Filed Pursuant to Rule 424(b)(4)
File #333-53441
[NorthEast Optic Network Logo]
4,500,000 Shares
NorthEast Optic Network, Inc.
Common Stock
($.01 par value)
------------
Of the 4,500,000 shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Equity Offering"), 4,000,000 are being sold by
NorthEast Optic Network, Inc. ("NorthEast Optic Network" or the "Company") and
500,000 are being sold by Central Maine Power Company, Northeast Utilities or
their affiliates (the "Selling Stockholders"), that, prior to the Equity
Offering, are collectively the owners of approximately 95% of the outstanding
Common Stock of the Company. The Company will not receive any proceeds from the
sale of the shares being sold by the Selling Stockholders. Following the
consummation of the Equity Offering, the officers, directors and other
affiliates of the Company, including the Selling Stockholders, will beneficially
own approximately 70.9% of the outstanding shares of Common Stock of the Company
(assuming no exercise of the Underwriters' (as defined) over-allotment option).
Prior to the Equity Offering, there was no public market for the Common
Stock of the Company. See "Underwriting" for information relating to the factors
considered in determining the initial price to the public.
Concurrently with the closing of the Equity Offering, the Company is offering
$180.0 million aggregate principal amount of its 12-3/4% Senior Notes Due 2008
(the "Debt Offering" and, together with the Equity Offering, the "Offerings").
The closing of each Offering is conditioned upon the closing of the other
Offering. A portion of the proceeds of the Offerings will be used to repay
indebtedness owed to one of the Selling Stockholders.
The Common Stock has been approved for listing on The Nasdaq Stock
Market's National Market ("NNM") under the symbol NOPT.
For a discussion of certain factors that should be considered by
prospective investors, see "Risk Factors" beginning on page 10.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
--------------- --------------- --------------- -------------
<S> <C> <C> <C> <C>
Per Share ...... $ 12.00 $ 0.84 $ 11.16 $ 11.16
Total(2) ....... $54,000,000 $3,780,000 $44,640,000 $5,580,000
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $600,000.
(2) The Company has granted the Underwriters an option exercisable for 30 days
from the date of this Prospectus to purchase a maximum of 675,000 additional
shares from the Company to cover over-allotments of shares. If the option is
exercised in full, the total Price to Public will be $62,100,000,
Underwriting Discounts and Commissions will be $4,347,000, and Proceeds to
Company will be $52,173,000.
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the shares of Common Stock will be made on or about August 5, 1998, against
payment in immediately available funds.
Credit Suisse First Boston Warburg Dillon Read LLC
Prospectus dated July 30, 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
-----------
NEON[RegTM] and the NEON logo are service marks of the Company.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read in
conjunction with the more detailed information, consolidated financial
statements and other financial data appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus gives effect to
(i) the completion of the Reorganization (as such term is defined below under
"Business--Reorganization"), (ii) a 2.5-for-1 stock split of the Company's
Common Stock (the "Stock Split"), and (iii) the conversion of all outstanding
shares of Series A and Series B Convertible Preferred Stock of the Company (the
"Preferred Stock") into an aggregate of 11,777,910 (post-split) shares of Common
Stock at the closing of the Offerings (the "Preferred Stock Conversion"). Unless
otherwise indicated, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option. As used herein "NorthEast Optic
Network" or the "Company" refers to NorthEast Optic Network, Inc. and its
subsidiaries, including predecessor companies, except where the context
otherwise requires. Certain terms used herein are defined in the Glossary
beginning on page G-1.
The Company
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic transmission capacity for communications carriers on
local loop, inter-city and interstate facilities. The Company is currently
expanding its fiber optic network, the NEON system, to encompass over 900 route
miles, or more than 60,000 fiber miles, in New York and New England (the
"Northeast"). The Company believes that the Northeast, which in 1996 represented
a $28.7 billion telephony services market and which the Company believes has one
of the highest population densities and concentrations of businesses,
universities, phone lines, personal computers and television sets in the
country, is a region characterized by significant and growing demand for
broadband communications infrastructure. The Company is constructing the NEON
system utilizing primarily electric utility rights-of-way ("ROWs"), which allow
the Company to provide secure fiber optic capacity at competitive prices with
potential access to virtually any urban location where the local utility
provides electrical service. The Company is using advanced fiber optic
technology in the NEON system, including non-zero dispersion shifted fiber,
dense wave division multiplexing optronics and SONET ring self-healing
technology, to allow the Company's carrier customers to meet the demand for
reliable, high-bandwidth voice, data and video transmission capacity in the
Northeast. For example, a pair of fiber optic strands on the NEON system can
transmit up to approximately 10 gigabits of data per second, or the equivalent
of approximately 129,000 simultaneous voice conversations.
The Company has already completed construction of approximately 295 route
miles, or approximately 19,500 fiber miles, of the NEON system as of June 30,
1998, and currently operates fiber optic routes from Hartford, Connecticut to
Springfield, Massachusetts and from Nashua, New Hampshire to Portland, Maine.
The Company is currently engineering, constructing or acquiring additional
routes in New York, Connecticut, Massachusetts, Rhode Island and New Hampshire
to create a continuous fiber optic link between New York City and Portland,
Maine with access into and around Boston, Massachusetts and numerous other major
service areas in the Northeast. These additional routes are expected to be
substantially completed in 1998 and will add approximately 500 route miles, or
approximately 23,300 fiber miles, to the NEON system. The Company is also
planning to complete further expansion routes in 1999 into and around New York
City and other metropolitan areas along the NEON system. The completion of
routes currently planned will enable the NEON system to connect more than 540
cities and towns in six states and pass more than 200 points-of-presence
("POPs"), tandem switches and central offices, which the Company believes serve
over 18 million people and over 470,000 businesses.
Commencing in September 1994, the Company entered into a series of ROW
agreements (the "NU Agreements") with the three principal operating subsidiaries
of Northeast Utilities ("NU"), the largest electric utility service provider in
New England, serving over 1.7 million customers in Connecticut, Massachusetts
and New Hampshire, to build fiber optic facilities utilizing NU's transmission
and distribution infrastructure, including utility towers, poles, underground
ducts and urban conduit systems. In January 1997, the Company entered into a
similar ROW agreement (the "CMP Agreement") with Central Maine Power Company
("CMP"), the largest electric utility service provider in Maine, serving over
500,000 customers, to build fiber optic facilities utilizing CMP's transmission
and distribution infrastructure. NU and CMP have also financed substantially all
of the construction and operations of the NEON system to date and currently
beneficially own (prior to the sale of shares in the Equity Offering) 41.4% and
53.5%, respectively, of the Company's capital stock. In July 1998, the Company
entered into
3
<PAGE>
agreements with NEES Communications, Inc., a subsidiary of New England Electric
System, and BecoCom, Inc., a subsidiary of Boston Edison Company, to extend the
NEON system from Hudson, New Hampshire to Boston, Massachusetts terminating at
the Company's POP and Company-targeted carrier centers.
The Company has pursued a strategy of establishing relationships with
electric utilities and building the NEON system utilizing primarily electric
utility ROWs. The Company believes that the use of such ROWs provides
significant advantages, including: (i) inter-city routes and potentially
ubiquitous intra-city coverage in the local electric utility's urban service
territory, including throughout downtown areas and directly to buildings, (ii)
use of existing electric transmission infrastructures, including towers, poles,
ducts and conduits, to achieve faster, less costly installation, (iii) generally
more secure and reliable routes than other traditional ROWs, (iv) desirable
geographically diverse fiber optic routes for communications carriers and (v)
establishment of an extensive ROW network through negotiation with relatively
few parties, rather than with numerous parties such as municipalities, transit
authorities and governmental agencies.
The Company intends to target communications carriers as customers, rather
than end-users of telecommunications services. The Company believes that this
strategy allows it to: (i) maximize the Company's opportunities to sell its
capacity regardless of the end-user's selection of a retail provider, (ii) avoid
the significant initial and ongoing investment required in selling, marketing
and providing services to end-users, (iii) attract carrier customers that may be
reluctant to contract with a direct competitor, (iv) generate revenues quickly
from carriers that are easily identifiable and require large amounts of fiber
optic capacity, and (v) lock in relatively secure long-term revenue streams from
customers that are generally more creditworthy than end-users and are likely to
make long-term capital commitments prior to completion of construction. Carrier
customers typically lease fiber optic capacity under multi-year contracts with
which they enhance or constitute their own communications networks as a
cost-effective alternative to constructing their own infrastructure or
purchasing measured services from other carriers with whom they may compete.
Carriers targeted by the Company include a broad range of communications
companies such as incumbent local exchange carriers ("ILECs"), competitive local
exchange carriers ("CLECs"), long distance companies/interexchange carriers
("IXCs"), paging, cellular and PCS companies, cable television companies and
Internet service providers ("ISPs"). Currently, the Company has contracts with
Brooks Fiber Properties, Inc. ("Brooks Fiber") (now owned by WorldCom, Inc.
("WorldCom")), Teleport Communications Group Inc. ("Teleport") (expected to be
acquired by AT&T Corp. ("AT&T")), MCI Communications Corporation ("MCI")
(expected to be acquired by WorldCom), Sprint Corporation ("Sprint") and Global
NAPs, Inc., a regional ISP.
The Company intends to offer its carrier customers leases of both dark
fiber (fiber optic transmission lines leased without optronics equipment
installed by the Company) and lit fiber (fixed amounts of capacity, such as
DS-3, OC-3, OC-12, OC-48 and higher, on fiber optic transmission lines that use
the Company's optronics equipment) at fixed-cost pricing and over multi-year
lease terms. The Company intends to lease approximately one-third of the
available fibers in the NEON system as dark fiber and one-third as lit fiber. In
addition, the Company plans to reserve approximately one-third of its available
fibers for future services that the Company may provide to capitalize on future
technological advances or changes that the Company expects to occur in the
communications industry.
History of the Company
The Company was incorporated in 1989 in Massachusetts under the name
"FiveCom, Inc." to develop fiber-optic networks in secondary and tertiary
markets in the Northeast. Prior to 1994, the Company was the managing general
partner of a venture which built a competitive access provider ("CAP") network
in Springfield, Massachusetts and also built several small private networks in
eastern Massachusetts. In February 1994, the Company sold its interest in the
Springfield network to Brooks Fiber. Following this sale, the Company expanded
its business strategy to include intra-LATA and long distance facilities using
electric utility ROWs and changed its focus to target carrier customers rather
than end-users. Commencing in September 1994, the Company entered into the NU
Agreements, pursuant to which the Company obtained ROWs in the service
territories of NU and its subsidiaries. In 1996, the Company raised
approximately $16.7 million from private placements of equity securities to
MaineCom Services ("MaineCom"), an affiliate of CMP, and Mode 1 Communications,
Inc. ("Mode 1"), an affiliate of NU. In January 1997, the Company entered into
the CMP Agreement, under which the Company obtained ROWs in CMP's service
territory, and raised an additional
4
<PAGE>
$2.6 million from CMP and other investors in a private equity financing. In
1998, the Company was reincorporated in Delaware under the name "NorthEast Optic
Network, Inc." See "Business--Reorganization."
Market Opportunity
The Company believes that there is a significant demand for high-bandwidth
communications services and a limited supply of technologically advanced dark
and lit fiber optic facilities in the Northeast. The Company believes the needs
of communications carriers for advanced, high-bandwidth voice, data and video
transmission capacity will increase over the next several years due to various
factors, including: (i) rapid growth of communications traffic; (ii) capacity
required by new entrants to the telecommunications market; (iii) the need for
redundant routing and geographic diversity of ROWs to provide reliability in the
event of equipment failure, fiber line break or other outage; (iv) the need to
upgrade older communications networks; (v) accommodation of multimedia (voice,
data and video) and other potential high-bandwidth applications; and (vi)
communications carriers' desire for low-cost local and regional transport.
Business Strategy
The Company's objective is to become the preferred facilities-based
provider of fiber optic network capacity in the Northeast. The following are the
key elements of the Company's strategy to achieve this objective:
[bullet] Leverage Electric Utility ROWs. The Company is pursuing a strategy
of building the NEON system utilizing primarily electric utility
ROWs, which the Company believes provide significant competitive
advantages, including potential connectivity to virtually any
building in the utilities' urban service areas covered by the NEON
system, faster and less costly installation on existing
infrastructure and geographic diversity from traditional ROWs.
[bullet] Target Carrier Customers. The Company intends to target
communications carriers as customers, rather than end-users of
telecommunications services, which the Company believes will allow
it to maximize its opportunities to sell its capacity regardless of
the end-user's selection of a retail provider, avoid the significant
initial and ongoing investment required to attract and retain
numerous retail customers and generate revenues quickly from carrier
customers, which require large amounts of fiber optic capacity and
are more likely to make long-term capital commitments prior to
completion of construction.
[bullet] Reduce Construction and Operating Costs. The Company is reducing its
construction and operating costs by using primarily pre-existing
electric utility transmission and distribution infrastructure,
including towers, poles, ducts and conduits, in the construction of
the NEON system, installing high fiber count cable and utilizing
high quality, advanced fiber optic technology in the NEON system.
[bullet] Establish a Reliable, Technologically Advanced Network. The Company
is constructing the NEON system utilizing bi-directional,
self-healing SONET ring architecture on primarily electric utility
ROWs, which allow for enhanced physical security and geographic
diversity. The Company plans to use what the Company believes to be
the highest quality fiber optic cable and optronics available which
enable the highest commercially available transmission capacity
(OC-192) and data integrity level (10(-15) Bit Error Rate).
[bullet] Focus on High Demand Northeast Market. The Company believes that the
Northeast market has one of the highest population densities and
concentrations of businesses, universities, phone lines, personal
computers and television sets in the country and is a region
characterized by significant and growing demand for reliable
broadband communications infrastructure.
[bullet] Capitalize on Management Experience. The Company's management team
includes individuals with significant experience in the
telecommunications and utility industries which will be important in
the build-out and management of the NEON system. Victor Colantonio,
the Chairman of the Company and its founder and President, has 25
years of experience in the telecommunications industry. Richard
Crabtree, the Chairman of the Board and Chief Executive Officer of
the Company, has 27 years of public utility company experience,
including serving as Chief Financial Officer to CMP. Other senior
executives of the Company also have extensive experience in the
telecommunications industry.
5
<PAGE>
[bullet] Leverage Utility Relationships. The Company believes that its
electric utility relationships enhance the Company's credibility
with large carrier customers and create opportunities to establish
relationships with other electric utility companies. In addition,
through its utility relationships, the Company has outsourced
substantially all of its engineering, design, routine maintenance
and construction supervision requirements, thereby building on the
utilities' significant resources and experience in the engineering
and construction of large transmission and distribution networks.
----------------
The Company's principal executive offices are located at 391 Totten Pond
Road, Suite 401, Waltham, Massachusetts, and its telephone number is (781)
890-6868.
6
<PAGE>
The Equity Offering
<TABLE>
<S> <C>
Common Stock offered:
By the Company ...................... 4,000,000 shares
By the Selling Stockholders ......... 500,000 shares
---------
Total .............................. 4,500,000 shares (1)
=========
Common Stock to be outstanding after
the Equity Offering ................. 16,062,735 shares (1)(2)
Concurrent Debt Offering ............. Concurrently with the Equity Offering, the Company is offering
$180.0 million aggregate principal amount of its 123/4% Senior
Notes Due 2008 (the "Notes") by a separate prospectus. The
closing of each Offering is conditioned on the closing of the
other Offering, which conditions may not be waived. See
"Description of Certain Indebtedness."
Use of Proceeds ...................... The net proceeds to the Company from the Offerings will be
used to purchase U.S. government obligations in order to
provide for payment in full of the first seven scheduled interest
payments on the Notes (as defined), for capital expenditures
associated with the continued construction and expansion of the
NEON system, to repay outstanding debt and for working
capital, including payment of certain bonuses, and other general
corporate purposes. See "Use of Proceeds." The Company will
not receive any proceeds from the sale by the Selling
Stockholders of Common Stock in the Equity Offering.
Dividend Policy ...................... The Company does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. The terms of the
Notes will restrict the Company's ability to pay cash dividends
on its Common Stock.
NNM symbol ........................... NOPT
</TABLE>
- ---------------------
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Based on shares outstanding as of March 31, 1998 after giving effect to the
Reorganization, the Stock Split and the Preferred Stock Conversion. Excludes
(i) 3,600 shares of Common Stock issuable upon the exercise of stock options
outstanding as of March 31, 1998 with an exercise price of $0.10 per share,
(ii) 2,436,105 shares of Common Stock reserved for future issuance under the
Company's 1998 Stock Incentive Plan, of which 1,705,242 will be subject to
outstanding options upon consummation of the Equity Offering, and (iii)
174,367 shares of Common Stock issuable upon the exercise of warrants
outstanding as of March 31, 1998 with a weighted average exercise price of
$1.92 per share.
Risk Factors
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should consider carefully the risk factors and
other information set forth in this Prospectus before making an investment in
the Common Stock offered hereby. See "Risk Factors."
7
<PAGE>
Summary Consolidated Financial Data
The summary consolidated financial data presented below for each of the
years in the three-year period ended December 31, 1997 and as of December 31,
1997 have been derived from the Consolidated Financial Statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants. The summary consolidated financial data for each of the three-month
periods ended March 31, 1997 and 1998 and as of March 31, 1998 have been derived
from the unaudited consolidated financial statements of the Company, which have
been prepared on the same basis as the Consolidated Financial Statements of the
Company and, in the opinion of management, reflect all normal recurring
adjustments necessary for a fair presentation of the financial position and
results of operations for such periods and as of such dates. The results for the
three months ended March 31, 1998 are not necessarily indicative of the
operating results to be expected for the entire year. The operations data
provided below for the year ended December 31, 1997 and the three-months ended
March 31, 1998 are also presented on a pro forma basis to give effect to the
Reorganization as if it had occurred on January 1, 1997. The balance sheet data
presented below as of March 31, 1998 are also presented on a pro forma basis to
give effect to the Reorganization and on a pro forma as adjusted basis to give
effect to the Offerings and the application of the estimated net proceeds
therefrom and to the Reorganization.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------------------------------
Pro Forma
1995 1996 1997(1) 1997(3)
------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues $ 42,598 $ 13,773 $ 394,704 $ 394,704
Operating expenses 487,159 1,185,595 2,693,03 4,219,316
-------- ---------- ---------- ----------
Loss from operations (444,561) (1,171,822) (2,298,333) (3,824,612)
Interest income (expense),
net (42,401) 125,838 (2,893) (2,893)
Minority interest(2) -- 353,222 1,080,200 --
Provision for (benefit from)
income taxes -- 16,000 (261,000) (261,000)
-------- ---------- ---------- ----------
Net loss (486,962) (708,762) (960,026) (3,566,505)
Basic and diluted loss per
share (1.71) (2.49) (3.37) (12.52)
Basic and diluted weighted
average shares outstanding 284,578 284,735 284,828 284,828
<CAPTION>
Three Months Ended March 31,
-------------------------------------------
Pro Forma
1997 1998(1) 1998(3)
------------- ------------- ---------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues $ -- $151,363 $ 151,363
Operating expenses 345,620 774,521 1,156,091
-------- -------- ----------
Loss from operations (345,620) (623,158) (1,004,728)
Interest income (expense),
net 56,638 (61,494) (61,494)
Minority interest(2) 137,620 314,498 --
Provision for (benefit from)
income taxes (33,000) (77,000) (77,000)
-------- -------- ----------
Net loss (118,362) (293,154) (989,222)
Basic and diluted loss per
share (0.42) (1.03) (3.47)
Basic and diluted weighted
average shares outstanding 284,828 284,828 284,828
</TABLE>
<TABLE>
<CAPTION>
As of March 31, 1998
-----------------------------------------------------
Pro Forma
Actual Pro Forma(3) As Adjusted(4)
---------------- ---------------- ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital $ (5,500,383) $ (5,500,383) $137,404,279
Total assets 26,183,672 71,972,038 289,032,328
Note payable to related party 3,975,000 3,975,000 --
Long-term debt, including current maturities 1,987,577 1,987,577 180,437,042
Total liabilities 11,605,478 11,605,478 186,079,943
Minority interest(2) 5,024,288 -- --
CMP Warrant 532,836 -- --
Stockholders' equity 9,021,070 60,366,560 102,952,385
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------- --------------------------------
1995 1996 1997(1) 1997 1998(1)
---------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Other Financial Data:
Cash provided by (used in)
operating activities ................ $ (413,196) $ 37,460 $ (553,427) $(1,027,065) $ 657,881
Cash used in investing activities ..... (4,619,702) (6,738,898) (8,798,251) (4,037,187) (3,540,475)
Cash provided by financing
activities .......................... 4,943,300 11,565,481 5,585,205 3,657,456 3,016,396
Net increase (decrease) in cash and
cash equivalents .................... (89,598) 4,864,043 (3,766,473) (1,406,796) 133,802
EBITDA(5) ............................. (420,386) (794,432) (665,271) (178,121) (6,647)
Capital expenditures .................. 4,596,901 6,711,082 5,609,459 3,978,512 3,297,062
Ratio of deficiency to fixed
charges(6) .......................... (2.54)x (4.50)x (10.11)x (9.46)x (7.53)x
</TABLE>
- ---------------------
(See footnotes on the following page)
8
<PAGE>
(1) If the Reorganization had occurred as of January 1, 1997, the pro forma
impact on the Company's Statement of Operations for the year ended December
31, 1997 would reflect depreciation and amortization of $2,079,141, a net
loss of $3,566,505 and a loss per share of $12.52, after giving effect to
the Stock Split. The pro forma impact on the Company's Statement of
Operations for the quarter ended March 31, 1998 would reflect depreciation
and amortization of $683,583, a net loss of $989,222 and a loss per share of
$3.47, after giving effect to the Stock Split.
(2) Minority interest consists of the interests of members other than CMP in
FiveCom LLC, NECOM LLC and FiveCom of Maine LLC. See
"Business--Reorganization." Changes in minority interest reflect such other
members' capital adjusted by their portion of the net loss.
(3) Pro forma to give effect to the Reorganization. In connection with the
Reorganization, the Company recorded an intangible asset to reflect the
Company's acquisition of NU's minority interest in a subsidiary (NECOM LLC),
in accordance with AICPA Accounting Interpretation 39 to APB Opinion No. 16,
Business Combinations (AIN-39). If the intangible asset were recorded at
January 1, 1997, the amount recorded would be $45,788,366.
(4) Pro forma as adjusted to give effect to (i) the Offerings and the
application of the estimated net proceeds therefrom, after deducting the
underwriting discount and estimated offering expenses payable by the
Company, and the write-off of unamortized financing costs associated with
debt extinguished and (ii) the Reorganization. See Notes 1 and 3 above.
(5) EBITDA is defined herein as net loss before interest income (expense), net,
loan commitment fees, provision for (benefit from) income taxes,
depreciation and amortization and is presented because it is commonly used
by certain investors and analysts to analyze and compare a company's
operating performance and to determine a company's ability to incur and
service debt. EBITDA should not be considered in isolation from, or as a
substitute for, net income, cash flow from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of profitability or
liquidity.
(6) For purposes of calculating the ratio of earnings (deficiency) to fixed
charges: (i) earnings consist of loss before income tax benefit, plus fixed
charges, excluding capitalized interest, and (ii) fixed charges consist of
interest expense and capitalized interest, plus amortization of deferred
financing costs. For the years ended December 31, 1995, 1996 and 1997 and
for the three months ended March 31, 1997 and 1998, the Company's earnings
were insufficient to cover fixed charges by approximately $601,400,
$1,474,524, $3,432,869, $416,419 and $995,487, respectively. For the year
ended December 31, 1997 and for the three months ended March 31, 1998, on a
pro forma as adjusted basis the Company's earnings would have been
insufficient to cover fixed charges by approximately $23,689,337 and
$6,757,318, respectively.
9
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered by prospective investors when
evaluating an investment in the securities offered hereby. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The cautionary statements contained in this Prospectus should be
read as being applicable to all related forward-looking statements wherever they
appear in this Prospectus. The Company's actual results could differ materially
from those discussed here. Important factors that could cause or contribute to
such differences include those discussed below, as well as those discussed
elsewhere in this Prospectus.
Limited History of Operations; Negative Cash Flow
Although the Company has conducted business since 1989, the Company's
current business has only a very limited history. As a facilities-based provider
of fiber optic transmission capacity, the Company is a development stage company
in the process of constructing the NEON system throughout the Northeast.
Although limited portions of the NEON system are currently operational, those
portions represent less than 23% of the route miles and 21% of the fiber miles
of the NEON system as currently planned, and until the NEON system is
substantially completed, the Company does not expect to begin to realize any
substantial revenues. See "--Risks Associated with Completing the NEON System."
Prospective investors, therefore, have no meaningful historical operating or
financial information about the Company's current business upon which to base an
evaluation of the Company's performance or their investment in the securities
offered hereby. The Company does not expect to achieve substantial completion of
the NEON system as currently planned until the end of 1999. The Company has
incurred net losses from inception. Such losses were approximately $487,000,
$709,000, $960,000 and $293,000 for the years ended December 31, 1995, 1996 and
1997 and the three months ended March 31, 1998, respectively. The Company's
future operating results will fluctuate annually and quarterly due to several
factors, some of which are outside the control of the Company. These factors
include the cost of construction of the NEON system (including any unanticipated
costs associated therewith), the availability of ROWs, the cost and timely
availability of equipment and construction contractors, pricing strategies for
its services, changes in the regulatory environment, changes in
telecommunications technology and changes in general and local economic
conditions. In addition, the extent of the demand for the Company's services
cannot be estimated with any degree of certainty. See "--Risks Associated with
Implementing the Company's Strategy."
In addition, the development of the Company's business, the completion of
the NEON system and the development of the Company's services and customer base
will require significant expenditures, most of which will need to be made before
the Company is able to offer services over substantially all of the NEON system.
These expenditures, together with associated operating expenses, will adversely
impact cash flow and profitability until an adequate customer base is
established. To date, the Company has expended substantial amounts on
construction of the NEON system. Such cash expenditures have been funded by
proceeds from the Company's financing activities. Accordingly, the Company has
generated negative cash flow. Moreover, the Company expects to continue
generating negative cash flow from operations through at least 2000. There can
be no assurance that the Company will not need to obtain additional capital to
complete the NEON system.
As a result of the foregoing factors, there can be no assurance that the
Company will generate significant revenues, achieve or sustain profitability or
generate positive cash flow from operating activities in the future. If the
Company cannot generate significant revenues, achieve and sustain profitability
or generate positive cash flow from operating activities in the future, it will
not be able to make principal and interest payments with respect to its
indebtedness (including the Notes) or meet its other debt service or working
capital requirements, and the securities offered hereby would have little or no
value.
Risks Associated with Completing the NEON System
The Company's ability to achieve its strategic objectives will depend in
large part upon the successful, timely and cost-effective completion of the NEON
system. Factors that could affect such completion include, among other things,
(i) obtaining adequate ROWs on acceptable terms in and between major cities in
the Northeast not covered by utility ROWs currently available to the Company,
(ii) obtaining required governmental permits and certifications where necessary
and (iii) delays or disruptions resulting from physical damage, power loss,
defective equipment
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or the failure of third-party suppliers or contractors to meet their obligations
in a timely and cost-effective manner. No assurance can be given that the
Company will be able to complete the NEON system or achieve completion on time
or within the anticipated budget.
In order to complete the NEON system, the Company must obtain additional
rights-of-way and other permits to install fiber optic cables from third
parties, including electric utilities, transit authorities and others. The
Company has not yet obtained the necessary ROWs to expand the NEON system to
encompass the planned New York local loop. The Company may be required to pay
cash or provide in-kind facilities for these ROWs or other ROWs to accommodate
extensions to the NEON system. In negotiating the terms for its ROWs, the
Company has sought, and expects to continue to seek, waivers or deferrals of
right-of-way fees while the NEON system is being constructed. For instance,
under its agreements with NU, the Company has, among other terms, agreed to pay
to NU mileage-based annual fees beginning in 2004 and a percentage of the gross
revenues of the Company generated over the ROWs granted by NU upon achieving
certain revenue levels. In addition, the Company has agreed to set aside for
NU's use a portion of the fibers along the ROWs granted by NU. Under its
agreements with CMP, the Company has agreed to pay CMP an annual fee beginning,
with regard to any particular route segment, in the first calendar year
following the installation date for such route segment, and the Company has
agreed to set aside certain fibers along the CMP ROWs for CMP's use. Although
the Company believes that its strategy of utilizing such ROWs, primarily from
electric utilities, will help to minimize the costs of acquiring ROWs for
telecommunications purposes, the Company is unable to predict with certainty the
cost of obtaining necessary ROWs, and there can be no assurance that it will be
able to obtain such ROWs on acceptable terms, if at all. If the Company is
unable to reach agreement on terms acceptable to the Company for the planned
completion of the NEON system, then such failure may prevent the completion of
the NEON system as currently planned by the Company, and such a result would
have a material adverse effect on the Company's business, financial condition
and results of operation. In addition, if CMP or NU or any other entity with
whom the Company has an agreement seeks bankruptcy or other protection from its
creditors, the Company's ability to exercise rights to obtain route extensions
or other rights under its agreement with such entity may be adversely affected.
See "Business--Right-of-Way Agreements."
The Company expects that it will require a substantial amount of capital to
complete the build-out of the NEON system as currently planned. The Company
currently estimates that its capital expenditure requirements for 1998 and 1999
will be approximately $54.0 million in each year. Additional funds will be
required to fund operating losses during these periods. The Company believes
that it will have sufficient capital to fund the build-out of the NEON system as
currently planned and its other working capital needs, contingent upon
completion of the Offerings. In the event that the proceeds of the Offerings are
less than anticipated or are otherwise insufficient to meet its capital
expenditure and other capital requirements, the Company would be required to
obtain funding from other sources to complete the construction of the NEON
system and to fund operating losses. Sources of funding may include vendor
financing, public offerings or private placements of equity and/or debt
securities, strategic customer alliances, and bank loans. However, there can be
no assurance that additional financing will be available to the Company or, if
available, that it can be obtained on a timely basis and on acceptable terms.
Failure to obtain such financing could result in the delay or curtailment of the
Company's development and expansion plans and expenditures or revisions to the
Company's business strategy. Any of these events would impair the Company's
ability to meet its debt service requirements and would have a material adverse
effect on its business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated with Implementing the Company's Strategy
The Company's ability to implement its business strategy is dependent upon
the Company's ability to secure a market for its leased dark and lit fiber optic
capacity and obtain service contracts with communications carriers.
The Company's ability to attract and retain customers is crucial to the
Company's success. Many of the Company's targeted customers are companies that
may also be the Company's potential competitors. If the Company's services are
not satisfactory or cost competitive, the Company's potential customers may
elect to develop other alternatives in the Company's markets. The Company has
incurred and will continue to incur significant operating expenses and has made
and will continue to make significant capital investments, in each case based
upon certain expectations as to the anticipated customer demand for the
Company's services in its markets. Accordingly, the failure of the Company to
attract and retain sufficient communications carriers for its services would
materially and adversely affect the Company's business, financial condition and
results of operations.
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The Company's business strategy assumes that its current and future service
revenues will come from a limited number of communications carriers. Therefore,
dissatisfaction with the Company's services by a relatively few number of
customers could have a material adverse effect on the Company's business,
financial condition and results of operations. Revenues through the second
quarter of 1997 consisted primarily of service fees from MCI. For the year ended
December 31, 1997, the Company's two largest customers, MCI and Cellular One
Group, accounted for 69% and 10% of total revenues, respectively, and for the
three months ended March 31, 1998, the Company's two largest customers, MCI and
Teleport, accounted for 76% and 10% of total revenues, respectively. The Company
is aware that certain IXCs are constructing or considering constructing new
networks, or buying companies with local networks, which could reduce their need
for the Company's services. See "--Competition." Accordingly, there can be no
assurance that any of the Company's customers or potential customers will use or
increase their use of the Company's services, which would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Implementation of the Company's business strategy also will require
substantial growth in the Company's management staff, support systems and other
operations and may be affected by factors such as: (i) the availability of
financing and regulatory approvals; (ii) the existence of strategic alliances or
relationships; (iii) technological, regulatory or other developments in the
Company's business; (iv) changes in the competitive climate in which the Company
operates; and (v) the emergence of future opportunities.
Risks Associated with Contractual Rights-of-Way
The construction and operation of the NEON system by the Company is
dependent upon indefeasible rights of use ("IRUs") granted to the Company in
ROWs and in fiber optic filaments. IRUs, which are created by contract, have
been used extensively in the telecommunications industry. Although IRUs confer
upon the holder certain indicia of ownership, legal title and the right to
control the ROW or the fiber optic filaments, as the case may be, remain in the
hands of the grantor. Therefore, while IRUs might be construed as conferring a
significant equitable right in the ROW or the fiber optic filaments, as the case
may be, the legal status of IRUs remains uncertain, and there can be no
assurance that a trustee in bankruptcy would not void an IRU in the event of the
bankruptcy of the grantor of such IRU. In addition, the IRUs granted by CMP and
the NU companies are subject to pre-existing, system-wide mortgages used to
secure utility bonds issued by those companies. The Company has sought
acknowledgments from the NU companies' indenture trustees that the Company's
rights under the NU Agreements would be recognized in the event of the
foreclosure of the related mortgage. Such agreements have been obtained from the
indenture trustees for The Connecticut Light and Power Company and Western
Massachusetts Electric Company, and negotiations are ongoing with the indenture
trustee of Public Service Company of New Hampshire ("PSNH"). If such an
agreement is not obtained from PSNH's indenture trustee, a default by PSNH under
its mortgage that resulted in the foreclosure of the mortgage could result in
the Company losing its rights under the NU Agreements in the State of New
Hampshire. The Company has not sought such acknowledgments from CMP's indenture
trustees because, unlike in the NU Agreements, in the CMP Agreement the Company
is not entitled to such acknowledgments. A default by CMP under its mortgage
that resulted in the foreclosure of the mortgage could result in the Company
losing its rights under the CMP Agreement.
