As filed with the Securities and Exchange Commission on July 9, 1998
Registration No. 333-53441
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NORTHEAST OPTIC NETWORK, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<CAPTION>
DELAWARE 4813 04-3056279
<S> <C> <C>
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
391 Totten Pond Road, Suite 401
Waltham, Massachusetts 02154
(781) 890-6868
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Victor Colantonio
President
NorthEast Optic Network, Inc.
391 Totten Pond Road, Suite 401
Waltham, Massachusetts 02154
(781) 890-6868
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copy to:
Alexander A. Bernhard, Esq. Kris Heinzelman, Esq.
John H. Chory, Esq. Cravath, Swaine & Moore
Hale and Dorr LLP, 60 State Street Worldwide Plaza, 825 Eighth Avenue
Boston, Massachusetts 02109 New York, New York 10019
(617) 526-6000 (212) 474-1000
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]_____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]___________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. -
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=========================================================================================================================
Title of Each Class Amount Proposed Maximum Proposed Maximum
of Securities to be to be Offering Price Aggregate Amount of
Registered Registered Per Unit Offering Price Registration Fee
- ----------------------------------- ------------------ ------------------ --------------------- -----------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value
per share ........................ 6,325,000 shares $ 14.00(1) $ 88,550,000 $26,122(2)
% Senior Notes Due 2008 ......... n/a n/a $165,000,000(3) $48,675
=========================================================================================================================
</TABLE>
- --------------------------------------------------------------------------------
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(a) under the Securities Act of 1933.
(2) $2,950 of this amount was previously paid by the Company with the original
filing of this Registration Statement on May 22, 1998.
(3) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) under the Securities Act of 1933.
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
================================================================================
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains alternate sections, paragraphs,
sentences or phrases which will be contained in two forms of Prospectus covered
by this Registration Statement, one to be used in connection with the offering
(the "Equity Offering") of shares of Common Stock of NorthEast Optic Network,
Inc. (the "Equity Prospectus") and the other to be used in connection with the
concurrent offering (the "Debt Offering") of % Senior Notes Due 2008 of
NorthEast Optic Network, Inc. (the "Debt Prospectus"). Those sections,
paragraphs, sentences or phrases that will appear only in the Equity Prospectus
are marked at the beginning of such section, paragraph, sentence or phrase by
the symbol [E] and those appearing only in the Debt Prospectus are designated
by the symbol [D]. Unless so indicated with a [D] or [E], the language therein
will appear in both forms of Prospectus. The closing of the Debt Offering is
conditioned upon the closing of the Equity Offering and the closing of the
Equity Offering is conditioned upon the closing of the Debt Offering.
<PAGE>
[E] SUBJECT TO COMPLETION, DATED JULY 9, 1998
5,500,000 Shares
[COMPANY LOGO]
NorthEast Optic Network, Inc.
Common Stock
($.01 par value)
------------
Of the 5,500,000 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
1,500,000 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 64.6% 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 has been no public market for the Common
Stock of the Company. It is currently estimated that the initial price to
the public will be between $12.00 and $14.00 per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial price to the public.
Concurrently with the closing of the Equity Offering, the Company is offering
$165.0 million aggregate principal amount of its % 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.
Application has been made to list the Common Stock 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 12.
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.
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Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Per Share ...... $ $ $ $
Total(2) ...... $ $ $ $
</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 825,000
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 $ ,
Underwriting Discounts and Commissions will be $ , Proceeds to Company
will be $ and Proceeds to Selling Stockholders will be $ .
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 , 1998, against
payment in immediately available funds.
Credit Suisse First Boston Warburg Dillon Read LLC
Prospectus dated , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
[D] SUBJECT TO COMPLETION, DATED JULY 9, 1998
[COMPANY LOGO]
$165,000,000
NorthEast Optic Network, Inc.
% Senior Notes Due 2008
Interest payable and Due , 2008
------------
NorthEast Optic Network, Inc. ("NorthEast Optic Network" or the "Company") is
offering (the "Debt Offering") $165.0 million aggregate principal amount of
its % Senior Notes Due 2008 (the "Notes"). Upon the closing of the Debt
Offering, the Company will purchase U.S. Government Obligations (as defined)
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 at the option of the Company prior to ,
2003, except that until , 2001, the Company may redeem, at its option, up
to 35% of the aggregate principal amount of the Notes at the redemption price
set forth herein with the net proceeds of one or more Public Equity Offerings
(as defined) if at least $107.25 million principal amount of the Notes remains
outstanding after any such redemption. On or after , 2003, the Notes may
be redeemed at the option of the Company, in whole or in part, at the
redemption prices set forth herein. Upon a Change of Control (as defined), each
holder of Notes may require the Company to purchase all or a portion of such
holder's Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase.
There can be no assurance that sufficient funds would be available at the time
of any Change of Control to make any required purchases of Notes tendered.
The Notes will be senior unsecured obligations of the Company. The Notes will
rank senior in right of payment to all subordinated indebtedness of the Company
and will rank pari passu in right of payment with all existing and future
indebtedness of the Company that is not by its terms subordinated in right and
priority to the Notes. In addition, claims of holders of the Notes will be
structurally subordinated to claims of holders of indebtedness of the Company's
subsidiaries. As of March 31, 1998, after giving effect to the Offerings (as
defined) and the application of the net proceeds therefrom, the Company would
have had outstanding approximately $165.4 million of senior indebtedness
(consisting of the Notes and indebtedness ranking pari passu with the Notes)
and no subordinated indebtedness.
Concurrently with the Debt Offering, the Company and certain shareholders of
the Company are offering (the "Equity Offering" and, together with the Debt
Offering, the "Offerings") 5,500,000 shares of Common Stock (6,325,000 shares
if the over-allotment option granted to the underwriters is exercised in
full). 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 principal stockholders of the Company.
For a discussion of certain factors that should be considered in connection
with an investment in the Notes, see "Risk Factors" beginning on page 12.
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
Price to Discounts and Proceeds to
Public(1) Commissions Company(1)(2)
----------- --------------- --------------
<S> <C> <C> <C>
Per Note ..... % % %
Total ........ $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1998.
(2) Before deducting expenses payable by the Company estimated at $600,000.
The Notes are offered by the several Underwriters (as defined) when, as
and if issued by the Company, 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 Notes will be made on or about , 1998, against payment
in immediately available funds.
Credit Suisse First Boston Warburg Dillon Read LLC
Prospectus dated , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
[INSIDE FRONT COVER]
[The inside front cover contains a picture of the fiber filaments that are
contained in fiber optic cables, and the following words: "NEON(R), Northeast
Optic Network. A facilities-based "carriers' carrier" providing technologically
advanced, high-bandwidth, fiber optic transmission capacity on local loop,
inter-city and interstate facilities.
The gatefold foldout following the inside front cover contains a map showing the
routes of the NorthEast Optic Network. The map shows routes which are (i)
currently operational; (ii) planned for 1998; and (iii) planned for 1999. In
addition, the map shows the location of existing NEON POPs, and planned NEON
POPs, existing carrier rings and local distribution and planned carrier rings
and local distribution, and shows the respective NU and CMP service territories.
The foldout also contains a copy of the Company's logo and the words: NorthEast
Optic Network. "NEON(R) and the NEON logo are service marks of the Company."
The back cover contains a picture of the Company's logo.
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"). [E] 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>
[D] The Debt Offering
<TABLE>
<S> <C>
Issuer ......................... NorthEast Optic Network, Inc.
Securities Offered ............. $165,000,000 aggregate principal amount of % Senior Notes
Due 2008.
Maturity Date .................. , 2008.
Interest Payment Dates ......... and of each year, commencing , 1999.
Pledge Account ................. Upon the closing of the Debt Offering, the Company will apply
a portion of the net proceeds of the Debt Offering to purchase
U.S. Government Obligations (the "Pledged Securities") to be
deposited in the Pledge Account (as defined) 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. The Pledged Securities will be pledged by the Company
to the Trustee for the benefit of the holders of the Notes. The
Notes will be secured by a first priority security interest in the
Pledged Securities and in the Pledge Account and, accordingly,
the Pledged Securities and the Pledge Account will also secure
repayment of the principal amount of the Notes to the extent of
such security. See "Description of the Notes--Security."
Optional Redemption ............ The Notes will not be redeemable at the option of the Company
prior to , 2003, except that until , 2001, the
Company may redeem, at its option, up to 35% of the aggregate
principal amount of the Notes at the redemption price set forth
herein with the net proceeds of one or more Public Equity
Offerings if at least $107.25 million principal amount of the
Notes remains outstanding after any such redemption. On or
after , 2003, the Notes may be redeemed at the option
of the Company, in whole or in part, at the redemption prices
set forth herein, plus accrued and unpaid interest, if any, to the
date of redemption. See "Description of the Notes--Optional
Redemption."
