Rights Act of 1964, the Age Discrimination in Employment Act, the Americans with Disabilities Act, the California Fair Employment and Housing Act, the Employee Retirement Income Securities Act, the Racketeer Influenced and Corrupt Organizations Act, or any other federal, state or local law or regulation now in existence or hereinafter enacted and as amended from time to time concerning in any way the subject of her employment with the Company or its termination. The only disputes not covered by this Employment Agreement are the following: (i) claims for benefits under the unemployment insurance or workers' compensation laws, and (ii) claims concerning the validity, infringement or enforceability of any trade secret, patent right, copyright, trademark or any other intellectual property held or sought by the Company or which the Company could otherwise seek; in each of these instances such disputes or claims shall not be subject to arbitration, but rather, shall be resolved pursuant to applicable law. Binding arbitration shall be conducted in the county in which the Company's principal place of business is then located in accordance with the rules and regulations of the American Arbitration Association (AAA). One arbitrator shall be chosen by mutual agreement of the Company and Executive from the AAA Employment Advisory Panel. Each side shall bear its own attorneys' fees; that is, the arbitrator shall not have authority to award attorneys' fees unless a statutory section at issue in the dispute ------ authorizes the award of attorneys' fees to the prevailing party, in which case the arbitrator has authority to make such award as permitted by the statute in question. Executive understands and agrees that the arbitration shall be instead of any jury trial and that the arbitrator's decision shall be final and binding to the fullest extent permitted by law and enforceable by any court having jurisdiction thereof. 18. Counterparts. This Employment Agreement may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 10 IN WITNESS WHEREOF, the parties hereto have executed this Employment Agreement as of the day and year first above written. NORTH POINT COMMUNICATIONS, INC. By /s/ J. Peter Wagner ------------------------------------------ Name: J. Peter Wagner Title: Chairman of the Compensation Committee of the Board of Directors EXECUTIVE: Shellye Archambeau ----------------------------- (Signature) Shellye Archambeau ----------------------------- (Print Name) 11 EXHIBIT A 12 EXHIBIT B Dear Ms. Archambeau: This letter is provided to confirm the agreement we have reached regarding your separation from employment with NorthPoint Communications, Inc., (the "Company"). We have agreed that your employment with the Company will terminate effective _________________, 200__. In consideration of the benefits to be provided to you pursuant to that certain in Employment Agreement between you and the Company dated June 27, 2000, you agree to the following: A. You fully and forever release and promise not to institute or participate in any legal proceeding against the Company or any of its directors, officers, or employees with respect to any and all claims and causes of action of any nature or kind, which are or may be claimed to exist, through and including the date on which this Agreement is executed by you, including but not limited to, any proceeding arising out of or relating in any way to your employment with the Company or your separation from employment. You should understand that you are forever waiving any rights you may have to pursue any remedies available to you against the Company, including, but not limited to, any employment-related cause of action, any tort or contract claims, any claim for violation of any state, federal or local statute, ordinance or regulation relating to employment or employment discrimination. B. You have agreed to maintain in confidence all information you have regarding the Company, its clients, the circumstances leading to your separation from the Company and the terms of this Agreement, except to the extent you are required by law to make any such disclosure. C. This Agreement between us shall be deemed to have been entered into in the State of California and shall be construed and interpreted in accordance with the laws of this State. It supersedes any and all prior agreements between you and the Company and contains the entire agreement between us. D. You and the Company hereby expressly waive any and all rights and benefits conferred by the provisions of Section 1542 of the Civil Code of the State of California, which states as follows: A general release does not extend to claims which the creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. You may have up to ____________ (___) days in which to consider this Agreement and you should review it with an attorney if you so desire. By your signature below, you acknowledge that you have read and understand the terms of this Agreement, and that you 13 are signing it voluntarily and without coercion. You further acknowledge that the waivers you have made in this Agreement are knowing, conscious and made with full appreciation that you are forever