The Company's IRUs are derivative of the grantor's interest in the real
property on which the NEON system is located. To the extent that the grantor has
a limited easement in such property, the IRUs granted to the Company may be
alleged to be insufficient for the Company's uses. Certain landowners have
asserted claims against the Company on this basis, and, to date, in one such
case, rather than electing to contest the landowner's interpretation of the
scope of the easement, the Company has made a payment to such landowner to
acquire a ROW meeting the Company's requirements. The Company believes that the
easements granted by a substantial number of landowners to grantors of the
Company's IRUs are similar in scope to those with respect to which claims have
been asserted, and there can be no assurance that additional claims will not be
made in the future. Although litigation has not commenced in connection with any
of these claims, there can be no assurance that litigation will not commence in
the future. In the event that a substantial number of landowners makes similar
claims in the future and the Company is required to compensate such landowners
for the use of their property for the NEON system or seek alternative routes for
portions of the NEON system so affected, the Company's business, financial
condition and results of operations would be materially adversely affected.
The NU Agreements and the CMP Agreement contain provisions which
acknowledge the right of NU and CMP, respectively, to make the provision of
electrical services to their own customers their top priority; NU and CMP are
required only to exercise "reasonable care" with respect to the Company's
facilities and are otherwise free to
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take whatever actions they deem appropriate with respect to ensuring or
restoring service to their electricity customers, any of which actions could
impair the operation of the NEON system. In addition, certain of the Company's
construction efforts are constrained by the ability of NU and CMP to de-energize
segments of their transmission and distribution facilities in order to permit
construction crews to work safely. The Company has experienced construction
delays in the past as a result of the inability to timely de-energize certain
segments and may experience such delays in the future.
The NU Agreements may be terminated under certain circumstances, including
the Company's failure to complete NUNet (as defined below under "Business--NU
Agreements") by September 1999, to maintain all necessary government permits,
licenses, franchises and approvals or its failure to pay amounts when due. In
addition, the CMP Agreement may be terminated by CMP under certain
circumstances, including the Company's failure to pay fees provided therein. The
termination of either the NU Agreements or the CMP Agreement would result in the
Company's loss of its ROWs under such agreements and would have a material
adverse effect on the Company's business, financial condition and results of
operations.
Some of the agreements that the Company enters into to construct, operate
and install the NEON system may be nonexclusive, short-term or revocable at
will, and there can be no assurance that the Company will have continued access
to existing rights-of-way after their expiration or termination. If any of these
agreements were terminated as a result of among other things a default by the
Company of its obligations thereunder including failure to maintain any
necessary governmental approvals or could not be renewed on commercially
reasonable terms and the Company lost its rights in the fiber optic cable or
abandoned portions of its NEON system, such actions would impair the operation
of the NEON system. See "Business--Right-of-Way Agreements."
Competition
The telecommunications industry is highly competitive. The Company faces
substantial competition from ILECs, which currently dominate their local
telecommunications markets, and CLECs, most of which have greater financial and
other resources than the Company. In addition to ILECs and CLECs, potential
competitors capable of offering services similar to those offered by the Company
include IXCs, other facilities-based communications service providers, cable
television companies, electric utilities, microwave carriers, satellite
carriers, wireless telephone system operators and end-users with private
communications networks. There can be no assurance that such entities will not
compete with the Company or that such competition would not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Competition."
The Company is currently aware of communications carriers that own or lease
fiber optic networks in New England (such as AT&T, MCI, Sprint, Bell Atlantic,
SNET, WorldCom and Teleport) and of other carriers (such as IXC Communications,
Qwest Communications International, Metromedia Fiber Network, Level 3
Communications and RCN) who are planning to own or lease additional networks
which, if constructed, may employ advanced technology comparable to that of the
NEON system.
NU and CMP each own or have an IRU in certain fibers in the cable that
includes the NEON system, which permit NU and CMP to compete directly with the
Company in the future if they are not using these fibers for their own corporate
requirements. See "Business--Right-of-Way Agreements." In addition the Company's
ROWs are nonexclusive in that other service providers (including the utilities
themselves) could install competing networks using the same ROWs.
In the future, the Company may be subject to more intense competition due
to the development of new technologies, an increased supply of domestic and
international transmission capacity, the consolidation in the industry among
local and long distance service providers and the effects of deregulation
resulting from the Telecommunications Act of 1996. The introduction of new
products or emergence of new technologies may reduce the cost or increase the
supply of certain services similar to those provided by the Company. The Company
cannot predict which of many possible future product and service offerings will
be crucial to maintain its competitive position or what expenditures will be
required to develop profitably and provide such products and services.
Regulatory Risks
Regulation of the telecommunications industry is changing rapidly. Existing
and future federal, state and local governmental regulations will greatly
influence the viability of the Company. Consequently, undesirable regulatory
changes could adversely affect the Company's business, financial conditions and
results of operations. For instance,
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while the Company does not believe that its fiber offerings, as proposed, are
subject to common carrier regulation by the Federal Communications Commission
("FCC") or under the common carrier provisions of the Communications Act of
1934, as amended (the "Communications Act"), except with respect to its
provision of telecommunications services on a common carrier basis offered
through its subsidiaries in New York and Connecticut, the Company cannot predict
the future regulatory status of its business. The FCC has recognized a class of
private, non-common carriers whose practice it is to make individualized
decisions on what terms and with whom to deal. These carriers may be subject to
FCC jurisdiction but are not currently extensively regulated. Such private
carriers include entities providing "telecommunications" for a fee as defined in
the 1996 Act, which may include certain of the Company's offerings. In the event
that the Company becomes subject to the FCC's jurisdiction, it will be required
to comply with a number of regulatory requirements, including, but not limited
to rate regulation, reporting requirements, special payments, including
universal service assessments and access charges, and required service
offerings. Compliance with these regulatory requirements may impose substantial
administrative burdens on the Company. In addition, ILECs, CLECs and IXCs are
subject to various federal telecommunications laws. Accordingly, changes in
federal telecommunications law may affect the Company's business by virtue of
the inter-relationships that exist among the Company and many of these regulated
telecommunications entities. It is difficult for the Company to forecast at this
time how these changes will affect the Company in light of the complex
interrelationships that exist in the industry and the different levels of
regulation.
The Company is subject to state regulation, which can vary substantially
from state to state. The Company's subsidiaries in New York and Connecticut have
petitioned to provide telecommunications services on a certificated common
carrier basis. Therefore, such subsidiaries may be subject to the obligations
that applicable law places on all similarly certificated common carriers as
described above and elsewhere in this Prospectus, including: the filing of
tariffs, state regulation of certain service offerings and pricing, requirements
for interconnection with and resale to other carriers, payment of regulatory
fees and assessments, and reporting requirements. See "Business--Regulation." At
present, the Company does not anticipate that the costs of compliance with these
regulatory requirements, or any of the regulatory requirements of other states
to which it might become subject, will have a material adverse effect on its
operations, and expects its direct competitors to be subject to similar
regulatory requirements to the extent they operate within these states. In some
jurisdictions, the Company's pricing flexibility for intrastate services may be
limited because of regulation, although the Company's direct competitors are
expected to be subject to similar restrictions.
For a more detailed discussion of the regulatory environment in which the
Company conducts its business, see "Business--Regulation."
Dependence on Third-Party Contractors
The Company has contracted to NU and CMP substantially all of the
engineering, routine maintenance and construction supervision activities
associated with the construction of that portion of the NEON system located on
NU and CMP properties and the Company has contracted to various third party
contractors, as well as CMP, the construction of the NEON system. As a result,
the Company may have less control over the timeliness and quality of the work
performed by such parties than if such work were to be performed by the
Company's own employees. The failure of NU, CMP or such contractors to complete
these activities in a timely manner, within anticipated budgets and in
accordance with the Company's quality standards and performance criteria, could
have a material adverse effect upon the Company's business, financial condition
and results of operations. In addition, as a result of their activities on
behalf of the Company, NU, CMP and such contractors may from time to time have
access to certain proprietary information about the Company. The Company's
agreements with NU, CMP and such contractors include provisions protecting the
confidentiality of such proprietary information.
Rapid Technological Changes
The telecommunications industry is subject to rapid and significant changes
in technology. For instance, recent technological advances permit substantial
increases in transmission capacity of both new and existing fiber, and the
introduction of new products or emergence of new technologies may reduce the
cost or increase the supply of certain services similar to those provided by the
Company. While the Company believes that, for the foreseeable future,
technological changes will neither materially affect the continued use of fiber
optic cable nor materially
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hinder the Company's ability to acquire necessary technologies, the effect of
technological changes on the Company's operations cannot be predicted and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Suppliers
The Company is dependent upon third-party suppliers for a number of
components and parts used in the NEON system. In particular, the Company
purchases cable that includes fiber optic glass manufactured by Lucent
Technologies, Inc. ("Lucent"). The Company believes that there are alternative
suppliers or alternative components for all of the components contained in the
NEON system. However, any delay or extended interruption in the supply of any of
the key components, changes in the pricing arrangements with its suppliers and
manufacturers or delay in transitioning a replacement supplier's product into
the NEON system could disrupt the Company's operations and, if such disruption
continued for an extended period of time, have a material adverse effect on the
Company's business, financial condition and results of operations.
Risk of Continued Decline in Prices
Although the Company believes that, in the last several years, increasing
demand for fiber optic transmission capacity has resulted in a shortage of
capacity and slowed a decline in prices, the Company anticipates that prices for
its services to carriers specifically, and interstate services in general, will
continue to decline over the next several years due primarily to (i) price
competition as various network providers continue to install networks that
compete with the NEON system, (ii) technological advances that permit
substantial increases in the transmission capacity of both new and existing
fiber and (iii) strategic alliances or similar transactions, such as long
distance capacity purchasing alliances among certain ILECs, that increase
customer purchasing power. Such price decreases, without offsetting decreases in
the Company's cost of services or increases in demand for the Company's
services, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Nature of Company's Services
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure, and does not control
whether a customer uses such bandwidth for voice, data or video signals. The
Company is not currently engaged in the transmission of voice, data or video
services and does not provide switched voice and data services. Accordingly, at
the present time, the Company, unlike some telecommunications companies,
receives no revenues from providing such services, and instead derives and
expects to continue to derive substantially all of its revenues from the leasing
of fiber optic capacity to its customers, many of whom transmit voice, data or
video information or provide switched voice and data services. The limited
nature of the Company's current services could limit potential revenues and
result in the Company having lower revenues than competitors which provide a
wider array of services. See "Business--Customers" and "--Competition."
Dependence Upon Network Infrastructure; Risk of System Failure
The Company's success in marketing its services to its customers requires
that the Company provide competitive reliability, capacity and security via its
network. The Company's network and the infrastructures upon which it depends are
subject to physical damage, power loss, capacity limitations, software defects,
breaches of security and other disruptions beyond the control of the Company
that may cause interruptions in service or reduced capacity for customers, any
of which could have a material adverse effect on the Company's business,
financial condition and results of operations. The Company's agreements with its
customers typically provide for the payment of outage related credits (a
predetermined reduction or offset against the Company's lease rate when a
customer's leased facility is non-operational or otherwise does not meet certain
operating parameters) or damages in the event of a disruption in service, which
credits or damages could be substantial and could have a material adverse effect
on the Company's business, financial condition and results of operations.
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Dependence on Key Personnel
The Company's future performance will depend to a significant extent upon
the efforts and abilities of its senior executives. The loss of service of one
or more of these persons could have an adverse effect on the Company's
business. There can be no assurance that the Company will be able to attract
and retain qualified executives to achieve its business objectives. See
"Management."
High Leverage; Ability to Service Indebtedness
Upon completion of the Offerings, the Company will be highly leveraged. As
of March 31, 1998, after giving effect to the Offerings and the application of
the estimated net proceeds therefrom, the Company would have had outstanding
approximately $180.4 million of indebtedness (consisting of the Notes and
$437,042 of other indebtedness) and the Company's ratio of total debt to total
capitalization would have been 63.67%.
The Company's high degree of leverage could have adverse consequences to
the holders of the Company's securities. Such consequences may include, among
other things: (i) commencing on August 15, 2002, a substantial portion of the
Company's cash flow will be dedicated to the payment of the Company's interest
expense with respect to the Notes and such cash flow may be insufficient to meet
its payment obligations on the Notes in addition to paying other obligations of
the Company as they become due; (ii) the Company's ability to obtain any
necessary financing in the future for completion of the NEON system or other
purposes may be impaired; (iii) certain of the future borrowings by the Company
may be at variable rates of interest that could cause the Company to be
vulnerable to increases in interest rates; (iv) the Company may be more
leveraged than its competitors, which may place the Company at a competitive
disadvantage; and (v) the Company may be vulnerable to a downturn in its
business or the economy generally or to delays in or increases in the cost of
constructing the NEON system.
For the year ended December 31, 1997 and the three months ended March 31,
1998, after giving effect to the Debt Offering (as if it had occurred at the
beginning of the periods) and the application of the net proceeds therefrom, the
Company's earnings would have been insufficient to cover fixed charges by
approximately $23,689,337 and $6,757,318 respectively. Although the first seven
interest payments on the Notes will be paid from the U.S. government obligations
(and interest and principal payments thereon) to be purchased by the Company
upon consummation of the Offerings, thereafter, the Notes will require annual
cash interest payments of $23.0 million, and the Notes will mature on August 15,
2008. The Company's ability to pay principal and interest on the Notes and any
additional indebtedness it may incur after the Offerings will depend upon its
ability to complete and operate the NEON system and its future operating
performance, which will be affected by prevailing economic conditions and
financial, business and other factors, many of which are beyond its control.
There can be no assurance that the NEON system will be completed on time or on
budget or that the Company will be able to generate sufficient cash flow to pay
its indebtedness and its other obligations as they become due. If the Company is
unable to service its indebtedness, the Company will be forced to take actions
such as reducing or delaying acquisitions or capital expenditures, selling
assets, restructuring or refinancing its indebtedness or seeking additional
equity capital. There is no assurance that any of these remedies could be
effected on satisfactory terms, if at all, including, whether, and on what
terms, the Company could refinance its indebtedness or raise equity capital.
The Indenture imposes and will impose significant operating and financial
restrictions on the Company and its present and future subsidiaries. These
restrictions affect, and in certain cases significantly limit or prohibit, among
other things, the ability of the Company and its subsidiaries to incur certain
indebtedness, pay dividends and make certain other restricted payments, create
liens, issue and sell capital stock of subsidiaries, guarantee certain
indebtedness, sell assets, or consolidate, merge or transfer all or
substantially all of their assets. There can be no assurance that such covenants
will not adversely affect the Company's ability to finance its future operations
or capital needs or to engage in attractive business opportunities.
Concentration of Stock Ownership; Potential Conflicts of Interest
After consummation of the Offerings, CMP and NU will beneficially own or
control, in the aggregate, approximately 68.2% of the outstanding Common Stock.
As a result of their stock ownership, these stockholders acting together will be
able to continue to elect the members of the Board of Directors and decide all
matters requiring stockholder approval. See "Principal and Selling
Stockholders."
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The Company has entered into various agreements with CMP and NU, including
certain existing ROW agreements for the engineering, design and construction
supervision of the NEON system. Certain conflicts may arise between the
interests of CMP and NU and other securityholders of the Company. Pursuant to
such agreements, CMP and NU may have monetary claims from time to time against
the Company. See "Business--Right-of-Way Agreements" and "Certain Transactions."
CMP and NU have entered into a Principal Stockholders Agreement dated May
28, 1998, whereby each such party agrees that, following the completion of the
Offerings, it will not permit or cause the Company to (i) merge or consolidate,
liquidate or dissolve, change its form of organization or sell, lease, exchange
or transfer all or substantially all of its assets; or (ii) seek bankruptcy
protection or certain other protection from creditors, unless both parties
agree. After the closing of the Offerings, this agreement will remain in effect
for so long as (a) NU owns at least 10% of the outstanding Common Stock of the
Company, fully diluted and (b) the aggregate Common Stock of the Company owned
by NU and CMP is at least 33-1/3% of the outstanding Common Stock of the
Company, fully diluted. The Company expects that each of CMP and NU will be
major creditors of the Company under their existing ROW agreements. See
"Business--Right-of-Way Agreements" and "Description of Capital
Stock--Shareholders Agreement."
The Company has agreed with Mode 1, an affiliate of NU, that for so long as
NU owns at least 10% of the Company's equity securities, the Company will not
take any action that would cause Mode 1 to fail to qualify as an "exempt
telecommunications carrier" under the Public Utility Holding Company Act of
1935, as amended, and as further amended by the Telecommunications Act of 1996.
No Prior Public Market; Possible Volatility of Stock Price
Prior to the Equity Offering, there has been no public market for the
Common Stock. The initial public offering price of the Common Stock was
determined by negotiations between the Company and the Representatives of the
Underwriters and may not be indicative of the market price for the Common Stock
in the future. See "Underwriting" for a discussion of the factors considered in
determining the initial public offering price. There can be no assurance that an
active trading market for the Common Stock will develop or be sustained after
the Equity Offering. If a trading market develops, the market price of the
Common Stock may fluctuate widely as a result of various factors, such as
period-to-period fluctuations in the Company's operating results, sales of
Common Stock by principal stockholders, developments in the industry,
competitive factors, regulatory developments, economic and other external
factors, general market conditions and market conditions affecting stocks of
telecommunications companies in particular. The stock market in general, and the
stocks of telecommunications companies in particular, have in the past
experienced extreme volatility in trading prices and volumes that has often been
unrelated to operating performance. Such market volatility may have a
significant adverse affect on the market price and marketability of the Common
Stock. See "Underwriting."
Absence of Dividends
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and has no current intention to pay cash dividends on its Common Stock. The
terms of the Notes will restrict the Company's ability to pay cash dividends on
its Common Stock. See "Dividend Policy."
Shares Eligible for Future Sale
Upon consummation of the Equity Offering, 16,066,335 shares of Common Stock
will be outstanding (16,741,335 shares if the Underwriters' over-allotment
option is exercised in full), of which 4,500,000 shares will be freely tradeable
(5,175,000 shares if the Underwriters' over-allotment option is exercised in
full). Of the 11,566,335 remaining shares, 10,950,780 shares will be held by
CMP, NU or their affiliates who, together with the Company and its officers and
directors, have entered into agreements not to sell, contract to sell, or
otherwise dispose of, any shares of Common Stock without the consent of Credit
Suisse First Boston Corporation for a period of 180 days after the date of this
Prospectus (the "Lock-Up Agreements"). Upon expiration of the Lock-Up
Agreements, such shares will be eligible for sale in the public markets in
accordance with Rule 144 ("Rule 144") promulgated under the Securities Act of
1933 (the "Securities Act"). Upon consummation of the Equity Offering, the
Company will have outstanding stock options to purchase a total of 1,705,272
shares of Common Stock, of which options for 284,210 shares will be exercisable
immediately upon consummation of the Equity Offering. The shares issued upon
exercise of these options will be potentially eligible for public sale 90 days
after the date of this Prospectus pursuant to Rule 701 under the Securities Act.
All holders of such options, however, have signed Lock-Up Agreements. Except as
limited by the Lock-Up Agreements and by Rule 144
17
<PAGE>
volume limitations applicable to affiliates, shares issued upon the exercise of
stock options generally are available for sale in the open market. Future sales
of significant amounts of Common Stock in the public market after the Equity
Offering could adversely affect the prevailing market price of the Common
Stock. See "Shares Eligible for Future Sale."
Immediate and Substantial Dilution
Investors purchasing Common Stock in the Equity Offering will experience
immediate and substantial dilution in the net tangible book value of their
shares. At the initial public offering price of $12.00 per share, dilution to
new investors is $8.96 per share. Additional dilution will occur upon exercise
of outstanding stock options. If the Company seeks additional capital in the
future, the issuance of shares or securities convertible into shares of Common
Stock to obtain such capital may lead to further dilution. See "Dilution."
Antitakeover Effect of Certain Charter Provisions
The Board of Directors has the authority to issue up to 2,000,000 shares of
Preferred Stock and to determine the price, rights, preferences, privileges and
restrictions, including voting rights, of those shares without any further vote
or action by the stockholders. The rights of the holders of Common Stock may be
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The issuance of Preferred
Stock may have the effect of delaying, deferring or preventing a change of
control of the Company without further action by the stockholders and may
adversely affect the voting and other rights of the holders of Common Stock,
which could have an adverse impact on the market price of the Common Stock. The
Company has no present plans to issue shares of Preferred Stock. Further,
certain provisions of the Company's charter documents, including provisions
eliminating the ability of stockholders to take action by written consent and
limiting the ability of stockholders to raise matters at a meeting of
stockholders without giving advance notice, may have the effect of delaying or
preventing changes in control or management of the Company, which could have an
adverse effect on the market price of the Company's Common Stock. The Company is
subject to the anti-takeover provision of Section 203 of the Delaware General
Corporation Law, which will prohibit the Company from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
The application of Section 203 also could have the effect of delaying or
preventing a change of control of the Company. See "Description of Capital
Stock."
18
<PAGE>
DEBT OFFERING
Concurrently with the Equity Offering, the Company is offering $180.0
million aggregate principal amount of its 12-3/4% Senior Notes Due 2008 to the
public in the Debt Offering. Upon the closing of the Debt Offering, the Company
will purchase U.S. government obligations in such amount as will be sufficient,
upon receipt of scheduled interest and principal payments on such securities, to
provide for payment in full of the first seven scheduled interest payments on
the Notes. Such securities will be pledged as security for the benefit of the
holders of the Notes. The indenture under which the Notes will be issued will
contain certain covenants that, among other things, will limit (i) the
incurrence of additional Indebtedness by the Company and its Restricted
Subsidiaries (as defined), (ii) the payment of dividends and other restricted
payments by the Company and its Restricted Subsidiaries, (iii) the creation of
restrictions on distributions from Restricted Subsidiaries, (iv) asset sales,
(v) transactions with affiliates, (vi) sales or issuances of Restricted
Subsidiary capital stock, (vii) the incurrence of liens and the entering into of
sale/leaseback transactions and (viii) mergers, consolidations and transfers of
assets. The closing of the Equity Offering is conditioned upon the closing of
the Debt Offering, and the closing of the Debt Offering is conditioned upon the
closing of the Equity Offering. Such conditions may not be waived. See
"Description of Certain Indebtedness."
USE OF PROCEEDS
The net proceeds to the Company from the Equity Offering will be
approximately $44.04 million (approximately $51.57 million if the Underwriters'
over-allotment option is exercised in full), after deducting the underwriting
discount and estimated offering expenses. The Company will not receive any of
the proceeds from the sale of shares of Common Stock sold by the Selling
Stockholders in the Equity Offering. The net proceeds to the Company from the
Debt Offering will be approximately $174.0 million, after deducting the
underwriting discount and estimated offering expenses.
Of the approximately $218.04 million net proceeds of the Offerings the
Company intends to use approximately $72.0 million to purchase U.S. government
obligations in such amount as will be sufficient, upon receipt of scheduled
interest and principal payments on such securities, to provide for payment in
full of the first seven scheduled interest payments due on the Notes,
approximately $90.0 million for capital expenditures in 1998 and 1999 associated
with the continued construction and expansion of the NEON system, approximately
$19.4 million (as of June 30, 1998) to repay certain indebtedness and the
balance for working capital and general corporate purposes. Such indebtedness to
be repaid includes approximately $17.9 million (as of June 30, 1998) of
principal plus accrued interest under the Company's Construction Loan Agreement
with CMP (the "CMP Loan Agreement") and approximately $1.5 million (as of June
30, 1998) of principal and prepayment premium plus accrued interest under the
Company's Construction Loan Agreement with Peoples Heritage Savings Bank (the
"Peoples Loan Agreement"). Indebtedness under the CMP Loan Agreement and the
Peoples Loan Agreement bears interest at an annual rate of LIBOR plus 3% and an
annual rate of 9.25%, respectively, and matures in 2002 and 2007, respectively.
Among the general corporate purposes for which the Company intends to use the
proceeds of the Offerings are the payment of a bonus of $500,000 to Mr.
Colantonio in recognition of his efforts on behalf of the Company and payment of
a bonus of $500,000 to MaineCom in recognition of the services provided by Mr.
Crabtree, as an employee of MaineCom, to the Company. See "Management--Executive
Compensation." The payment of these amounts is contingent upon the closing of
the Offerings. Pending the foregoing uses, the net proceeds of the Offerings
will be invested in short-term, investment-grade securities.
DIVIDEND POLICY
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
payment of dividends is within the discretion of the Company's Board of
Directors and will be dependent upon, among other factors, the Company's results
of operations, financial condition and capital requirements, restrictions
imposed by the Company's financing arrangements and legal requirements.
The terms of the Notes will restrict the Company's ability to pay cash
dividends on its Common Stock. See "Description of Certain Indebtedness."
19
<PAGE>
DILUTION
At March 31, 1998, after giving effect to the Reorganization and Stock
Split, the Company had a net tangible book value of approximately $10,870,000 or
$0.90 per share of Common Stock. Net tangible book value per share represents
the amount of total tangible assets less total liabilities divided by the number
of shares of Common Stock outstanding, after giving effect to the Preferred
Stock Conversion and the Stock Split. After giving effect to the sale of shares
of Common Stock offered by the Company hereby and after deducting the
underwriting discount and estimated offering expenses payable by the Company,
the pro forma net tangible book value of the Company as of March 31, 1998 would
have been approximately $48,910,000 or $3.04 per share. This represents an
immediate increase in net tangible book value of $2.14 per share to the existing
stockholders and an immediate dilution of $8.96 per share to new investors. The
following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price ............................. $ 12.00
Net tangible book value as of March 31, 1998 ..................... $ 0.90
Increase attributable to net proceeds to the
Company of the Equity Offering ................................. 2.14
Pro forma net tangible book value after the Equity Offering ....... 3.04
--------
Dilution to new investors ......................................... $ 8.96
========
</TABLE>
The following table summarizes on a pro forma basis, as of March 31, 1998,
the differences between existing stockholders and new investors in the Equity
Offering with respect to the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ --------------------------
Average Price
Number Percent Amount Percent per Share
------------ --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2) ......... 12,062,735 75.1% $19,378,632 28.8% $ 1.61
New investors(2) .................... 4,000,000 24.9 48,000,000 71.2 12.00
---------- ---- ----------- ---- -------
Total ............................. 16,062,735 100% $67,378,632 100%
========== ==== =========== ====
</TABLE>
- ---------------------
(1) Excludes options outstanding as of March 31, 1998 to purchase 3,600 shares
of Common Stock with an exercise price of $0.10 per share and warrants
outstanding as of March 31, 1998 to purchase 174,367 shares of Common Stock
with a weighted average exercise price of $1.92 per share. See
"Capitalization," "Management--1998 Stock Incentive Plan" and the Notes to
Consolidated Financial Statements of the Company included elsewhere in this
Prospectus. To the extent these options and warrants are exercised, there
will be further dilution to the new investors.
(2) Sales by the Selling Stockholders in the Equity Offering will reduce the
number of shares held by existing stockholders to 11,562,735, or
approximately 72.0% of the total number of shares of Common Stock
outstanding after the Equity Offering (or approximately 69.1% if the
Underwriters over-allotment option is exercised in full), and will increase
the number of shares held by new investors to 4,500,000, or approximately
28.0% of the total number of shares of Common Stock outstanding after the
Equity Offering (or 5,175,000 shares and approximately 30.9% if the
Underwriters over-allotment option is exercised in full).
20
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of the Company as of March 31, 1998 (i) on an actual basis, (ii)
on a pro forma basis after giving effect to the Reorganization and (iii) on a
pro forma as adjusted basis reflecting in addition to the Reorganization, (A)
the conversion of the Company's Preferred Stock into an aggregate of 11,777,910
(post-split) shares of Common Stock upon the closing of the Offerings and (B)
the Offerings and the application of the estimated net proceeds therefrom
(giving effect to, in the case of the Equity Offering, the initial public
offering price of $12.00 per share).
<TABLE>
<CAPTION>
As of March 31, 1998
---------------------------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents .................................... $ 1,232,254 $ 1,232,254 $142,586,381
Restricted cash .............................................. 839,662 839,662 72,000,000
------------ ------------ ------------
Total cash, cash equivalents and restricted cash ......... $ 2,071,916 $ 2,071,916 $214,586,381
============ ============ ============
Short-term borrowings ........................................ $ 1,949,936 $ 1,949,936 $ 399,401
Note payable to related party ................................ 3,975,000 3,975,000 --
Long-term debt (less current portion) ........................ 37,641 37,641 37,641
12-3/4% Senior Notes Due 2008 ................................ -- -- 180,000,000
------------ ------------ ------------
Total debt ............................................... 5,962,577 5,962,577 180,437,042
------------ ------------ ------------
Minority interest (1) ........................................ 5,024,288 -- --
------------ ------------ ------------
CMP Warrant (1)(4) ........................................... 532,836 -- --
Stockholders' equity:
Preferred stock (no shares authorized, issued or outstanding,
actual; 2,000,000 shares authorized and no shares issued or
outstanding, pro forma and pro forma as adjusted) ......... -- -- --
Series A convertible preferred stock (200,000 and
277,960 shares authorized and 78,324 and
277,960 shares issued and outstanding, actual and
pro forma, respectively) (2) .............................. 783 2,779 --
Series B convertible preferred stock (4,500,000 and
4,498,371 shares authorized and 962,734 and
4,433,204 issued and outstanding, actual and pro
forma, respectively) (1) .................................. 9,627 44,332 --
Common stock (4,000,000, 30,000,000 and 30,000,000 shares
authorized and 284,828, 284,828 and 16,062,735 shares
issued and outstanding, actual, pro forma and pro forma
as adjusted, respectively) (3) ............................ 2,848 2,848 160,627
Warrants .................................................... 8,595 8,595 8,595
Additional paid-in capital (4)(5) ........................... 11,817,216 63,126,005 107,055,337
Accumulated deficit (6) ..................................... (2,817,999) (2,817,999) (4,272,174)
------------ ------------ ------------
Total stockholders' equity ............................... 9,021,070 60,366,560 102,952,385
------------ ------------ ------------
Total capitalization ................................... $ 20,540,771 $ 66,329,137 $283,389,427
============ ============ ============
</TABLE>
- ---------------------
(See footnotes on the following page)
21
<PAGE>
(1) In connection with the Reorganization, the minority interests in the
Company's subsidiaries were exchanged for Series B convertible preferred
stock, resulting in the elimination of any minority interest and an increase
of 3,470,470 shares of Series B convertible preferred stock, of which
144,172 shares arose from CMP's exercise of a warrant.
(2) In connection with the Reorganization, the conversion rate on the Series A
convertible preferred stock was reduced to a 1 : 1 ratio and 199,636
additional shares of Series A convertible preferred stock were issued to
adjust for such reduction.
(3) Excludes (i) 3,600 shares of Common Stock issuable upon the exercise of
stock options outstanding as of March 31, 1998 with an exercise price of
$0.10 per share, (ii) an additional 2,436,105 shares of Common Stock
reserved for future issuance under the Company's 1998 Stock Incentive Plan,
and (iii) 174,367 shares of Common Stock issuable upon the exercise of
warrants outstanding as of March 31, 1998 with a weighted average exercise
price of $1.92 per share.
(4) The exercise of the CMP warrant resulted in an increase in additional
paid-in capital of $531,394, which represents the difference between the
actual book value of the warrant and the new par value of Series B
convertible preferred stock arising upon exercise of the warrant.
(5) In connection with the Reorganization, the Company recorded an intangible
asset of $45,788,366 to reflect the Company's acquisition of NU's minority
interest in a subsidiary (NECOM LLC), in accordance with AICPA Accounting
Interpretation 39 to APB Opinion No. 16, Business Combinations (AIN-39).