Change of Control .............. Upon a Change of Control, each holder of Notes will be entitled
to require the Company to purchase all or a portion of such
holder's Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase. There can be no assurance that the Company
would have sufficient funds at the time of any Change of Control
to purchase any of the Notes tendered. See "Risk
Factors--Purchase of Notes Upon Change of Control" and
"Description of the Notes--Change of Control."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Ranking ............................ The Notes will be senior unsecured (except to the extent of the
Pledge Account and the Pledged Securities) obligations of the
Company. The Notes will rank pari passu in right of payment
with all existing and future indebtedness of the Company that
is not by its terms subordinated in right and priority to the Notes
and will be senior in right of payment to all future subordinated
indebtedness of the Company. In addition, claims of holders of
the Notes will be structurally subordinated to claims of holders
of indebtedness of the Company's subsidiaries. As of March 31,
1998, after giving effect to the Offerings and the application of
the net proceeds therefrom, the Company would have had
outstanding approximately $165.4 million of senior
indebtedness (consisting of the Notes and $437,042 of other
indebtedness) and no subordinated indebtedness.
Restrictive Covenants .............. The indenture under which the Notes will be issued (the
"Indenture") will contain certain covenants that, among other
things, will limit (i) the incurrence of additional Indebtedness
(as defined) by the Company and its Restricted Subsidiaries (as
defined), (ii) the payment of dividends and other Restricted
Payments (as defined) 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. All these limitations and prohibitions,
however, are subject to a number of important qualifications and
exceptions. See "Description of the Notes--Change of
Control--Certain Covenants."
Concurrent Equity Offering ......... Concurrently with the Debt Offering, the Company and certain
shareholders of the Company are offering 5,500,000 shares
(6,325,000 shares if the over-allotment option granted to the
underwriters thereof is exercised in full) of its Common Stock
(the "Common Stock") by a separate prospectus. The closing of
each Offering is conditioned upon the closing of the other
Offering, which conditions may not be waived.
Use of Proceeds .................... The net proceeds to the Company from the Offerings will be
used to purchase the Pledged Securities, 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."
</TABLE>
[D] Risk Factors
An investment in the Notes 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
Notes offered hereby. See "Risk Factors."
8
<PAGE>
[E] The Equity Offering
<TABLE>
<S> <C>
Common Stock offered:
By the Company ...................... 4,000,000 shares
By the Selling Stockholders ......... 1,500,000 shares
Total .............................. 5,500,000 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
$165.0 million aggregate principal amount of its % 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.
Proposed 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.
[E] 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."
9
<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 balance sheet data presented below as of December 31, 1997 and March
31, 1998 is also presented on an as adjusted 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>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------- --------------------------------
1995 1996 1997(1)(2) 1997 1998(1)(2)
--------------- ----------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues .............................. $ 42,598 $ 13,773 $ 394,704 $ -- $ 151,363
Operating 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), net ........ (42,401) 125,838 (2,893) 56,638 (61,494)
Minority interest(3) .................. -- 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
Other Financial Data:
Cash provided by (used in)
operating activities ................ $(413,196) $ 37,460 $ (553,427) $(1,030,173) $ 657,881
Cash used in investing activities ..... (776,272) (10,100,020) (8,081,266) (3,804,785) (1,953,253)
Cash provided by financing
activities .......................... 1,099,870 14,926,603 4,868,220 3,428,162 1,429,174
Net increase (decrease) in cash and
cash equivalents .................... (89,598) 4,864,043 (3,766,473) (1,406,796) 133,802
EBITDA(4) ............................. (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 earnings (deficiency) to
fixed charges(2)(5) ................. (2.54)x (4.50)x (10.11)x (9.46)x (7.53)x
</TABLE>
<TABLE>
<CAPTION>
As of
December 31, 1997
--------------------------------------------------
Pro Forma
Actual As Adjusted(6) As Adjusted(7)
---------------- ---------------- ----------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital .............. $ (3,463,011) $ (3,463,011) $137,466,912
Total assets ................. 23,461,000 71,239,102 279,081,524
Note payable to related
party ...................... 2,100,000 2,100,000 --
Long-term debt,
including current
maturities ................. 2,118,905 2,118,905 165,543,133
Total liabilities ............ 8,275,154 8,275,154 169,599,382
Minority interest(3) ......... 5,338,786 -- --
Stockholders' equity ......... 9,847,060 62,963,948 109,482,142
<CAPTION>
As of
March 31, 1998
-------------------------------------------------
Pro Forma
Actual As Adjusted(6) As Adjusted(7)
---------------- ---------------- ---------------
<S> <C> <C> <C>
Balance Sheet Data:
Working capital .............. $ (5,500,383) $ (5,500,383) $133,574,279
Total assets ................. 26,183,672 74,276,272 280,056,562
Note payable to related
party ...................... 3,975,000 3,975,000 --
Long-term debt,
including current
maturities ................. 1,987,577 1,987,577 165,437,042
Total liabilities ............ 11,605,478 11,605,478 171,079,943
Minority interest(3) ......... 5,024,288 -- --
Stockholders' equity ......... 9,553,906 62,670,794 108,976,619
</TABLE>
- ---------------------
(See footnotes on the following page)
10
<PAGE>
(1) If the Reorganization had occurred as of January 1, 1997, the as adjusted
impact on the Company's Statement of Operations for the year ended
December 31, 1997 would reflect depreciation and amortization of
$2,145,465, a net loss of $3,632,829 and a loss per share of $12.75, 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 $702,785, a net loss of $1,008,424 and a
loss per share of $3.54, after giving effect to the Stock Split.
(2) On a pro forma as adjusted basis giving effect to the Reorganization and to
the Offerings (assuming a 12 1/2% per annum interest rate on the Notes) and
the application of the net proceeds therefrom, (A) net loss and basic and
diluted loss per share for 1997, (i) before the extraordinary charge, would
have been $14,504,790 and $0.90, respectively, reflecting additional
interest expense of $20,483,189 from the issuance of the Notes offset by
interest income of $10,176,711 from the reinvestment of a portion of the net
proceeds of the Offerings (assuming a 5% per annum interest rate on the
cash, cash equivalents and restricted cash), and (ii) after the
extraordinary charge (which reflects the write-off of deferred financing
costs of $1,241,806 related to the extinguishment of debt), would have been
$15,746,596 and $0.98, respectively, and (B) net loss and basic and diluted
loss per share for the first quarter of 1998, (i) before the extraordinary
charge, would have been $3,690,552 and $0.23, respectively, reflecting
additional interest expense of $5,064,434 from the issuance of the Notes
offset by interest income of $2,521,056 from the reinvestment of a portion
of the net proceeds of the Offerings (assuming a 5% per annum interest rate
on the cash, cash equivalents and restricted cash), and (ii) after the
extraordinary charge (which reflects the write-off of deferred financing
costs of $1,454,175 related to the extinguishment of debt), would have been
$5,144,727 and $0.32, respectively.
(3) 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.
(4) 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.
(5) 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 $16,145,239 and
$5,240,609, respectively. See Note 2 above.
(6) Adjusted 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 subsidiaries (NECOM LLC
and FiveCom LLC), in accordance with AICPA Accounting Interpretation 39 to
APB Opinion No. 16, Business Combinations (AIN-39). If the intangible
asset were recorded at December 31, 1997, the amount recorded would be
$47,778,102. If the intangible asset were recorded at March 31, 1998, the
amount recorded would be $48,092,600.
(7) Pro forma as adjusted to give effect to (i) the Offerings and the
application of the estimated net proceeds therefrom, assuming an initial
public offering price of $13.00 per share, the midpoint of the estimated
price range, and after deducting the estimated underwriting discount and
offering expenses payable by the Company, and the write-off of unamortized
financing costs associated with debt extinguished and (ii) the
Reorganization. See Note 6 above.
11
<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
12
<PAGE>
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.
13
<PAGE>
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.
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 and 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
14
<PAGE>
are required only to exercise "reasonable care" with respect to the Company's
facilities and are otherwise free to 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.
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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, 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
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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 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 $165.4 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 60.29%. [D]Although the Indenture will contain
certain limitations on the ability of the Company and its subsidiaries to incur
additional Indebtedness, under certain circumstances such additional
Indebtedness could be substantial and such limitations generally do not
restrict the Company and its subsidiaries from incurring liabilities that do
not constitute Indebtedness.