foreclosed from pursuing any of the rights so waived. Very truly yours, -------------------------- Dated: By: ------------------ ---------------------- (Name, Title) I hereby accept and agree to the terms and conditions set forth in the above agreement. Dated: ------------------ ------------------------------ (Executive Name) 14 EX-10.40 5 0005.txt 2ND AMENDED HEMMENWAY EMPLOYMENT AGREEMENT EXHIBIT 10.40 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT --------------------------------------- This AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT, made as of June 1, 2000 (the "Effective Date"), is entered into by and between NorthPoint Communications, Inc. (the "Company") and Nancy J. Hemmenway (the "Executive"). WHEREAS, the Company and Executive are parties to that certain Employment Agreement dated as of March 7, 2000, as amended by that certain Amendment No. 1 to Employment Agreement dated as of April 17, 2000 (together, the "Original Employment Agreement"). WHEREAS, the Company and Executive wish to amend the Original Employment Agreement to revise Executive's salary. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. Amendment to Sections 3.B and 3.C. Sections 3.B and 3.C of the Original Employment Agreement are hereby amended by deleting such section in its entirety and inserting in their place the following: "B. Cash Compensation. Executive is paid a base salary at the annual rate ----------------- of One Hundred Eighty Thousand Dollars ($190,000.00), to be paid in accordance with the Company's standard payroll policy. Such base salary may be increased by the Board of Directors in its sole discretion. C. Bonus. Executive shall be eligible to receive an annual target ----- bonus of up to a maximum of forty-five percent (45%) of her annual base salary. Payment of the bonus shall be at the discretion of the Compensation Committee of the Company's Board of Directors and shall be based on the achievement of objectives agreed to by the Compensation Committee of the Board of Directors. In future years, payment of the bonus shall be at the discretion of the Compensation Committee of the Company's Board of Directors and shall be based on the achievement of objectives as determined by such Committee." 2. Successors and Assigns. The provisions of this Amendment shall inure to the benefit of, and shall be binding upon, the Company, its successors and assigns, and the Executive, the personal representative of his estate and his heirs and legatees; provided, however, Executive may not assign, transfer or delegate his rights or obligations hereunder and any attempt to do so shall be void. 3. Governing Document; Effect of Amendment. This Amendment, the Original Employment Agreement, the Option Agreement and the Option Plan, and all other exhibits and attachments thereto, constitute the entire agreement and understanding of the Company and Executive with respect to the terms and conditions of Executive's employment with the Company and the payment of severance and other benefits, and supersedes all prior and contemporaneous written or verbal agreements and understandings between Executive and the Company relating to such subject matter. Where the terms of the Option Agreement conflict with the terms of the Original Employment Agreement, as amended by this Amendment, the terms of the Original Employment Agreement shall control. Any and all prior agreements, understandings or representations relating to Executive's employment with the Company are hereby terminated and cancelled in their entirety and are of no further force or effect. On and after the date hereof, each reference in the Original Employment Agreement to the "Employment Agreement" or the "Agreement" shall mean the Original Employment Agreement as amended hereby. Except as specifically amended above, the Original Employment Agreement shall remain in full force and effect and is hereby ratified and confirmed. 4. Governing Law. The provisions of this Amendment shall be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. If any provision of this Amendment as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permitted by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this Amendment, or the enforceability or invalidity of this Amendment as a whole. Should any provision of this Amendment become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Amendment shall continue in full force and effect. 5. Counterparts. This Amendment may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 6. No Other Amendments. Except as specifically provided in this Amendment, no amendments, revisions or changes are made to the Original Employment Agreement. All other terms and conditions of the Original Employment Agreement remain in full force and effect and apply fully to this Amendment. 