(6) Pro forma as adjusted reflects the write-off of deferred financing costs of
$1,454,175 related to the extinguishment of debt with a portion of the
proceeds of the Offerings.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial and operating data presented below for
each of the years in the three-year period ended December 31, 1997 and as of
December 31, 1996 and 1997 have been derived from the Consolidated Financial
Statements of the Company, which have been audited by Arthur Andersen LLP,
independent public accountants. The selected consolidated financial data for
each of the years in the two-year period ended December 31, 1994 and for each of
the three-month periods ended March 31, 1997 and 1998 and as of December 31,
1993, 1994 and 1995, and March 31, 1998 have been derived from the unaudited
consolidated financial statements of the Company, which have been prepared on
the same basis as the Consolidated Financial Statements of the Company and, in
the opinion of management, reflect all normal recurring adjustments necessary
for a fair presentation of the financial position and results of operations for
such periods and as of such dates. The results for the three-months ended March
31, 1998 are not necessarily indicative of the operating results to be expected
for the entire year. The information set forth below should be read in
conjunction with the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus. The operations
data provided below for the year ended December 31, 1997 and the three-months
ended March 31, 1998 are also presented on a pro forma basis to give effect to
the Reorganization as if it had occurred on January 1, 1997. The balance sheet
data presented below as of March 31, 1998 are also presented on a pro forma
basis to give effect to the Reorganization and on a pro forma as adjusted basis
to give effect to the Offerings and the application of the estimated net
proceeds therefrom and the Reorganization.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------------------
Pro Forma
1993 1994 1995 1996 1997(1) 1997(3)
----------- ------------- ------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ........................... $287,894 $326,581 $ 42,598 $ 13,773 $ 394,704 $ 394,704
Operating expenses ................. 291,551 589,250 487,159 1,185,595 2,693,037 4,219,316
-------- -------- -------- ---------- ---------- ----------
Loss from operations ............... (3,657) (262,669) (444,561) (1,171,822) (2,298,333) (3,824,612)
Interest income (expense), net ..... -- 59,959 (42,401) 125,838 (2,893) (2,893)
Minority interest(2) ............... -- -- -- 353,222 1,080,200 --
Provision for (benefit from)
income taxes ...................... -- -- -- 16,000 (261,000) (261,000)
-------- -------- -------- ---------- ---------- ----------
Net loss ........................... (3,657) (202,710) (486,962) (708,762) (960,026) (3,566,505)
Basic and diluted loss per share (6.90) (2.48) (1.71) (2.49) (3.37) (12.52)
Basic and diluted weighted
average shares outstanding ........ 530 81,745 284,578 284,735 284,828 284,828
<CAPTION>
Three Months Ended
March 31,
-------------------------------------------
Pro Forma
1997 1998(1) 1998(3)
------------- ------------- ---------------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues ........................... $ -- $151,363 $ 151,363
Operating expenses ................. 345,620 774,521 1,156,091
-------- -------- ----------
Loss from operations ............... (345,620) (623,158) (1,004,728)
Interest income (expense), net ..... 56,638 (61,494) (61,494)
Minority interest(2) ............... 137,620 314,498 --
Provision for (benefit from)
income taxes ...................... (33,000) (77,000) (77,000)
-------- -------- ----------
Net loss ........................... (118,362) (293,154) (989,222)
Basic and diluted loss per share (0.42) (1.03) (3.47)
Basic and diluted weighted
average shares outstanding ........ 284,828 284,828 284,828
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------- ---------------- ------------- ----------------
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital .................... $ (9,165) $ (29,141) $ (4,526,664) $3,209,234 $ (3,463,011)
Total assets ....................... 63,612 165,081 4,774,827 16,369,663 23,461,000
Note payable to related party ...... 5,000 -- -- -- 2,100,000
Long-term debt, including
current maturities ............... -- 348,198 932,713 927,021 2,118,905
Total liabilities .................. 23,213 478,332 5,574,589 2,332,963 8,275,154
Minority interest(2) ............... -- -- -- 6,312,554 5,338,786
CMP Warrant ........................ -- -- -- -- 532,836
Stockholders' equity (deficit) ..... 40,399 (313,251) (799,762) 7,724,146 9,314,224
<CAPTION>
As of March 31, 1998
-------------------------------------------------
Pro Forma Pro Forma As
Actual (3) Adjusted(4)
---------------- ---------------- ---------------
Balance Sheet Data:
<S> <C> <C> <C>
Working capital .................... $ (5,500,383) $ (5,500,383) $137,404,279
Total assets ....................... 26,183,672 71,972,038 289,032,328
Note payable to related party ...... 3,975,000 3,975,000 --
Long-term debt, including
current maturities ............... 1,987,577 1,987,577 180,437,042
Total liabilities .................. 11,605,478 11,605,478 186,079,943
Minority interest(2) ............... 5,024,288 -- --
CMP Warrant ........................ 532,836 -- --
Stockholders' equity (deficit) ..... 9,021,070 60,366,560 102,952,385
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997(1)
------- -------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Other Financial Data:
Cash provided by (used in) operating
activities ............................... N/A $(194,091) $ (413,196) $ 37,460 $ (553,427)
Cash provided by (used in) investing
activities ............................... N/A 19,591 (4,619,702) (6,738,898) (8,798,251)
Cash provided by financing activities ..... N/A 258,374 4,943,300 11,565,481 5,585,205
Net increase (decrease) in cash and cash
equivalents .............................. N/A 83,874 (89,598) 4,864,043 (3,766,473)
EBITDA(5) ................................. N/A (250,032) (420,386) (794,432) (665,271)
Capital expenditures ...................... 1,579 26,179 4,596,901 6,711,082 5,609,459
Ratio of deficiency to fixed charges(6) ... -- (6.43)x (2.54)x (4.50)x (10.11)x
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1997 1998(1)
---------------- ---------------
<S> <C> <C>
Other Financial Data:
Cash provided by (used in) operating
activities ............................... $(1,027,065) $ 657,881
Cash provided by (used in) investing
activities ............................... (4,037,187) (3,540,475)
Cash provided by financing activities ..... 3,657,456 3,016,396
Net increase (decrease) in cash and cash
equivalents .............................. (1,406,796) 133,802
EBITDA(5) ................................. (178,121) (6,647)
Capital expenditures ...................... 3,978,512 3,297,062
Ratio of deficiency to fixed charges(6) ... (9.46)x (7.53)x
</TABLE>
- ---------------------
(See footnotes on following page)
23
<PAGE>
(1) If the Reorganization had occurred as of January 1, 1997, the pro forma
impact on the Company's Statement of Operations for the year ended December
31, 1997 would reflect depreciation and amortization of $2,079,141, a net
loss of $3,566,505 and a loss per share of $12.52, after giving effect to
the Stock Split. The pro forma impact on the Company's Statement of
Operations for the quarter ended March 31, 1998 would reflect depreciation
and amortization of $683,583, a net loss of $989,222 and a loss per share of
$3.47, after giving effect to the Stock Split.
(2) Minority interest consists of the interests of members other than CMP in
FiveCom LLC, NECOM LLC and FiveCom of Maine LLC. See
"Business--Reorganization." Changes in minority interest reflect such other
members' capital adjusted by their portion of the net loss.
(3) Pro forma to give effect to the Reorganization. In connection with the
Reorganization, the Company recorded an intangible asset to reflect the
Company's acquisition of NU's minority interest in a subsidiary (NECOM LLC,
in accordance with AICPA Accounting Interpretation 39 to APB Opinion No. 16,
Business Combinations (AIN-39). If the intangible asset were recorded at
January 1, 1997, the amount recorded would be $45,788,366.
(4) Pro forma as adjusted to give effect to (i) the Offerings and the
application of the estimated net proceeds therefrom, after deducting the
underwriting discount and estimated offering expenses payable by the
Company and the write-off of unamortized financing costs associated with debt
extinguished and (ii) the Reorganization. See Notes 1 and 3 above.
(5) EBITDA is defined herein as net loss before interest income (expense), net,
loan commitment fees, provision for (benefit from) income taxes,
depreciation and amortization and is presented because it is commonly used
by certain investors and analysts to analyze and compare a company's
operating performance and to determine a company's ability to incur and
service debt. EBITDA should not be considered in isolation from, or as a
substitute for, net income, cash flow from operating activities or other
consolidated income or cash flow statement data prepared in accordance with
generally accepted accounting principles or as a measure of profitability or
liquidity.
(6) For purposes of calculating the ratio of earnings (deficiency) to fixed
charges: (i) earnings consist of loss before income tax benefit, plus fixed
charges, excluding capitalized interest, and (ii) fixed charges consist of
interest expenses and capitalized interest, plus amortization of deferred
financing costs. For the years ended December 31, 1993, 1994, 1995, 1996 and
1997 and for the three months ended March 31, 1997 and 1998, the Company's
earnings were insufficient to cover fixed charges by approximately $3,657,
$202,710, $601,400, $1,474,524, $3,432,869, $416,419 and $995,487,
respectively. For the year ended December 31, 1997 and for the three months
ended March 31, 1998, on a pro forma as adjusted basis, the Company's
earnings would have been insufficient to cover fixed charges by
approximately $23,689,337 and $6,757,318, respectively.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The discussion contains certain trend analysis and
other statements of a forward-looking nature relating to future events or the
future financial performance of the Company. Prospective investors are cautioned
that such statements are only projections and that actual results or events may
differ materially. In evaluating such statements, prospective investors should
consider the risk factors identified in this Prospectus, particularly the
matters set forth under the caption "Risk Factors," which could cause actual
results to differ materially from those indicated by such forward-looking
statements.
Overview
The Company is a facilities-based provider of technologically advanced,
high bandwidth, fiber optic transmission capacity for communications carriers on
local loop, inter-city and interstate facilities. The Company is currently
expanding its fiber optic network, the NEON system, to encompass over 900 route
miles, or more than 60,000 fiber miles, in New York and New England (the
"Northeast").
The Company has already completed construction of approximately 295 route
miles, or approximately 19,500 fiber miles, of the NEON system as of June 30,
1998, and currently operates fiber optic routes from Hartford, Connecticut to
Springfield, Massachusetts and from Nashua, New Hampshire to Portland, Maine.
The Company is currently engineering, constructing or acquiring additional
routes in New York, Connecticut, Massachusetts, Rhode Island and New Hampshire
to create a continuous fiber optic link between New York City and Portland,
Maine with access into and around Boston, Massachusetts and numerous other major
service areas in the Northeast. These additional routes are expected to be
substantially completed in 1998 and will add approximately 500 route miles, or
approximately 23,300 fiber miles, to the NEON system. The Company is also
planning to complete further expansion routes in 1999 into and around New York
City and other metropolitan areas along the NEON system. The completion of
routes currently planned will enable the NEON system to connect more than 540
cities and towns in six states and pass more than 200 points-of-presence
("POPs"), tandem switches and central offices, which the Company believes serve
over 18 million people and over 470,000 businesses.
The Company generates revenue primarily through the leasing of capacity on
its network and also through the provision of services consisting principally of
design and installation work. The Company generally receives fixed monthly
payments from its customers for the leasing of capacity on its network and
recognizes revenues ratably over the term of the applicable customer agreement.
Other service revenues are recognized as services are performed.
Prior to the Reorganization, the Company held interests in its
majority-owned or controlled subsidiaries, FiveCom LLC, FiveCom of Maine LLC and
NECOM LLC. See "Business--Reorganization." The interests of the minority owners
of these subsidiaries are reflected on the Company's balance sheet as minority
interest in consolidated subsidiaries. As a result of the Reorganization, such
minority owners became stockholders of the Company, and the value of the stock
of the Company received by them over the tangible book value of their minority
interests was reflected as goodwill.
Prior to the Offerings, the Company was included in CMP's consolidated
federal income tax return pursuant to the terms of a tax-sharing arrangement
entered into in 1996. The benefit from income taxes represents refundable income
taxes from CMP as a result of this tax sharing arrangement. The Company has no
net operating loss carryforwards as a result of this tax sharing arrangement.
Results Of Operations
The Company did not generate significant revenues until the last half of
1997. Revenues through the second quarter of 1997 consisted primarily of service
fees from MCI. The Company began recognizing revenues under recurring lease
arrangements in the third quarter of 1997.
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Three Months Ended March 31, 1998 Compared to the Three Months Ended March 31,
1997
Revenues for the first quarter of 1998 were $151,363, compared to no
revenue in the first quarter of 1997. Revenues in 1998 were generated by
recurring lease services to customers, which commenced during the second half of
1997.
Total cost of sales for the first quarter of 1998 were $247,386, an
increase of 128% over the $108,358 recorded in the first quarter of 1997. The
increase was associated with right-of-way fees and property taxes incurred in
connection with the expansion of the NEON system.
Selling, general and administrative expenses increased to $225,122 in the
first quarter of 1998 from $204,275 in the first quarter of 1997, a 10%
increase. This increase resulted primarily from higher legal fees.
Depreciation and amortization expense was $302,013 in the first quarter of
1998 as compared to $32,987 in the first quarter of 1997. The increase resulted
from higher depreciation expense, resulting from portions of the NEON system
being placed into service at the end of the second quarter of 1997.
Interest income decreased in the first quarter of 1998 to $30,322 compared
to $56,638 in the first quarter of 1997. The decline was due primarily to a
decrease in cash balances as cash was used to fund construction of the NEON
system.
Interest expense (including the amortization of financing costs) increased
in the first quarter of 1998 to $91,816 from no interest expense in the first
quarter of 1997. The increase resulted from a reduction in the amount of
interest capitalized as the NEON system was placed into service.
Minority interest increased in the first quarter of 1998 to $314,498 from
$137,620 in the first quarter of 1997. The increase resulted in a rise in the
proportionate share of the net losses of subsidiaries.
Benefit from income taxes increased in the first quarter of 1998 to $77,000
from $33,000 in the first quarter of 1997. The benefit related to refundable
income taxes in 1997 resulting from the Company's tax sharing arrangement with
CMP.
A net loss of $293,154 was recorded in the first quarter of 1998 versus a
net loss of $118,362 in the first quarter of 1997. The increase in net loss is
primarily attributable to the factors discussed above.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
During the years ended December 31, 1997 and 1996, the Company was
continuing in its development stage and did not generate significant revenues
until the last half of 1997, when customers began using the NEON system.
Revenues for 1997 were $394,704 as compared to 1996 revenues of $13,773.
The revenue increase was generated primarily from services to customers during
the last half of 1997 as the NEON system was placed in service and contracts
with carriers commenced.
Cost of sales for 1997 were $1,137,943 as compared to $260,619 in 1996. The
increase resulted primarily from accrued right-of-way fees due to NU under
arrangements for right-of-way extensions and property taxes incurred in
connection with the expansion of the NEON system.
Selling, general and administrative expenses increased to $1,002,232 in
1997 from $900,808 in 1996, an 11% increase. This increase resulted primarily
from increased professional fees and salaries and benefits caused by increased
business activities and growth within the Company.
Depreciation and amortization expense was $552,862 in 1997 as compared to
$24,168 in 1996. The increase resulted from the recognition of depreciation
expense resulting from portions of the NEON system being placed into service at
the end of the second quarter of 1997.
Interest income of $138,918 was recorded in 1997 as compared to $201,473 in
1996. The decline was due primarily to a decrease in cash balances as cash was
used to fund construction of the NEON system.
Interest expense (including the amortization of financing costs) increased
in 1997 to $141,811 from $75,635 in 1996. The increase reflects additional debt
incurred in 1997 to finance construction of the NEON system and to fund
operations of the Company.
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Minority interest increased in 1997 to $1,080,200 from $353,222 in 1996.
The increase resulted from an increase in the proportionate share of net losses
of subsidiaries.
Provision (benefit) for income taxes decreased in 1997 to $(261,000) from
$16,000 in 1996. The decrease relates to the fact that the Company had
refundable income taxes in 1997 as a result of its tax sharing arrangement with
CMP.
A net loss of $960,026 was recorded in 1997 compared to a net loss of
$708,762 in 1996. The increase in net loss is primarily attributable to the
factors discussed above.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Revenues decreased to $13,773 for the year ended December 31, 1996 from
$42,598 for the year ended December 31, 1995. The decrease resulted from a
reduction in services provided to the Company's sole customer.
Cost of sales for 1996 were $260,619, an increase of 150% versus $104,223
in 1995. The increase was associated with an increase in right-of-way fees.
Selling, general and administrative expenses increased to $900,808 in 1996
from $358,761 in 1995, a 151% increase. The increase resulted primarily from
higher professional fees, increased start-up activities within the Company and
increased staffing to accommodate the Company's anticipated growth.
Depreciation and amortization amounted to $24,168 for the year ended
December 31, 1996 compared to $24,175 for the year ended December 31, 1995.
Interest income of $201,473 was recorded in 1996 as compared to no interest
income in 1995. The interest income increased in 1996 due primarily to an
increase in cash balances as a result of the timing of cash requirements to fund
construction of the NEON system compared to borrowings.
Interest expense (including the amortization of financing costs) increased
to $75,635 during 1996 from $42,401 during 1995. This increase was a result of
additional debt incurred in 1996 to finance construction of the NEON system and
to fund the operations of the Company.
Minority interest increased in 1996 to $353,222 from no minority interest
in 1995. Minority interest reflects the portion of the net loss related to the
minority interest investment in the Company's subsidiaries in 1996.
A net loss of $708,762 was recorded in 1996 compared to a net loss of
$486,962 in 1995, representing an increase of $221,800. The increase in net loss
is attributable to the factors discussed above.
Liquidity and Capital Resources
The Company has funded the construction of the NEON system and operations
primarily from equity investments from CMP and NU, and borrowings under a $30
million construction loan agreement with CMP, a $1.6 million construction loan
from Peoples Heritage Savings Bank and $1.5 million of lease financing from
Applied Telecommunications Technologies, Inc.
Net cash generated from (used in) operating activities was $657,881 for the
three months ended March 31, 1998, $(553,427) for the year ended December 31,
1997, $37,460 for the year ended December 31, 1996 and $(413,196) for the year
ended December 31, 1995. Net cash generated for the three months ended March 31,
1998 was due primarily to the prepayment in full by New England Fiber
Communications Company for telecommunications network services and increased
vendor payables. Net cash used in operating activities during 1997 resulted
primarily from an increase in restricted cash. Net cash generated by operating
activities during 1996 was primarily from an increase in vendor payables offset
by net operating losses. Net cash used in operating activities in 1995 resulted
primarily from increases in prepayments and net operating losses.
Cash flow from financing activities was $3,016,396 in the three months
ended March 31, 1998, $5,585,205 in the year ended December 31, 1997,
$11,565,481 in the year ended December 31, 1996 and $4,943,300 in the year ended
December 31, 1995. In the three months ended March 31, 1998, cash flow from
financing activities was generated by borrowings of $1,875,000 under long-term
construction loan agreements. In 1997, cash flow from financing activities was
generated by proceeds from long term construction loan agreements and proceeds
from equity investments, of $3,700,000 and $2,550,104, respectively. In 1996,
cash flow from financing activities was generated by the sale of convertible
preferred stock to CMP amounting to $10.0 million and the purchase of
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membership interests by Northeast Utilities amounting to $6,665,776. Cash flow
from financing activities during 1995 was generated from lease financing of
$1,147,766 from Applied Telecommunications Technologies, Inc.
Upon completion of the Offerings, the Company expects to repay all
remaining outstanding principal and interest under the $30 million construction
loan agreement with CMP and the $1.6 million construction loan from Peoples
Heritage Savings Bank. Upon the repayment of the loan from Peoples Heritage
Savings Bank, the Company will also be required to pay approximately $120,000 to
CMP, representing accrued right-of-way fees that were deferred while such loan
was outstanding.
Cash flow used in investing activities totaled $3,540,475, $8,798,251,
$6,738,898 and $4,619,702 in the three month period ended March 31, 1998, and
the one year periods ended December 31, 1997, December 31, 1996 and December 31,
1995, respectively. Cash requirements in all the periods consisted primarily of
the cost of construction to build the NEON system.
The Company anticipates that it will continue to experience negative cash
flow as it expands the NEON system, constructs additional networks and markets
its services to an expanding customer base. The Company anticipates that its
total capital expenditures to build out the NEON system as currently planned
will be approximately $128.0 million. Of this amount, the Company had already
expended approximately $23.0 million as of March 31, 1998. The Company
anticipates remaining total capital expenditures of approximately $51.0 million
in the remainder of 1998 and approximately $54.0 million in 1999 relating to the
build-out of the NEON system. The Company expects to incur additional capital
expenditures to enhance the capacity and penetration of the NEON system after
1999. Cash provided by operations will not be sufficient to fund the expansion
and development of the NEON system as currently planned and as a result the
Company intends to use cash on hand and the net proceeds of the Offerings to
fund this expansion and development. Management believes that the net proceeds
of the Offerings will be sufficient to fund the substantial completion of the
NEON system as currently planned and its other working capital needs. The
expectations of required future capital expenditures are based on the Company's
current estimates. There can be no assurance that actual expenditures will not
significantly exceed current estimates or that the Company will not accelerate
its capital expenditures program.
The Indenture for the Notes contains certain covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, engage in transactions with stockholders and affiliates, create
liens, sell assets and engage in mergers and consolidations.
Year 2000
The Company has completed an assessment of its exposure to the "Year 2000"
computer problem. Based on this assessment, the Company believes that no
critical software systems of the Company will be impacted by this situation.
Systems currently used by the Company are already "Year 2000" compliant.
Although the Company believes that it is taking appropriate precautions against
disruption of its systems due to the "Year 2000" problem, there can be no
assurance that the Company's suppliers and customers will not be adversely
affected by the "Year 2000" problem. Nonetheless, the Company believes that the
"Year 2000" issue will not have a material impact on the Company's business
operations or financial condition.
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BUSINESS
General
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic transmission capacity for communications carriers on
local loop, inter-city and interstate facilities. The Company is currently
expanding its fiber optic network, the NEON system, to encompass over 900 route
miles, or more than 60,000 fiber miles, in the Northeast. The Company believes
that the Northeast, which in 1996 represented a $28.7 billion telephony services
market and which the Company believes has one of the highest population
densities and concentrations of businesses, universities, phone lines, personal
computers and television sets in the country, is a region characterized by
significant and growing demand for broadband communications infrastructure. The
Company is constructing the NEON system utilizing primarily electric utility
ROWs, which allow the Company to provide secure fiber optic capacity at
competitive prices with potential access to virtually any urban location where
the local utility provides electrical service. The Company is using advanced
fiber optic technology in the NEON system, including non-zero dispersion shifted
fiber, dense wave division multiplexing optronics and SONET ring self-healing
technology, to allow the Company's carrier customers to meet the demand for
reliable, high-bandwidth voice, data and video transmission capacity in the
Northeast. For example, a pair of fiber optic strands on the NEON system can
transmit up to approximately 10 gigabits of data per second, or the equivalent
of approximately 129,000 simultaneous voice conversations.
The Company has already completed construction of approximately 295 route
miles, or approximately 19,500 fiber miles, of the NEON system as of June 30,
1998, and currently operates fiber optic routes from Hartford, Connecticut to
Springfield, Massachusetts and from Nashua, New Hampshire to Portland, Maine.
The Company is currently engineering, constructing or acquiring additional
routes in New York, Connecticut, Massachusetts, Rhode Island and New Hampshire
to create a continuous fiber optic link between New York City and Portland,
Maine with access into and around Boston, Massachusetts and numerous other major
service areas in the Northeast. These additional routes are expected to be
substantially completed in 1998 and will add approximately 500 route miles, or
approximately 23,300 fiber miles, to the NEON system. The Company is also
planning to complete further expansion routes in 1999 into and around New York
City and other metropolitan areas along the NEON system. The completion of
routes currently planned will enable the NEON system to connect more than 540
cities and towns in six states and pass more than 200 POPs, tandem switches and
central offices, which the Company believes serve over 18 million people and
over 470,000 businesses.
Commencing in September 1994, the Company entered into a series of ROW
agreements with the three principal operating subsidiaries of NU, the largest
electric utility service provider in New England, serving over 1.7 million
customers in Connecticut, Massachusetts and New Hampshire, to build fiber optic
facilities utilizing NU's transmission and distribution infrastructure,
including utility towers, poles, underground ducts and urban conduit systems. In
January 1997, the Company entered into a similar ROW agreement with CMP, the
largest electric utility service provider in Maine, serving over 500,000
customers, to build fiber optic facilities utilizing CMP's transmission and
distribution infrastructure. NU and CMP have also financed substantially all of
the construction and operations of the NEON system to date and currently
beneficially own (prior to the sale of shares in the Equity Offering) 41.4% and
53.5%, respectively, of the Company's capital stock. In July 1998, the Company
entered into agreements with NEES Communications, Inc., a subsidiary of New
England Electric System, and BecoCom, Inc., a subsidiary of Boston Edison, to
extend the NEON system from Hudson, New Hampshire to Boston, Massachusetts
terminating at the Company's POP and Company-targeted carrier centers.
The Company has pursued a strategy of establishing relationships with
electric utilities and building the NEON system utilizing primarily electric
utility ROWs. The Company believes that the use of such ROWs provides
significant advantages, including: (i) inter-city routes and, where permitted by
applicable rights, potentially ubiquitous intra-city coverage in the local
electric utility's urban service territory, including throughout downtown areas
and directly to buildings, (ii) use of existing electric transmission
infrastructures, including towers, poles, ducts and conduits, to achieve faster,
less costly installation, (iii) generally more secure and reliable routes than
other ROWs, (iv) desirable geographically diverse fiber optic routes for
communications carriers and (v) establishment of an extensive ROW network
through negotiation with relatively few parties, rather than with numerous
parties such as municipalities, transit authorities and governmental agencies.
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The Company intends to target communications carriers as customers, rather
than end-users of telecommunications services. The Company believes that this
strategy allows it to: (i) maximize the Company's opportunities to sell its
capacity regardless of the end-user's selection of a retail provider, (ii) avoid
the significant initial and ongoing investment required in selling, marketing
and providing services to end-users, (iii) attract carrier customers that may be
reluctant to contract with a direct competitor, (iv) generate revenues quickly
from carriers that are easily identifiable and require large amounts of fiber
optic capacity, and (v) lock in relatively secure long-term revenue streams from
customers that are generally more creditworthy than end-users and are likely to
make long-term capital commitments prior to completion of construction. Carrier
customers typically lease fiber optic capacity under multi-year contracts with
which they enhance or constitute their own communications networks as a
cost-effective alternative to constructing their own infrastructure or
purchasing measured services from other carriers with whom they may compete.
Carriers targeted by the Company include a broad range of communications
companies such as ILECs, CLECs, IXCs, paging, cellular and PCS companies, cable
television companies and ISPs. Currently, the Company has contracts with Brooks
Fiber (now owned by WorldCom), Teleport (expected to be acquired by AT&T), MCI
(expected to be acquired by WorldCom), Sprint and Global NAPs, Inc., a regional
ISP.
The Company intends to offer its carrier customers leases of both dark
fiber (fiber optic transmission lines leased without optronics equipment
installed by the Company) and lit fiber (fixed amounts of capacity, such as
DS-3, OC-3, OC-12, OC-48 and higher, on fiber optic transmission lines that use
the Company's optronics equipment) at fixed-cost pricing and over multi-year
lease terms. The Company intends to lease approximately one-third of the
available fibers in the NEON system as dark fiber and one-third as lit fiber. In
addition, the Company plans to reserve approximately one-third of its available
fibers for future services that the Company may provide to capitalize on future
technological advances or changes that the Company expects to occur in the
communications industry.
History of the Company
The Company was incorporated in 1989 in Massachusetts under the name
"FiveCom, Inc." to develop fiber-optic networks in secondary and tertiary
markets in the Northeast. Prior to 1994, the Company was the managing general
partner of a venture which built a CAP network in Springfield, Massachusetts and
also built several small private networks in eastern Massachusetts. In February
1994, the Company sold its interest in the Springfield network to Brooks Fiber.
Following this sale, the Company expanded its business strategy to include
intra-LATA and long distance facilities using electric utility ROWs and changed
its focus to target carrier customers rather than end users. Commencing in
September 1994, the Company entered into the NU Agreements, pursuant to which
the Company obtained ROWs in the service territories of NU and its subsidiaries.
In 1996, the Company raised approximately $16.7 million from private placements
of equity securities to MaineCom and Mode 1. In January 1997, the Company
entered into the CMP Agreement, under which the Company obtained ROWs in CMP's
service territory, and raised an additional $2.6 million from CMP and other
investors in a private equity financing. In 1998 the Company was reincorporated
in Delaware under the name "NorthEast Optic Network, Inc." See
"--Reorganization."
Market Opportunity
The Company believes that there is a significant demand for high-bandwidth
communications services and a limited supply of technologically advanced dark
and lit fiber optic facilities in the Northeast to meet such demand. The Company
believes the needs of communications carriers for advanced, high-bandwidth
voice, data and video transmission capacity will increase over the next several
years due to various factors, including:
Rapid Growth of Communications Traffic. The Company believes that total
telephony service revenue in the United States grew by approximately 9% annually
from 1992 to 1996, to $222.3 billion. Data traffic service grew by 28% from 1996
to 1997 to $16 billion and is projected to grow by 38% to $22.1 billion in 1998.
Much of this growth in data traffic is attributable to increased Internet
traffic and its corresponding demands for increased data communications
bandwidth. For example, the number of Americans using the Internet is estimated
to have grown from fewer than 5 million in 1993 to as many as 62 million by the
end of 1997. The Company believes that the growth of communications traffic in
the Northeast will be enhanced by the favorable demographic characteristics of
the region, including the high population density, income and education levels
and number of phone lines per
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household. With its advanced fiber optic transmission capacity, the Company
believes that it will be well-positioned to capitalize on this growth.
Capacity Required by New Entrants. Competition and deregulation are
attracting new entrants to the telecommunications market. The Telecommunications
Act of 1996 (the "1996 Act") allows the Regional Bell Operating Companies
("RBOCs") to enter the long distance business upon meeting certain competitive
conditions and also eliminates certain barriers to entry in the local exchange
market. The 1996 Act also enables other entities, including entities affiliated
with power utilities and ventures between ILECs and cable television companies,
to provide a wider range of telecommunications products and services. The
Company believes that the deregulation of various telecommunications markets
will lead to an increase in the number of telecommunications providers needing
fiber optic transmission capacity as more parties choose to compete. The Company
believes that many carrier customers will choose to lease fiber optic capacity
from facilities providers such as the Company to enhance or constitute their own
communications networks as a lower-cost alternative to constructing their own
infrastructure or purchasing measured services from other carriers. The Company
believes that the NEON system will provide a cost-effective alternative in a
number of communications industry segments for new market entrants, including
ILECs, CLECs, IXCs, wireless companies, cable companies and ISPs.
Need for Redundant Routing and Geographic Diversity of ROWs. Carriers
require redundant paths throughout their networks to provide reliability in the
event of an equipment failure, break in one of their fiber lines or other
outage. In order to ensure the required redundancy, carriers typically build,
swap or lease capacity along fiber routes that do not share a common point of
potential failure. In the Northeast, however, there are relatively few
preassembled ROWs available to support new telecommunications infrastructure and
many of the carriers' routes currently run within the same ROWs. As a result,
many carriers are unable to establish secure redundant routing. In the event
such a common ROW were to be damaged or cut, the consequences would be severe
for the carriers and their customers. This lack of geographic diversity of fiber
optic routes in the Northeast has created a substantial need for network
capacity on new and alternative ROWs, such as those offered by the Company.
Need for Upgrades to Older Communications Networks. Many of the fiber optic
networks currently operated by existing carriers in the Northeast were
constructed prior to 1990, using asynchronous, non-SONET ring architecture and
using earlier generation fiber that cannot optimally deploy dense wave division
multiplexing ("DWDM") optronics for high capacity transmission. The Company
believes that these carriers will need to improve or replace parts of their
networks to complete the SONET ring architecture and also add more high capacity
fiber optic transmission lines to remain competitive in the future. In addition,
the Company believes that, in 1996, approximately 88% of the ILECs networks were
comprised of copper cable. The ILECs will likely need to replace or upgrade
their networks to remain competitive and satisfy their customers' increasing
demand for reliable, high-bandwidth capacity in the coming years. The Company
believes that carriers with older, more limited networks will seek
cost-effective and expedient solutions when faced with the decision to lease,
buy or build fiber optic capacity which could result in increased demand for the
Company's fiber optic capacity.
Accommodation of Multimedia and Other New Applications. The Company
believes that additional transmission capacity and faster response times will be
required to accommodate the needs of multimedia (voice, data and video) and
other potential high-bandwidth applications, including the deployment of
corporate intranets and wide area networks, and the use of the
telecommunications infrastructure for providing cable television and other
entertainment services. In addition, the Company's SONET technology and
high-bandwidth fiber optic capacity support advanced communications
applications, such as Frame Relay, ATM and IP platforms. The Company believes
that these capacity-intensive requirements will create significant demand for
its high quality, high-bandwidth fiber optic capacity.
Carriers' Desire for Low-Cost Local and Regional Transport. The Company
believes that it has an opportunity to fill the needs of the predominant
interstate carriers that are building or have completed their backbone networks
to key LATAs in the Northeast. Generally, an IXC constructs a network with trunk
lines terminating into tandem switches in LATAs. To get from the tandem switch
to the end-user, or vice versa, IXCs typically pay to a LEC access and egress
charges, which often comprise a significant component of the IXCs' transmission
costs. For this reason, IXCs are seeking less costly, alternative local access
within LATAs. One alternative for the IXCs is to carry their traffic deeper into
the region's telecommunications base and to hand off their traffic at a LEC host
switch, which is located much closer to the end-user than the tandem switch, or
to terminate their traffic directly at the customer's premises. Similarly, the
Company believes that LECs with inter-LATA traffic, including the RBOCs when
they are permitted to provide long-distance traffic, desire to minimize the
transportation costs imposed by
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the IXCs and are seeking lower cost, alternative regional transport. The NEON
system, which will connect into and around numerous cities and towns in the
Northeast, will be able to provide such local and regional transport.
Business Strategy
The Company's objective is to become the preferred facilities-based
provider of fiber optic network capacity in the Northeast. The following are the
key elements of the Company's strategy to achieve this objective:
Leverage Electric Utility ROWs. The Company is pursuing a strategy of
building the NEON system utilizing primarily electric utility ROWs, which the
Company believes provide significant competitive advantages compared to
alternative ROWs in the Northeast such as railbeds and highways. Using electric
utility ROWs, the Company can provide fiber optic connectivity for its carrier
customers to and from virtually any location in the utilities' urban service
territory covered by the NEON system, including throughout downtown areas and
directly to buildings. The Company also intends to utilize existing,
pre-assembled electric utility transmission infrastructure, including towers,
poles, ducts and conduits for faster, less costly installation. In addition,
since electric utility ROWs are generally more secure than other ROWs and
provide valuable geographic route diversity for carriers, the Company can offer
its customers highly reliable primary and redundant network capacity. In
addition to the Company's existing ROW agreements with electric utilities, the
Company is currently pursuing additional agreements with other utilities in
adjoining territories to expand the Company's network footprint and gain access
to further ROWs through negotiation with relatively few parties.
Target Carrier Customers. The Company intends to target communications
carriers as customers, rather than end-users of telecommunications services.