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 , 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 $16,145,239 and $5,240,609, respectively. Although the first seven
interest payments on the Notes will be paid from the [D] Pledge Account [E] 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 $ million, and the Notes
will mature on , 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.
[D] Ranking of the Notes
The indebtedness evidenced by the Notes will be senior unsecured (except
to the extent of the Pledge Account and the Pledged Securities) obligations of
the Company. The Notes will rank senior in right of payment to all subordinated
indebtedness of the Company and will rank pari passu in right of payment with
all existing and future indebtedness
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of the Company that is not by its terms subordinated in right and priority to
the Notes. As of March 31, 1998, after giving effect to the Offerings and the
application of the net proceeds therefrom, the Company would have had
outstanding approximately $165.4 million of senior indebtedness (consisting of
the Notes and $437,042 of other indebtedness). The Notes will be effectively
subordinated to any future secured indebtedness of the Company to the extent of
the value of the assets securing such indebtedness. The Indenture will permit
the Company or its subsidiaries to incur additional secured indebtedness,
including purchase money indebtedness. See "Description of the Notes." In the
event of a bankruptcy, liquidation, dissolution, restructuring or similar
proceeding with respect to the Company, such assets will be available to
satisfy obligations of any such secured debt before any payment can be made on
the Notes. In addition, to the extent such assets would not satisfy in full any
such secured indebtedness, the holders of such indebtedness will have a claim
for any shortfall that is pari passu (or effectively senior if the indebtedness
were issued by the subsidiaries) with the Notes. Accordingly, other than the
Pledge Account and the Pledged Securities (if such are still in existence),
there may only be a limited amount of assets available to satisfy any claims of
the holders of the Notes upon an acceleration of the Notes.
The Notes will also be structurally subordinated to all existing and
future indebtedness of any subsidiary of the Company. Claims of creditors of
such subsidiaries, including trade creditors, secured creditors and creditors
holding indebtedness and guarantees issued by such subsidiaries, and claims of
preferred stockholders (if any) of such subsidiaries, generally will have
priority with respect to the assets and earnings of such subsidiaries over the
claims of creditors of the Company, including holders of the Notes. As of March
31, 1998, on a pro forma as adjusted basis after giving effect to the Offerings
and the application of the net proceeds therefrom and to the Reorganization,
the total liabilities of the Company's subsidiaries were approximately
$289,000, including trade payables.
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 61.9% 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 [E]"Principal and Selling
Stockholders" [D]"Principal Stockholders."
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 331/3% 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.
[E] 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 will be
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"
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for a discussion of the factors to be 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."
[E] 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."
[E] Shares Eligible for Future Sale
Upon consummation of the Equity Offering, 16,066,335 shares of Common
Stock will be outstanding (16,891,335 shares if the Underwriters'
over-allotment option is exercised in full), of which 5,500,000 shares will be
freely tradeable (6,325,000 shares if the Underwriters' over-allotment option
is exercised in full). Of the 10,566,335 remaining shares, 9,950,780 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 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."
[E] 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. Assuming an initial public offering price of $13.00 per share
(representing the midpoint of the estimated price range), dilution to new
investors would be $9.70 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."
[E] 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
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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."
[D] Purchase of Notes Upon Change of Control
Upon a Change of Control, the Company must offer to purchase all
outstanding Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase. The source of funds for any
such purchase would be the Company's available cash or cash generated from
other sources. However, there can be no assurance that sufficient funds would
be available at the time of any Change of Control to make any required
purchases of Notes tendered. See "Description of the Notes--Change of Control."
[D] Absence of Trading Market for the Notes
The Notes constitute a new issue of securities, have no established
trading market and may not be widely held. Although the Underwriters have
informed the Company that they currently intend to make a market in the Notes
as permitted by applicable laws and regulations, they are not obligated to do
so and may discontinue market making at any time without notice. The Company
does not intend to list the Notes on any national securities exchange, and
there can be no assurance as to the development of any market or the liquidity
of any market that may develop for the Notes. If such a market does develop,
the price of the Notes may fluctuate and liquidity may be limited. If such a
market does not develop, purchasers may be unable to resell the Notes for an
extended period of time, if at all.
[D] Risks of Investing in Non-Investment Grade Debt
The Notes have not been rated as investment-grade by any rating
institution and it is not expected that the Notes will be so rated. As a
result, holders of the Notes will have the risks associated with an investment
in non-investment grade debt. Historically, the market for non-investment grade
debt has been subject to disruptions that have caused substantial volatility in
the prices of such securities and greatly reduced liquidity for the holders of
such securities. If the Notes are traded, they may trade at a discount from
their initial offering price, depending upon prevailing interest rates, the
market for similar securities, the performance of the Company and certain other
factors. The liquidity of, and trading markets for, the Notes may also be
adversely affected by general declines in the market for non-investment grade
debt. Such declines may adversely affect the liquidity of, and trading markets
for, the Notes, independent of the financial performance of or prospects for
the Company. In addition, certain regulatory restrictions prohibit certain
types of financial institutions from investing in non-investment grade debt,
which may further suppress demand for such securities. There can be no
assurance that the market for the Notes will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on holders of the
Notes.
[D] EQUITY OFFERING
Concurrently with the Debt Offering, the Company and certain selling
stockholders of the Company (the "Selling Stockholders") are offering 5,500,000
shares of Common Stock to the public in the Equity Offering. In addition, as
part of the Equity Offering the Company has granted the underwriters thereof an
option to purchase up to 825,000 additional shares of Common Stock to cover
over-allotments, if any. The closing of the Debt Offering is conditioned upon
the closing of the Equity Offering, and the closing of the Equity Offering is
conditioned upon the closing of the Debt Offering. Such conditions may not be
waived.
[E] DEBT OFFERING
Concurrently with the Equity Offering, the Company is offering $165.0
million aggregate principal amount of its % 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
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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
[E] The net proceeds to the Company from the Equity Offering are estimated
to be approximately $47.76 million (approximately $57.73 million if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $13.00 per share, the midpoint of the estimated price
range, and after deducting the estimated underwriting discount and 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 are estimated to be
approximately $159.45 million, after deducting the estimated underwriting
discount and offering expenses.
[D] The net proceeds to the Company from the Debt Offering are estimated
to be approximately $159.45 million after deducting the estimated underwriting
discount and offering expenses and the net proceeds to the Company from the
Equity Offering are estimated to be approximately $47.76 million (approximately
$57.73 million if the underwriters' over-allotment option is exercised in
full), assuming an initial public offering price of $13.00 per share and after
deducting the estimated underwriting discount and offering expenses.
Of the net proceeds of the Offerings, estimated to be $207.2 million, the
Company intends to use approximately $65.0 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.
[E] 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."
22
<PAGE>
[E] 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 at an assumed initial
public offering price of $13.00 per share (the mid-point of the estimated price
range) and after deducting the estimated underwriting discount and 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 $53,080,000 or $3.30
per share. This represents an immediate increase in net tangible book value of
$2.40 per share to the existing stockholders and an immediate dilution of $9.70
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price ............................. $ 13.00
Net tangible book value as of March 31, 1998 ..................... $ 0.90
Increase attributable to net proceeds to the
Company of the Equity Offering ................................. 2.40
Pro forma net tangible book value after the Equity Offering ....... 3.30
--------
Dilution to new investors ......................................... $ 9.70
========
</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 (at an assumed initial public offering price of $13.00 per share) 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 27.1% $ 1.61
New investors(2) .................... 4,000,000 24.9 52,000,000 72.9 13.00
---------- ---- ----------- ---- -------
Total ............................. 16,062,735 100% $71,378,632 100%
========== ==== =========== ====
</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 10,562,735, or
approximately 65.7% of the total number of shares of Common Stock
outstanding after the Equity Offering (or approximately 62.5% if the
Underwriters over-allotment option is exercised in full), and will
increase the number of shares held by new investors to 5,500,000, or
approximately 34.2% of the total number of shares of Common Stock
outstanding after the Equity Offering (or 6,325,000 shares and
approximately 37.5% if the Underwriters over-allotment option is exercised
in full).
23
<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 an as adjusted 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
(assuming, in the case of the Equity Offering, an initial public offering price
of $13.00 per share).