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 to Employment Agreement as of the day and year first above written. NORTH POINT COMMUNICATIONS, INC. By /s/ J. Peter Wagner ------------------- Name: J. Peter Wagner Title: Chairman of the Compensation Committee of the Board of Directors EXECUTIVE: /s/ Nancy J. Hemmenway ---------------------- (Signature) Nancy J. Hemmenway ---------------------- (Print Name) 3 EX-10.41 6 0006.txt 1ST AMENDED PARKS EMPLOYMENT AGREEMENT EXHIBIT 10.41 AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT --------------------------------------- This AMENDMENT NO. 1 TO EMPLOYMENT AGREEMENT, made as of June 1, 2000 (the "Effective Date"), is entered into by and between NorthPoint Communications, Inc. (the "Company") and Michael Parks (the "Executive"). WHEREAS, the Company and Executive are parties to that certain Employment Agreement dated as of March 7, 2000 (the "Original Employment Agreement"). WHEREAS, the Company and Executive wish to amend the Original Employment Agreement to revise Executive's salary and title. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. Amendment to Section 3.B. Section 3.B. of the Original Employment Agreement is hereby amended by deleting such section in its entirety and inserting in its place the following: "B. Cash Compensation. Executive is paid a base salary at the annual rate ----------------- of Two Hundred Twenty Thousand Dollars ($220,000.00), to be paid in accordance with the Company's standard payroll policy. Such base salary may be increased by the Board of Directors in its sole discretion." 2. Successors and Assigns. The provisions of this Amendment shall inure to the benefit of, and shall be binding upon, the Company, its successors and assigns, and the Executive, the personal representative of his estate and his heirs and legatees; provided, however, Executive may not assign, transfer or delegate his rights or obligations hereunder and any attempt to do so shall be void. 3. Governing Document; Effect of Amendment. This Amendment, the Original Employment Agreement, the Option Agreement and the Option Plan, and all other exhibits and attachments thereto, constitute the entire agreement and understanding of the Company and Executive with respect to the terms and conditions of Executive's employment with the Company and the payment of severance and other benefits, and supersedes all prior and contemporaneous written or verbal agreements and understandings between Executive and the Company relating to such subject matter. Where the terms of the Option Agreement conflict with the terms of the Original Employment Agreement, as amended by this Amendment, the terms of the Original Employment Agreement shall control. Any and all prior agreements, understandings or representations relating to Executive's employment with the Company are hereby terminated and cancelled in their entirety and are of no further force or effect. On and after the date hereof, each reference in the Original Employment Agreement to the "Employment Agreement" or the "Agreement" shall mean the Original Employment Agreement as amended hereby. Except as specifically amended above, the Original Employment Agreement shall remain in full force and effect and is hereby ratified and confirmed. 4. Governing Law. The provisions of this Amendment shall be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. If any provision of this Amendment as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permitted by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this Amendment, or the enforceability or invalidity of this Amendment as a whole. Should any provision of this Amendment become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Amendment shall continue in full force and effect. 5. Counterparts. This Amendment may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 7. No Other Amendments. Except as specifically provided in this Amendment, no amendments, revisions or changes are made to the Original Employment Agreement. All other terms and conditions of the Original Employment Agreement remain in full force and effect and apply fully to this Amendment. 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 1 to Employment Agreement as of the day and year first above written. NORTH POINT COMMUNICATIONS, INC. By /s/ J. Peter Wagner ---------------------------- Name: J. Peter Wagner Title: Chairman of Compensation Committee of the Board of Directors EXECUTIVE: /s/ Michael Parks --------------------------- (Signature) Michael Parks --------------------------- (Print Name) 3 EX-10.42 7 0007.txt 2ND AMENDED GOROSH EMPLOYMENT AGREEMENT EXHIBIT 10.42 AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT --------------------------------------- This AMENDMENT NO. 2 TO EMPLOYMENT AGREEMENT, made as of June 1, 2000 (the "Effective Date"), is entered into by and between NorthPoint Communications, Inc. (the "Company") and Steven Gorosh (the "Executive"). WHEREAS, the Company and Executive are parties to that certain Employment Agreement dated as of March 7, 2000, as amended by that certain Amendment No. 1 to Employment Agreement dated as of April 17, 2000 (together, the "Original Employment Agreement"). WHEREAS, the Company and Executive wish to amend the Original Employment Agreement to revise Executive's salary and title. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the parties agree as follows: 1. Amendment to Sections 3.B and 3.C. Sections 3.B and 3.C of the Original Employment Agreement are hereby amended by deleting such section in its entirety and inserting in their place the following: "B. Cash Compensation. Executive is paid a base salary at the annual rate ----------------- of Two Hundred Twenty Thousand Dollars ($220,000.00), to be paid in accordance with the Company's standard payroll policy. Such base salary may be increased by the Board of Directors in its sole discretion. C. Bonus. Executive shall be eligible to receive an annual target ----- bonus of up to a maximum of fifty percent (50%) of his annual base salary. Payment of the bonus shall be at the discretion of the Compensation Committee of the Company's Board of Directors and shall be based on the achievement of objectives agreed to by the Compensation Committee of the Board of Directors. In future years, payment of the bonus shall be at the discretion of the Compensation Committee of the Company's Board of Directors and shall be based on the achievement of objectives as determined by such Committee." 2. Successors and Assigns. The provisions of this Amendment shall inure to the benefit of, and shall be binding upon, the Company, its successors and assigns, and the Executive, the personal representative of his estate and his heirs and legatees; provided, however, Executive may not assign, transfer or delegate his rights or obligations hereunder and any attempt to do so shall be void. 3. Governing Document; Effect of Amendment. This Amendment, the Original Employment Agreement and the Purchase Agreement, and all other exhibits and attachments thereto, constitute the entire agreement and understanding of the Company and Executive with respect to the terms and conditions of Executive's employment with the Company and the payment of severance and other benefits, and supersedes all prior and contemporaneous written or verbal agreements and understandings between Executive and the Company relating to such subject matter. Where the terms of the Purchase Agreement conflict with the terms of the Original Employment Agreement, as amended by this Amendment, the terms of the Original Employment Agreement shall control. Any and all prior agreements, understandings or representations relating to Executive's employment with the Company are hereby terminated and cancelled in their entirety and are of no further force or effect. On and after the date hereof, each reference in the Original Employment Agreement to the "Employment Agreement" or the "Agreement" shall mean the Original Employment Agreement as amended hereby. Except as specifically amended above, the Original Employment Agreement shall remain in full force and effect and is hereby ratified and confirmed. 4. Governing Law. The provisions of this Amendment shall be construed and interpreted under the laws of the State of California applicable to agreements executed and to be wholly performed within the State of California. If any provision of this Amendment as applied to any party or to any circumstance should be adjudged by a court of competent jurisdiction to be void or unenforceable for any reason, the invalidity of that provision shall in no way affect (to the maximum extent permitted by law) the application of such provision under circumstances different from those adjudicated by the court, the application of any other provision of this Amendment, or the enforceability or invalidity of this Amendment as a whole. Should any provision of this Amendment become or be deemed invalid, illegal or unenforceable in any jurisdiction by reason of the scope, extent or duration of its coverage, then such provision shall be deemed amended to the extent necessary to conform to applicable law so as to be valid and enforceable or, if such provision cannot be so amended without materially altering the intention of the parties, then such provision shall be stricken and the remainder of this Amendment shall continue in full force and effect. 5. Counterparts. This Amendment may be executed in more than one counterpart, each of which shall be deemed an original, but all of which together shall constitute but one and the same instrument. 6. No Other Amendments. Except as specifically provided in this Amendment, no amendments, revisions or changes are made to the Original Employment Agreement. All other terms and conditions of the Original Employment Agreement remain in full force and effect and apply fully to this Amendment. 2 IN WITNESS WHEREOF, the parties hereto have executed this Amendment No. 2 to Employment Agreement as of the day and year first above written. NORTH POINT COMMUNICATIONS, INC. By /s/ J. Peter Wagner ------------------------------------------- Name: J. Peter Wagner Title: Chairman of the Compensation Committee of the Board of Directors EXECUTIVE: /s/ Steven Gorosh ---------------------------------------------- (Signature) Steven Gorosh ---------------------------------------------- (Print Name) 3 EX-27.1 8 0008.txt FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 3-MOS DEC-31-2000 APR-01-2000 JUN-30-2000 91,679 125,383 28,926 1,434 8,811 287,400 443,260 45,947 734,693 113,814 0 0 0 133 125,926 734,693 24,403 24,403 40,894 40,894 81,512 688 16,602 (112,060) 0 (112,060) 0 0 0 (112,060) (0.85) (0.85)
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