This enables the Company to maximize its opportunities to sell its capacity
regardless of the end-user's selection of a retail provider and to attract
carrier customers that may be reluctant to purchase services from a direct
competitor that serves the same retail market. Carrier customers are also easily
identifiable, which allows the Company to focus its sales and marketing and
customer services efforts and avoid the significant initial and ongoing
investment required to attract and retain numerous retail customers. In
addition, the Company believes that it can generate revenues more quickly from
carrier customers, which are generally more creditworthy than end-users, require
large amounts of fiber optic capacity and are more likely to make long-term
capital commitments prior to completion of construction. To date, the Company
has entered into contracts with five carriers, including Brooks Fiber (now owned
by WorldCom), Teleport (expected to be acquired by AT&T), MCI (expected to be
acquired by WorldCom), Sprint and Global NAPs, Inc., a regional ISP.
Reduce Construction and Operating Costs. The Company is reducing the
construction and operating costs of the NEON system in order to offer its
customers competitive prices while maximizing its operating margins and return
on investment. The Company is using primarily pre-existing electric utility
transmission and distribution infrastructure, including towers, poles, ducts and
conduits, in the construction of the NEON system, which reduces the need to
obtain local permits, conduct surveys, install conduits and ducts and erect
towers and poles prior to installation. In addition, the Company's electric
utility ROWs typically provide easy and safe access to the fiber cable for low
cost maintenance and repair. The Company is also installing high fiber count
cable in the NEON system--64 to 96 fiber optic strands per cable in the routes
currently under construction and is planning to install cable with up to 144 to
432 fiber optic strands on future installations, depending on the anticipated
demand for a particular route and the Company's ROW agreements. This high fiber
count reduces the Company's fiber cost per mile and provides reserve capacity,
which will reduce the cost of providing additional services in the future. The
Company's newly-constructed network also provides significant operating and
maintenance cost advantages because of the high quality, advanced fiber optic
technology utilized by the NEON system.
Establish a Reliable, Technologically Advanced Network. The Company
believes that the characteristics of its network will allow it to meet its
customers' demands for reliability and high capacity. The Company is
constructing the NEON system utilizing bi-directional, self-healing SONET ring
architecture primarily on electric utility ROWs, which allow for enhanced
physical security and more geographic flexibility than other ROWs. The Company
uses both non-zero dispersion shifted Truewave[RegTM] fiber and conventional
single-mode fiber manufactured by Lucent Technologies Inc., which the Company
believes to be the highest quality fiber optic cable available. The Company is
also planning to use Nortel's DWDM optronics and forward error correction
technology at high optical carrier ("OC") levels that enable the highest
commercially available transmission capacity (OC-192) and data integrity level
(10(-15) Bit Error Rate). The NEON system can also accommodate advanced
communications applications such as Frame Relay, ATM and Internet Protocol.
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Focus on High Demand Northeast Market. The Northeast is one of the most
densely-populated regions of the United States. The Company believes that the
Northeast market, which in 1996 represented a $28.7 billion telephony services
market and which the Company believes has one of the highest population
densities and concentrations of businesses, universities, phone lines, personal
computers and television sets in the country, is a region characterized by
significant and growing demand for broadband communications infrastructure. The
Company believes that the Northeast market is dependent in part upon antiquated
telecommunications infrastructure currently lacking sufficient fiber optic
capacity, route diversity and redundancy. The Company's strategy is to focus on
serving the present and future needs of this market by constructing and
operating a technologically advanced network offering (i) more capacity, (ii)
enhanced capabilities, such as SONET ring architecture and route diversity, and
(iii) near-ubiquitous urban coverage.
Capitalize on Management Experience. The Company's management team includes
individuals with significant experience in the telecommunications and utility
industries which will be important in the build-out and management of the NEON
System. Victor Colantonio, the Company's founder and President, has 25 years of
experience in the telecommunications industry. The Company's Chairman of the
Board of Directors and Chief Executive Officer, Richard Crabtree, has 27 years
of public utility company experience, including serving as Chief Financial
Officer of CMP. William Fennell, the Company's Chief Financial Officer and
Treasurer, held several positions at GTE Corporation over 16 years before
becoming Chief Financial Officer of Philips Electronics Group of North America.
James Mack, the Company's head of sales, has worked in the telecommunications
industry since 1966 having held various sales positions at Bell Atlantic and
NYNEX. The Company's head of operations, Michael Musen, has spent 18 years in
telecommunications having previously worked at International Communications
Services Corp., a provider of network services.
Leverage Utility Relationships. The Company intends to continue to leverage
its relationships with electric utilities, including NU and CMP, its principal
stockholders. The Company directly benefits from these relationships for the
following reasons: (i) the Company believes relationships with electric
utilities enhance the Company's credibility with large carrier customers and
facilitates new customer contracts with such carriers, (ii) the Company
outsources substantially all of its engineering and design, routine maintenance
and construction supervision requirements to these utilities, thereby increasing
the Company's mission critical preparedness and the reliability of the Company's
network and enhancing the Company's ability to respond to emergency repair
needs, (iii) these utilities have significant resources and experience in the
engineering and construction supervision of large transmission and distribution
networks, and (iv) the Company's experience with these utilities creates
opportunities to establish relationships with other electric utility companies.
The Company is currently in the process of pursuing additional agreements with
other electric utilities.
The NEON System
The NEON system is a technologically-advanced, high-bandwidth, fiber optic
network that the Company is constructing primarily using electric utility ROWs
in the Northeast and that the Company intends to expand into a communications
system serving numerous cities and towns in six states. The Company has
completed construction of approximately 295 route miles, or approximately 19,500
fiber miles, of the NEON system as of June 30, 1998, and currently operates
fiber optic routes from Portland, Maine to Nashua, New Hampshire and
Springfield, Massachusetts to Hartford, Connecticut. The Company is currently
engineering, constructing or acquiring additional routes in New York,
Connecticut, Massachusetts, Rhode Island and New Hampshire, to create a
continuous fiber optic link between New York City and Portland, Maine with
access into and around Boston, Massachusetts and numerous other major service
areas in the Northeast. These additional routes are expected to be completed in
1998 and will add approximately 500 route miles, or approximately 23,300 fiber
miles, to the NEON system. The Company is planning to complete further expansion
routes in 1999 into and around New York City and other metropolitan areas along
the NEON system. Upon completion of routes currently planned, the NEON system
will exceed 900 route miles or over 60,000 fiber miles, and will enable the
Company to connect more than 540 cities and towns in six states and pass more
than 200 POPs, tandem switches and central offices, which the Company believes
serve over 18 million people and over 470,000 businesses.
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The following table lists the states through which the NEON system is
expected to pass, the estimated route miles and fiber miles of the NEON system
in each state, the estimated number of POPs, tandem switches and central offices
passed by the NEON system, the estimated population of the service areas
expected to be passed by the NEON system, the major service areas the Company
expects to connect to the NEON system and the expected dates of completion:
<TABLE>
<CAPTION>
Estimated
Number of
POPs, Tandem Estimated
Estimated Estimated Switches and Population of
Route Fiber Central Offices Service Areas Major Expected
State Miles Miles Passed Passed Service Areas Completion
- ----------------------- ----------- ----------- ----------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Connecticut ........... 271 17,502 62 2,990,000 Hartford Completed
Stamford 1998
New London 1998
New Haven 1998
Bridgeport 1998
Maine ................. 55 3,630 15 425,000 Portland Completed
Massachusetts ......... 235 14,842 55 4,750,000 Springfield Completed
Boston 1998/1999
Amherst 1998
Framingham 1998
Lawrence 1999
New Hampshire ......... 205 12,100 34 920,000 Nashua Completed
Manchester Completed
Dover Completed
Portsmouth 1998
Keene 1998
New York .............. 94 15,000 25 8,190,000 Westchester 1998/1999
New York City 1998/1999
Rhode Island .......... 70 840 14 996,000 Providence 1998
--- ------ -- ---------
Total ................ 930 63,914 205 18,271,000
=== ====== === ==========
</TABLE>
The Company acquires its ROWs principally from electric utilities in the
territory covered by the NEON system. The Company believes that such ROWs are
superior to alternative ROWs available in the Northeast, because electric
utility ROWs may provide near-ubiquitous urban coverage at lower cost and
because deviations from other ROWs often entail significant expenditures and a
lengthy and expensive community-by-community approval process. Furthermore,
installing cable in electric utility ROWs is often safer, easier and faster,
because the cable is placed in existing underground conduits and ducts or
installed on existing towers and poles. With other ROWs cable must often be
buried in trenches, a process often hampered by accommodating commuter rush
hours, complying with stringent environmental laws, crossing water, trenching
and blasting bedrock. In addition, using primarily electric utility ROWs, the
NEON system has the potential to provide communications connections to nearly
every building, business park and industrial complex in its urban service
territory.
The Company uses three cost-effective methods for installing its fiber
optic cable and taking advantage of the pre-assembled and pre-existing electric
utility infrastructure in the Company's ROWs, including utility transmission
structures (towers) and distribution infrastructure (poles, civil works and
conduit). The first is to replace existing ordinary ground wire (which is used
to provide lightning protection atop utility structures) with optical phased
ground wire ("OPGW"), which is custom-made for the Company and contains up to 96
fiber strands currently and will contain up to 144 fiber strands in future
sheath designs. The second method is to install new all dielectric (non-
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conductive) self-support fiber optic cable ("ADSS") under the electrical
conductors on electric transmission structures. ADSS is capable of carrying up
to 288 fiber strands currently and is expected to carry up to 432 fiber strands
in future designs. Finally, in underground utility conduits, the Company uses
conventional optical cable made for underground conditions.
Advanced Technology
The Company uses state-of-the-art technology in the NEON system. The NEON
system consists of fiber optic communication paths, which allow for high speed,
high quality transmission of voice, data and video communications. Fiber optic
systems use laser-generated light waves to transmit voice, data and video in
digital formats through ultra-thin strands of glass. Fiber optic systems are
generally characterized by large circuit capacity, are resistant to external
signal interference and directly interface to digital switching equipment or
digital microwave systems. The Company is currently installing fiber optic cable
containing between 64 and 96 fiber optic strands and in the future may install
up to 144 or 216 fiber optic strands per cable depending on anticipated demand
for the particular route and the number of fiber optic strands allowed by the
Company's ROW agreements. Each of these fiber optic strands is capable of
transmitting significantly greater bandwidth than traditional analog copper
cables. Using current fiber optic transmission optronics, a single pair of fiber
optic strands used by the Company's network can transmit up to 10 gigabits of
data per second or the equivalent of approximately 129,000 simultaneous voice
conversations. The Company believes that continuing developments in compression
technology and multiplexing equipment will increase the capacity of each fiber
optic strand, thereby providing more bandwidth carrying capacity at attractive
incremental costs.
The technologies employed by the Company in the construction and operation
of the NEON system include Lucent's non-zero dispersion shifted fiber and
Nortel's DWDM optronics possessing forward error correction technology at high
OC levels that enable the highest commercially available capacity transmission
(OC-192) and data integrity level (10(-15) Bit Error Rate). The Company believes
that the advanced technical operating characteristics of the NEON system will
enable it to provide highly reliable services to its customers at low costs by
permitting higher capacity transmission over longer distances between
regeneration and amplifier facilities than can be provided by less advanced
fiber systems.
The Company offers end-to-end fiber optic capacity utilizing bi-directional
SONET ring architecture, which has the ability to route customer traffic in two
directions around a ring design thereby minimizing service interruptions due to
fiber cuts. Currently, the NEON system is continuously monitored to maintain
quality control on a 24-hour basis and to alert the Company of any degradation
of signal or loss of fiber capacity, and to pinpoint the location of such
difficulty and enable the Company to repair or replace impaired fiber quickly.
Right-of-Way Agreements
The following is a summary of the Company's agreements that provide for
most of the ROWs currently used in the NEON system.
NU Agreements
In 1994 and 1995, the Company entered into a series of agreements (as
subsequently amended and restated in February 1998, the "NU Agreements") with
the three principal operating subsidiaries of NU concerning the provision of
ROWs along electric utility towers and inside urban electric utility ducts.
Pursuant to the NU Agreements, the Company acquired indefeasible rights of use
("IRUs") in fiber optic filaments placed along NU's ROWs prior to February 1998
and acquired ownership of fiber optic filaments placed along NU's ROWs
subsequent to February 1998 (collectively, the "NU System"). NU and the Company
both agreed to use their best efforts to complete installation of the NU System
by September 1999. The Company agreed to pay the cost of installing the cable
and to utilize NU's engineering staff in carrying out the installation. Under
the NU Agreements, the Company agreed to pay to NU mileage-based annual fees and
a percentage of the gross revenues that the Company generates on the portion of
the NEON system located on NU ROWs.
A portion of the NU System, comprised of 12 fibers within the cable, has
been set aside for NU's use ("NUNet"). NU may lease these fibers to third
parties, provided that prior to September 2001, NU is not permitted to assign
any fibers or resell capacity on NUNet to certain specified carriers except for
certain limited purposes. After September 2001, NU will be free to use NUNet to
compete with the Company.
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Under the NU Agreements, if any proposed segment of the NEON system's route
requires material modifications or unusual expense to make it available for the
Company's fiber, or if NU withdraws any segment from the route in order to give
priority to electrical services, the Company has the right to designate
additional or alternative route segments, subject to NU's approval, which shall
not be withheld unless such additional or alternative segments would materially
adversely affect NU's ability to provide reliable electric service, cause or
create safety problems or would not be feasible for structural reasons. If NU
desires to create new route segments in order to extend the NU System, the
Company has a right of first refusal on the provision of any such segments. If
NU obtains such segments from third parties, NU has agreed to use its best
efforts to obtain for the Company the unimpeded use of not less than 12 usable
single mode fibers in such segment on terms no less favorable than those
provided to NU.
The NU Agreements have an initial term of 30 years and expire in September
2024. Thereafter they automatically renew for five-year terms, unless one of the
parties has given a one-year advance notice of termination. In the event that NU
gives such a notice and terminates the NU Agreements, it must either, at its
option, pay to the Company an amount equal to the fair market value of the NU
System less NUNet or allow the Company to retain its IRUs and receive from the
Company an annual payment equal to 10% of the Company's gross revenue from the
NU System, which payment would be in addition to the other annual payments under
the NU Agreements.
In addition to the foregoing, the NU Agreements may be terminated by NU if
the Company defaults in the performance of certain of its obligations under the
NU Agreements, including the failure to establish NUNet by September 1999, the
failure to obtain and maintain all necessary government permits, licenses,
franchises and approvals, and the failure to pay amounts due by it under the NU
Agreements, subject in most cases to cure periods of between 30 and 90 days.
CMP Agreement
In January 1997, the Company entered into an agreement with CMP (the "CMP
Agreement") in which CMP granted the Company a right of use in fiber optic
filaments within a cable along a certain route in CMP's service territory (the
"CMP System"). CMP and the Company both agreed to use their best efforts to
complete installation of the CMP System by January 1999. The Company has the
right to install additional cable in CMP's service territory, subject to the
approval of CMP, which must not be unreasonably withheld. The Company is
obligated to pay the cost of installing the cable.
In exchange for the rights of use, the Company agreed to pay to CMP an
annual fee beginning, with regard to any particular route segment, in the first
calendar year following the installation date for such route segment (the
"Installation Date").
The Company's rights of use do not apply to 6 fibers that have been set
aside for CMP's use ("CMPNet"). CMP may use these fibers for its own business
purposes, but may not lease them to third parties prior to the seventh
anniversary of any given Installation Date. After such seven-year period, to the
extent that CMP has excess capacity on CMPNet, CMP is required to negotiate in
good faith with the Company to provide such excess capacity to the Company
before making it available to third parties. If the Company does not enter into
an agreement with CMP with respect to such excess capacity, CMP will be able to
use such capacity to compete with the Company.
The CMP Agreement has an initial term of 30 years and expires in January
2027. Thereafter it is renewable at the option of the Company for an additional
ten-year term. In the event that the Company elects to renew the CMP Agreement,
it must pay to CMP an annual payment equal to 10% of the Company's gross annual
revenue from the CMP System, which payment would be in addition to the other
annual payments under the CMP Agreement.
In addition to the foregoing, the CMP Agreement may be terminated by CMP if
the Company defaults in certain of its obligations under the CMP Agreement and
such default is not cured within a designated cure period.
Boston Agreements
In July 1998, the Company entered into a Fiber Optic Lease Agreement with
NEES Communications, Inc., a subsidiary of New England Electric System (the
"NEES Com Agreement"), and a Fiber Optic Use Agreement with BecoCom, Inc., a
subsidiary of Boston Edison Company (the "BecoCom Agreement"). Pursuant to the
terms of these agreements, the Company acquired the right to use certain fibers
(the "Company Fibers"), to be constructed and maintained by NEES Communications
and BecoCom, respectively, on a route running from Hudson, New
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<PAGE>
Hampshire to Boston, Massachusetts terminating at the Company's POP and
Company-targeted carrier centers. Under the terms of these agreements, the
Company is required to pay a monthly fee, and has agreed to share a portion of
the revenue generated from the use of the Company Fibers (in excess of a base
revenue amount specified in each agreement). The Company Fibers are expected to
be available by December 31, 1998. Both the NEES Com Agreement and the BecoCom
Agreement have an initial term of 20 years, with the potential to negotiate for
up to two additional, consecutive five-year extensions. Although the BecoCom
Agreement permits the Company to grant capacity to third parties, the Company
may not use the Company Fibers under the BecoCom Agreement to handle local point
to point services within the service area generally prescribed as the Boston
Edison service territory. Nothing, however, precludes the Company from acquiring
other sources for local point to point services.
Other Agreements
In July 1998, the Company entered into an IRU agreement (the "Qwest
Agreement") with Qwest Communications Corporation ("Qwest") in which Qwest
agreed to grant the Company an IRU in certain fibers along a route to be
constructed between Boston and New York City (the "Boston-New York Segment"). In
consideration of such grant, the Company agreed to pay to Qwest an IRU fee in a
series of installments. The Boston-New York Segment is expected to become
available to the Company by December 31, 1998. Although the Qwest Agreement
permits the Company to grant capacity in lit fiber to third parties, the Company
may not grant IRUs in dark fiber to third parties for five years following the
availability date of the Boston-New York Segment. The term of the Qwest
Agreement is for approximately 20 years; provided, however, that the Qwest
Agreement may be terminated at any time upon the occurrence of certain uncured
defaults by the Company or the loss of certain underlying rights held by Qwest
or other parties upon whom Qwest depends for its rights in the fiber.
The Company also has a number of agreements with Bell Atlantic to use
certain ROWs along pole lines and within ducts in various areas throughout the
Northeast to supplement its primary means of procuring ROWs.
Payments under Right-of-Way Agreements
The aggregate amount accrued by the Company under its agreements that
provide for its ROWs used in the NEON system was $350,400, $435,100 and $158,000
for the years ended December 31, 1996 and 1997 and the three-month period ended
March 31, 1998, respectively.
Services
The Company generally leases high capacity transmission services for use by
various communications carriers. The Company's customers include
facilities-based carriers that require transmission capacity where they have
geographic gaps in their facilities, need additional capacity or require
alternative or redundant routing, and non-facilities-based carriers requiring
transmission capacity to carry their customers' telecommunications traffic.
The Company currently leases dark fiber and lit fiber, as described below,
and has also reserved fibers for future uses.
Dark Fiber
The leasing of dark fiber allows a carrier to interconnect any two or more
specific points on the NEON system. This product requires the Company to install
a fiber optic patch panel ("FOPP"), which is the minimal customer premise
equipment installed by the Company. Dark fiber leases allow a carrier to install
its own optronic equipment and to use as much or as little capacity as it
desires and to customize its capacity with feature rich technology and its
network protocols that differentiate that carrier's product offerings from
others. As a result, the carrier can deploy the dark fiber for whatever purpose
it chooses while the Company remains transparent to the carrier's end-user.
Whenever possible, the carrier customer is restricted from using the dark
fibers for purposes other than supporting its own customers. To date, the
Company has placed restrictions on the transfer or assignment of the leased
fiber from one carrier to another. In addition, the lease prohibits carriers
from accessing its leased fibers at any point other than those designated in the
lease; therefore carriers cannot add additional traffic or draw off traffic
along the path.
Lit Fiber
Pursuant to its leases with its customers, the Company provides a specific
amount of capacity between any two or more points on the NEON system as
specified by the carrier. Lit services involve the installation of optronic
terminals by the Company, to the carrier's specifications, that "light" the
fiber and transmit/receive capacity on the
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network. The Company intends to provide lit transport capacity initially at
SONET OC-3, OC-12, OC-48 and higher rates. In the future the Company intends to
provide carriers with services at the lower DS-3 and, potentially, DS-1 levels.
Reserved Fiber
Part of the Company's strategy is to reserve approximately one-third of the
fibers comprising the NEON system in order to have the capacity necessary to
take advantage of changes in telecommunications technology and services and to
meet future anticipated market demand. The Company believes that continuing
improvements in telecommunications technology will alter the way in which such
services are provided as well as the level of demand for such services. These
changes include developments in compression and multiplexing technology, as well
as changes in communications protocols. These changes will likely effect a
change in the nature of services provided by the Company's customers and,
thereby, a change in the nature of the services provided by the Company. In
addition, such changes may open new opportunities for the Company, including
opportunities to serve new classes of customers. Because the exact nature and
effect of such changes are, at present, difficult to measure, the Company
believes it prudent to retain capacity that is not committed to any particular
use or technology but can be brought out of reserve when the impact of such
technological changes becomes clear. In the meantime, the Company may enter into
short-term agreements with respect to such reserved capacity for the provision
of its current services if such opportunities arise.
Sales and Marketing
The Company's sales and marketing strategy includes positioning itself as
the carriers' carrier of choice, emphasizing its capacity, reliability, rapid
deployment, customer service, access in urban areas of its service territory and
the cost advantages that will allow the Company to lease its fiber optic
infrastructure at competitive prices. The Company intends to price its services
below what the Company believes it would cost carriers to construct their own
facilities or to obtain capacity from other sources.
The Company believes that communications carriers will be attracted to the
Company's dark fiber and lit fiber products. The contracts that the Company has
signed to date arose as a result of management's long standing relationships in
the telecommunications industry. The Company intends to leverage these
relationships and increase customer scope and penetration through a dedicated
sales force.
Customers
The Company is targeting other telecommunications carriers as customers and
does not intend to offer its services directly to end-users. The NEON system
enables carriers to link geographically separated central offices and POPs with
primary or redundant connections in their networks. The Company's facilities
also enable carriers to connect their networks directly into the premises of the
carriers' end-users.
The Company currently has contracts with Brooks Fiber (now owned by
WorldCom), Teleport (expected to be acquired by AT&T), MCI (expected to be
acquired by WorldCom), Sprint and Global NAPs, Inc., a regional ISP. The terms
of certain of these customer contracts are twenty years with varying lease rates
to be paid monthly. The monthly lease rates cover dark fiber and/or lit fiber
leased from the Company. In addition, the contracts typically provide for
"outage related credits," a predetermined reduction or offset against the
customer's lease rate when a customer's leased facility is non-operational or
does not meet the customer's operating parameters, and also typically require
the Company to maintain adequate insurance coverages, including product
liability coverage. In addition, the Company is currently in the process of
negotiating agreements with certain other major communications carriers. There
can be no assurance that such agreements will be consummated or will be on terms
as favorable to the Company as its existing agreements. The Company has received
a letter from Sprint alleging that it may have incurred unspecified damages as a
result of certain disclosures by the Company.
The Company's potential carrier customer base includes the following
classes of carriers:
[bullet] Incumbent Local Exchange Carriers & Independent Telcos, such as
Bell Atlantic, SNET, Standish Telephone Co. (ME), Wilton Telephone
Company, Inc. (NH) and Saco River Telephone Co. (ME). ILECs
typically require some interstate paths for internal communications,
signal control and operator services. ILECs also require intrastate
capacity to connect central offices to one another and to connect
central offices to POPs and customer premises.
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[bullet] Facilities Based IXCs, such as AT&T, Sprint, MCI/WorldCom/LDDS,
WilTel, Frontier, Qwest, IXC Communications, Inc., Cable & Wireless
PLC, Level 3 Communications, Inc. and others. IXCs typically require
(i) regional short-haul connectivity from their national backbone
facilities to originate and terminate traffic deeper into the
customer base, (ii) redundant routing to ensure reliability in their
networks, and (iii) additional capacity for their customers as
minutes-of-use and IP bandwidth requirements increase.
[bullet] Competitive Local Exchange Carriers, such as WorldCom/Brooks Fiber,
Teleport, WorldCom/MFS Communications Company, Inc., RCN
Corporation, MCImetro, Intermedia Communications Inc., NextLink
Communications, Inc., ICG Communications, Inc. and others. CLECs
typically require interconnection between their local networks and
extensions further into the community.
[bullet] Internet Service Providers, such as MCI, GTE Corporation/BBN, Bell
Atlantic, WorldCom/Gridnet, WorldCom/UUNet Technologies
Incorporated, Sprint, RCN Corporation, HarvardNet, MediaOne and
others. ISPs typically require distribution channels to IXC and LEC
switches and interconnection to ISP switches.
[bullet] Cable Television Companies and Video Carriers, such as MediaOne
Group, Inc. (U S West, Inc.), Time Warner Inc., Cablevision Systems
Corporation, Cox Communications, Inc., Vyvx, Public Broadcasting
Service affiliates, broadcasters and others. Cable companies
typically require fiber optic capacity to upgrade their systems to
higher speed bandwidths, which allow them to increase the number of
channels available, add interactive programming and Internet and
data transfer capabilities and to consolidate head-end facilities.
Broadcasters typically require inexpensive video paths to extend
their reach to distant locations.
[bullet] Wireless Communication Companies, such as SNET Links, Bell Atlantic
Mobile, CellularOne, Sprint PCS, OmniPoint, AT&T Wireless, STV
Group, Inc., WinStar Communications, Inc., NextWave Telecom Inc.,
NorthCoast, Opcse-Galloway, Personal Communications, ACC-PCS (TCG),
Devon Mobile, Vtel Corporation and others. Wireless companies
typically require land-based back-hauling of traffic from towers to
their switches and also capacity between their switches with IXCs,
POPs, and ILECs central offices.
[bullet] Microwave Carriers, such as Eastern Microwave Inc./Intermedia
Communications Inc. Microwave carriers typically require fiber optic
capacity to replace microwave service as their primary source of
communications capacity.
Supply Relationships
The Company has entered into agreements and arrangements for the supply of
equipment and services relating to the construction of the NEON system. In
choosing its suppliers, the Company uses such criteria as the quality and
performance of the product for the intended purpose, pricing, and the ability of
the supplier to meet the Company's delivery schedule and technical support
requirements. The Company purchases optronic network multiplexers and network
services from Northern Telecom Ltd. ("Nortel"), and cable from Fitel/Lucent
Technologies, Inc. ("Fitel") and FOCAS, Inc. ("FOCAS"). The cable purchased from
Fitel and FOCAS includes Lucent's patented "TrueWave" fiber, which the Company
believes contains certain favorable performance characteristics that reduce the
Company's investment in signal enhancing network equipment. The Company believes
that there are alternative suppliers or alternative components for all of the
components contained in the NEON system. However, any delay or extended
interruption in the supply of any of the key components, changes in the pricing
arrangements with its suppliers and manufacturers or delay in transitioning a
replacement supplier's product into the NEON system could disrupt the Company's
operations and, if such disruption continued for an extended period of time,
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Risk Factors--Dependence on Suppliers."
Competition
The telecommunications industry is highly competitive, and the Company
faces substantial competition. Many of the Company's existing and potential
competitors have financial, management and other resources that are
substantially greater than those of the Company, as well as other competitive
advantages, including established reputations in the communications market. See
"Risk Factors--Competition."
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The Company is currently aware of communications carriers that own or lease
fiber optic networks in New England (such as AT&T, MCI, Sprint, Bell Atlantic,
SNET, WorldCom and Teleport) and of other carriers (such as IXC Communications,
Qwest Communications International, Metromedia Fiber Network, Level 3
Communications and RCN) who are planning to own or lease additional networks
which, if constructed, could employ advanced technology comparable to that of
the NEON system.
Qwest Communications International recently announced that it had acquired
approximately 288 miles of fiber optic network between New York and Boston,
connecting such cities as Providence and Greenhill in Rhode Island and New
London, New Haven, Bridgeport and Stamford in Connecticut. Similarly, IXC
Communications recently announced that it had acquired approximately 280 miles
of fiber optic network between New York and Boston. Another company, RCN, is
engaged in the construction of fiber optic networks in Boston and several
surrounding communities and in New York City. The Company's customers and
potential customers, such as AT&T, MCI and Sprint, also have facilities
available to them in the region which could be used to compete with the Company.
Development of fiber optic networks is also continuing on a national scale; for
example, Frontier Corp. is currently in the midst of constructing a
cross-continental long distance fiber optic network from Los Angeles to New York
and Qwest Communications International is constructing a fiber-based national
backbone network which will connect 115 metropolitan areas and span
approximately 16,000 miles. In addition, other companies, including Level 3
Communications, are planning nationwide and regional networks of their own.
These networks enable their owners either to operate dedicated facilities for
themselves or to install excess fiber to lease to other communications carriers
and large corporate, government or other customers seeking high-bandwidth
capacity. Alternatively, some network owners, typically CLECs, may choose to use
their infrastructure to provide switched voice and data services, competing
directly with ILECs and IXCs. Currently, the Company does not provide such
services or plan to provide such services. See "Risk Factors--Limited Nature of
Company's Services."
In the cities connected by the NEON system, the Company also faces
significant competition from the ILECs, which currently dominate their
respective local markets. In addition, the Company faces competition from CLECs
and wireless competitors in the cities in which the Company plans to build its
networks.
Most communications carriers already own fiber optic cables as part of
their communications networks, and each of these carriers could, and some do,
compete directly with the Company in the market for leasing fiber capacity.
Some local cable television companies have extensive coaxial cable networks
in place that have been or could be further upgraded to fiber optic cable. To
the extent that local cable television companies decide to equip their networks
with fiber optic cable, they are potential direct competitors of the Company.
The Company also faces potential competition from both NU and CMP, both of
which have rights to use fibers in certain portions of the NEON system, which
use may include competition with the Company. See "--Right-of-Way Agreements."
Properties
The NEON system and its component assets are the principal properties
currently owned by the Company or with respect to which the Company has an IRU.
The Company owns substantially all of the communications equipment currently
utilized in its business and holds certain ownership interests in the cable
comprising the NEON system. The Company's installed fiber optic cable is laid
along the various rights-of-way held by the Company. See "--Right-of-Way
Agreements." Other fixed assets are located at various leased locations in
geographic areas served by the Company.
The Company's executive, administrative and sales offices are located at
its principal office in Waltham, Massachusetts. The Company leases this space
(approximately 4,375 square feet) under an agreement that expires in June 2000.
Reorganization
The Company was incorporated in Massachusetts in July 1989 under the name
"FiveCom, Inc." In May 1996, FiveCom LLC, an operating subsidiary majority-owned
by the Company, was organized in Massachusetts. Also in May 1996, FiveCom LLC
and Mode 1 Communications, Inc. ("Mode 1"), a subsidiary of NU, organized NECOM
LLC
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in Massachusetts, with FiveCom LLC owning approximately 60%, and Mode 1 owning
approximately 40% of the membership interests in NECOM LLC. In December 1996,
FiveCom LLC and MaineCom Services ("MaineCom"), a wholly-owned subsidiary of
CMP, organized FiveCom of Maine LLC in Massachusetts, with MaineCom owning
66.67%, and FiveCom LLC owning 33.33%, of the membership interests in FiveCom of
Maine LLC.
In order to simplify the corporate structure and in contemplation of the
Offerings, the Company's major stockholders decided to reorganize the Company.
In April 1998, prior to the Reorganization, CMP exercised its warrants to
purchase 5,876 shares of membership interests in FiveCom LLC for an aggregate
exercise price of $58.76 and in July 1998, (i) each of the minority members in
FiveCom LLC (and each of Mode 1 and MaineCom) exchanged their membership
interests in FiveCom LLC, NECOM LLC and FiveCom of Maine LLC, respectively, for
shares of the Series B Convertible Preferred Stock of the Company; (ii) FiveCom
LLC and NECOM LLC were each merged with and into a wholly-owned subsidiary of
the Company; (iii) FiveCom of Maine LLC was merged into FiveCom of Maine, Inc.,
a wholly-owned subsidiary of the Company; and (iv) the Company was
reincorporated in Delaware under the name "NorthEast Optic Network, Inc." and
the Company's Certificate of Incorporation was amended and restated. The actions
described in the preceding sentence are referred to in this Prospectus as the
"Reorganization." The shares of membership interest in FiveCom LLC received by
CMP upon exercise of its warrant were exchanged for 144,172 shares of the Series
B Convertible Preferred Stock of the Company, which shares had an estimated
value at the time of the Reorganization of approximately $4.3 million. Mr.
Colantonio, the Company's President, and Mr. Musen, a Vice President of the
Company, exchanged their membership interests in FiveCom LLC for 17,788 shares
and 14,549 shares, respectively, of the Company's Series B Convertible Preferred
Stock, which shares had an estimated aggregate value at the time of the
Reorganization of approximately $542,000 and $443,000, respectively. The Company
believes that the value of the membership interests exchanged in the
Reorganization was equivalent to the value of the shares issued in respect of
each such membership interest. See "Certain Transactions."
Regulation
While the Company believes it is not directly subject to common carrier
regulation (except to the extent is certified as a common carrier through its
subsidiaries in Connecticut and New York), it is part of an industry that is
highly regulated by federal, state and local governments whose regulatory
actions are often subject to judicial modification. The Company has not been
subject to such regulation because it has not offered its facilities to the
general public nor indifferently for a fee, which would subject an entity to
such regulation. In light of the changes that are occurring in the regulation of
telecommunications, the Company cannot forecast whether or not it will be
subject to additional regulation in the future. In Connecticut and New York the
Company has petitioned to be recognized as a regulated telecommunications
service provider because of the nature of its activities in, and the statutory
provisions of, those two states; these subsidiaries, as authorized
telecommunications service providers, would also be subject to certain federal
law and regulation.