<TABLE>
<CAPTION>
As of March 31, 1998
---------------------------------------------------
Pro Forma
Actual As Adjusted As Adjusted
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents .................................... $ 1,232,254 $ 1,232,254 $138,756,381
Restricted cash .............................................. 839,662 839,662 65,000,000
------------ ------------ ------------
Total cash, cash equivalents and restricted cash ......... $ 2,071,916 $ 2,071,916 $203,756,381
============ ============ ============
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
% Senior Notes Due 2008 .................................... -- -- 165,000,000
------------ ------------ ------------
Total debt ............................................... 5,962,577 5,962,577 165,437,042
------------ ------------ ------------
Minority interest (1) ........................................ 5,024,288 -- --
------------ ------------ ------------
Stockholders' equity:
Preferred stock (no shares authorized, issued or
outstanding, actual; 2,000,000 shares authorized
and no shares issued or outstanding, as adjusted
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
as adjusted, 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 as
adjusted, 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, as adjusted and pro forma
as adjusted, respectively) (3) ............................ 2,848 2,848 160,627
Warrants (1)(4) ............................................. 541,431 8,595 8,595
Additional paid-in capital (4)(5) ........................... 11,817,216 65,430,239 113,079,571
Accumulated deficit (6) ..................................... (2,817,999) (2,817,999) (4,272,174)
------------ ------------ ------------
Total stockholders' equity ............................... 9,553,906 62,670,794 108,976,619
------------ ------------ ------------
Total capitalization ..................................... $ 20,540,771 $ 68,633,371 $274,413,661
============ ============ ============
</TABLE>
- ---------------------
(See footnotes on the following page)
24
<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 $48,092,600 to reflect the Company's acquisition of NU's minority
interest in subsidiaries (NECOM LLC and FiveCom 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.
25
<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 balance
sheet data presented below as of December 31, 1997 and March 31, 1998 is also
presented on an as adjusted 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,
-----------------------------------------------------------------------------
1993 1994 1995 1996 1997(1)(2)
----------- --------------- --------------- ----------------- ---------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ...................................... $287,894 $ 326,581 $ 42,598 $ 13,773 $ 394,704
Operating expenses ............................ 291,551 589,250 487,159 1,185,595 2,693,037
-------- --------- --------- ------------- ------------
Loss from operations .......................... (3,657) (262,669) (444,561) (1,171,822) (2,298,333)
Interest income (expense), net ................ -- 59,959 (42,401) 125,838 (2,893)
Minority interest(3) .......................... -- -- -- 353,222 1,080,200
Provision for (benefit from) income taxes ..... -- -- -- 16,000 (261,000)
-------- --------- --------- ------------- ------------
Net loss ...................................... (3,657) (202,710) (486,962) (708,762) (960,026)
Basic and diluted loss per share .............. (6.90) (2.48) (1.71) (2.49) ( 3.37)
Basic and diluted weighted average shares
outstanding .................................. 530 81,745 284,578 284,735 284,828
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 (776,272) (10,100,020) (8,081,266)
Cash provided by financing activities ......... N/A 258,374 1,099,870 14,926,603 4,868,220
Net increase (decrease) in cash and cash
equivalents .................................. N/A 83,874 (89,598) 4,864,043 (3,766,473)
EBITDA(4) ..................................... 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 earnings (deficiency) to fixed
charges(2)(5) ................................ -- (6.43)x (2.54)x (4.50)x (10.11)x
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1997 1998(1)(2)
---------------- ---------------
<S> <C> <C>
Statement of Operations Data:
Revenues ...................................... $ -- $ 151,363
Operating expenses ............................ 345,620 774,521
----------- ------------
Loss from operations .......................... (345,620) (623,158)
Interest income (expense), net ................ 56,638 (61,494)
Minority interest(3) .......................... 137,620 314,498
Provision for (benefit from) income taxes ..... (33,000) (77,000)
----------- ------------
Net loss ...................................... (118,362) (293,154)
Basic and diluted loss per share .............. (0.42) (1.03)
Basic and diluted weighted average shares
outstanding .................................. 284,828 284,828
Other Financial Data:
Cash provided by (used in) operating
activities ................................... $(1,030,173) $ 657,881
Cash provided by (used in) investing
activities ................................... (3,804,785) (1,953,253)
Cash provided by financing activities ......... 3,428,162 1,429,174
Net increase (decrease) in cash and cash
equivalents .................................. (1,406,796) 133,802
EBITDA(4) ..................................... (178,121) (6,647)
Capital expenditures .......................... 3,978,512 3,297,062
Ratio of earnings (deficiency) to fixed
charges(2)(5) ................................ (9.46)x (7.53)x
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------ ------------- ---------------- ------------- ----------------
Actual
-----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
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(3) ......... -- -- -- 6,312,554 5,338,786
Stockholders' equity (deficit) 40,399 (313,251) (799,762) 7,724,146 9,847,060
<CAPTION>
As of December 31, As of March 31, 1998
-------------------------------- -------------------------------------------------
1997
-------------------------------
Pro Forma Pro Forma
As As As As
Adjusted(6) Adjusted(7) Actual Adjusted(6) Adjusted(7)
---------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital .............. $ (3,463,011) $137,466,912 $ (5,500,383) $ (5,500,383) $133,574,279
Total assets ................. 71,239,102 279,081,524 26,183,672 74,276,272 280,056,562
Note payable to related party 2,100,000 -- 3,975,000 3,975,000 --
Long-term debt, including
current maturities ........... 2,118,905 165,543,133 1,987,577 1,987,577 165,437,042
Total liabilities ............ 8,275,154 169,599,382 11,605,478 11,605,478 171,079,943
Minority interest(3) ......... -- -- 5,024,288 -- --
Stockholders' equity (deficit) 62,963,948 109,482,142 9,553,906 62,670,794 108,976,619
</TABLE>
- ---------------------
(See footnotes on following page)
26
<PAGE>
(1) If the Reorganization had occurred as of January 1, 1997, the as adjusted
impact on the Company's Statement of Operations for the year ended
December 31, 1997 would reflect depreciation and amortization of
$2,145,465, a net loss of $3,632,829 and a loss per share of $12.75,
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 $702,785, a net loss of
$1,008,424 and a loss per share of $3.54, after giving effect to the
Stock Split.
(2) On a pro forma as adjusted basis giving effect to the Reorganization and to
the Offerings (assuming a 12 1/2% per annum interest rate on the Notes) and
the application of the net proceeds therefrom, (A) net loss and basic and
diluted loss per share for 1997, (i) before the extraordinary charge, would
have been $14,504,790 and $0.90, respectively, reflecting additional
interest expense of $20,483,189 from the issuance of the Notes offset by
interest income of $10,176,711 from the reinvestment of a portion of the net
proceeds of the Offerings (assuming a 5% per annum interest rate on the
cash, cash equivalents and restricted cash), and (ii) after the
extraordinary charge (which reflects the write-off of deferred financing
costs of $1,241,806 related to the extinguishment of debt), would have been
$15,746,596 and $0.98, respectively, and (B) net loss and basic and diluted
loss per share for the first quarter of 1998, (i) before the extraordinary
charge, would have been $3,690,552 and $0.23, respectively, reflecting
additional interest expense of $5,064,434 from the issuance of the Notes
offset by interest income of $2,521,056 from the reinvestment of a portion
of the net proceeds of the Offerings (assuming a 5% per annum interest rate
on the cash, cash equivalents and restricted cash), and (ii) after the
extraordinary charge (which reflects the write-off of deferred financing
costs of $1,454,175 related to the extinguishment of debt), would have been
$5,144,727 and $0.32, respectively.
(3) Minority interest consists of the interests of member 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.
(4) 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.
(5) 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 $16,145,239 and $5,240,609, respectively. See Note 2 above.
(6) Adjusted 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 subsidiaries (NECOM LLC
and FiveCom LLC), in accordance with AICPA Accounting Interpretation 39 to
APB Opinion No. 16, Business Combinations (AIN-39). If the intangible
asset were recorded at December 31, 1997, the amount recorded would be
$47,778,102. If the intangible asset were recorded at March 31, 1998, the
amount recorded would be $48,092,600.
(7) Pro forma as adjusted to give effect to (i) the Offerings and the
application of the estimated net proceeds therefrom, assuming an initial
public offering price of $13.00 per share, the midpoint of the estimated
price range, and after deducting the estimated underwriting discount and
offering expenses payable by the Company and the write-off of unamortized
financing costs associated with debt extinguished and (ii) the
Reorganization. See Note 6 above.
27
<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.
28
<PAGE>
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 $207,383 in the first quarter of 1997, a 9%
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 $29,879 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 a payment advanced by a customer 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 $1,429,174 in the three months
ended March 31, 1998, $4,868,220 in the year ended December 31, 1997,
$14,926,603 in the year ended December 31, 1996 and $1,099,870 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
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<PAGE>
generated by the sale of convertible preferred stock to CMP amounting to $10.0
million and the purchase of 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 $115,000
to CMP, representing accrued right-of-way fees that were deferred while such
loan was outstanding.