Federal
Federal regulation has the greatest impact on the telecommunications
industry and has undergone major changes in the last two years as the result of
the adoption by Congress of the Telecommunications Act of 1996 ("the 1996 Act")
on February 8, 1996. The 1996 Act is the most comprehensive reform of the
nation's telecommunications laws since the Communications Act was enacted. The
1996 Act imposes a number of access and interconnection requirements on
telecommunications carriers and on all local exchange providers, including
CLECs, with additional requirements imposed on ILECs. The 1996 Act provides a
detailed list of items which are subject to these interconnection requirements,
as well as a detailed set of duties for all affected carriers. All
telecommunications carriers must interconnect with the facilities of other
carriers and not install features that will interfere with the interoperability
of networks. All LECs, including CLECs, have a duty to (i) not unreasonably
limit the resale of their services, (ii) provide number portability if
technically feasible, (iii) provide dialing parity to competing providers, and
nondiscriminatory access to telephone numbers, directory assistance, operator
services and directory listings, (iv) provide access to poles, ducts, conduits
and rights-of-way and (v) establish reciprocal compensation arrangements for the
transport and termination of telecommunications. In addition to those general
duties of all LECs, ILECs have additional duties to (i) interconnect at any
technically feasible point and provide service equal in quality to that provided
to their customers or the ILEC itself, (ii) provide unbundled access to network
elements at any technically feasible point at just, reasonable and
nondiscriminatory rates, terms and conditions, (iii) offer retail services at
wholesale prices for the use of telecommunication carriers, (iv) provide
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reasonable public notice of changes in the network or the information necessary
to use the network or which affect interoperability and (v) provide for physical
collocation. "Physical collocation" is an offering by an ILEC that enables
another telecommunications carrier to enter the ILEC's premises to install,
maintain and repair its own equipment that is necessary for interconnection or
access to the ILEC's network elements. An ILEC must allocate reasonable amounts
of space to telecommunications carriers on a first-come first-served basis. If
space limitations or practical or technical reasons prohibit physical
collocation, an ILEC must offer "virtual collocation," by which the other
telecommunications carrier may specify ILEC equipment to be dedicated to its use
and electronically monitor and control communications terminating in such
equipment.
The FCC adopted pricing and other guidelines to implement the
interconnection provisions of the 1996 Act, but the 8th Circuit Court of Appeals
vacated many of the FCC's guidelines. The Supreme Court has granted a writ of
certiorari to review the 8th Circuit's decision and is expected to decide the
case during its 1998-1999 term. The responsibility for setting pricing and other
guidelines with respect to interconnection has thus been left up to the
individual state public service commissions. It is expected that varying pricing
and guidelines will emerge from state to state and some of these guidelines may
eventually have an indirect adverse effect on the Company's business.
Aside from the impact of the 1996 Act, the Company believes federal
regulation does not affect the Company directly because the Company is not
currently regulated as a common carrier under federal law. Federal
telecommunications law imposes special legal requirements on "common carriers"
who engage in "interstate or foreign communication by wire or radio for hire."
The Company believes that the leasing of fiber facilities does not constitute
engaging in the transmission of "communications by wire or radio" and therefore
is not subject to these legal requirements. However, this conclusion could be
affected by the FCC's review of its earlier decision, on remand from the U.S.
Court of Appeals for the District of Columbia Circuit, that local exchange
carriers offered dark fiber on a common carrier basis. In any event, the Company
does not intend to offer its fiber facilities as a common carrier. Common
carriers are those who offer telecommunications services directly to the public
for a fee. The Company does not intend to offer its fiber capacity in this
manner, but instead intends to enter into individual agreements on a selective
basis with prospective lessees of its fiber facilities. The Company therefore
does not believe that its fiber offerings are subject to the common carrier
provisions of the Communications Act. These conclusions reflect the Company's
view that there is no material difference from a regulatory perspective between
the leasing of dark and lit fiber, both of which are offered by the Company.
There is no assurance that the FCC may not take the position that in making
fiber transmission capable, in the case of lit fiber, the leasing of such fiber
is subject to regulation under the Communication Act or that even the offering
of dark fiber itself is subject to regulation.
As indicated above, the two subsidiaries of the Company which have applied
for authority to provide telecommunications services on a common carrier basis
in New York and Connecticut will be subject to regulation under the
Communications Act.
In addition to regulation of common carriers, federal telecommunications
law also imposes special legal requirements on "telecommunications carriers."
The law essentially defines "telecommunications carriers" as those offering
certain telecommunication services "directly to the public" or such classes of
users as to be effectively available directly to the public, regardless of the
facilities used. The Company therefore believes that a company has to be a
common carrier in order to be considered a telecommunications carrier. For the
reasons stated above, the Company believes that it is not a common carrier and
therefore that it is also not a telecommunications carrier with respect to its
fiber capacity leases. Nevertheless, the law is not entirely clear as to, and
the FCC has not definitively addressed whether, the term "telecommunications
carriers" is meant to encompass only common carriers, and therefore whether a
provider of fiber facilities on an individualized basis, like the Company, is a
"common carrier" or "telecommunications carrier." The FCC has been petitioned by
certain railroad, power and telecommunications associations, none of which are
affiliated with the Company, to clarify the status of fiber providers in this
respect. The FCC's pending remand, described above, could also definitively
address the application of these requirements to the Company. If the agency
decides that such companies are telecommunications carriers or common carriers,
then the Company would be subject to certain regulatory requirements, which
could have a material adverse effect on the Company.
If the Company were deemed to be a common carrier it would be required,
with respect to its telecommunications services, to (1) provide such services
indiscriminately upon any reasonable request; (2) charge rates and adopt
practices, classifications and regulations that are just and reasonable; (3)
avoid unreasonable discrimination in charges, practices, regulations, facilities
and services; (4) ensure that its services are accessible
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to and usable by persons with disabilities; (5) pay into federal funds for
Telecommunications Relay Services and the North American Numbering
Administration; (6) assure that its networks comply with the requirements of the
Communications Assistance for Law Enforcement Act; (7) be subject to government
oversight and limitations on its transactions with affiliates; (8) limit its use
of Customer Proprietory Network Information (CPNI) to provisioning of the
services in connection with which the CPNI was obtained; (9) be subject to the
complaint process at the FCC; and comply with various reporting, regulatory fee
payment and other requirements. The Company might also be required to file
tariffs setting forth the rates for its services. These regulatory requirements
could impose substantial burdens on the Company.
If the Company's offering of fiber facilities were deemed to constitute a
"telecommunications service," or the provision of "telecommunications" for a fee
(unless deemed de minimis) then its revenues from fiber leases to end users (but
not to most other telecommunication carriers) would become subject to assessment
for the FCC's Universal Service Fund, a fund that was established by the FCC
pursuant to the 1996 Act to assist in ensuring the universal availability of
basic telecommunications services at affordable prices. The Company may be
subject to this assessment even if it is found to not be a common carrier and
only provides service on a private contractual basis or through the leasing of
excess capacity to end-users. This assessment could create a liability equal to
a percentage of the gross revenues from these leases although the FCC has not
announced what the annual assessment will be (the Company anticipates, based on
quarterly contribution factors as of May 1998 that the annual rate of assessment
will be approximately 4.5% of gross interstate end-user revenues for the year
1998, and may be higher in subsequent years). The Company also may be liable for
assessments by state commissions for state universal service programs. The
Company does not anticipate that its aggregate liability for these universal
service programs would be material. In addition, since the revenues of the
Company's competitors will be subject to comparable assessments; this should not
reduce the Company's competitiveness.
Federal telecommunications law may also affect the Company's business by
virtue of the inter-relationships that exist among the Company and ILECs and
IXCs. For example, the FCC recently issued an order requiring, among other
things, that common line access fees charged to IXCs, which previously amounted
to more than what was necessary to recover the costs of providing access, shift
from being usage driven to a fixed flat cost-based structure. While it is not
possible to predict the precise effect the access charge changes will have on
the Company's business or financial condition, the reforms will reduce access
charges paid by IXCs, likely eliminating one of the principal disincentives for
use of ILEC facilities by IXCs, which could have a material adverse effect on
the use of the Company's fiber optic telecommunications networks by IXCs.
The FCC has responsibility under the 1996 Act's interconnection provisions
to determine what elements of an ILEC's network must be provided to competitors
on an unbundled basis. The FCC has decided not to declare fiber an unbundled
network element under these provisions. This decision is currently subject to
petitions for reconsideration before the FCC. An FCC decision to alter this
decision on reconsideration could decrease the demand for fiber provided by the
Company. In addition, the FCC has announced that state commissions may decide to
add network elements to the FCC's list of elements that are required to be
unbundled by all carriers throughout the country.
State
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
person from providing any interstate or intrastate telecommunications service.
In addition, under current FCC policies, any dedicated transmission service or
facility that is used more than 10% of the time for the purpose of interstate or
foreign communication is subject to FCC jurisdiction to the exclusion of any
state regulation. Notwithstanding these prohibitions and limitations, states
regulate telecommunications services, including through certification of
providers of intrastate services, regulation of intrastate rates and service
offerings, and other regulations and retain jurisdiction under the 1996 Act to
adopt regulations necessary to preserve universal service, protect public safety
and welfare, ensure the continued quality of communications services and
safeguard the rights of consumers. Accordingly, the degree of state involvement
in local telecommunications services may be substantial.
The state regulatory environment varies substantially from state to state.
At present, the Company does not anticipate that the regulatory requirements to
which it will be subject in Connecticut, Maine, Massachusetts, New Hampshire,
New York and Rhode Island will have any material adverse effect on its
operations. In some jurisdictions, the Company's pricing flexibility for
intrastate services may be limited because of regulation, although
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the Company's direct competitors will be subject to similar restrictions.
However, there can be no assurance that future regulatory, judicial, or
legislative action will not have a material adverse effect on the Company.
In arbitrating interconnection agreements under the 1996 Act between ILECs
and their potential competitors, some state commissions have considered whether
fiber should be an unbundled network element. The New York Public Service
Commission determined that it would not require NYNEX Corporation to provide
fiber as an unbundled network element. State commissions in Florida, Maryland,
North Carolina, and Virginia have either refused to require the ILECs to offer
fiber to competitors, or have stated that the issue would be addressed at a
later time. On the other hand, state commissions in Illinois, Massachusetts,
Arizona, Georgia, Minnesota, Ohio, Oregon and Tennessee have found fiber to be a
network element and required the ILECs to offer it on an unbundled basis to
CLECs. There can be no assurance that these requirements, and the associated
pricing methodologies, where applicable will not reduce the demand for fiber
provided by the Company.
The Company has determined that there are advantages to having certain of
its subsidiaries subject to state regulation in Connecticut and New York. As a
regulated carrier in those two jurisdictions, these subsidiaries will have
access to poles and rights of way for its fiber lines that would not be
available to it as an unregulated lessor of fiber. Two subsidiaries of the
Company have, therefore, recently filed petitions in those two states requesting
authority to provide telecommunications services. The Company anticipates that
based on past practices these petitions will be granted within the next three or
four months. As a result, these subsidiaries will incur certain costs to comply
with regulatory requirements such as the filing of tariffs, submission of
periodic financial and operational reports to regulators, and payment of
regulatory fees and assessments in Connecticut and New York.
Local
In addition to federal and state laws, local governments exercise legal
authority that may impact the Company's business. For example, local
governments, such as the City of Boston and the City of New York, typically
retain the ability to license public rights-of-way, subject to the limitation
that local governments may not prohibit persons from providing
telecommunications services. Local authorities affect the timing and costs
associated with the Company's use of public rights-of-way. These regulations may
have an adverse effect on the Company's business.
Employees
As of June 30, 1998, the Company employed 13 people. The Company's
employees are not represented by any labor union. The Company considers its
relationship with employees to be satisfactory.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their ages as of
May 20, 1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ------------------------------- ----- ------------------------------------------------
<S> <C> <C>
Richard A. Crabtree ........... 51 Chairman of the Board of Directors and Chief
Executive Officer
Victor Colantonio ............. 50 Chairman of the Company, President and Director
William F. Fennell ............ 53 Chief Financial Officer and Treasurer
James D. Mack, Jr. ............ 53 Vice President, Sales
Michael A. Musen .............. 49 Vice President, Operations and Secretary
John H. Forsgren .............. 51 Director (1)
David Marsh ................... 50 Director (2)
F. Michael McClain ............ 48 Director (1)
Gary D. Simon ................. 49 Director (2)
Katherine D. Courage .......... 40 Director-designee
</TABLE>
- ------------
(1) Member of Compensation Committee
(2) Member of Audit Committee
Richard A. Crabtree has been a member of the Board of Directors since 1996 and
was elected Chief Executive Officer and Chairman of the Board of Directors in
May 1997. From 1971 to May 1997, Mr. Crabtree held various positions at Central
Maine Power Company, including Senior Vice President and Chief Financial
Officer, Senior Vice President, Customer Service and Vice President, Retail
Operations. Mr. Crabtree also serves as President of MaineCom, a wholly-owned
subsidiary of Central Maine Power Company.
Victor Colantonio, the Company's founder and the Chairman and President of the
Company, has been a director of the Company since 1989. Prior to founding the
Company, from 1987 to 1991 Mr. Colantonio was president of International
Communications Services Corp., a provider of network services to New England
Telephone Company, AT&T and others. He served as President of Ireland-based
Murray International from 1986 to 1987, where he sold network services to SNET,
LiTel, MCI, Sprint and others. From 1983 to 1986, Mr. Colantonio served as
Director of Marketing for Tele-Engineering Corp., an advanced WAN/LAN developer
and video switch and ad-insertion manufacturer, and in such capacity he secured
contracts with, among others, USAF Logistic Command, U.S. Navy Underwater Signal
Command and NASA.
William F. Fennell joined the Company in August 1996 and became its Chief
Financial Officer and Treasurer in May 1997. From October 1986 to January 1996,
Mr. Fennell was Chief Financial Officer of Philips Electronics Group of North
America, a manufacturer and distributor of electronic and electrical products.
From 1970 to 1986, Mr. Fennell served in various positions at GTE Corporation,
including Director of Operations for the Communications Products Group.
James D. Mack, Jr. joined the Company in March 1998 as its Vice President,
Sales. From March 1997 until joining the Company, Mr. Mack was General Manager
of US Telecenters, an independent telecommunications dealer, representing Bell
Atlantic, Nothern Telecom, GTE Corporation and Southwestern Bell. From 1966
until March 1997, Mr. Mack held various sales and marketing positions at Bell
Atlantic/NYNEX Corporation (formerly NYNEX), including Branch Manager for NYNEX
Systems Marketing.
Michael A. Musen has served as an officer of the Company since its inception,
and became Vice President, Operations in 1996. Prior to joining the Company, Mr.
Musen was Vice President of International Communications Services Corp.
John H. Forsgren has served as a Director of the Company since May 1998. Mr.
Forsgren has served as Executive Vice President and Chief Financial Officer of
Northeast Utilities and certain of its affiliates since February 1996.
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From September 1996 to the present, he has served as a director of Connecticut
Yankee Atomic Power Company. From January 1990 to July 1994, he served as Senior
Vice President-Chief Financial Officer of Euro Disney (a division of the Walt
Disney Company), and from December 1994 to January 1996, he was a Managing
Director of Chase Manhattan Bank.
David E. Marsh has served as Director of the Company since May 1998. Since 1973,
he has held various positions at Central Maine Power Company, including
Treasurer, Senior Vice President of Finance, and his current position, Chief
Financial Officer. Mr. Marsh also serves as director of Maine Yankee Atomic
Power Company and as Chairman of the Boards of CMPI, MaineCom Union Water Power
Company and Telesmart.
F. Michael McClain has served as a Director of the Company since May 1998. Mr.
McClain has served as Vice President, Corporate Development of Central Maine
Power Company since February 1998. From 1979 to December 1996 he was Group Vice
President-Petroleum for Dead River Company, a petroleum and real estate company.
Gary D. Simon has served as a Director of the Company since May 1998. Mr. Simon
has served as Senior Vice President-Strategy and Development for the Northeast
Utilities System since April 1998. From 1989 to April 1998, he was Senior
Director, Electric Power of Cambridge Energy Research Associates. From 1984 to
1989, Mr. Simon was Director of California Affairs and then Vice President of
Marketing for El Paso Natural Gas Company. From 1981 to 1984, he served as
President of Sigma Group, an economics consulting and project development
company which he founded in 1981.
There are no family relationships among any of the directors and executive
officers of the Company.
Katherine D. Courage has consented to become a director of the Company upon the
closing of the Offerings. Ms. Courage is a managing director in the Global
Telecommunications and Media Group in the Investment Banking Department of
Credit Suisse First Boston ("CSFB"), one of the underwriters of the Equity
Offering and Debt Offering. Prior to joining CSFB in September 1996, Ms. Courage
worked at Salomon Brothers, Inc for ten years where she was a managing director
with responsibility for the Global Telecommunications Group. Ms. Courage also
worked at Merrill Lynch & Co. in the corporate finance department.
Committees of the Board of Directors
The Compensation Committee makes recommendations concerning salaries and
incentive compensation for employees of and consultants to the Company and
administers certain aspects of the Company's incentive plans. See "--1998 Stock
Incentive Plan." The Audit Committee reviews the results and scope of the audit
and other services provided by the Company's independent public accountants.
Compensation of Directors
The Company has no present plans to pay cash compensation to directors. The
Company intends to reimburse directors for certain out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors or
Committees thereof. In addition, the Company may issue options to the directors
under the 1998 Stock Incentive Plan, which options would vest and become
exercisable over time.
Executive Compensation
The following table sets forth compensation paid to the Chief Executive
Officer and each of the two other most highly compensated individuals who served
as executive officers on December 31, 1997 and who received over $100,000 in
compensation for services rendered to the Company in all capacities during the
year ended December 31, 1997 (the "Named Executive Officers"):
46
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
1997 Annual Compensation Awards
-------------------------------------------- ------------
Securities
Other Annual Underlying All Other
Name and Principal Position Salary($) Bonus($) Compensation($) Options(#) Compensation($)
- ----------------------------- ----------- ---------- ----------------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Richard A. Crabtree ......... -- -- -- -- --
Chairman of the Board and
Chief Executive Officer(1)
Victor Colantonio ........... 150,000 2,885 -- -- --
Chairman of the Company,
President and Director(2)
Michael A. Musen ............ 112,000 2,154 -- -- --
</TABLE>
Vice President, Operations
- ------------
(1) During 1997, while serving as Chairman of the Board of Directors and Chief
Executive Officer of the Company, Mr. Crabtree was President of MaineCom, a
wholly-owned subsidiary of CMP, which paid his salary and benefits.
Therefore, the Company did not pay any compensation to Mr. Crabtree for his
services in 1997; however, the Company reimbursed MaineCom $67,808 for Mr.
Crabtree's services in 1997. Effective July 1, 1998, Mr. Crabtree became a
full-time employee of the Company with an annual base salary of $200,000. In
June 1998, the Board of Directors of the Company granted to him an option to
purchase up to 649,628 shares of the Company's Common Stock, which becomes
exercisable in three equal annual installments, beginning one year after the
closing of the Offerings. The exercise price per share for such option is
the price to the public of a share of Common Stock in the Equity Offering.
In addition, Mr. Crabtree has an opportunity to earn an annual bonus,
targeted at 35% of his salary. Upon the closing of the Offerings, the
Company will pay a cash bonus of $500,000 to MaineCom in recognition of Mr.
Crabtree's efforts on behalf of the Company while he was employed by
MaineCom.
(2) In May 1998, the Board of Directors of the Company increased Mr.
Colantonio's annual base salary to $200,000 effective upon the consummation
of the Offerings and granted to him an option to purchase up to 649,628
shares of the Company's Common Stock, which becomes exercisable in four
equal annual installments, with the first such installment becoming
exercisable upon the closing of the Offerings. The exercise price per share
for such option is the price to the public of a share of Common Stock in the
Equity Offering. In addition, Mr. Colantonio has an opportunity to earn an
annual bonus, targeted at 35% of his salary. In recognition of Mr.
Colantonio's services to the Company in obtaining financing and establishing
and maintaining the Company's utility and customer relationships, the Board
of Directors determined that, upon the closing of the Offerings, Mr.
Colantonio will be entitled to a cash bonus of $500,000. Pursuant to the
terms of Mr. Colantonio's employment agreement with the Company, MaineCom
transferred 42,310 shares of Series A Preferred Stock of the Company to Mr.
Colantonio as of April 17, 1998. Mr. Colantonio may forfeit such shares if
he voluntarily terminates employment with the Company prior to October 14,
2000. See "--Employment Agreements."
Employment Agreements
The Company has entered into an Employment Agreement, dated July 1, 1998,
with Richard Crabtree. This agreement has an initial term expiring on December
31, 1998, and is extendable by mutual agreement of the parties for an additional
three years. The Agreement provides for an annual base salary of not less than
$200,000 per year, as well as an option to purchase 649,628 shares of Common
Stock at an exercise price equal to the price to the public of a share of Common
Stock in the Equity Offering, vesting in three equal annual installments
beginning on the first anniversary of the closing of the Offerings. Pursuant to
the Agreement, Mr. Crabtree is also entitled to participate in the Company's
executive incentive plan and has an opportunity to earn an annual bonus,
targeted at 35% of his base salary.
The Company has entered into an Employment Agreement with Victor
Colantonio, dated October 15, 1997, as amended. This Agreement has an initial
term of three years and automatically extends for one-year terms thereafter
unless either party gives written notice of its desire to terminate the
agreement no later than the immediately preceding April 1. The Agreement
provides for an annual base salary of not less than $150,000. If Mr.
Colantonio's employment is terminated without cause after the occurrence of a
"Change of Control" (as defined
47
<PAGE>
in the Agreement) of the Company, Mr. Colantonio will be entitled to receive a
lump sum payment in an amount equal to 2.99 times his then-current base salary.
Upon consummation of the Offerings, Mr. Colantonio's annual base salary will be
increased to $200,000.
The Company has entered into an Employment Agreement, dated July 1, 1998,
with William Fennell. This Agreement has an initial term expiring on the later
of the third anniversary of the execution date or the third anniversary of the
closing of the Offerings. The Agreement provides for an annual base salary of
not less than $125,000 per year, as well as an option to purchase 162,407 shares
of Common Stock at an exercise price equal to the price to the public of a share
of Common Stock in the Equity Offering, vesting in four equal installments
beginning on the date of the closing of the Offerings and on each of the next
three anniversaries of such date. Pursuant to the Agreement, Mr. Fennell is also
entitled to participate in the Company's executive incentive plan and has an
opportunity to earn an annual bonus, targeted at 25% of his base salary.
The Company has also entered into employment agreements with James Mack,
the Company's Vice President, Sales, and Michael Musen, the Company's Vice
President, Operations, dated May 4, 1998 and September 29, 1994, respectively.
The Company's agreement with Mr. Mack has a term of three years and provides
that Mr. Mack will receive a base salary of at least $150,000 per year and
bonus, awards, cash incentives and stock option incentives having an aggregate
value of at least an additional $150,000 per year provided certain performance
targets are met. Pursuant to the terms of this agreement, Mr. Mack was granted
an option to purchase up to 162,407 shares of the Company's Common Stock, which
become exercisable as to 50% of such shares beginning on April 30, 1999 and as
to an additional 25% on each anniversary of such date. The exercise price per
share is the price to the public of a share of Common Stock in the Equity
Offering. The Company's agreement with Mr. Musen has a term of three years and
renews automatically on an annual basis unless terminated by either party on at
least 180 days' notice. The Agreement provides for an annual base salary of
$112,000. In addition, in June 1998 the Board of Directors granted to Mr. Musen
an option to purchase 40,601 shares of the Company's Common Stock, exercisable
in full upon the closing of the Offerings, with an exercise price per share
equal to the price to the public of a share of Common Stock in the Equity
Offering.
Option Grants
The Company did not grant any options to the Named Executive Officers in
1997.
Option Exercises and Options Outstanding
None of the Named Executive Officers held any options as of December 31,
1997.
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "1998 Plan") was adopted by
the Board of Directors on May 18, 1998 and approved by the Company's
stockholders on May 26, 1998, and amended and restated by the Board of Directors
and the stockholders on July 28, 1998. The 1998 Plan provides for the grant of
incentive stock options intended to qualify under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code"), nonstatutory stock options,
restricted stock awards and other stock-based awards, including the grant of
shares based upon certain conditions, the grant of securities convertible into
Common Stock and the grant of stock appreciation rights (collectively "Awards").
Options may be granted at an exercise price which may be less than, equal to or
greater than the fair market value of the Common Stock on the date of grant.
Under present law, however, incentive stock options and options intended to
qualify as performance-based compensation under Section 162(m) of the Code may
not be granted at an exercise price less than the fair market value of the
Common Stock on the date of grant (or less than 110% of the fair market value in
the case of incentive stock options granted to optionees holding more than 10%
of the voting power of the Company). Options granted under the 1998 Plan
typically will vest over time, subject to acceleration upon a Change in Control
of the Company (as defined therein). Restricted stock awards entitle recipients
to acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares from the recipient in the event that the
conditions specified in the applicable Award are not satisfied prior to the end
of the applicable restriction period established for such Award. Under the 1998
Plan, the Board has the right to grant other Awards based upon the Common Stock
having such terms and conditions as the Board may determine, including the grant
of shares based upon certain conditions, the grant of securities convertible
into Common Stock and the grant of stock appreciation rights. Officers,
employees, directors, consultants and advisors of the Company and its
subsidiaries are eligible to be granted Awards under the 1998 Plan.
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The 1998 Plan is administered by the Board of Directors. The Board has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the 1998 Plan and to interpret the provisions of the 1998
Plan. The Board has authorized the Compensation Committee to administer the
granting of options to executive officers under the 1998 Plan.
Upon consummation of the Equity Offering, a total of 2,436,105 shares will
be reserved for issuance under the 1998 Plan, of which 1,705,272 shares will be
subject to options granted to employees of the Company with an exercise price
per share equal to the price to the public of a share of Common Stock in the
Equity Offering. See "--Executive Compensation--Employment Agreements."
Compensation Committee Interlocks and Insider Participation
During 1997, the Company had no compensation committee, and no officers,
other than Messrs. Crabtree and Colantonio, who were also members of the Board
of Directors, participated in deliberations of the Board of Directors concerning
executive officer compensation. No interlocking relationship exists between any
member of the Company's anticipated Compensation Committee and any member of any
other company's board of directors or compensation committee.
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CERTAIN TRANSACTIONS
The Company has entered into certain agreements with NU and CMP, affiliates
of which are major stockholders of the Company, relating to fiber optic
facilities and services upon which the NEON system depends. See
"Business--Right-of-Way Agreements." The Company believes that these agreements
are on terms at least as favorable to the Company as could have been obtained
from unaffiliated third parties. NU has waived right-of-way fees otherwise
payable by the Company through 2004 in return for the Company's agreement to
build the NEON system to certain NU facilities and to allow NU to use 12 fibers
on designated route segments in the NU service territory.
In July 1998, the Company entered into a Restructuring and Contribution
Agreement with, inter alia, CMP, MaineCom (an affiliate of CMP) and Mode 1 (an
affiliate of NU) relating to the restructuring of the Company. Pursuant to this
Agreement, each of MaineCom and Mode 1 exchanged membership interests in
subsidiaries of the Company for shares of the Series B Convertible Preferred
Stock of the Company. In addition, pursuant to the Restructuring and
Contribution Agreement, Mr. Colantonio, the Company's President, and Mr. Musen,
the Company's Vice President, Operations, exchanged their membership interests
in FiveCom LLC, a subsidiary of the Company, for shares of the Series B
Convertible Preferred Stock of the Company. See "Business --Reorganization."
During the years ended December 31, 1996 and 1997, the Company reimbursed
CMP and/or MaineCom for personnel and construction costs related to activities
of the Company. The amount paid to CMP totaled $310,591 and $725,000 for the
years ended December 31, 1996 and 1997, respectively. Approximately $0 and
$29,779 was included in accounts payable at December 31, 1996 and 1997,
respectively.
CMP and the Company are parties to a Tax Sharing Agreement pursuant to
which CMP has included the Company in its consolidated federal income tax return
since 1996. At December 31, 1996 and 1997, the amounts due under the Tax Sharing
Agreement to the Company from CMP amounted to approximately $0 and $368,734,
respectively, for current and deferred income tax benefits related to CMP's
utilization of the Company's loss carryforwards. As a result of this
arrangement, the Company has no loss carryforwards.
The Company paid NU $3,719,404 in 1996 and $945,667 in 1997 for materials,
labor and other contractor charges related to the construction of the NEON
system. Approximately $357,100 and $494,500 was included in accounts payable at
December 31, 1996 and 1997, respectively.
CMP agreed to allow right-of-way payments otherwise payable by the Company
to accrue so long as amounts borrowed by the Company from Peoples Heritage
Savings Bank under a $1.6 million construction loan agreement were outstanding.
The Company expects to repay the Peoples Heritage Savings Bank loan with the
proceeds of the Offerings. The amount of right-of-way payments accrued through
March 31, 1998 was approximately $120,000.
For a description of certain employment agreements and other arrangements
between the Company and its executive officers, see "Management--Executive
Compensation."
Upon the closing of the Offerings, the Company has agreed to pay a bonus of
$500,000 to each of Mr. Colantonio and MaineCom. The payment to MaineCom is in
recognition of the services provided by Mr. Crabtree, as an employee of
MaineCom, to the Company.
In October 1997, the Company entered into a Construction Loan Agreement
with CMP, as amended in February 1998 and June 1998 (as amended, the "CMP Loan
Agreement"). Pursuant to the terms of the CMP Loan Agreement, the Company may
borrow up to $30 million to pay approved expenses related to the construction of
the NEON system. Amounts borrowed by the Company bear interest at an annual
interest rate equal to LIBOR plus 3%, and are secured by a first priority
security interest in all of the Company's assets, including the Company's rights
in the NEON system, except that part of the NEON system which is located in
CMP's service territory, as to which CMP's security interest is subordinated to
that of another lender. As of June 30, 1998, the Company had outstanding
principal of approximately $17,875,000 under the CMP Loan Agreement. Amounts due
under the CMP Loan Agreement are being paid in full with the proceeds of the
Offerings. See "Use of Proceeds."
Concurrently with the CMP Loan Agreement, CMP was issued warrants to
purchase 5,876 shares of membership interest in FiveCom LLC with an exercise
price of $.01 per share.
MaineCom has certain rights with respect to the registration of its shares
of the capital stock of the Company. See "Description of Capital
Stock--Registration Rights."
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's voting securities as of June 30, 1998, assuming
exercise of options exercisable within 60 days of June 30, 1998, and as adjusted
to reflect the sale of the shares of Common Stock offered hereby, by (i) each
Selling Stockholder, (ii) each person who, to the knowledge of the Company,
beneficially owns more than 5% of any class of the Company's voting securities;
(iii) each director of the Company; (iv) each Named Executive Officer of the
Company; and (v) all directors and officers of the Company as a group.
<TABLE>
<CAPTION>
Shares of Common Shares of Common
Stock Beneficially Stock Beneficially Owned
Owned Prior to the Number of After the Equity
Equity Offering(2) Shares of Offering(2)(3)
------------------------------ Common Stock ------------------------
Name(1) Number Percent Being Offered Number Percent
- ------------------------------------- ------------------ --------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Central Maine Power Company
83 Edison Drive
Augusta, ME 04336 .................. 6,458,765(4) 53.5% 282,023 6,176,742 38.5%
Northeast Utilities
107 Selden Street
Berlin, CT 06037 ................... 4,992,015(5) 41.4% 217,977 4,774,038 29.7%
Executive Officers and Directors
Richard A. Crabtree(6)(7) ........... -- -- -- -- --
Victor Colantonio(8) ................ 293,122 2.4% -- 293,122 1.8%
William F. Fennell(9) ............... 40,601 * -- 40,601 *
James D. Mack, Jr. .................. -- --
Michael A. Musen(10) ................ 113,141 * -- 113,141 *
John H. Forsgren(11) ................ -- -- -- -- --
David E. Marsh(7) ................... -- -- -- -- --
F. Michael McClain(7) ............... -- -- -- -- --
Gary D. Simon(11) ................... -- -- -- -- --
All executive officers and directors
as a group (9 persons)(12) ......... 446,864 3.6% -- 446,864 2.7%
</TABLE>
- ------------
* Represents less than one percent of the outstanding Common Stock
(1) The address of each person in the table other than Central Maine Power
Company and Northeast Utilities is 391 Totten Pond Road, Suite 401,
Waltham, Massachusetts.
(2) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days after June 30, 1998. The inclusion herein of such shares,
however, does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of such shares. Unless otherwise
indicated, each person or entity named in the table has sole voting power
and investment power (or shares such power with his or her spouse) with
respect to all shares of capital stock listed as owned by such person or
entity.
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Consists of 360,430 shares held by CMP and 6,098,335 shares held by
MaineCom, a wholly-owned subsidiary of CMP. Mr. Crabtree, the Chief
Executive Officer and Chairman of the Board of Directors of the Company, is
the President of MaineCom. Mr. Marsh, a director of the Company, is the
Chief Financial Officer of CMP. Mr. McClain, a director of the Company, is
the Vice President, Corporate Development of CMP. Each of Messrs. Crabtree,
Marsh and McClain disclaims beneficial ownership of the shares held by
MaineCom and CMP except to the extent of his pecuniary interest therein.
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(5) All shares beneficially owned by NU are held by Mode 1, a wholly-owned
subsidiary of NU. Mr. Forsgren, a director of the Company, is an Executive
Vice President and the Chief Financial Officer of NU. Mr. Simon, a director
of the Company, is the Senior Vice President-Strategy and Development for
Northeast Utilities Service Company, a service company affiliate of NU.
Each of Messrs. Forsgren and Simon disclaims beneficial ownership of the
shares held by Mode 1 except to the extent of his pecuniary interest
therein.
(6) Does not include 649,628 shares subject to options granted to Mr. Crabtree
in May 1998. See "Management --Executive Compensation."
(7) Does not include shares held by CMP and MaineCom.
(8) Includes 162,407 shares subject to options granted to Mr. Colantonio in
May 1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(9) Includes 40,601 shares subject to options granted to Mr. Fennell in May
1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(10) Includes 40,601 shares subject to options granted to Mr. Musen in June
1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(11) Does not include shares held by Mode 1.
(12) Does not include Katherine D. Courage, who will become a director of the
Company following the completion of the Offerings. Ms. Courage is a
managing director of Credit Suisse First Boston, one of the underwriters in
this Offering. As of June 30, 1998, Ms. Courage did not beneficially own
any shares of Common Stock of the Company.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of March 31, 1998 (after giving effect to the Reorganization and the
Preferred Stock Conversion), there were outstanding an aggregate of 12,062,735
shares of Common Stock held of record by 21 stockholders.
Common Stock
The Company's Restated Certificate of Incorporation authorizes the issuance
of up to 30,000,000 shares of Common Stock, $.01 par value per share. Holders of
Common Stock are entitled to one vote for each share held on all matters
submitted to a vote of stockholders and do not have cumulative voting rights.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election. Holders of Common Stock are entitled to receive ratably such
dividends, if any, as may be declared by the Board of Directors out of funds
legally available therefor, subject to any preferential dividend rights of
outstanding Preferred Stock. Upon the liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Equity Offering will be, when issued and paid for,
fully paid and nonassessable. The rights, preferences and privileges of holders
of Common Stock are subject to, and may be adversely affected by, the rights of
the holders of shares of any series of Preferred Stock which the Company may
designate and issue in the future.
Preferred Stock
The Restated Certificate of Incorporation authorizes the issuance of up to
2,000,000 shares of Preferred Stock, $.01 par value per share. Under the terms
of the Restated Certificate of Incorporation, the Board of Directors is
authorized, subject to any limitations prescribed by law, without stockholder
approval, to issue such shares of Preferred Stock in one or more series. Each
such series of Preferred Stock shall have such rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by the
Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could have the effect of making it more difficult for
a third party to acquire, or of discouraging a third party from acquiring, a
majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
Delaware Law and Certain Charter and Bylaw Provisions
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
Under the Restated Certificate of Incorporation, any vacancy on the Board
of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board, may only be filled by vote of a majority of the
directors then in office. The Restated Certificate of Incorporation also
provides that any action required or permitted to be taken by the stockholders
of the Company at an annual meeting or special meeting of stockholders may only
be taken if it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting. The Restated Certificate of Incorporation
further provides that special meetings of the stockholders may only be called by
a Chairman of the Board of Directors or by the Board of Directors. Under the
Company's Bylaws, in order for any matter to be considered "properly brought"
before a meeting, a stockholder must comply with certain requirements regarding
advance notice to the Company. The foregoing provisions could have the effect of
delaying until the next stockholders' meeting stockholder actions which are
favored by the holders of a majority of the
53
<PAGE>
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the Company's
Common Stock, because such person or entity, even if it acquired a majority of
the outstanding voting securities of the Company, would be able to take action
as a stockholder (such as electing new directors or approving a merger) only at
a duly called stockholders' meeting, and not by written consent.
The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain circumstances
involving wrongful acts, such as the breach of a director's duty of loyalty or
acts or omissions which involve intentional misconduct or a knowing violation of
law. Further, the Restated Certificate of Incorporation contains provisions to
indemnify the Company's directors and officers to the fullest extent permitted
by the General Corporation Law of Delaware. The Company believes that these
provisions will assist the Company in attracting and retaining qualified
individuals to serve as directors.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is
BankBoston, N.A.
Registration Rights
In November 1995, the Company and MaineCom entered into a Stock
Subscription Agreement, pursuant to which MaineCom purchased shares of the
Company's Series B Convertible Preferred Stock. Pursuant to the terms of the
Agreement, MaineCom has the right to have the shares of Common Stock issuable
upon conversion of its shares of Series B Convertible Preferred Stock
("Registrable Securities") included in any registration statement filed by the
Company relating to any public offering of the Company's Common Stock, except to
the extent the number of such shares may be limited by the managing underwriter
of any such offering. In addition, MaineCom may request that the Company
register all or part of the Registrable Securities at any time at least 180 days
after the effective date of a registered underwritten offering of the Company's
Common Stock, provided that the anticipated aggregate net offering price for
such securities is at least $10,000,000.
In May 1996, the Company issued a warrant to Oppenheimer & Co., Inc. (now
CIBC Oppenheimer Corp.) ("Oppenheimer"), relating to the right to purchase
65,167 shares of the Company's Series B Convertible Preferred Stock (the
"Oppenheimer Warrant"). Pursuant to the terms of the Oppenheimer Warrant, upon
Oppenheimer's request, the Company is required to include any securities
issuable with respect to the Oppenheimer Warrant ("Oppenheimer Registrable
Securities") in any registration statement filed by the Company (other than a
Registration Statement on Form S-8) relating to any public offering of the
Company's Common Stock. In addition, if requested by the holders of 50% of the
Oppenheimer Registrable Securities, the Company is required to register such
securities on a Registration Statement on Form S-3 when the Company becomes
eligible to use such form. However, in lieu of either of the above-referenced
registrations, the Company may purchase the Oppenheimer Registrable Securities
for an amount in cash equal to 95% of the difference between (a) the last sale
price of such securities on the day the request for registration is made and (b)
the exercise price in effect for the Oppenheimer Warrant on such day.
Principal Stockholders Agreement
CMP and NU have entered into an agreement dated May 20, 1998, whereby each
such party agrees that, following the completion of the Offerings, it will not
permit or cause the Company to (i) merge or consolidate, liquidate or dissolve,
change its form of organization or sell, lease, exchange or transfer all or
substantially all of its assets or (ii) seek bankruptcy protection or certain
other protection from creditors, without the consent of both parties. In
addition, each of NU and CMP has rights of first offer in connection with the
proposed sale of Common Stock of the Company held by the other party and the
option to purchase the shares of Common Stock of the Company held by the other
party if such other party seeks bankruptcy protection or similar relief. After
the closing of the Offerings, this agreement will remain in effect for so long
as (a) NU owns at least 10% of the outstanding Common Stock of the Company,
fully diluted and (b) the aggregate Common Stock of the Company owned by NU and
CMP is at least 33-1/3% of the outstanding Common Stock of the Company, fully
diluted.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
Concurrently with the Equity Offering, the Company is offering $180.0
million aggregate principal amount of its 12-3/4% Senior Notes Due 2008 pursuant
to the Debt Offering. The following is a summary of certain terms of the Notes
and is qualified in its entirety by reference to the Indenture (the "Indenture")
relating to the Notes.
The Notes will be senior unsecured (except to the extent of the Pledge
Account and the Pledged Securities (each as defined in the Indenture))
obligations of the Company, and will mature on August 15, 2008. The Notes will
pay interest semiannually each February 15 and August 15, commencing on February
15, 1999. Upon the closing of the Debt Offering, the Company will purchase U.S.
government obligations in such amount as will be sufficient, upon receipt of
scheduled interest and principal payments on such securities, to provide for
payment in full of the first seven scheduled interest payments on the Notes.
Such securities will be pledged as security for the benefit of the holders of
the Notes.
The Notes will not be redeemable prior to August 15, 2003. Thereafter, the
Notes will be redeemable at the option of the Company, in whole or in part, at
any time or from time to time.
Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder of Notes will have the right to require the Company to purchase all
or a portion of such holder's Notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase.
The Indenture will contain certain covenants, including covenants that
limit (i) indebtedness, (ii) restricted payments, (iii) restrictions on
distributions from certain subsidiaries, (iv) transactions with affiliates, (v)
sales of assets and subsidiary stock (including sale and leaseback
transactions), (iv) sale or issuance of capital stock of certain subsidiaries,
(vii) liens and (viii) mergers, consolidations or transfers of assets.
55
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Equity Offering, there has been no market for the Common Stock
of the Company. Future sales of substantial amounts of Common Stock in the
public market could adversely affect prevailing market prices from time to time.
Furthermore, since only a limited number of shares will be available for sale
shortly after the Equity Offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of the Equity Offering (based on shares outstanding at
March 31, 1998), the Company will have outstanding an aggregate of 16,062,735
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, the 4,500,000
shares sold in the Equity Offering will be freely tradeable without restrictions
or further registration under the Securities Act, unless such shares are
purchased by an existing "affiliate" of the Company as that term is defined in
Rule 144 under the Securities Act (an "Affiliate"). The remaining 11,562,735
shares of Common Stock held by existing stockholders are "restricted securities"
as that term is defined in Rule 144 under the Securities Act ("Restricted
Shares"). Restricted Shares may be sold in the public market only if registered
or if they qualify for an exemption from registration under Rules 144, 144(k) or
701 promulgated under the Securities Act, which rules are summarized below. As a
result of the contractual restrictions described below and the provisions of
Rule 144, 144(k) and 701, 11,159,995 shares will be eligible for sale upon
expiration of the lock-up agreements 180 days after the date of this Prospectus
and 402,740 shares will be eligible for sale upon expiration of their respective
one-year holding periods.
All officers, directors and principal stockholders of the Company have
agreed not to offer, pledge, sell, contract to sell, sell any option or contract
to purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer, lend or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or enter into any swap or other
arrangement that transfers to another, in whole or in part, any of the economic
consequences of ownership of the Common Stock for a period of 180 days after the
date of this Prospectus, without the prior written consent of Credit Suisse
First Boston Corporation, subject to certain limited exceptions. Credit Suisse
First Boston Corporation currently has no plans to release any portion of the
securities subject to lock-up agreements. When determining whether or not to
release shares from the lock-up agreements, Credit Suisse First Boston
Corporation will consider, among other factors, the stockholder's reasons for
requesting the release, the number of shares for which the release is being
requested and market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 160,627 shares immediately after the
Equity Offering); or (ii) the average weekly trading volume of the Common Stock
on the Nasdaq National Market during the four calendar weeks preceding the
filing of a notice on Form 144 with respect to such sale. Sales under Rule 144
are also subject to certain manner of sale provisions, notice requirements and
the availability of current public information about the Company. Under Rule
144(k), a person who is not deemed to have been an Affiliate of the Company at
any time during the 90 days preceding a sale, and who has beneficially owned the
shares proposed to be sold for at least two years (including the holding period
of any prior owner except an Affiliate), is entitled to sell such shares without
complying with the manner of sale, public information, volume limitation or
notice provisions of Rule 144. Accordingly, unless otherwise restricted, "144(k)
shares" may therefore be sold immediately upon the completion of the Equity
Offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisors prior to the date the issuer
becomes subject to the reporting requirements of the Securities Exchange Act of
1934, as amended (the "Exchange Act") pursuant to written compensatory benefit
plans or written contracts relating to the compensation of such persons. In
addition, the SEC has indicated that Rule 701 will apply to typical stock
options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of the Equity Offering).
Securities issued in reliance on Rule 701 are restricted securities and, subject
to the
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<PAGE>
contractual restrictions described above, beginning 90 days after the date of
this Prospectus, may be sold (i) by persons other than Affiliates, subject only
to the manner of sale provisions of Rule 144 and (ii) by Affiliates, under Rule
144 without compliance with its one-year minimum holding period requirements.
The Company has agreed not to offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer, lend or
dispose of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or enter into
any swap or similar agreement that transfers, in whole or in part, the economic
risk of ownership of the Common Stock, for a period of 180 days after the date
of this Prospectus, without the prior written consent of Credit Suisse First
Boston Corporation, subject to certain limited exceptions.
Following the Equity Offering, the Company intends to file registration
statements under the Securities Act covering approximately 2,436,105 shares of
Common Stock issued and outstanding, subject to outstanding options or reserved
for issuance under the Company's 1998 Plan. See "Management--1998 Stock
Incentive Plan." Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to Affiliates,
be available for sale in the open market, except to the extent that such shares
are subject to vesting restrictions with the Company or the contractual
restrictions described above.
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UNITED STATES FEDERAL TAX CONSEQUENCES
The following is a summary of material United States federal income tax
considerations relating to the ownership and disposition of Common Stock
applicable to Non-United States Holders, but does not purport to be a complete
analysis of all the potential tax considerations relating thereto. This summary
is based on the provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), the applicable Treasury Regulations promulgated or proposed thereunder
("Treasury Regulations"), judicial authority and current administrative rulings
and practice, all of which are subject to change, possibly on a retroactive
basis. This summary does not address tax considerations that may be relevant to
a particular investor in light of such investor's personal investment
circumstances, nor does it address any tax consequences arising out of the laws
of any state, local or foreign taxing jurisdiction.
Non-United States Holders
A "Non-United States Holder" is any beneficial owner of Common Stock that,
for United States federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership or an estate or trust
not subject to United States federal income tax on a net income basis in respect
of income or gain with respect to Common Stock. An individual may be deemed to
be a resident alien (as opposed to a non-resident alien) by virtue of being
present in the United States on at least 31 days during the calendar year and
for an aggregate of 183 days during the calendar year and the two preceding
calendar years (counting, for such purposes, all the days present in the current
year, one-third of the days present in the immediately preceding year and
one-sixth of the days present in the second preceding year). In addition to the
"substantial presence test" described in the immediately preceding sentence, an
individual may be treated as a resident alien if he or she (i) meets a lawful
permanent residence test (a so-called "green card" test) or (ii) elects to be
treated as a U.S. resident and meets the "substantial presence test" in the
immediately following year.
Each prospective Non-United States Holder is advised to consult its own tax
advisor with respect to the tax consequences of owning and disposing of Common
Stock.
Sale or Exchange of Common Stock
A Non-United States Holder of Common Stock will generally not be subject to
United States federal income tax or withholding tax on any gain realized on the
sale or exchange of the Common Stock unless (1) the gain is effectively
connected with a United States trade or business of the Non-United States
Holder, (2) in the case of a Non-United States Holder who is an individual and
holds Common Stock as a capital asset, such Holder is present in the United
States for a period or periods aggregating 183 days or more during the taxable
year of the disposition and certain other conditions are met, (3) such Holder is
subject to tax pursuant to the provisions of the Code applicable to certain
United States expatriates, or (4) subject to the exceptions discussed below, the
Company is or has been a "United States real property holding corporation" for
federal income tax purposes at any time within the shorter of the five-year
period preceding such disposition or such Holder's holding period and certain
other conditions are met.
United States Real Property Holding Corporations
Under present law, a company is a United States real property holding
corporation if (a) the fair market value of its United States real property
interests is equal to or more than (b) 50% of the sum of the fair market value
of its United States real property interests, its interests in real property
located outside the United States, and its other assets which are used or held
in a trade or business. Because of its investment in the communication network,
the Company may be a United States real property holding corporation. If the
Company is a "United States real property holding corporation," gain recognized
on a disposition of the Common Stock by a Non-United States Holder would be
subject to United States federal income tax unless (i) the Common Stock is
"regularly traded on an established securities market" within the meaning of the
Code and (ii) the Non-United States Holder disposing of Common Stock did not
own, actually or constructively, at any time during the five-year period
preceding the disposition, more than 5% of the Common Stock. It is anticipated
that the Common Stock will be regularly traded on an established securities
market.
Dividends
Subject to the discussion below, any dividend paid to a Non-United States
Holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate
58
<PAGE>
as may be specified by an applicable income tax treaty. For purposes of
determining whether tax is to be withheld at a 30% rate or at a reduced rate as
specified by an income tax treaty, the Company ordinarily will presume that
dividends paid to an address in a foreign country are paid to a resident of such
country absent knowledge that such presumption is not warranted. Under recently
issued Treasury Regulations, however, Non-United States Holders of Common Stock
who wish to claim the benefit of an applicable treaty rate would be required to
satisfy certain certification requirements. The new Treasury Regulations are
effective for payments made after December 31, 1999. Dividends paid to a holder
with an address within the United States generally will not be subject to
withholding tax, unless the Company has actual knowledge that the holder is a
Non-United States Holder.
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from withholding tax. However, such effectively
connected dividends are subject to regular United States income tax in the same
manner as if the Non-United States Holder were a United States resident. A
Non-United States Holder may claim exemption from withholding under the
effectively connected income exception by filing Form 4224 (Statement Claiming
Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of a Trade or Business in the United States) each year with the Company
or its paying agent prior to the payment of the dividends for such year.
Effectively connected dividends received by a corporate Non-United States Holder
may be subject to an additional "branch profits tax" at a rate of 30% (or such
lower rate as may be specified by an applicable tax treaty) of such corporate
Non-United States Holder's effectively connected earnings and profits, subject
to certain adjustments.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
United States Internal Revenue Service (the "IRS").
Backup Withholding and Information Reporting
Generally, the Company must report to the IRS the amount of dividends paid,
the name and address of the recipient, and the amount, if any, of tax withheld.
A similar report is sent to the holder. Pursuant to tax treaties or other
agreements, the IRS may make its reports available to tax authorities in the
recipient's country of residence.
Unless the Company has actual knowledge that a holder is a non-United
States person, dividends paid to a holder at an address within the United States
may be subject to backup withholding at a rate of 31% if the holder is not an
exempt recipient as defined in Treasury Regulation Section 1.6049-4(c)(1)(ii)
(which includes corporations) and fails to provide a correct taxpayer
identification number and other information to the Company. If paid to an
address outside the United States, dividends on Common Stock held by a
Non-United States Holder will generally not be subject to the information
reporting and backup withholding requirements. However, under recently issued
Treasury Regulations, dividend payments will be subject to information reporting
and backup withholding unless applicable certification requirements are
satisfied. The new Treasury Regulations apply to dividend payments made after
December 31, 1999.
If the proceeds of the disposition of Common Stock by a Non-United States
Holder are paid over, by or through a United States office of a broker, the
payment is subject to information reporting and to backup withholding at a rate
of 31% unless the disposing holder certifies as to its name, address and status
as a Non-United States Holder under penalties of perjury or otherwise
establishes an exemption. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-United States office of
a non-United States broker. However, United States information reporting
requirements (but not backup withholding) will apply to a payment of disposition
proceeds outside the United States if (a) the payment is made through an office
outside the United States of a broker that is either (i) a United States person
for United States federal income tax purposes, (ii) a "controlled foreign
corporation" for United States federal income tax purposes, or (iii) a foreign
person which derives 50% or more of its gross income for certain periods from
the conduct of a United States trade or business, and (b) the broker fails to
maintain documentary evidence in its files that the holder is a Non-United
States Holder and that certain conditions are met or that the holder otherwise
is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
59
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated July 30, 1998 (the "Underwriting Agreement"), the underwriters
named below (the "Underwriters"), for whom Credit Suisse First Boston
Corporation and Warburg Dillon Read LLC are acting as representatives (the
"Representatives"), have severally but not jointly agreed to purchase from the
Company and the Selling Stockholders the following respective numbers of shares
of Common Stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ---------------------------------------------------------------- ------------
<S> <C>
Credit Suisse First Boston Corporation ...................... 1,775,453
Warburg Dillon Read LLC ..................................... 1,775,452
ABN AMRO Incorporated ....................................... 65,455
CIBC Oppenheimer Corp. ...................................... 65,455
Donaldson, Lufkin & Jenrette Securities Corporation.......... 65,455
Everen Securities, Inc. ..................................... 32,727
Goldman, Sachs & Co. ........................................ 65,455
Hambrecht & Quist LLC ....................................... 65,455
Invemed Associates, Inc. .................................... 65,455
Kaufman Bros., L.P. ......................................... 32,727
Kirkpatrick, Pettis, Smith, Polian Inc. ..................... 32,727
Merrill Lynch, Pierce, Fenner & Smith Incorporated .......... 65,455
Morgan Stanley & Co. Incorporated ........................... 65,455
NationsBanc Montgomery Securities LLC ....................... 65,455
Charles Schwab & Co., Inc. .................................. 65,455
SG Cowen Securities Corporation ............................. 65,455
Smith Barney Inc. ........................................... 65,455
Wedbush Morgan Securities ................................... 32,727
Wheat First Securities, Inc. ................................ 32,727
---------
Total ..................................................... 4,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of the Common Stock
offered hereby (other than those shares covered by the over-allotment option
described below) if any are purchased. The Underwriting Agreement provides that,
in the event of a default by an Underwriter, in certain circumstances the
purchase commitments of non-defaulting Underwriters may be increased or the
Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring on the 30th
day after the date of this Prospectus to purchase up to 675,000 additional
shares at the initial public offering price, less the underwriting discounts and
commissions, all as set forth on the cover page of this Prospectus. Such option
may be exercised only to cover over-allotments in the sale of the shares of
Common Stock. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares of Common Stock as it was obligated to
purchase pursuant to the Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public initially at the price set forth on the cover page of this
Prospectus, and through the Representatives, to certain dealers (who may include
the Underwriters) at such price less a concession of $0.51 per share and the
Underwriters and such dealers may allow a discount of $0.10 per share on sales
to certain other dealers. After the initial public offering, the public offering
price and concession and discount to dealers may be changed by the
Representatives.
Each of the Company and its officers, directors and principal stockholders
have agreed, subject to certain exceptions, that it will not offer, sell,
contract to sell, announce its intention to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act relating to, any shares of
Common Stock or securities convertible into or exchangeable or exercisable
60
<PAGE>
for Common Stock, without the prior written consent of Credit Suisse First
Boston Corporation for a period of 180 days after the date of this Prospectus.
See "Shares Eligible for Future Sale."
The Underwriters have reserved for sale at the initial public offering
price up to 275,000 shares of the Common Stock for employees, directors and
other persons with whom the Company has business relationships, including
potential marketing or supply partners and other persons who have been
supportive of the Company's efforts, who have expressed an interest in
purchasing such shares of Common Stock in the offering. The number of shares
available for sale to the general public in the offering will be reduced to the
extent these individuals purchase such reserved shares. Any reserved shares not
so purchased will be offered by the Underwriters to the general public on the
same terms as the other shares offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
The shares of Common Stock have been approved for listing on the Nasdaq
National Market.
Prior to the Equity Offering, there has been no public market for the
Common Stock of the Company. The initial public offering price was determined
through negotiations between the Company and the Representatives. Among the
factors considered in determining the initial public offering price were
prevailing market conditions for initial public offerings, certain financial
information of the Company, the history of, and the prospects for, the Company
and the industry in which it competes, and assessment of the Company's
management, its past and present operations, the prospects for, and timing of,
future revenues of the Company, the present state of the Company's development,
and the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to the Company. There
can be no assurance that an active trading market will develop for the Common
Stock or that the Common Stock will trade in the public market subsequent to the
Equity Offering at or above the initial public offering price.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids do not
involve purchases of the securities in the open market after the distribution
has been completed in order to cover syndicate short positions. Penalty bids
permit the Representatives to reclaim a selling concession from a syndicate
member when the securities originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the number of shares of
the Common Stock offered hereby.
61
<PAGE>
NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Common Stock in Canada is being made only on a
private placement basis exempt from the requirement that the Company and the
Selling Stockholders prepare and file a prospectus with the securities
regulatory authorities in each province where trades of Common Stock are
effected. Accordingly, any resale of the Common Stock in Canada must be made in
accordance with applicable securities laws, which will vary depending on the
relevant jurisdiction, and which may require resales to be made in accordance
with available statutory exemptions or pursuant to a discretionary exemption
granted by the applicable Canadian securities regulatory authority. Purchasers
are advised to seek legal advice prior to any resale of the Common Stock.
Representations of Purchasers
Each purchaser of Common Stock in Canada who receives a purchase
confirmation will be deemed to represent to the Company, the Selling
Stockholders and the dealer from whom such purchase confirmation is received
that (i) such purchaser is entitled under applicable provincial securities laws
to purchase such Common Stock without the benefit of a prospectus qualified
under such securities laws, (ii) where required by law, that such purchaser is
purchasing as principal and not as agent, and (iii) such purchaser has reviewed
the text above under "Resale Restrictions."
Rights of Action (Ontario Purchasers)
The securities being offered are those of a foreign issuer and Ontario
purchasers will not receive the contractual right of action prescribed by
Section 32 of the Regulation under the Securities Act (Ontario). As a result,
Ontario purchasers must rely on other remedies that may be available, including
common law rights of action for damages or rescission or rights of action under
the civil liability provisions of the U.S. federal securities laws.
Enforcement of Legal Rights
All of the issuer's directors and officers as well as the experts named
herein and the Selling Shareholders may be located outside of Canada and, as a
result, it may not be possible for Canadian purchasers to effect service of
process within Canada upon the issuer or such persons. All or a substantial
portion of the assets of the issuer and such persons may be located outside of
Canada and, as a result, it may not be possible to satisfy a judgment against
the issuer or such persons in Canada or to enforce a judgment obtained in
Canadian courts against such issuer or persons outside of Canada.
Notice to British Columbia Residents
A purchaser of Common Stock to whom the Securities Act (British Columbia)
applies is advised that such purchaser is required to file with the British
Columbia Securities Commission a report within ten days of the sale of any
Common Stock acquired by such purchaser pursuant to this offering. Such report
must be in the form attached to British Columbia Securities Commission Blanket
Order BOR #95/17, a copy of which may be obtained from the Company. Only one
such report must be filed in respect of Common Stock acquired on the same date
and under the same prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of Common Stock should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Common
Stock in their particular circumstances and with respect to the eligibility of
the Common Stock for investment by the purchaser under relevant Canadian
Legislation.
62
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Hale and Dorr LLP, Boston, Massachusetts. H&D Investments II, a
partnership comprised of partners of Hale and Dorr LLP, owns 15,845 shares of
Common Stock of the Company. The Underwriters have been represented by Cravath,
Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 included in this Prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act with
respect to the securities being offered by this Prospectus. This Prospectus does
not contain all of the information set forth in the Registration Statement and
the exhibits thereto, certain portions of which have been omitted as permitted
by the rules and regulations of the Commission. For further information with
respect to the Company and the securities offered hereby, reference is made to
the Registration Statement and the exhibits thereto, copies of which may be
obtained upon payment of the fees prescribed by the Commission or examined
without charge at (i) the Public Reference Section of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and (ii)
the Commission's regional offices located at 500 W. Madison Street, Suite 1400,
Chicago, Illinois 60661 and 75 Park Plaza, 14th Floor, New York, New York 10007.
Statements contained in this Prospectus as to the contents of any contract or
other document are not necessarily complete, and in each instance where such
contract or other document is an exhibit to the Registration Statement,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each statement being qualified in all
respects by such reference. The Commission maintains a World Wide Web site
(http://www.sec.gov) that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission.
63
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Public Accountants ............................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited) ............................................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 and for the three month periods
ended March 31, 1997 and 1998 (unaudited) ............................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and for the three month period
ended March 31, 1998 (unaudited) ...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the three month periods ended
March 31, 1997 and 1998 (unaudited) ................................................... F-6
Notes to Consolidated Financial Statements ............................................. F-8
Consolidated Pro Forma Financial Statements (unaudited) ................................ F-23
Consolidated Pro Forma Balance Sheet as of March 31, 1997 (unaudited) .................. F-24
Consolidated Pro Forma Statements of Operations for the year ended December 31, 1997
and for the three month period ended March 31, 1998 (unaudited) ....................... F-25
Notes to Consolidated Pro Forma Financial Statements (unaudited) ....................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NorthEast Optic Network, Inc.:
We have audited the accompanying consolidated balance sheets of NorthEast Optic
Network, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NorthEast Optic
Network, Inc. and subsidiaries as of December 31, 1996 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
Boston, Massachusetts ARTHUR ANDERSEN LLP
July 8, 1998
F-2
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1997 March 31, 1998
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ............................................. $ 4,864,925 $ 1,098,452 $ 1,232,254
Accounts receivable ................................................... 125,540 1,034,391 168,740
Refundable taxes from related party (Note 2) .......................... -- 368,734 495,375
Prepaid expenses and other current assets ............................. 4,853 13,572 109,893
------------ ------------ ------------
Total current assets ............................................... 4,995,318 2,515,149 2,006,262
------------ ------------ ------------
Property and Equipment, at cost:
Communications network ................................................ -- 15,583,770 16,355,922
Machinery and equipment ............................................... 51,390 54,927 72,118
Motor vehicles ........................................................ 29,426 29,426 29,426
Furniture and fixtures ................................................ 8,057 11,918 17,319
Communications network construction in progress (Note 3) .............. 11,274,200 1,292,492 3,794,811
------------ ------------ ------------
11,363,073 16,972,533 20,269,596
Less--Accumulated depreciation ........................................ 33,578 437,830 640,173
------------ ------------ ------------
11,329,495 16,534,703 19,629,423
------------ ------------ ------------
Restricted Cash (Note 5) ............................................... -- 819,923 839,662
Intangible Assets, net (Notes 2 and 4)
Prepaid right-of-way fees--related party .............................. -- 2,348,156 2,286,362
Other ................................................................. 44,850 1,243,069 1,421,963
------------ ------------ ------------
$ 16,369,663 $ 23,461,000 $ 26,183,672
============ ============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations (Notes 2 and 5) ........... $ 380,142 $ 1,982,911 $ 1,949,936
Accounts payable ...................................................... 315,977 294,758 290,636
Accounts payable construction in progress ............................. 482,308 1,199,293 2,786,515
Accrued expenses (Note 13) ............................................ 32,243 571,493 409,135
Accrued right-of-way fees--related party (Note 2) ..................... 350,414 785,535 940,848
Deferred revenue ...................................................... 225,000 1,144,170 1,129,575
------------ ------------ ------------
Total current liabilities .......................................... 1,786,084 5,978,160 7,506,645
------------ ------------ ------------
Deferred Tax Liability ................................................. -- 61,000 86,192
------------ ------------ ------------
Note Payable to Related Party (Note 5) ................................. -- 2,100,000 3,975,000
------------ ------------ ------------
Long-Term Obligations, less current maturities (Notes 2 and 5) ......... 546,879 135,994 37,641
------------ ------------ ------------
Minority Interest in Consolidated Subsidiaries ......................... 6,312,554 5,338,786 5,024,288
Commitments and Contingencies (Notes 5, 10 and 11)
CMP Warrant ............................................................ -- 532,836 532,836
Stockholders' Equity:
Series A convertible preferred stock, $.01 par value--
Authorized--200,000 shares; 21,180, 78,324 and 78,324 shares
issued and outstanding at December 31, 1996 and 1997 and
March 31, 1998, respectively ........................................ 212 783 783
Series B convertible preferred stock, $.01 par value--
Authorized--2,025,120 shares; 962,734 shares issued and
outstanding ......................................................... 9,627 9,627 9,627
Common stock, $.01 par value--
Authorized--4,000,000 shares; 284,828 shares issued and
outstanding ......................................................... 2,848 2,848 2,848
Warrants .............................................................. 8,595 8,595 8,595
Additional paid-in capital ............................................ 9,267,683 11,817,216 11,817,216
Accumulated deficit ................................................... (1,564,819) (2,524,845) (2,817,999)
------------ ------------ ------------
Total stockholders' equity ......................................... 7,724,146 9,314,224 9,021,070
------------ ------------ ------------
$ 16,369,663 $ 23,461,000 $ 26,183,672
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
1995 1996 1997 1997 1998
------------- --------------- --------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Network service ............................. $ -- $ -- $ 347,718 $ -- $ 146,257
Other service ............................... 42,598 13,773 46,986 -- 5,106
---------- ------------ ------------ ---------- ----------
Total revenues ............................. 42,598 13,773 394,704 -- 151,363
---------- ------------ ------------ ---------- ----------
Expenses:
Cost of sales (includes right-of-way
fees of approximately $0,
$350,400, $435,100, $108,000 and
$158,000, respectively, paid to
related parties) (Notes 2 and 10) ......... 104,223 260,619 1,137,943 108,358 247,386
Selling, general and administrative
(Note 2) ................................... 358,761 900,808 1,002,232 204,275 225,122
Depreciation and amortization ............... 24,175 24,168 552,862 32,987 302,013
---------- ------------ ------------ ---------- ----------
Total expenses ............................. 487,159 1,185,595 2,693,037 345,620 774,521
---------- ------------ ------------ ---------- ----------
Loss from operations ....................... (444,561) (1,171,822) (2,298,333) (345,620) (623,158)
---------- ------------ ------------ ---------- ----------
Interest Income (Expense):
Interest income ............................. -- 201,473 138,918 56,638 30,322
Interest expense ............................ (42,401) (75,635) (141,811) -- (91,816)
---------- ------------ ------------ ---------- ----------
Total interest income (expense) ............ (42,401) 125,838 (2,893) 56,638 (61,494)
---------- ------------ ------------ ---------- ----------
Loss before minority interest in
subsidiaries' earnings and
provision for (benefit from)
income taxes .............................. (486,962) (1,045,984) (2,301,226) (288,982) (684,652)
Minority Interest ............................ -- 353,222 1,080,200 137,620 314,498
Provision for (Benefit From)
Income Taxes ................................ -- 16,000 (261,000) (33,000) (77,000)
---------- ------------ ------------ ---------- ----------
Net Loss ..................................... $ (486,962) $ (708,762) $ (960,026) $ (118,362) $ (293,154)
========== ============ ============ ========== ==========
Basic and Diluted Loss per Share ............. $ (1.71) $ (2.49) $ (3.37) $ (0.42) $ (1.03)
========== ============ ============ ========== ==========
Basic and Diluted Weighted Average
Shares Outstanding .......................... 284,578 284,735 284,828 284,828 284,828
========== ============ ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Series B
Convertible Preferred Convertible Preferred
Stock Stock Common Stock
---------------------- ---------------------- ----------------------
Number of $.01 Par Number of $.01 Par Number of $.01 Par
Shares Value Shares Value Shares Value
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ......... 21,180 $212 -- $ -- 284,578 $2,846
Issuance of common stock
warrant .......................... -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- --
------ ---- -- ------ ------- ------
Balance, December 31, 1995 ......... 21,180 212 -- -- 284,578 2,846
Issuance of Series B
convertible preferred stock,
net of issuance cost of
$775,950 ......................... -- -- 405,024 4,050 -- --
Exercise of common stock
options .......................... -- -- -- -- 250 2
Issuance of common stock
warrant .......................... -- -- -- -- -- --
Issuance of Series B
convertible preferred stock -- -- 557,710 5,577 -- --
Net loss .......................... -- -- -- -- -- --
------ ---- ------- ------ ------- ------
Balance, December 31, 1996 ......... 21,180 212 962,734 9,627 284,828 2,848
Issuance of ownership
interest ......................... -- -- -- -- -- --
Issuance of Series A
convertible preferred stock 57,144 571 -- -- -- --
Net loss .......................... -- -- -- -- -- --
------ ---- ------- ------ ------- ------
Balance, December 31, 1997 ......... 78,324 783 962,734 9,627 284,828 2,848
Net loss (unaudited) .............. -- -- -- -- -- --
------ ---- ------- ------ ------- ------
Balance, March 31, 1998
(unaudited) ....................... 78,324 $783 962,734 $9,627 284,828 $2,848
====== ==== ======= ====== ======= ======
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Warrants Capital Deficit Equity (Deficit)
---------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ......... $ -- $ 52,786 $ (369,095) $ (313,251)
Issuance of common stock
warrant .......................... -- 451 -- 451
Net loss .......................... -- -- (486,962) (486,962)
------ ----------- ------------ ----------
Balance, December 31, 1995 ......... -- 53,237 (856,057) (799,762)
Issuance of Series B
convertible preferred stock,
net of issuance cost of
$775,950 ......................... -- 9,220,000 -- 9,224,050
Exercise of common stock
options .......................... -- 23 -- 25
Issuance of common stock
warrant .......................... 8,595 -- -- 8,595
Issuance of Series B
convertible preferred stock -- (5,577) -- --
Net loss .......................... -- -- (708,762) (708,762)
------ ----------- ------------ ----------
Balance, December 31, 1996 ......... 8,595 9,267,683 (1,564,819) 7,724,146
Issuance of ownership
interest ......................... -- 1,750,088 -- 1,750,088
Issuance of Series A
convertible preferred stock -- 799,445 -- 800,016
Net loss .......................... -- -- (960,026) (960,026)
------ ----------- ------------ ----------
Balance, December 31, 1997 ......... 8,595 11,817,216 (2,524,845) 9,314,224
Net loss (unaudited) .............. -- -- (293,154) (293,154)
------ ----------- ------------ ----------
Balance, March 31, 1998
(unaudited) ....................... $8,595 $11,817,216 $ (2,817,999) $9,021,070
====== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
1995 1996 1997 1997 1998
---------------- ---------------- ---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss .......................... $ (486,962) $ (708,762) $ (960,026) $ (118,362) $ (293,154)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities--
Accretion of long-term
obligations .................... -- -- 26,642 -- 26,642
Warrants issued in connection
with long-term obligations 451 -- -- -- --
Depreciation and amortization 24,175 24,168 552,862 32,987 302,013
Changes in assets and
liabilities--
Accounts receivable ............. (4,912) (120,628) (908,851) 2,783 865,651
Refundable taxes from
related party ................ -- -- (368,734) -- (126,641)
Prepaid expenses and other
current assets ............... (98,905) 104,565 (8,719) 1,124 (96,321)
Restricted cash ................ -- -- (819,923) (800,000) (19,739)
Accounts payable ............... (32,560) 315,977 (21,219) (213,565) (4,122)
Accrued expenses ............... 185,517 197,140 974,371 67,968 (7,045)
Deferred revenue ............... -- 225,000 919,170 -- (14,595)
Deferred tax liability ......... -- -- 61,000 -- 25,192
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities .................. (413,196) 37,460 (553,427) (1,027,065) 657,881
------------ ------------ ------------ ------------ ------------
Cash Flows from Investing
Activities:
Purchases of property and
equipment ....................... (16,303) (17,480) (7,397) -- (22,591)
Purchases of communications
network ......................... (4,580,598) (6,693,602) (5,602,062) (3,981,620) (3,274,471)
Increase in intangible assets ..... (22,801) (27,816) (3,188,792) (55,567) (243,413)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities ..................... $ (4,619,702) $ (6,738,898) $ (8,798,251) $ (4,037,187) $ (3,540,475)
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
1995 1996 1997 1997 1998
------------- ---------------- --------------- --------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Financing Activities:
Increase (Decrease) in
construction accounts payable $3,843,430 $ (3,361,122) $ 716,985 $ 229,294 $1,587,222
Proceeds from issuance of
long-term obligations ............. 1,147,766 -- 1,600,000 1,000,000 --
Proceeds from note payable to
related party ..................... -- -- 2,100,000 -- 1,875,000
Payments on long-term
obligations ....................... (47,896) (618,621) (408,116) (90,772) (131,328)
Proceeds from issuance of
ownership interest ................ -- -- 1,750,088 1,750,088 --
Proceeds from exercise of stock
options ........................... -- 25 -- -- --
Minority interest in subsidiary ..... --- 6,312,554 (973,768) (31,189) (314,498)
Proceeds from sale of preferred
stock, net ........................ -- 9,232,645 800,016 800,035 --
---------- ------------ ------------ ------------ ----------
Net cash provided by
financing activities ............. 4,943,300 11,565,481 5,585,205 3,657,456 3,016,396
---------- ------------ ------------ ------------ ----------
Net Increase (Decrease) in Cash
and Cash Equivalents ................ (89,598) 4,864,043 (3,766,473) (1,406,796) 133,802
Cash and Cash Equivalents,
beginning of period ................. 90,480 882 4,864,925 4,864,925 1,098,452
---------- ------------ ------------ ------------ ----------
Cash and Cash Equivalents,
end of period ....................... $ 882 $ 4,864,925 $ 1,098,452 $ 3,458,129 $1,232,254
========== ============ ============ ============ ==========
Supplemental Disclosure of Cash
Flow information:
Cash paid during the year for--
Interest ........................... $ 27,896 $ 331,505 $ 165,446 $ 35,672 $ 161,555
========== ============ ============ ============ ==========
Taxes .............................. $ -- $ -- $ 45,261 $ 27,550 $ 28,440
========== ============ ============ ============ ==========
Supplemental Disclosure of
Noncash Investing and
Financing Activities:
Issuance of warrants in
connection with sale of
preferred stock and note
payable to related party .......... $ -- $ 8,595 $ 532,836 $ -- $ --
========== ============ ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NorthEast Optic Network, Inc. (the Company) (formerly FiveCom, Inc.) and
its subsidiaries are engaged in the ownership, management, operation and
construction of fiber optic telecommunication networks in the Northeast,
consisting of New England and New York.