Cash flow used in investing activities totaled $1,953,253, $8,081,266,
$10,100,020 and $776,272 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
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<PAGE>
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
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 pre-
assembled 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
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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 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
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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.
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
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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.
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
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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 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.
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. 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'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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<PAGE>
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
David Marsh ................... 50 Director
F. Michael McClain ............ 48 Director
Gary D. Simon ................. 49 Director
Katherine D. Courage .......... 40 Director-designee
</TABLE>
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. 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
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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
Upon the completion of the Offerings, the Board of Directors will
establish a Compensation Committee and an Audit Committee. The Compensation
Committee, which is expected to include a representative of each of NU and CMP,
and, in the future, a director not employed by the Company or affiliated with
NU or CMP, will make recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company and will
administer certain aspects of the Company's incentive plans. See "--1998 Stock
Incentive Plan." The Audit Committee will review 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
$100,000 in compensation for services rendered to the Company in all capacities
during the year ended December 31, 1997 (the "Named Executive Officers"):
49
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
1997 Annual Compensation Awards
-------------------------------------------- --------------------------------
Securities
Other Annual Underlying All Other
Name and Principal Position Salary($) 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
50
<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. 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.
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
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<PAGE>
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.
52
<PAGE>
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."
53
<PAGE>
[E] 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% 846,069 5,612,696 34.9%
Northeast Utilities
107 Selden Street
Berlin, CT 06037 ................... 4,992,015(5) 41.4% 653,931 4,338,084 27.0%
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.
54
<PAGE>
(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.
55
<PAGE>
[D] PRINCIPAL 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 shares of Common Stock offered in the Equity
Offering, by (i) each person who, to the knowledge of the Company, beneficially
owns more than 5% of any class of the Company's voting securities; (ii) each
director of the Company; (iii) each Named Executive Officer of the Company, and
(iv) all directors and officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Number of of Common Stock
Shares of Beneficially Owned
Common Stock ------------------------------------
Beneficially Prior to the After the
Name(1) Owned(1) Offerings Offerings(2)(3)
- ----------------------------------------- ------------------ -------------- ----------------
<S> <C> <C> <C>
5% Stockholders
Central Maine Power Company
83 Edison Drive
Augusta, ME 04336 ...................... 6,458,765(4) 53.5% 34.9%
Northeast Utilities
107 Selden Street
Berlin, CT 06037 ....................... 4,992,015(5) 41.4% 27.0%
Executive Officers and Directors
Richard A. Crabtree(6)(7) ............... -- -- --
Victor Colantonio(8) .................... 293,122 2.4% 1.8
William F. Fennell(9) ................... 40,601 * *
James D. Mack, Jr.(10) .................. -- -- --
Michael A. Musen(10) .................... 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% 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 02154.
(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 in the
Equity Offering. Reflects the sale by each of the Company, CMP (including
shares held by MaineCom Services) and Mode 1 of 4,000,000, 846,069 and
653,931 shares of Common Stock, respectively, in the Equity Offering.
(4) Consists of 360,430 shares held by CMP and 6,098,335 shares held by
MaineCom Services, 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
56
<PAGE>
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.
(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.
57
<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
58
<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 in 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 331/3% of the outstanding Common Stock of the Company, fully
diluted.
59
<PAGE>
[E] DESCRIPTION OF CERTAIN INDEBTEDNESS
Concurrently with the Equity Offering, the Company is offering $165.0
million aggregate principal amount of its % 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 , 2008. The Notes will pay
interest semiannually each and , commencing on , 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.
Except as described below, the Notes will not be redeemable prior to
, 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. In the event
the Company consummates certain public equity offerings prior to , 2001,
the Company may, at its option, use proceeds from such offerings to redeem up
to 35% of the aggregate principal amount of the Notes.
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.
60
<PAGE>
[D] DESCRIPTION OF THE NOTES
General
The Notes are to be issued under an Indenture, to be dated as of ,
1998 (the "Indenture"), between the Company and U.S. Bank Trust National
Association, as Trustee (the "Trustee"). A copy of the form of the Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The Indenture will be subject to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The following summary of certain
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act. For purposes of this summary,
the term "Company" refers only to NorthEast Optic Network, Inc., and not to any
of its subsidiaries.
The Notes will be issued only in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple of $1,000. No service
charge shall be made for any registration of transfer or exchange of Notes, but
the Company may require payment of a sum sufficient to cover any transfer tax
or other similar governmental charge payable in connection therewith.
Terms of the Notes
The Notes will be senior unsecured (except to the extent of the Pledge
Account and the Pledged Securities) obligations of the Company, limited to
$165.0 million aggregate principal amount, and will mature on , 2008. The
Notes will bear interest at the rate per annum shown on the cover page hereof
from , 1998, or from the most recent date to which interest has been paid
or provided for, payable semiannually to Holders of record at the close of
business on the or immediately preceding the interest payment date on
and of each year, commencing , 1999. The Company will pay interest on
overdue principal at 1% per annum in excess of such rate, and it will pay
interest on overdue installments of interest at such higher rate to the extent
lawful. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
Optional Redemption
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to , 2003. Thereafter, the
Notes will be redeemable, at the Company's option, in whole or in part, at any
time or from time to time, upon not less than 30 nor more than 60 days' prior
notice mailed by first-class mail to each Holder's registered address, at the
following redemption prices (expressed in percentages of principal amount),
plus accrued and unpaid interest, if any, to the redemption date (subject to
the right of Holders of record on the relevant record date to receive interest
due on the relevant interest payment date), if redeemed during the 12-month
period commencing on of the years set forth below:
<TABLE>
<CAPTION>
Redemption
Period Price
- ------------------------------------ -----------
<S> <C>
2003 ........................ %
2004 ........................
2005 ........................
2006 and thereafter ......... 100
</TABLE>
In addition, at any time and from time to time prior to , 2001, the
Company may redeem in the aggregate up to 35% of the aggregate principal amount
of the Notes with the net proceeds of one or more Public Equity Offerings, at a
redemption price (expressed as a percentage of principal amount) of % plus
accrued and unpaid interest, if any, to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date); provided, however, that (i) at least
$107.25 million aggregate principal amount of the Notes must remain outstanding
and be held, directly or indirectly, by Persons other than the Company and its
Affiliates, after any such redemption and (ii) any such redemption shall occur
within 60 days of the applicable Public Equity Offering.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in principal amount or less shall be
redeemed in part. If any Note is to
61
<PAGE>
be redeemed in part only, the notice of redemption relating to such Note shall
state the portion of the principal amount thereof to be redeemed. A new Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
Ranking
The indebtedness evidenced by the Notes will be senior unsecured (except
to the extent of the Pledge Account and the Pledged Securities) obligations of
the Company. The Notes will be senior in right of payment to all subordinated
indebtedness of the Company and will rank pari passu in right of payment with
all existing and future indebtedness of the Company that is not by its terms
subordinated in right and priority to the Notes. As of March 31, 1998, after
giving effect to the issuance of the Notes and the application of the net
proceeds therefrom, the Company's senior indebtedness outstanding would have
been approximately $165.4 million (consisting of the Notes and $437,042 of
other indebtedness).
A portion of the operations of the Company are conducted through its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes. The Notes, therefore, will be effectively
subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of subsidiaries of the Company. As of March 31, 1998, on
a pro forma as adjusted basis after giving effect to the Offering and the
application of the net proceeds therefrom and to the Reorganization, the total
liabilities of the Company's subsidiaries were approximately $289,000,
including trade payables. Although the Indenture limits the incurrence of
Indebtedness and preferred stock of certain of the Company's subsidiaries, such
limitation is subject to a number of significant qualifications. Moreover, the
Indenture does not impose any limitation on the incurrence by such subsidiaries
of liabilities that are not considered Indebtedness or Preferred Stock under
the Indenture. See "--Certain Covenants--Limitation on Indebtedness."
Security
The Indenture will provide that upon the closing of the Debt Offering, the
Company shall apply a portion of the net proceeds of the Debt Offering to
purchase, and pledge to the Trustee for the benefit of the holders of the
Notes, the Pledged Securities in such amount as will be sufficient upon receipt
of scheduled interest and principal payments on such securities, in the opinion
of a nationally recognized firm of independent public accountants selected by
the Company, to provide for payment in full of the first seven scheduled
interest payments due on the Notes. The Company expects to use approximately
$65.0 million of the net proceeds of the Debt Offering to acquire the Pledged
Securities; however, the precise amount of securities to be acquired will
depend upon the interest rates on U.S. Government Obligations prevailing at the
time of the closing of the Debt Offering and the interest rate on the Notes.
The Pledged Securities will be pledged by the Company to the Trustee for the
benefit of the Holders of the Notes pursuant to a Pledge Agreement and will be
held by the Trustee in the Pledge Account. Pursuant to the Pledge Agreement,
immediately prior to an interest payment date on the Notes, the Company may
either deposit with the Trustee, from funds otherwise available to the Company,
cash sufficient to pay the interest scheduled to be paid on such date or the
Company may direct the Trustee to release from the Pledge Account proceeds
sufficient to pay interest then due. In the event that the Company exercises
the former option, the Company may thereafter direct the Trustee to release to
the Company proceeds or Pledged Securities from the Pledge Account in like
amount. The failure by the Company to pay interest on the Notes in a timely
manner through , 2002 will constitute an immediate Event of Default
under the Indenture, with no grace period or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Company, to provide for
payment in full of the first seven scheduled interest payments due on the Notes
(or, in the event an interest payment or payments have been made, an amount
sufficient to provide for payment in full of any interest payments remaining,
up to and including the seventh scheduled interest payment) the Trustee will
release to the Company at the Company's request any such excess amount. The
Notes will be secured by a first priority security interest in the Pledged
Securities and in the Pledge Account and the Pledged Securities and the Pledge
Account will also secure repayment of the principal amount of the Notes to the
extent of such security.
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Under the Pledge Agreement, assuming that the Company makes the first
seven scheduled interest payments on the Notes in a timely manner, all of the
Pledged Securities will have been released from the Pledge Account and
thereafter the Notes will be unsecured.
Book-Entry, Delivery and Form
The Notes sold will be issued in the form of a Global Note. The Global
Note will be deposited with, or on behalf of, the Depository and registered in
the name of the Depository or its nominee. Except as set forth below, the
Global Note may be transferred, in whole and not in part, only to the
Depository or another nominee of the Depository. Investors may hold their
beneficial interests in the Global Note directly through the Depository if they
have an account with the Depository or indirectly through organizations which
have accounts with the Depository.
Upon the transfer of a Note in definitive form, such Note will, unless the
Global Note has previously been exchanged for Notes in definitive form, be
exchanged for an interest in the Global Note representing the principal amount
of Notes being transferred.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system
is also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the Notes
represented by such Global Note to the accounts of participants. Ownership of
beneficial interests in the Global Note will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in the Global Note will be shown on, and the transfer of those
ownership interests will be effected only through, records maintained by the
Depository (with respect to participants' interest) and such participants (with
respect to the owners of beneficial interests in the Global Note other than
participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Notes for all
purposes of such Notes and the Indenture. Except as set forth below, owners of
beneficial interests in the Global Note will not be entitled to have the Notes
represented by the Global Note registered in their names, will not receive or
be entitled to receive physical delivery of certificated Notes in definitive
form and will not be considered to be the owners or holders of any Notes under
the Global Note. The Company understands that under existing industry practice,
in the event an owner of a beneficial interest in the Global Note desires to
take any action that the Depository, as the holder of the Global Note, is
entitled to take, the Depository would authorize the participants to take such
action, and that the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Payment of principal of and interest on Notes represented by the Global
Note registered in the name of and held by the Depository or its nominee will
be made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of
any payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will
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be the responsibility of such participants. The Company will not have any
responsibility or liability for any aspect of the records relating to, or
payments made on account of, beneficial ownership interests in the Global Note
for any Note or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests or for any other aspect of the
relationship between the Depository and its participants or the relationship
between such participants and the owners of beneficial interests in the Global
Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
Notes in definitive form, the Global Note may not be transferred except as a
whole by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated Notes
The Notes represented by the Global Note are exchangeable for certificated
Notes in definitive form of like tenor as such Notes in denominations of U.S.
$1,000 and integral multiples thereof if (i) the Depository notifies the
Company that it is unwilling or unable to continue as Depository for the Global
Note or if at any time the Depository ceases to be a clearing agency registered
under the Exchange Act and a successor Depository is not appointed by the
Company within 90 days, (ii) the Company in its discretion at any time
determines not to have all of the Notes represented by the Global Note or (iii)
an Event of Default has occurred and is continuing. Any Note that is
exchangeable pursuant to the preceding sentence is exchangeable for
certificated Notes issuable in authorized denominations and registered in such
names as the Depository shall direct. Subject to the foregoing, the Global Note
is not exchangeable, except for a Global Note of the same aggregate
denomination to be registered in the name of the Depository or its nominee.
Same-Day Payment
The Indenture will require that payments in respect of Notes (including
principal, premium and interest) be made by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
Change of Control
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof on the date of purchase, plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 3d-5 under the Exchange
Act, except that for purposes of this clause (i) such person shall be
deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 35%
of the total voting power of the Voting Stock of the Company; provided,
however, that the Permitted Holders beneficially own (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock
of the Company than such other person and do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by another Person (a "parent corporation") if
such other person is the beneficial owner (as described in this clause
(i)), directly or indirectly, of more than 35% of the voting power of the
Voting Stock of such parent corporation and the Permitted Holders
beneficially own (as described in this clause (i)), directly or indirectly,
in the aggregate a lesser percentage of the voting power
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of the Voting Stock of such parent corporation and do not have the right or
ability by voting power, contract or otherwise to elect or designate for
election a majority of the board of directors of such parent corporation);
(ii) individuals who on the Issue Date constituted the Board of Directors
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of 662/3% of the directors of the Company then still in
office who were either directors on the Issue Date or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office;
(iii) the adoption of a plan relating to the liquidation or dissolution
of the Company; or
(iv) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee (the "Change of Control
Offer") stating: (1) that a Change of Control has occurred and that such Holder
has the right to require the Company to purchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof on the
date of purchase, plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of holders of record on the relevant record date
to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by
the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.
If a Holder's Notes are redeemed by the Company pursuant to its option to
redeem Notes as described under "--Optional Redemption" prior to the date on
which the Company would be obligated to pay for such Notes tendered pursuant to
a Change of Control Offer, such Holder will be entitled to receive only the
redemption price. The Company will not be required to make a Change of Control
Offer following a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer
made by the Company and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that
the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "--Certain Covenants--Limitation on Indebtedness",
"--Limitation on Liens" and "--Limitation on Sale/Leaseback Transactions." Such
restrictions can only be waived with the consent of the holders of a majority
in principal amount of the Notes then outstanding. Except for the limitations
contained in
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such covenants, however, the Indenture will not contain any covenants or
provisions that may afford holders of the Notes protection in the event of a
highly leveraged transaction.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require the Company to repurchase
the Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the holders of Notes
following the occurrence of a Change of Control may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required repurchases. The
provisions under the Indenture relative to the Company's obligation to make an
offer to repurchase the Notes as a result of a Change of Control may be waived
or modified with the written consent of the holders of a majority in principal
amount of the Notes.