The Company was incorporated in Massachusetts in July 1989. In May 1996,
FiveCom LLC, an operating subsidiary majority-owned by the Company, was
organized in Massachusetts. Also in May 1996, FiveCom LLC and Mode 1
Communications, Inc. (Mode 1), an affiliate of Northeast Utilities Services
Company (NU), organized NECOM LLC in Massachusetts, with FiveCom LLC owning 60%,
and Mode 1 owning 40% of the membership interest in NECOM LLC. In December 1996,
FiveCom LLC and Central Maine Power Company (CMP), organized FiveCom of Maine
LLC in Massachusetts, with CMP owning 66.67% and FiveCom LLC owning 33.33% of
the membership interests in FiveCom of Maine LLC. In addition, CMP purchased a
90.9% interest in the Company, giving it a controlling interest in the Company.
FiveCom LLC, NECOM LLC and FiveCom of Maine LLC commenced operations upon their
respective dates of organization. Prior to the Reorganization completed on July
8, 1998 (see Note 14(a)--Reorganization) the Company had a controlling interest
in all entities except FiveCom of Maine LLC (FiveCom of Maine LLC and the
Company were commonly controlled by CMP). After the Reorganization, FiveCom of
Maine LLC became a wholly owned subsidiary of the Company. As a result, the
accompanying financial statements have been restated to give retroactive effect
to the merger of FiveCom of Maine LLC with and into a subsidiary of the Company
as a reorganization of entities under common control in a manner similar to a
pooling of interest.
To date, the Company has recorded limited revenues, principally from
contract and other services, and has incurred cumulative operating losses. The
Company is dependent on the funds received from CMP (Note 5) to fund
construction of the communications networks and working capital. The Company is
also dependent upon a single or limited source of suppliers for a number of
components and parts. Shortages resulting from a change in arrangements with
these suppliers and manufacturers could cause significant delays in the
expansion of the NEON systems and could have a material adverse effect on the
Company.
The market for fiber optic telecommunications networks in which the Company
operates can be characterized as rapidly changing due to technological
advancements, the introduction of new products and services and the increasing
demands placed on equipment in worldwide telecommunications networks.
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described below and elsewhere in these notes
to consolidated financial statements.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of NorthEast
Optic Network, Inc. and its majority owned or controlled subsidiaries, FiveCom
LLC, FiveCom of Maine LLC and NECOM LLC. All significant intercompany
transactions and balances have been eliminated in consolidation.
(b) Minority Interest in Consolidated Subsidiaries
Minority interest in the Company at December 31, 1996 and 1997 consists of
other members' interests in the LLCs identified above. Changes in minority
interest reflect other members' capital adjusted by their portion of the net
loss.
(c) Interim Financial Statements (Unaudited)
The accompanying consolidated financial statements as of March 31, 1998 and
for the three-month periods ended March 31, 1997 and 1998 are unaudited, but in
the opinion of management, include all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted with respect to the quarters, although
the Company
F-8
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
believes that the disclosures included are adequate to make the information
presented not misleading. Results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
(d) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.
(e) Revenue Recognition
Revenues on telecommunications network services are recognized ratably over
the term of the applicable agreements with customers. Other service revenue,
which consists of design and installation work, is recognized as services are
performed.
(f) Income Taxes
The Company has been majority-owned by CMP and under a tax-sharing
arrangement has been included in the consolidated federal tax return of CMP
since 1996 (see Note 2).
(g) Cash and Cash Equivalents
The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Under SFAS No. 115, investments for which the Company has
the positive intent and ability to hold to maturity, consisting of cash
equivalents, are reported at amortized cost, which approximates fair market
value. Cash equivalents are highly liquid investments with original maturities
of three months or less. To date, the Company has not recorded any realized
gains or losses. Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents--
Cash ..................................... $ 270,316 $ 194,735 $ 232,984
Money markets ............................ -- 903,717 999,270
U.S. Treasury money markets .............. 4,594,609 -- --
---------- ---------- ----------
Total cash and cash equivalents ......... $4,864,925 $1,098,452 $1,232,254
========== ========== ==========
</TABLE>
(h) Deferred Revenue
Deferred revenue represents prepayments received from customers for future
use of the Company's fiber optic network, as well as prepayment for installation
services that have not yet been provided. During 1997 and the first quarter of
1998, the Company derived revenue from leasing dark fiber optic cable. Lease
payments are structured as either prepayments or monthly recurring charges.
Prepayments are accounted for as deferred revenue and recognized over the term
of the respective customer fiber optic lease agreement. At December 31, 1996 and
1997, the Company had prepaid lease payments totaling $225,000 and $1,144,170,
respectively.
F-9
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) Depreciation
The Company provides for depreciation using the straight-line method to
allocate the cost of property and equipment over their estimated useful lives as
follows:
<TABLE>
<S> <C>
Communications network ..................................... 20 years
Machinery and equipment .................................... 5-7 years
Motor vehicles ............................................. 3-5 years
Furniture and fixtures ..................................... 7 years
</TABLE>
(j) Long-Lived Assets
The Company follows SFAS No. 121, Accounting for Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of. SFAS No. 121, which requires that
long-lived assets be reviewed for impairment by comparing the fair value of the
assets with their carrying amount. Any write-downs are to be treated as
permanent reductions in the carrying amount of the assets. Accordingly, the
Company evaluates the possible impairment of long-lived assets when facts and
circumstances indicate that the carrying amount of an asset may not be
recoverable based on the undiscounted projected cash flows of the related asset.
Should there be an impairment, the cash flow estimates that will be used will
contain management's best estimates, using appropriate and customary assumption
and projections at the time. To date the Company does not believe that an
impairment exists.
(k) Concentrations of Credit Risk
Financial instruments that subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's cash equivalents are invested in financial
instruments with high credit ratings. Concentration of credit risk with respect
to accounts receivable is limited to customers to whom the Company makes
significant sales. One customer accounted for approximately 90%, 90%, and 88% of
accounts receivable at December 31, 1996 and 1997 and March 31, 1998,
respectively (see Note 12). To control credit risk, the Company performs regular
credit evaluations of its customers' financial condition and maintains
allowances, when required, for potential credit losses.
(l) Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to the short-term
nature of these instruments. The carrying amounts of debt issued pursuant to
agreements with banks approximate fair value as the interest rates on these
instruments fluctuate with market interest rates.
(m) Earnings per Share
The Company has adopted SFAS No. 128, Earnings per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The Company has applied the provisions of SFAS
No. 128, retroactively to all periods presented. In accordance with SEC Staff
Accounting Bulletin (SAB) No. 98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the period prior
to the Company's planned initial public offering. The dilutive effect of
potential common shares in 1998, consisting of outstanding stock options and
convertible preferred stock, is determined using the treasury method and the
if-converted method, respectively, in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for 1995, 1996 and 1997 exclude the
potential common shares from warrants, stock options and convertible preferred
stock outstanding because to do so would have been antidilutive for the years
presented. The potential common shares excluded in 1995, 1996 and 1997 related
to outstanding warrants and stock options were 0, 0 and 4,493 shares,
respectively. The potential common shares excluded in 1995, 1996 and 1997
related to convertible preferred stock were 21,180, 391,332 and 1,096,953
shares, respectively. In addition, the warrants to purchase membership interest
in a subsidiary (see Note 8(d)) have been excluded from diluted weighted average
shares.
F-10
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) New Accounting Standards
AICPA Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up
Activities was issued in April 1998. SOP 98-5 requires that all non-governmental
entities expense the costs of start-up activities, including organizational
costs, as those costs are incurred. The Company has recorded such costs as
expense, in the period incurred.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive Income.
SFAS No. 130 requires disclosure of all components of comprehensive income on an
annual and interim basis. Comprehensive income is defined as the change in
equity of a business enterprise during a period from transactions and other
events and circumstances from nonowner sources. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. This new standard is not
anticipated to have a significant impact on the Company's financial statements
based on the current structure and operations.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997. Unless impracticable, companies would
be required to restate prior period information upon adoption. The Company
implemented this standard in the first quarter of 1998. The Company intends to
analyze segment reporting based on dark fiber and lit fiber facilities. To date,
the Company has recorded revenues and costs related to dark fiber facilities
only.
(o) Litigation
Certain claims arising in the ordinary course of business are pending
against the Company. In the opinion of management, these claims are without
merit and there is no potential liability.
(2) RELATED PARTY TRANSACTIONS
Applied Telecommunication Technologies, Inc. (ATTI) has provided the
Company with $1,594,433 of lease financing to date as reflected in Note 5. The
principal balance of the obligations is $912,837 and $533,740 as of December 31,
1996 and 1997, respectively. ATTI owns 12,409 shares of the Company's
outstanding common stock at December 31, 1997. One of ATTI's investment funds
owns 21,180 shares of the Company's Series A convertible preferred stock.
During the years ended December 31, 1996 and 1997, the Company reimbursed
CMP and/or its subsidiary MaineCom Services primarily for personnel costs
related to the activities of the Company. The amount paid to CMP totaled
approximately $310,591 and $725,000 for the years ended December 31, 1996 and
1997, respectively. Approximately $0 and $29,779 was included in accounts
payable at December 31, 1996 and 1997, respectively. The Company believes that
these costs approximated the actual costs incurred by CMP and/or MaineCom
Services related to such personnel, and does not believe that such costs would
have been materially different had CMP and/or MaineCom Services not been
affiliates of the Company.
CMP agreed to allow right-of-way payments otherwise payable by the Company
to accrue so long as amounts borrowed by the Company from a Bank under a $1.6
million construction loan agreement were outstanding. The amount of right-of-way
payments accrued through March 31, 1998 was approximately $120,000.
In addition, CMP includes the Company in its consolidated federal income
tax return. At December 31, 1996 and 1997, the amounts due under the tax-sharing
arrangement to the Company from CMP are included in refundable taxes from
related party and amounted to approximately $0 and $368,734, respectively, for
current and deferred income tax benefits related to CMP's utilization of the
Company's loss carryforwards (see Note 9).
F-11
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(2) RELATED PARTY TRANSACTIONS (Continued)
The Company is also affiliated with NU (see Note 1). The Company paid NU
approximately $3,719,404 in 1996 and $945,667 in 1997 for materials, labor and
other contractor charges. Approximately $357,100 and $494,500 was included in
accounts payable at December 31, 1996 and 1997, respectively.
In 1994, the Company entered into an agreement with NU whereby NU waived
right-of-way fees for 10 years in return for the Company's guarantee to build
the fiber optic network to certain NU facilities and allow NU the use of 12
fibers on designated route segments in the NU service territory.
The Company's agreement with NU provides for payments on a per mile basis
for certain right-of-way extensions. Such payments are recognized ratably over
the 30-year term of the contract. Approximately $350,400 and $785,500 was
included in accrued right-of-way fees--related party at December 31, 1996 and
1997, respectively.
The Company believes that the right-of-way fees payable under the NU and
CMP agreements are reasonable and are comparable to those which would have been
negotiated on an arms length basis with an unaffiliated third party.
The Company has employment contracts with four of its officers, two of whom
are also common and preferred stockholders of the Company. The contracts are for
three-year terms expiring at varying dates through July 2001 with an annual
compensation commitment of $537,000 in the aggregate. In addition, the Company
will record a one-time bonus for a payment to one individual totaling $500,000
upon the successful completion of an initial public offering in the period
incurred.
Upon the successful completion of an initial public offering the Company
will record a one-time bonus for a payment of $500,000 to MaineCom Services.
(3) COMMUNICATIONS NETWORK CONSTRUCTION
The Company is constructing a communications network in the Northeast.
Costs directly related to the construction of the network are being capitalized
and will be depreciated over the 20-year estimated useful life of the fiber
optic transmission plant as individual segments of the system are placed in
service. During 1996 and 1997, approximately 0 and 160 miles, respectively, were
placed in service. Approximately $114,000, $181,000 and $142,000 of interest has
been capitalized to communications network construction in progress in each of
the three years in the period ended December 31, 1997.
(4) INTANGIBLE ASSETS
Intangible assets subject to amortization have been capitalized and are
amortized on a straight-line basis as follows:
<TABLE>
<S> <C>
Deferred right-of-way fees ......... 10 years (term of the agreement)
Financing costs .................... 3-5 years (term of the debt)
Trademarks ......................... 10 years
</TABLE>
Intangible assets consist of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
<S> <C> <C>
Deferred right-of-way fees--related party .......... $ -- $2,471,743
Financing costs .................................... 68,404 1,318,258
Trademarks ......................................... 2,098 2,098
------- ----------
70,502 3,792,099
Less--Accumulated amortization ..................... 25,652 200,874
------- ----------
$44,850 $3,591,225
======= ==========
</TABLE>
F-12
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(5) LONG-TERM OBLIGATIONS AND NOTE PAYABLE TO RELATED PARTY
<TABLE>
<CAPTION>
1996 1997
---------- -------------
<S> <C> <C>
Note payable to related party ................................... $ -- $ 2,100,000
======== ===========
Construction loan payable ....................................... $ -- $ 1,575,772
ATTI notes payable (related party) .............................. 912,837 533,740
Capital lease payable to a bank in monthly principal and interest
installments of $482 with interest at 8.25% through August
1999, collateralized by a motor vehicle ........................ 14,184 9,393
-------- -----------
927,021 2,118,905
Less--Current portion ........................................... 380,142 1,982,911
-------- -----------
$546,879 $ 135,994
======== ===========
</TABLE>
(a) Note Payable to Related Party
On October 7, 1997 the Company entered into a $30,000,000 construction loan
agreement with CMP. The Company paid CMP a commitment fee of $150,000. The note
bears interest at the LIBOR rate (5.72% at December 31, 1997) plus three hundred
basis points. Interest is payable quarterly in arrears commencing January 1,
1998 through the conversion date (first day of the first month after the
completion of certain portions of the network (see Note 10)). Beginning on the
first day of the first month after the conversion date, the loan is payable in
equal monthly payments of principal plus interest accrued thereon. On October 1,
2002, all amounts are due and payable in full. If required by the Maine Public
Utilities Commission (PUC), CMP has the option of demanding payment in full on
April 1, 1999 of any amounts of the loan outstanding on April 1, 1999 that are
necessary to cause CMP to be in compliance with the PUC's requirements
concerning CMP's capitalization. The loan is secured by a perfected mortgage
lien on the security interest in substantially all assets of the Company.
As of December 31, 1997, $2,100,000 has been advanced under the loan
agreement. Additional advances will be made upon the completion of certain
conditions contained in the loan document, as defined. Subsequent to year-end
the Company was advanced an additional $15,775,000. In conjunction with the
note, the Company issued a warrant to purchase membership interest in FiveCom
LLC (see Note 8(d)). The fair market value of the warrant, $532,836, included in
deferred financing costs in the accompanying balance sheet, is being amortized
as interest expense over the term of the note. Upon successful completion of an
initial public offering and retirement of the note, the Company will record a
charge in the statement of operations for the remaining balance of the deferred
financing costs in the period extinguished.
(b) Construction Loan Payable
In March 1997, the Company entered into a $1,600,000 construction loan
agreement with a bank. The Company is required to maintain $800,000 in a reserve
account, which is included in the accompanying consolidated balance sheets as of
December 31, 1997 and March 31, 1998 as restricted cash. All interest earned on
the deposit becomes part of the reserve account. The reserve account agreement
remains in effect until the note is paid in full; however, the bank may release
the reserve account in the absence of any material default under the loan
agreement and a debt service coverage ratio greater than 1.5 to 1.0, as defined.
As of December 31, 1997, the bank has not released any funds in the reserve
account. Under the agreement, the Company is required to maintain certain
covenants, as defined, including tangible net worth. As of December 31, 1997 and
March 31, 1998, the Company was not in compliance with this covenant. The
Company received a waiver from the bank related to compliance with this covenant
through March 31, 1998. The Company has classified this debt as current in the
accompanying financial statements, due to noncompliance with this covenant
subsequent to March 31, 1998.
F-13
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(5) LONG-TERM OBLIGATIONS AND NOTE PAYABLE TO RELATED PARTY (Continued)
(c) ATTI Notes Payable
Through August 1994 and October 1995, the Company entered into five notes
payable with ATTI. The notes bear interest at 13% and are payable in monthly
principal and interest installments ranging from $1,194 to $13,270 through
August 1999. In addition, the Company issued common stock warrants in
conjunction with the notes (see Notes 2 and 8(d)).
(d) Future Maturities
Future maturities of long-term obligations as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 .......................................................... $1,982,911
1999 .......................................................... 135,994
----------
2,118,905
Less--Current portion .......................................... 1,982,911
----------
Total long-term obligations .................................... $ 135,994
==========
</TABLE>
(6) CMP WARRANT
During October 1997 and in connection with the CMP construction loan
agreement (see Note 5), the Company issued a warrant to purchase 5,876 shares of
membership interest in FiveCom LLC to the lender at an exercise price of $.01
per share. The warrant expires on October 7, 2002. At the time of issuance, the
warrant was recorded as a discount on the agreement and as a component of
stockholders' equity in the accompanying consolidated balance sheet at $532,836,
the fair market value of the warrant, as calculated using the Black-Scholes
option pricing model. The discount is being amortized as interest expense over
the term of the debt. The warrant contains put and call options and a right of
first refusal. At the earlier of three years from the date of the agreement or
upon any reorganization, as defined, or an initial public offering, the lender
shall have the right to require the Company to repurchase the warrant at fair
market value, as defined. In addition, the Company has the option to purchase
the warrant prior to the warrant exercise at the fair market value, as defined.
Subsequent to year end, CMP exercised the warrant (see Note 14).
(7) STOCKHOLDERS' EQUITY
(a) Reverse Stock Split
On April 30, 1996, the Company declared a five-for-one reverse split of
each class of its capital stock. All share and per share amounts for all periods
presented have been adjusted to reflect this split.
(b) Preferred Stock
The Company's Board of Directors authorized up to 3,000,000 shares of $.01
par value preferred stock, of which 200,000 shares are designated as Series A
convertible preferred stock (Series A preferred) and 2,025,120 are designated as
Series B convertible preferred stock (Series B preferred).
Pursuant to a stock subscription agreement dated November 22, 1995, CMP
invested $10,000,000 for 75% of the fully diluted equity of the Company. As of
December 31, 1996 and 1997, CMP owned 962,734 (subject to antidilution
adjustment) shares of Series B preferred.
On May 5, 1998 the Board of Directors voted to increase the authorized
shares of Series B convertible preferred stock to 4,500,000.
F-14
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(7) STOCKHOLDERS' EQUITY (Continued)
Dividends
The holders of Series A and B preferred are entitled to receive dividends,
as defined, if and when declared by the Company's Board of Directors. To date no
dividends have been declared.
Voting
Each holder of outstanding shares of Series A and B preferred is entitled
to a number of votes equal to the number of whole shares of common stock into
which such share of Series A and B preferred held is then convertible. All
outstanding holders of Series A and Series B preferred shall vote together with
the holders of common stock as a single class, except holders of Series A
preferred shall vote as a separate class upon matters adversely affecting the
Series A preferred stock and holders of Series B preferred shall vote as a
separate class upon matters adversely affecting the Series B preferred stock.
Liquidation
After payment in full to any class or series of stock ranking senior to
Series A and B preferred and before payment to any class or series of stock
ranking junior to Series A and B preferred, Series A and B preferred
stockholders are entitled to receive, in the event of any voluntary or
involuntary liquidation or dissolution of the Company, (i) $23.6 and $24.7 per
share, respectively (subject to certain adjustments, as defined) plus any
dividends declared or accrued but unpaid or (ii) such amount per share as would
have been payable had each such share been converted into common stock.
Conversion
Each share of Series A and B preferred is convertible, at the option of the
holder, at any time after the date of issuance and without any additional
payment into such number of shares of Common Stock as is determined by dividing
$23.6 and $24.7, respectively, by the Conversion Price, as defined ($2.948 and
$9.88 as of December 31, 1997, respectively). Series A and Series B preferred
will automatically convert into common stock upon the closing of an underwritten
public offering, as defined.
(c) Common Stock
In November 1995, the Company's Board of Directors authorized the issuance
of up to 4,000,000 shares of common stock. At December 31, 1997, there were
1,500 shares reserved for issuance under the Company's stock option plan and
1,213,541 shares reserved for issuance upon conversion of Series A and B
preferred stock. On June 23, 1998 the Board of Directors voted to increase the
authorized shares to 30,000,000.
(8) STOCK-BASED COMPENSATION
(a) 1994 Stock Option Plan
On December 2, 1994, the Company's Board of Directors adopted the 1994
Stock Option Plan (the 1994 Plan). Under the terms of the 1994 Plan, incentive
and nonstatutory options may be granted to employees, officers, directors,
consultants and advisers to purchase an aggregate of 4,000 shares of common
stock. The exercise price of the incentive options will be 100% of the fair
market value of the common stock or 110% of the fair market value in the case of
options granted to a greater than 10% stockholder. Options generally vest
quarterly over a two-year period and are exercisable within five years of the
original date of grant.
Stock option activity for the three years in the period ended December 31,
1997 and for the three-month period ended March 31, 1998 (unaudited) is as
follows:
F-15
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(8) STOCK-BASED COMPENSATION (Continued)
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
----------- ---------
<S> <C> <C>
Outstanding, December 31, 1995 .................. -- $ --
Granted ........................................ 4,000 .10
Exercised ...................................... (250) .10
------ -----
Outstanding, December 31, 1996 .................. 3,750 .10
Canceled ....................................... (3,750) .10
------ -----
Outstanding, December 31, 1997 .................. -- $ .10
====== =====
Outstanding, March 31, 1998 (unaudited) ......... -- $ --
====== =====
</TABLE>
(b) 1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the 1998 Plan) was adopted by the
Board of Directors on May 18, 1998 and approved by the Company's stockholders on
May 26, 1998. The 1998 Plan provides for the grant of incentive stock options,
nonstatutory stock options, restricted stock awards and other stock-based
awards, including the grant of shares based on certain conditions, the grant of
securities convertible into common stock and the grant of stock appreciation
rights (collectively the Awards). Options may be granted at an exercise price
that may be less than, equal to or greater than the fair market value of the
common stock on the date of grant. Incentive stock options and options intended
to qualify as performance-based compensation may not be granted at an exercise
price less than the fair market value of the common stock on the date of grant
(or less than 110% of the fair market value in the case of incentive stock
options granted to optionees holding more than 10% of the voting power of the
Company). Options granted under the 1998 Plan typically will vest over time,
subject to acceleration upon change in control. Restricted stock awards entitle
recipients to acquire shares of common stock, subject to the right of the
Company to repurchase all or part of such shares from the recipient in the event
that the conditions specified in the applicable Award are not satisfied prior to
the end of the applicable restriction period established for such Award. Under
the 1998 Plan, the Board of Directors has the right to grant other Awards based
on the common stock having such terms and conditions as the Board of Directors
may determine, including the grant of shares based on certain conditions, the
grant of securities convertible into common stock and the grant of stock
appreciation rights. Officers, employees, directors, consultant and advisors of
the Company and its subsidiaries are eligible to be granted Awards under the
1998 Plan.
Upon consummation of the Equity Offering, a total of 2,436,105 shares will
be reserved for issuance under the 1998 Plan, of which 1,705,272 shares will be
subject to options granted to employees of the Company with an exercise price
per share equal to the initial public offering price.
(c) Fair Value of Stock Options
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statements of income or disclosed in the notes to
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the
disclosure-only alternative under SFAS No. 123.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following assumptions used for
grants during the applicable period: dividend yield of 0% for all periods;
volatility of 0% for all periods; risk-free interest rate of 7.67% for options
granted during 1995 and a weighted average expected option term of two years for
all periods. The weighted average fair value per share of options granted during
1995 was $0. No options were granted during 1996 and 1997.
F-16
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(8) STOCK-BASED COMPENSATION (Continued)
(d) Warrants
From August 1994 to October 1995, the Company issued warrants to ATTI (see
Note 2) for the purchase of 11,450 shares of the Company's common stock at an
exercise price of $.06 per share. The warrants expire five years from the date
of grant. At the time of issuance, the Company recorded a charge of $178,
representing the fair market value of the warrants, as determined by the Board
of Directors.
During July 1996, the Company issued a warrant to one of its advisors for
the purchase of 2,656 shares of membership interest in FiveCom LLC at an
exercise price of $125.84 per share. The warrant expires on April 30, 2001. At
the time of issuance, the Company recorded a charge of $8,595, representing the
fair market value of the warrant, as calculated using the Black-Scholes option
pricing model.
(9) INCOME TAXES
As discussed in Note 2, the Company is included in CMP's consolidated
federal income tax return. The Company accounts for income taxes under SFAS No.
109, Accounting for Income Taxes, the objective of which is to recognize the
amount of current and deferred income taxes payable or refundable at the date of
the financial statements as a result of all events that have been recognized in
the accompanying consolidated financial statements, as measured by enacted tax
laws.
The income tax provision (benefit) for the years ended December 31, 1995,
1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------ --------------
<S> <C> <C> <C>
Current--
Federal ......................... $ -- $ 14,000 $ (291,000)
State ........................... -- 2,000 (31,000)
---------- --------- ----------
-- 16,000 (322,000)
Deferred--
Federal ......................... (150,000) (58,000) 47,000
State ........................... (16,000) (6,000) 14,000
---------- --------- ----------
(166,000) (64,000) 61,000
Less valuation allowance ......... 166,000 64,000 --
---------- --------- ----------
Total .......................... $ -- $ 16,000 $ (261,000)
========== ========= ==========
</TABLE>
The provision for income taxes for the year ended December 31, 1996
consists of alternative minimum and net worth taxes. The benefit from income
taxes for the year ended December 31, 1997 represents refundable income taxes
from CMP as a result of its tax-sharing agreement with CMP.
The Company has recorded a deferred tax liability of $61,000 at December
31, 1997 related to the temporary differences associated with accelerated
depreciation.
(10) NETWORK CONSTRUCTION AND NU AND CMP CONTRACTS
In 1994 the Company contracted for the rights to use NU property over an
initial 30-year term for the purpose of owning and operating the fiber optic
network facilities. At the end of the initial 30-year term, NU will have the
option to purchase the network on NU rights-of-way from the Company at the
appraised value, or to extend the agreement for an additional 30-year term with
an added payment incentive of 10% of revenues generated from the network built
on NU rights-of-way. Contractually, the Company is required to build 310 fiber
route miles in NU's service territory by September 27, 1999.
Pursuant to the Company's agreement with NU, the right-of-way fees for
specified route segments have been waived for 10 years in return for the
Company's guarantee to build the fiber optic network to certain NU facilities
F-17
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(10) NETWORK CONSTRUCTION AND NU AND CMP CONTRACTS (Continued)
and allow NU the use of 12 fibers on designated route segments in the NU service
territory. Costs of $2,348,156 associated with the construction of the 12 fibers
are included in Prepaid right-of-way fees-related party in the accompanying
balance sheet and are being recognized as a cost-of-service ratably by over 10
years.