Certain Covenants
The Indenture contains covenants including, among others, the following:
Limitation on Indebtedness. (a) The Company shall not, and shall not
permit any Restricted Subsidiary to, Incur, directly or indirectly, any
Indebtedness; provided, however, that the Company may Incur Indebtedness if, on
the date of such Incurrence and after giving effect thereto, the Consolidated
Leverage Ratio would be less than 5.5 to 1.0 if such Indebtedness is Incurred
on or prior to December 31, 2000 or 5.0 to 1.0 if such Indebtedness is Incurred
thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to Credit Agreements; provided, however,
that, after giving effect to any such Incurrence, the aggregate
principal amount of such Indebtedness then outstanding does not exceed
$50.0 million less the sum of all principal payments with respect to such
Indebtedness pursuant to paragraph (a)(ii)(A) of the covenant described
under "--Limitation on Sales of Assets and Subsidiary Stock";
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that (i) any subsequent issuance or
transfer of any Capital Stock of a Restricted Subsidiary which results
in any such Indebtedness being owned or held by a Person that is no
longer a Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Restricted Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the obligor thereon and (ii) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations
with respect to the Notes;
(3) the Notes;
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (3) or (4) above, this clause (5)
or clauses (7), (8) or (10) below; provided, however, that to the extent
such Refinancing Indebtedness directly or indirectly Refinances
Indebtedness of a Restricted Subsidiary described in clause (10), such
Refinancing Indebtedness shall be Incurred only by such Restricted
Subsidiary;
(6) Hedging Obligations directly related to Indebtedness permitted to be
Incurred by the Company or any Restricted Subsidiary pursuant to
paragraphs (a) or (b) hereof;
(7) Indebtedness (including Indebtedness of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such
Subsidiary was acquired by the Company or another Restricted Subsidiary)
Incurred to finance the cost (including the cost of design, development,
acquisition, construction, installation, improvement, transportation and
integration) of acquiring property, plant and equipment or inventory to
be used in connection with a Telecommunications Business (including
acquisitions by way of capital lease and acquisitions of the Capital
Stock of a Person that becomes a Restricted Subsidiary
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to the extent of the fair market value of the property, plant and
equipment or inventory so acquired) by the Company or Restricted
Subsidiary after the Issue Date;
(8) Indebtedness of the Company in an amount which, when taken together
with the amount of Indebtedness Incurred pursuant to this clause (8) and
then outstanding, does not exceed two times the Net Cash Proceeds
received by the Company after the Issue Date as a capital contribution
from, or from the issuance and sale of its Capital Stock (other than
Disqualified Stock) to, a Person that is not a Subsidiary of the
Company, to the extent such Net Cash Proceeds have not been used
pursuant to paragraph (a)(3)(B) or paragraph (b)(i) of the covenant
described under "--Limitation on Restricted Payments" to make a
Restricted Payment; provided, however, that such Indebtedness does not
mature prior to the Stated Maturity of the Notes and has an Average Life
longer than the Average Life of the Notes;
(9) Guarantees by any Restricted Subsidiary of the Notes, Indebtedness
Incurred pursuant to paragraph (a) above and any Indebtedness that
Refinances the Notes or any Indebtedness Incurred pursuant to paragraph
(a) above;
(10) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or
prior to the date on which such Subsidiary was acquired by the Company
(other than Indebtedness Incurred in connection with, or to provide all
or any portion of the funds or credit support utilized to consummate,
the transaction or series of related transactions pursuant to which
such Subsidiary became a Subsidiary or was acquired by the Company);
provided, however, that on the date of such acquisition and after
giving effect thereto, the Company would have been able to Incur at
least $1.00 of additional Indebtedness pursuant to paragraph (a)
hereof; and
(11) Indebtedness Incurred in an aggregate amount which, when taken
together with the aggregate amount of all other Indebtedness of the
Company and its Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by clause (1) through
(10) above or paragraph (a)) does not exceed $5 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof
are used, directly or indirectly, to Refinance any Subordinated Obligations
unless such Indebtedness shall be subordinated to the Notes to at least the
same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses
and (ii) an item of Indebtedness may be divided and classified in more than one
of the types of Indebtedness described above. For the purposes of determining
the amount of Indebtedness outstanding at any time, Guarantees with respect to
Indebtedness otherwise included in the determination of such amount shall not
be included.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any Restricted Subsidiary, directly or indirectly, to make a
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); (2) the Company is not able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "--Limitation on Indebtedness"; or (3) the aggregate amount of
such Restricted Payment and all other Restricted Payments since the Issue Date
would exceed the sum of (without duplication):
(A) the remainder of (x) cumulative EBITDA during the period (taken as a
single accounting period) beginning on the first day of the fiscal
quarter of the Company beginning after the Issue Date and ending on the
last day of the most recent fiscal quarter for which financial
statements have been made publicly available but in no event ending more
than 135 days prior to the date of such determination minus (y) the
product of 1.5 times cumulative Consolidated Interest Expense during
such period;
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an issuance or sale to a
Subsidiary of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees);
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(C) the amount by which Indebtedness of the Company is reduced on the
Company's balance sheet upon the conversion or exchange (other than by a
Subsidiary of the Company) subsequent to the Issue Date of any
Indebtedness of the Company convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount of
any cash, or the fair value of any other property, distributed by the
Company upon such conversion or exchange); and
(D) an amount equal to the sum of (i) the net reduction in Investments in
Unrestricted Subsidiaries resulting from dividends, repayments of loans
or advances or other transfers of assets, in each case to the Company or
any Restricted Subsidiary from Unrestricted Subsidiaries, and (ii) the
portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of an
Unrestricted Subsidiary at the time such Unrestricted Subsidiary is
designated a Restricted Subsidiary; provided, however, that the
foregoing sum shall not exceed, in the case of any Unrestricted
Subsidiary, the amount of Investments previously made (and treated as a
Restricted Payment) by the Company or any Restricted Subsidiary in such
Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any Restricted Payment (other than a Restricted Payment described in
clause (i) of the definition of "Restricted Payment") made out of the Net
Cash Proceeds of the substantially concurrent sale of, or made by exchange
for, Capital Stock of the Company (other than Disqualified Stock and other
than Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company or
any of its Subsidiaries for the benefit of their employees); provided,
however, that (A) such Restricted Payment shall be excluded in the
calculation of the amount of Restricted Payments and (B) the Net Cash
Proceeds from such sale used to make such Restricted Payment shall be
excluded from the calculation of amounts under clause (3)(B) of paragraph
(a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of the Company which is permitted to be Incurred pursuant
to the covenant described under "--Limitation on Indebtedness"; provided,
however, that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the calculation of
the amount of Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend,
no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments; or
(iv) the repurchase or other acquisition of shares of, or options to
purchase shares of, common stock of the Company or any of its Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
of such repurchases and other acquisitions shall not exceed $500,000 in any
calendar year; provided further, however, that such repurchases and other
acquisitions shall be excluded in the calculation of the amount of
Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) make any loans or advances to the Company or (c) transfer any
of its property or assets to the Company (the limitations described in (a), (b)
and (c) being called the "Subsidiary Distributions"), except:
(i) any encumbrance or restriction pursuant to an agreement in effect at
or entered into on the Issue Date;
(ii) any encumbrance or restriction with respect to a Restricted
Subsidiary pursuant to an agreement relating to any Indebtedness Incurred
by such Restricted Subsidiary on or prior to the date on which such
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Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds
or credit support utilized to consummate, the transaction or series of
related transactions pursuant to which such Restricted Subsidiary became a
Restricted Subsidiary or was acquired by the Company) and outstanding on
such date;
(iii) any encumbrance or restriction pursuant to an agreement effecting a
Refinancing of Indebtedness Incurred pursuant to an agreement referred to
in clause (i) or (ii) of this covenant or this clause (iii) or contained in
any amendment to an agreement referred to in clause (i) or (ii) of this
covenant or this clause (iii); provided, however, that the encumbrances and
restrictions with respect to such Restricted Subsidiary contained in any
such refinancing agreement or amendment are no less favorable to the
Noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such predecessor agreements;
(iv) any customary encumbrance or restriction applicable to a Restricted
Subsidiary that is contained in an agreement or instrument governing or
relating to Indebtedness Incurred pursuant to clause (b)(1) of the covenant
described under "Limitation on Indebtedness"; provided, however, that such
encumbrances and restrictions permit the distribution of funds to the
Company in an amount sufficient for the Company to make the timely payment
of interest, premium (if any) and principal (whether at stated maturity, by
way of a sinking fund applicable thereto, by way of any mandatory
redemption, defeasance, retirement or repurchase thereof, including upon
the occurrence of designated events or circumstances or by virtue of
acceleration upon an event of default, or by way of redemption or
retirement at the option of the holder of the Indebtedness, including
pursuant to offers to purchase) according to the terms of the Indenture and
the Notes and other Indebtedness that is solely an obligation of the
Company; provided further, however, that such agreement or instrument may
nevertheless contain (A) customary net worth, leverage, invested capital
and other financial covenants, customary covenants regarding the merger of
or sale of all or any substantial part of the assets of the Company or any
Restricted Subsidiary, customary restrictions on transactions with
affiliates and customary subordination provisions governing Indebtedness
owed to the Company or any Restricted Subsidiary and (B) a customary
provision prohibiting such Restricted Subsidiary from making any Subsidiary
Distributions upon the occurrence and during the continuance of any payment
default under any such agreement or instrument (for purposes of this clause
(iv), any determination as to what is customary shall be conclusively
determined in good faith by the Chief Financial Officer of the Company as
certified to the Trustee at the time such agreement or instrument is
entered into);
(v) any such encumbrance or restriction consisting of customary non
assignment provisions in leases governing leasehold interests to the extent
such provisions restrict the transfer of the lease or the property leased
thereunder;
(vi) in the case of clause (c) above, restrictions contained in security
agreements or mortgages securing Indebtedness of a Restricted Subsidiary to
the extent such restrictions restrict the transfer of the property subject
to such security agreements or mortgages; and
(vii) any restriction with respect to a Restricted Subsidiary imposed
pursuant to an agreement entered into for the sale or disposition of all or
substantially all the Capital Stock or assets of such Restricted Subsidiary
pending the closing of such sale or disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company shall
not, and shall not permit any Restricted Subsidiary to, directly or indirectly,
consummate any Asset Disposition unless (i) the Company or such Restricted
Subsidiary receives consideration at the time of such Asset Disposition at
least equal to the fair market value (including as to the value of all non-cash
consideration), as determined in good faith by the Board of Directors, of the
shares and assets subject to such Asset Disposition and at least 75% of the
consideration thereof received by the Company or such Restricted Subsidiary is
in the form of cash or cash equivalents and (ii) an amount equal to 100% of the
Net Available Cash from such Asset Disposition is applied by the Company (or
such Restricted Subsidiary, as the case may be) (A) first, to the extent the
Company elects (or is required by the terms of any Indebtedness), to prepay,
repay, redeem or purchase Senior Indebtedness or Indebtedness (other than any
Disqualified Stock) of a Wholly Owned Subsidiary (in each case other than
Indebtedness owed to the Company or an Affiliate of the Company controlled
directly or indirectly by the Company) within one year from the later of the
date of such Asset Disposition or the receipt of such Net Available Cash; (B)
second, to the extent of the balance of such Net Available Cash after
application in accordance with clause (A), to the extent the Company
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elects, to acquire Additional Assets within one year from the later of the date
of such Asset Disposition or the receipt of such Net Available Cash; and (C)
third, to the extent of the balance of such Net Available Cash after
application in accordance with clauses (A) and (B), to make an offer to the
holders of the Notes pursuant to and subject to the conditions contained in the
Indenture; provided, however, that in connection with any prepayment, repayment
or purchase of Indebtedness pursuant to clause (A) or (C) above, the Company or
such Restricted Subsidiary shall permanently retire such Indebtedness and shall
cause the related loan commitment (if any) to be permanently reduced in an
amount equal to the principal amount so prepaid, repaid or purchased.