The Company's agreement with NU also provides for payments on a per mile
basis for certain right-of-way extensions. Such payments are being recognized
ratably over the 30-year term of the contract.
In 1996, the Company contracted for the rights to use CMP's property over
an initial 30-year term for the purpose of owning and operating fiber optic
network facilities. At the end of the initial 30-year term, CMP will have the
option to purchase the network on CMP rights-of-way from the Company at the
appraised value, or to extend the agreement for an additional 10-year term with
an added payment incentive of 10% of revenues generated from the network built
on CMP rights-of-way.
The Company's agreement with CMP provides for payments on a per mile basis.
Such payments are payable annually by January 31st of each year and are
recognized ratably over the 30-year term of the contract. CMP has agreed to
allow right-of-way payments otherwise payable by the Company to accrue so long
as amounts borrowed by the Company from a Bank under a $1.6 million construction
loan agreement were outstanding. The amount of right-of-way payments accrued at
December 31, 1997 and March 31, 1998 was approximately $0 and $120,000,
respectively.
The Company believes that the right-of-way fees payable under the NU and
CMP agreements are reasonable and are comparable to those which would have been
negotiated on an arms length basis with an unaffiliated third party.
(11) COMMITMENTS
The Company leases certain motor vehicles, equipment and office facilities
under noncancelable operating leases which expire at various dates through
December 1999. Future minimum lease payments required under these leases at
December 31, 1997 are approximately as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 ...................................................... $14,000
1999 ...................................................... 4,000
-------
$18,000
=======
</TABLE>
(12) SIGNIFICANT CUSTOMERS
Sales to significant customers as a percentage of the Company's total
revenues were as follows:
<TABLE>
<CAPTION>
Three-Months Ended
December 31, March 31,
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Customer A ......... 100% 98% 10% --% --%
Customer B ......... -- -- 69 -- 76
Customer C ......... -- -- -- -- 10
</TABLE>
F-18
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(13) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997, and March 31, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
--------- ----------- ----------
<S> <C> <C> <C>
Accrued property taxes ................... -- $315,036 $293,034
Accrued interest ......................... -- 92,180 --
Accrued professional fees ................ 12,016 50,000 15,387
Accrued payable to related party ......... -- 61,793 61,793
Accrued payroll and benefits ............. 20,227 22,992 --
Accrued other ............................ -- 29,492 38,921
------ -------- --------
$32,243 $571,493 $409,135
======= ======== ========
</TABLE>
(14) SUBSEQUENT EVENTS
(a) Reorganization
Prior to the Reorganization, approximately 90.9% of the Company was owned
by MaineCom Services. In addition, the Company had one direct subsidiary,
FiveCom LLC, of which the Company owned approximately 82.6% of the outstanding
membership interests, with 9.9% of the outstanding membership interests being
owned by Mode 1, 5% of the outstanding membership interests being owned by CMP
and the remaining membership interests being owned by certain individuals.
FiveCom LLC in turn owned 60% of the outstanding membership interests in NECOM
LLC (with Mode 1 owning the other 40%) and 33.3% of the outstanding membership
interests of FiveCom of Maine LLC (with MaineCom Services owning the other
66.7%).
In order to simplify the corporate structure and in contemplation of the
Offerings, the Company's major stockholders decided to reorganize the Company.
In April 1998, prior to the Reorganization, CMP exercised its warrants to
purchase 5,876 shares of membership interests in FiveCom LLC for an aggregate
exercise price of $58.76 and on July 8, 1998, (i) each of the minority members
in FiveCom LLC (and each of Mode 1 and MaineCom Services) exchanged their
membership interests in FiveCom LLC, NECOM LLC and FiveCom of Maine LLC,
respectively, for 3,470,470 shares of the Series B Convertible Preferred Stock
of the Company; (ii) FiveCom LLC and NECOM LLC were each merged with and into
the Company; (iii) FiveCom of Maine LLC was merged into FiveCom of Maine, Inc.,
a wholly-owned subsidiary of the Company; and (iv) the Company was
reincorporated in Delaware under the name "NorthEast Optic Network, Inc." and
the Company's Certificate of Incorporation was amended and restated.
As a result of the Reorganization, (i) MaineCom Services ownership of the
Company was reduced to 52.82%, with Mode 1 gaining an ownership interest of
40.84% in the Company, and (ii) FiveCom LLC and NECOM LLC were merged with and
into the Company, and FiveCom of Maine LLC became a wholly-owned subsidiary of
the Company which was converted from a Massachusetts limited liability company
into a Delaware corporation.
On July 8, 1998, the Company entered into a Restructuring and Contribution
Agreement with CMP, MaineCom Services (a wholly-owned subsidiary of CMP) and
Mode 1 (an affiliate of NU) relating to the restructuring of the Company.
Pursuant to this Agreement, each of MaineCom Services and Mode 1 exchanged
membership interests in subsidiaries of the Company for shares of the Series B
Convertible Preferred Stock of the Company. In addition, pursuant to the
Restructuring and Contribution Agreement, the Company's President and the
Company's Vice President, Operations, exchanged their membership interests in
FiveCom LLC, a subsidiary of the Company, for shares of the Series B Convertible
Preferred Stock of the Company.
Prior to the reorganization, Fivecom, Inc., NU, and other minority
interests owned 82.7%, 9.9% and 7.4%, respectively, of FiveCom LLC membership
interests. CMP through its ownership in FiveCom, Inc. owned a 75.1% interest in
FiveCom LLC. In connection with the Reorganization, the Company will record an
intangible asset of approximately $46,000,000 to reflect the Company's exchange
of membership interest (acquisition) related to NU's
F-19
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(14) SUBSEQUENT EVENTS (Continued)
minority interest in a subsidiary (NECOM LLC), in accordance with AICPA
Accounting Interpretation 39 to APB Opinion No. 16, Business Combinations
(AIN-39). The intangible will be amortized over 30 years, reflecting assignment
of value to goodwill and to the rights-of-ways, which have 30-year terms.
Pro forma results of operations for the Company for the year ended December
31, 1997 assuming that the Reorganization had occurred on January 1, 1997 would
have been revenues of $394,704; operating loss of ($3,824,612); a net loss of
($3,566,505); and a basic and diluted loss per share of $12.52.
(b) Stockholders' Equity
The Restated Certificate of Incorporation authorizes the issuance of up to
2,000,000 shares of preferred stock, $.01 par value per share. Under the terms
of the Certificate of Incorporation, the Board of Directors is authorized,
subject to any limitations prescribed by law, without stockholder approval, to
issue such shares of preferred stock in one or more series. Each series of
preferred stock shall have rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors.
In connection with the Reorganization, the par value of the Series A
convertible preferred stock, Series B convertible preferred stock and common
stock was reduced from $0.05 to $0.01 per share, resulting in a reduction in par
value of $3,133, $38,509 and $4,557 in Series A convertible preferred stock,
Series B convertible preferred stock and common stock, respectively, and a
corresponding increase in additional paid-in capital of $46,199. All par value
amounts have been retroactively restated to reflect the reduction.
In connection with the Reorganization, the conversion rate on the Series A
convertible preferred stock was reduced to a 1:1 ratio and 199,636 additional
shares of Series A Convertible Preferred Stock were issued to adjust for such
reduction.
On June 23, 1998 the Board of Directors voted to increase the authorized
common shares to 30,000,000.
In July 1998, the Company's Board of Directors voted to effect a 2.5- to -1
common stock split. Series A and B convertible preferred stock will convert at a
rate equal to the common stock split. All share and per share amounts have been
retroactively restated to reflect the stock split.
(c) Principal Stockholders Agreement
CMP and NU have entered into a Principal Stockholders Agreement dated May
28, 1998, whereby each such party agrees that, following the completion of the
Offerings, it will not permit or cause the Company to (i) merge or consolidate,
liquidate or dissolve, change its form of organization or sell, lease, exchange
or transfer all or substantially all of its assets; or (ii) seek bankruptcy
protection or certain other protection from creditors, unless both parties
agree. After the closing of the proposed equity offering and debt financing,
this agreement will remain in effect for so long as (a) NU owns at least 10% of
the outstanding Common Stock of the Company, fully diluted and (b) the aggregate
Common Stock of the Company owned by NU and CMP is at least 33-1/3% of the
outstanding Common Stock of the Company, fully diluted. The Company expects that
each of CMP and NU will be major creditors of the Company under their existing
right-of-way agreements.
(d) Qwest Agreement
In July 1998, the Company entered into an agreement (the "Qwest Agreement")
with Qwest Communications Corporation ("Qwest") in which Qwest agreed to grant
to the Company an indefeasible right to use (IRU) in certain fibers along a
route to be constructed between Boston and New York City (the "Boston-New York
Segment"). In consideration of such grant, the Company agreed to pay to Qwest an
aggregate IRU fee to be paid in a series of installments. The Boston-New York
Segment is expected to become available to the Company by December 31, 1998. The
term of the Qwest Agreement is for the longer of 20 years or the useful economic
life of the fiber subject
F-20
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(14) SUBSEQUENT EVENTS (Continued)
to the Qwest Agreement, provided, however, that the Qwest Agreement may be
terminated at any time upon the occurrence of certain uncured defaults by the
Company or the loss of certain underlying rights held by Qwest or the other
parties upon whom Qwest depends for its rights in the fiber.
(e) BecoCom/NEES Communications Agreements
In July 1998, the Company entered into a Fiber Optic Lease Agreement with
NEES Communications, Inc., a subsidiary of New England Electric System (the
"NEES Com Agreement"), and a Fiber Optic Use Agreement with BecoCom, Inc., a
subsidiary of Boston Edison Company (the "BecoCom Agreement"). Pursuant to the
terms of these agreements, the Company acquired the right to use certain fibers
(the "Company Fibers") to be constructed and maintained by NEES Communications
and BecoCom, respectively, on routes running from Hudson, New Hampshire to and
within Boston, Massachusetts. Under the terms of these agreements, the Company
is required to pay a monthly fee, and has agreed to share a portion of the
revenue generated from the use of the Company Fibers (in excess of a base
revenue amount specified in each agreement). NEES Communications and BecoCom are
each required to use their best commercial efforts to make the fibers available
to the Company by December 31, 1998. Both the NEES Com Agreement and the BecoCom
Agreement have an initial term of 20 years, with the potential to negotiate for
up to two additional, consecutive five-year extensions.
(15) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly results of
operations for each of the four quarters ended December 31, 1997 and the quarter
ended March 31, 1998. In management's opinion, this unaudited information has
been prepared on the same basis as the annual financial statements and includes
all adjustments (consisting only of normal recurring adjustments) necessary for
a fair presentation of the information for the quarters presented, when read in
conjunction with the financial statements and notes thereto included elsewhere
in this document. The operating results for any quarter are not necessarily
indicative of results for any subsequent quarter.
F-21
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(15) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31,
1997 1997 1997 1997 1998
------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Network service ............................. $ -- $ 106,369 $ 114,784 $ 126,565 $ 146,257
Other service ............................... -- 5,036 18,221 23,729 5,106
---------- ---------- ---------- ---------- ----------
Total revenues ............................. -- 111,405 133,005 150,294 151,363
---------- ---------- ---------- ---------- ----------
Expenses:
Cost of sales ............................... $ 108,358 $ 405,038 $ 289,777 $ 334,770 $ 247,386
Selling, general and administrative ......... 204,275 445,930 172,554 176,365 225,122
Depreciation and amortization ............... 32,987 135,204 137,936 249,843 302,013
---------- ---------- ---------- ---------- ----------
Total expenses ............................. 345,620 986,172 600,267 760,978 774,521
---------- ---------- ---------- ---------- ----------
Loss from operations ....................... (345,620) (874,767) (467,262) (610,684) (623,158)
---------- ---------- ---------- ---------- ----------
Other Income (Expense):
Interest income and other, net .............. 56,638 28,118 38,603 15,559 30,322
Interest expense ............................ -- (481) (37,297) (104,033) (91,816)
---------- ---------- ---------- ---------- ----------
Total other income (expense) ............... 56,638 27,637 1,306 (88,474) (61,494)
---------- ---------- ---------- ---------- ----------
Loss before minority interest in
subsidiaries' earnings and
provision for income taxes ................ (288,982) (847,130) (465,956) (699,158) (684,652)
Minority Interest ............................ 137,620 397,644 218,721 326,215 314,498
Benefit From Income Taxes .................... (33,000) (96,000) (53,000) (79,000) (77,000)
---------- ---------- ---------- ---------- ----------
Net Loss ..................................... $ (118,362) $ (353,486) $ (194,235) $ (293,943) $ (293,154)
========== ========== ========== ========== ==========
Basic and Diluted Loss per Share ............. $ (0.42) $ (1.24) $ (0.68) $ (1.03) $ (1.03)
</TABLE>
F-22
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
The following unaudited consolidated pro forma financial statements give
effect to the Reorganization of entities under common control. These unaudited
consolidated pro forma financial statements have been prepared from, and should
be read in conjunction with, the historical financial statements and notes
thereto of NorthEast Optic Network, Inc.
On July 8, 1998, the Company entered into a Restructuring and Contribution
Agreement with CMP, MaineCom Services (an affiliate of CMP) and Mode 1 (an
affiliate of NU) related to the restructuring of the Company. See Notes 1 and
14(a). In connection with the Reorganization, the Company will record an
intangible asset of approximately $46,000,000 to reflect the Company's exchange
of membership interest (acquisition) related to NU's minority interest in a
subsidiary (NECOM LLC), in accordance with AICPA Accounting Interpretation 39 to
APB Opinion No. 16, Business Combinations (AIN-39).
The unaudited Consolidated Pro Forma Balance Sheet gives effect to the
Mergers as if they had occurred on March 31, 1998. The Consolidated Pro Forma
Statement of Operations for the three months ended March 31, 1998 and the year
ended December 31, 1997 give effect to the Reorganization as if it had occurred
on January 1, 1997.
The Consolidated Pro Forma Financial Statements of the Company do not
purport to present the financial position or results of operations of the
Company had the Mergers or acquisitions been consummated at the dates indicated,
nor is it necessarily indicative of future operating results or financial
position of the reorganized companies.
F-23
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 Adjustments March 31, 1998
Actual As Adjusted
<S> <C> <C> <C>
Assets
Current Assets:
Total current assets ................................ $ 2,006,262 $ 2,006,262
------------ ------------
Property and equipment, net ............................ 19,629,423 19,629,423
Restricted cash ........................................ 839,662 839,662
Intangible Assets, net ................................. 3,708,325 $45,788,366(1) 49,496,691
------------ ----------- ------------
$ 26,183,672 $45,788,366 $ 71,972,038
============ =========== ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations ........... $ 1,949,936 $ 1,949,936
Accounts payable and accrued expenses ................. 699,771 699,771
Accounts payable construction in progress ............. 2,786,515 2,786,515
Accrued right-of-way fees--related party .............. 940,848 940,848
Deferred revenue ...................................... 1,129,575 1,129,575
------------ ------------
Total current liabilities ........................... 7,506,645 7,506,645
------------ ------------
Note Payable Related Party ............................. 3,975,000 3,975,000
------------ ------------
Other Long-Term Obligations ............................ 123,833 123,833
Minority Interest in Consolidated Subsidiaries ......... 5,024,288 $(5,024,288)(2) --
CMP Warrant ............................................ 532,836 (532,836)(3) --
Stockholders' Equity:
Series A convertible preferred stock .................. 783 1,996(7) 2,779
Series B convertible preferred stock .................. 9,627 34,705(6) 44,332
Common stock .......................................... 2,848 2,848
Warrants .............................................. 8,595 8,595
Additional paid-in capital ............................ 11,817,216 51,308,789(1)(2)(3) 63,126,005
Accumulated deficit ................................... (2,817,999) (2,817,999)
------------ ------------
Total stockholders' equity .......................... 9,021,070 60,366,560
------------ ------------
$ 26,183,672 $45,788,366 $ 71,972,038
============ =========== ============
</TABLE>
The accompanying notes are an integral part of these consolidated pro forma
financial statements.
F-24
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 Adjustments
--------------- -----------
Actual
<S> <C> <C>
Revenues: ................... $ 394,704
-------------
Expenses:
Cost of sales .............. 1,137,943
Selling, general and
administrative ........... 1,002,232
Depreciation and
amortization ............. 552,862 1,526,279(4)
------------- ---------
Total expenses ........... 2,693,037 1,526,279
------------- ---------
Loss from
operations ............ (2,298,333) (1,526,279)
------------- ----------
Interest Income
(Expense):
Interest income ............ 138,918
Interest expense ........... (141,811)
-------------
Total interest
expense ............... (2,893)
-------------
Loss before minority
interest in
subsidiaries' earnings
and provision for
(benefit from)
income taxes ............. (2,301,226) (1,526,279)
Minority Interest ........... 1,080,200 (1,080,200)(5)
Provision for (Benefit
From) Income Taxes ......... (261,000)
------------- ----------
Net Loss ................... (960,026) (2,606,479)
============= ==========
Basic and Diluted Loss
per Share .................. (3.37)
=============
Basic and Diluted
Weighted Average
Shares Outstanding ......... 284,828
=============
<CAPTION>
Three Months
Year Ended Three Months Ended
December 31, Ended March 31, March 31,
1997 1998 Adjustments 1998
------------ --------------- ----------- ------------
As Adjusted As Adjusted
<S> <C> <C> <C> <C>
Revenues: ................... $ 394,704 $ 151,363 $ 151,363
------------- ----------- -------------
Expenses:
Cost of sales .............. 1,137,943 247,386 247,386
Selling, general and
administrative ........... 1,002,232 225,122 225,122
Depreciation and
amortization ............. 2,079,141 302,013 381,570(4) 683,583
------------- ----------- ------- -------------
Total expenses ........... 4,219,316 774,521 381,570 1,156,091
------------- ----------- ------- -------------
Loss from
operations ............ (3,824,612) (623,158) (381,570) (1,004,728)
------------- ----------- -------- -------------
Interest Income
(Expense):
Interest income ............ 138,918 30,322 30,322
Interest expense ........... (141,811) (91,816) (91,816)
------------- ----------- -------------
Total interest
expense ............... (2,893) (61,494) (61,494)
------------- ----------- -------------
Loss before minority
interest in
subsidiaries' earnings
and provision for
(benefit from)
income taxes ............. (3,827,505) (684,652) (381,570) (1,066,222)
Minority Interest ........... -- 314,498 (314,498)(5) 0
Provision for (Benefit
From) Income Taxes ......... (261,000) (77,000) (77,000)
------------- ----------- -------- -------------
Net Loss ................... (3,566,505) (293,154) (696,068) (989,222)
============= =========== ======== =============
Basic and Diluted Loss
per Share .................. (12.52) (1.03) (3.47)
============= =========== =============
Basic and Diluted
Weighted Average
Shares Outstanding ......... 284,828 284,828 284,828
============= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated pro forma
financial statements.
F-25
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(1) To record an intangible asset to reflect the step-up in basis resulting from
the Company's acquisition of NU's minority interest in a subsidiary (NECOM
LLC), in accordance with AIN-39.
(2) To record the elimination of minority interest resulting from the exchange
of minority members' interest in subsidiaries of the Company for Company
stock as part of the Reorganization.
(3) To record CMP's exercise in April 1998 of its warrants to purchase 5,876
shares of membership interests in FiveCom LLC for an aggregate exercise
price of $58.76.
(4) To record additional amortization associated with the intangible asset
recorded to reflect the step-up in basis resulting from the Company's
acquisition of NU's minority interest in a subsidiary (NECOM LLC). The
Company is utilizing a 30-year amortization period, reflecting the
assignment of value to goodwill and to the rights-of-way, which have 30-year
terms.
(5) To eliminate the allocation of losses to minority members due to the
exchange of such interests' for the Company's stock in the reorganization.
(6) In connection with the Reorganization, the minority interests in the
Company's subsidiaries were exchanged for Series B convertible preferred
stock, resulting in the elimination of any minority interest and an increase
of 3,470,470 shares of Series B convertible preferred stock, of which
144,172 shares arose from CMP's exercise of a warrant.
(7) In connection with the Reorganization, the conversion rate on the Series A
convertible preferred stock was reduced to a 1 : 1 ratio and 199,636
additional shares of Series A convertible preferred stock were issued to
adjust for such reduction.
F-26
<PAGE>
GLOSSARY
Set forth below are definitions of certain terms used herein.
<TABLE>
<S> <C>
Access charges ................ The fees paid by long distance carriers to LECs for originating and
terminating long distance calls on the LECs' local networks.
Analog Transmission ........... A way of sending voice, video and data signals electronically in which the
transmitted signal is analogous to the original signal.
ATM (Asynchronous
Transfer Mode) ................ An information transfer standard that is one of a general class of packet
technologies that relay traffic by way of an address contained within the first
five bytes of a standard fifty-three-byte-long packet or cell. The ATM format
can be used by many different information systems, including local area
networks, to deliver traffic at varying rates, permitting a mix of voice, data
and video.
Backbone ...................... The through-portions of a transmission network, as opposed to spurs that
branch off the through-portions.
Band .......................... A range of frequencies between two defined limits.
Bandwidth ..................... The relative range of analog frequencies or digital signals that can be passed
through a transmission medium, such as glass fibers, without distortion. The
greater the bandwidth, the greater the information carrying capacity.
Bandwidth is measured in Hertz, or "Hz" (analog), or Bits Per Second or
"bps" (digital).
Bit ........................... A contraction of the term Binary Digit, it is the basic unit in data
communications. Bits are typically represented by ones or zeros.
Bit Error Rate ................ A measure of transmission quality stated as the expected probability of error
per bit transmitted.
CAP ........................... Competitive Access Provider.
Capacity ...................... The information carrying ability of a telecommunications facility.
Carrier ....................... A provider of communications transmission services by fiber, wire or radio.
Carrier Ring .................. Local fiber optic network that connects one or more carrier facilities to a
NEON POP.
Carrier's Carrier ............. A wholesale private telecommunications carrier offering services primarily to
other carriers and not to the general public.
Central Office ................ A telephone company facility where subscribers' lines are joined to switching
equipment for connecting with other subscribers, both locally and for long
distance.
CLEC (Competitive Local
Exchange Carrier) ............. A company that competes with LECs in the local services market.
CMP ........................... Central Maine Power Company
CMP Service Territory ......... The geographical areas prescribed by CMP's franchise service territory in the
State of Maine.
Collocation ................... The physical locating of a telecommunication carrier's switch in another
carrier's premises that facilitates the interconnection of their respective
switching equipment.
Common Carrier ................ A government defined group of private companies offering
telecommunications services or facilities to the general public on a non-
discriminatory basis.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
Conduit ........................... A pipe, usually made of metal, ceramic or plastic, that protects buried cables.
Dark Fiber ........................ Fiber optic cable without any of the electronic or optronic equipment
necessary to use the fiber for transmission.
Dense Wave Division
Multiplexing ...................... A technique for transmitting 8 or more different light wave frequencies on a
single fiber to increase the information carrying capacity.
Digital ........................... Describes a method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission/switching technologies employ a sequence
of discrete, distinct pulses to represent information, as opposed to the
continuously variable analog signal.
DS-0, DS-1, DS-3 .................. Standard telecommunications industry digital signal formats, which are
distinguishable by bit rate (the number of binary digits (0 and 1) transmitted
per second). DS-0 service has a bit rate of 64 kilobits per second and
typically transmits only the equivalent of one voice conversation at a time.
DS-1 service has a bit rate of 1.544 megabits per second and typically
transmits the equivalent of 24 simultaneous voice conversations. DS-3 service
has a bit rate of 45 megabits per second and typically transmits the equivalent
of 672 simultaneous voice conversations.
Equal Access ...................... The basis upon which customers of interexchange carriers are able to obtain
access to their Primary Interexchange Carriers' (PIC) long distance telephone
network by dialing "1", thus eliminating the need to dial additional digits and
an authorization code to obtain such access.
Facilities-Based Carriers ......... Facilities-based carriers that own and operate their own network and
equipment.
FCC (Federal
Communications
Commission) ....................... Regulatory body established pursuant to the Communications Act of 1934; it
has the authority to regulate all interstate communications originating in the
United States.
Fiber Miles ....................... The number of strands of fiber in a length of fiber optic cable multiplied by
the length of the cable in miles.
Fiber Optics ...................... A technology in which light is used to transport information from one point to
another. Fiber optic cables are thin filaments of glass through which light
beams are transmitted over long distances carrying large amounts of data.
Modulating light on thin strands of glass produces major benefits in high-
bandwidth, relatively low cost, low power consumption, small space needs,
total insensitivity to electromagnetic interference and great resistance to
bugging.
Frame Relay ....................... A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access
speeds ranging from 56 kilobits per second to 1.5 megabits per second. This
service is well-suited for connecting local area networks, but is not presently
well-suited for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern
fiber optic networks.
Gbps .............................. Gigabits per second, which is a measurement of speed for digital signal
transmission expressed in billions of bits per second.
ILEC .............................. Incumbent Local Exchange Carrier, an historic provider of local telephone
services.
</TABLE>
G-2
<PAGE>
<TABLE>
<S> <C>
Interconnect .................... Connection of a telecommunications device or service to the public switched
telephone network ("PSTN").
IXC (Interexchange carrier) ..... A company providing inter-LATA or long distance services between LATAs
on an intrastate or interstate basis.
Kbps ............................ Kilobits per second, which is a measurement of speed for digital signal
transmission expressed in thousands of bits per second.
LATAs (Local Access
Transport Areas) ................ The approximately 200 geographic areas that define the areas between which
the RBOCs currently are prohibited from providing long distance services.
LEC (Local Exchange Carrier) .... A company providing local telephone services.
Lit Fiber ....................... Fiber activated or equipped with the requisite electronic and optronic
equipment necessary to use the fiber for transmission.
Local loop ...................... A circuit that connects an end-user to the LEC central office within a LATA.
Long-haul circuit ............... A dedicated telecommunications circuit generally between locations in
different LATAs.
Mbps ............................ Megabits per second, which is a measurement of speed for digital signal
transmission expressed in millions of bits per second.
Multiplexing .................... An electronic or optical process that combines a large number of lower speed
transmission lines into one high speed line by splitting the total available
bandwidth into narrower bands (frequency division), or by allotting a common
channel to several different transmitting devices, one at a time in sequence
(time division).
NEON ............................ NorthEast Optic Network, the Company's fiber optic network in the Northeast.
NEON POP ........................ A POP owned and operated by the Company.
Non-Zero Dispersion Fiber ....... This fiber was designed and introduced in the early 1990's for communication
systems operating in the 1550 nm
transmission window. The refractive index
profile has been selected to provide
non-zero dispersion over the Erbium- doped
fiber amplifier passband region. This
non-zero dispersion feature is important for
system performance in high bit rate Dense
Wavelength Division Multiplexing (DWDM)
applications.
Northeast ....................... Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island
and Vermont.
NU .............................. Northeast Utilities.
NU Service Territory ............ The geographical areas where NU provides retail or wholesale electric service;
owns or operates electric transmission facilities or has obtained rights,
interests or permissions which would allow NU to install transmission or
distribution facilities in such areas.
OC-3, OC-12, OC-48 and
OC-192 .......................... OC is a measure of SONET transmission optical carrier level, which is equal
to a corresponding number of DS-3s (e.g., OC-3 is equal to 3 DS-3s and
OC-48 is equal to 48 DS-3s).
POP (Point of Presence) ......... Locations where a carrier has installed transmission equipment in a service
area to relay telecommunications traffic to a network or a switching center.
PCS (Personal
Communications Services) ........ Services planned for a new digital Radio Frequency (RF) equipment conveying both voice
and data over wireless networks.
</TABLE>
G-3
<PAGE>
<TABLE>
<S> <C>
RBOCs (Regional Bell
Operating Companies) .............. The seven local telephone companies (formerly part of AT&T) established as
a result of the AT&T Divestiture Decree.
Regeneration/amplifier ............ Devices which automatically re-transmit or boost signals on an out-bound
circuit.
Reseller .......................... A carrier that does not own transmission facilities, but obtains
communications services from another carrier for resale to the public.
Route Miles ....................... The number of miles spanned by fiber optic cable calculated without including
physically overlapping segments of cable.
ROWs .............................. Rights-of-way.
Single Mode Fiber ................. A fiber having a small core diameter and in which only one mode (the
fundamental mode which may consist of two polarizations) will propagate at
the wavelengths of interest.
SONET (Synchronous
Optical Network
Technology) ....................... An electronics and network architecture for variable-bandwidth products
which enables transmission of voice, data and video (multimedia) at very high
speeds.
SONET ring ........................ A network architecture which provides for instantaneous restoration of service
in the event of a fiber cut by automatically rerouting traffic along an
alternating path. This occurs so rapidly (in 50 milliseconds) that it is virtually
undetectable to the user.
Switch ............................ A device that selects the paths or circuits to be used for transmission of
information and establishes a connection. Switching is the process of
interconnecting circuits to form a transmission path between users and it also
captures information for billing purposes.
Switched service carriers ......... A carrier that sells switched long distance service and generally refers to a
carrier that owns its switch.
Switchless resellers .............. A carrier that does not own facilities or switches, but purchases minutes in
high volumes from other carriers and resells those minutes.
Tandem Switch ..................... An electronic communications switch located between the LEC switch and the
IXC switch that passes along routing, signaling and billing information.
Telecommunications ................ The transmission, between or among points specified by the user, of
information of the user's choosing, without change in the form or content of
the information as sent or received.
Telecommunications Service ........ The offering of telecommunications for a fee to the public, or to such
classes of users as to be effectively available directly to the public,
regardless of the facilities used.
Telephony ......................... The transmission of sounds between widely removed points with or without
connecting wires.
Unbundled ......................... Services, programs, software and/or training sold separately from the hardware.
Video Services .................... The provision of video over a channel.
Wireless .......................... A communications system that operates without wires, such as cellular services.
</TABLE>
G-4
<PAGE>
- --------------------------------------------------------------------------------
No dealer, salesperson or any other person has been authorized to give any
information or to make any representation not contained in this Prospectus and,
if given or made, such information or representation must not be relied upon as
having been authorized by the Company, any Selling Stockholder or any
Underwriter. This Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any of the securities offered hereby in any
jurisdiction to any person to whom it is unlawful to make such offer in such
jurisdiction. Neither the delivery of this Prospectus nor any sale made
hereunder shall, under any circumstances, create any implication that the
information herein is correct as of any time subsequent to the date hereof or
that there has been no change in the affairs of the Company since such date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary .................................. 3
Risk Factors ........................................ 10
Debt Offering ....................................... 19
Use of Proceeds ..................................... 19
Dividend Policy ..................................... 19
Dilution ............................................ 20
Capitalization ...................................... 21
Selected Consolidated Financial and
Operating Data ................................... 23
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ....................................... 25
Business ............................................ 29
Management .......................................... 45
Certain Transactions ................................ 50
Principal and Selling Stockholders .................. 51
Description of Capital Stock ........................ 53
Description of Certain Indebtedness ................. 55
Shares Eligible for Future Sale ..................... 56
United States Federal Tax Consequences .............. 58
Underwriting ........................................ 60
Notice to Canadian Residents ........................ 62
Legal Matters ....................................... 63
Experts 63
Additional Information .............................. 63
Index to Consolidated Financial Statements .......... F-1
Glossary ............................................ G-1
</TABLE>
------------------------
Until August 24, 1998, all dealers effecting transactions in the Common
Stock, whether or not participating in this distribution, may be required to
deliver a prospectus. This is in addition to the obligation of dealers to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
[GRAPHIC OMITTED]
NorthEast Optic
Network, Inc.
4,500,000 Shares
Common Stock
($.01 par value)
P R O S P E C T U S
Credit Suisse First Boston
Warburg Dillon Read LLC
- --------------------------------------------------------------------------------
EXHIBIT 5.1
July 30, 1998
NorthEast Optic Network, Inc.
391 Totten Pond Road, Suite 401
Waltham, Massachusetts 02154
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (the "Registration Statement") filed pursuant to Rule
462(b) with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Securities Act"), for the registration
of $15,000,000 aggregate principal amount of Senior Notes due 2008
("Debentures").
The Debentures are to be sold by the Company pursuant to an underwriting
agreement (the "Debt Underwriting Agreement") to be entered into by and among
the Company and Credit Suisse First Boston Corporation and Warburg Dillon Read
LLC.
We have examined signed copies of the Registration Statement and all
exhibits thereto, all as filed with the Commission. We have also examined and
relied upon the original or copies of minutes of the meetings of the
stockholders and the Board of Directors of the Company, stock record books of
the Company, a copy of the ByLaws of the Company, as amended, a copy of the
Certificate of Incorporation of the Company, as amended, and such other
documents as we have deemed necessary for purposes of rendering the opinions
hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as copies, and the authenticity of the originals of such documents. Our
opinion expressed below with respect to the Debentures being binding obligations
of the Company is
<PAGE>
NorthEast Optic Network, Inc.
July 30, 1998
Page 2
qualified to the extent that it may be subject to or affected by (i)
applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent
transfer or other laws relating to or affecting the rights of creditors
generally; and (ii) general principles of equity, including concepts of
materiality, reasonableness, good faith and fair dealing, regardless of whether
such binding nature is considered in a proceeding in equity or at law.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Debentures, to register and qualify the Debentures for sale under
all applicable state securities or "blue sky" laws.
Based upon and subject to the foregoing, we are of the opinion that the
Debentures have been duly authorized and, when issued and sold pursuant to the
Debt Underwriting Agreement, such Debentures will be validly issued, fully paid
and nonassessable and will be binding obligations of the Company.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and to the use of our name therein and in
the related Prospectuses under the caption "Legal Matters." In giving such
consent, we do not hereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Debentures while the Registration Statement is in
effect.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions, and we disclaim any obligations to advise you of any
change in any of these sources of law or subsequent legal or factual
developments which might affect any matters or opinions set forth herein.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