Notwithstanding the foregoing provisions of this paragraph, the Company and the
Restricted Subsidiaries shall not be required to apply any Net Available Cash
in accordance with this paragraph except to the extent that the aggregate Net
Available Cash from all Asset Dispositions which are not applied in accordance
with this paragraph exceeds $5.0 million. Pending application of Net Available
Cash pursuant to this covenant, such Net Available Cash shall be invested in
Permitted Investments or used to reduce outstanding borrowings under revolving
credit facilities.
For the purposes of clause (a)(i) above, the following are deemed to be
cash or cash equivalents: (x) the assumption of Indebtedness of the Company or
any Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such
Asset Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of the
Notes pursuant to clause (a)(ii)(C) above, the Company will be required to
purchase Notes tendered pursuant to an offer by the Company for the Notes at a
purchase price of 100% of their principal amount (without premium) plus accrued
but unpaid interest in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture. The Company shall
not be required to make such an offer to purchase Notes pursuant to this
covenant if the Net Available Cash available therefor is less than $5 million
(which lesser amount shall be carried forward for purposes of determining
whether such an offer is required with respect to the Net Available Cash from
any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $1.0 million, (i) are set forth in
writing and (ii) have been approved by a majority of the members of the Board
of Directors having no personal stake in such Affiliate Transaction and (3) if
such Affiliate Transaction involves as amount in excess of $5.0 million, have
been determined by nationally recognized investment banking firm to be fair,
from a financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to the covenant described
under "--Limitation on Restricted Payments", (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of the Company pursuant to
plans approved by the Board of Directors, (iv) loans or advances to employees
in the ordinary course of business in accordance with the past practices of the
Company or its Restricted Subsidiaries, but in any event not to exceed $1.0
million in the aggregate outstanding at any one time, (v) the payment of
reasonable fees to directors of the Company and its Restricted Subsidiaries who
are not employees of the Company or its Restricted Subsidiaries, (vi) any
Affiliate Transaction between the Company and a Wholly Owned Subsidiary or
between Wholly Owned Subsidiaries and (vii) the issuance or sale of any Capital
Stock (other than Disqualified Stock) of the Company.
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Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of
any of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary, (ii) directors' qualifying shares, (iii) if, immediately after
giving effect to such issuance, sale or other disposition, neither the Company
nor any of its Subsidiaries own any Capital Stock of such Restricted Subsidiary
or (iv) if, immediately after giving effect to such issuance, sale or other
disposition, such Restricted Subsidiary would no longer constitute a Restricted
Subsidiary and any Investment in such Person remaining after giving effect
thereto would have been permitted to be made under the covenant described under
"--Limitation on Restricted Payments" if made on the date of such issuance,
sale or other disposition.
Limitation on Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Notes shall be secured equally and ratably with (or prior to) the obligations
so secured for so long as such obligations are so secured.
Limitation on Sale/Leaseback Transactions. The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to
the Attributable Debt with respect to such Sale/Leaseback Transaction pursuant
to the covenant described under "--Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described under
"--Limitation on Liens", (ii) the net proceeds received by the Company or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair value (as determined by the Board of Directors) of such
property and (iii) the Company applies the proceeds of such transaction in
compliance with the covenant described under "--Limitation on Sale of Assets
and Subsidiary Stock."
Future Guarantors. The Company shall cause each Restricted Subsidiary that
Guarantees any Indebtedness of the Company (other than the Notes) pursuant to
clause (b)(9) of the covenant described under "--Limitation on Indebtedness" to
guarantee the Notes on substantially the same terms and conditions as such
Guarantee.
Merger and Consolidation. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall
be a Person organized and existing under the laws of the United States of
America, any State thereof or the District of Columbia and the Successor
Company (if not the Company) shall expressly assume, by an indenture
supplemental thereto, executed and delivered to the Trustee, in form
satisfactory to the Trustee, all the obligations of the Company under the Notes
and the Indenture; (ii) immediately after giving effect to such transaction
(and treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having been
Incurred by such Successor Company or such Subsidiary at the time of such
transaction), no Default shall have occurred and be continuing; (iii)
immediately after giving effect to such transaction, the Successor Company's
Consolidated Leverage Ratio is not greater than the Company's Consolidated
Leverage Ratio immediately prior to such transaction; and (iv) the Company
shall have delivered to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
supplemental indenture (if any) comply with the Indenture.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
SEC Reports. Notwithstanding that the Company may not be subject to the
reporting requirements of Section 13 or 15(d) of the Exchange Act, the Company
shall file with the SEC and provide the Trustee and Noteholders with such
annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S.
corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
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Defaults
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, as to any interest payment date
falling on or prior to , 2002, and any such default in the payment of
interest on the Notes continued for 30 days as to any interest payment date
thereafter, (ii) a default in the payment of principal of any Note when due at
its Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under "--Certain Covenants--Merger and Consolidation" above, (iv)
the failure by the Company to comply for 30 days after notice with any of its
obligations in the covenants described above under "--Change of Control" (other
than a failure to purchase Notes) or under "--Certain Covenants" under
"--Limitation on Indebtedness", "--Limitation on Restricted Payments",
"--Limitation on Restrictions on Distributions from Restricted Subsidiaries",
"--Limitation on Sales of Assets and Subsidiary Stock" (other than a failure to
purchase Notes), "--Limitation on Affiliate Transactions", "--Limitation on the
Sale or Issuance of Capital Stock of Restricted Subsidiaries", "--Limitation on
Liens", "--Limitation on Sale/Leaseback Transactions", "--Future Guarantors" or
"--SEC Reports", (v) the failure by the Company to comply for 60 days after
notice with its other agreements contained in the Indenture, (vi) Indebtedness
of the Company or any Significant Subsidiary not being paid within any
applicable grace period after final maturity or being accelerated by the
holders thereof because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $5 million (the "cross acceleration provision"),
(vii) certain events of bankruptcy, insolvency or reorganization of the Company
or a Significant Subsidiary (the "bankruptcy provisions"), (viii) any judgment
or decree for the payment of money in excess of $5 million is entered against
the Company or a Significant Subsidiary, remains outstanding for a period of 60
days following such judgment and is not discharged, waived or stayed within 10
days after notice (the "judgment default provision") or (ix) the security
interest under the Pledge Agreement shall cease to be in full force and effect
for any reason other than in accordance with its terms or such security
interest shall be declared invalid or unenforceable or the Company shall
assert, in any pleading in any court of competent jurisdiction, that such
security interest is invalid or unenforceable (the "security default
provision"). However, a default under clauses (iv), (v) and (viii) will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Notes notify the Company of the default and
the Company does not cure such default within the time specified after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the outstanding Notes may
declare the principal of and accrued but unpaid interest on all the Notes to be
due and payable. Upon such a declaration, such principal and interest shall be
due and payable immediately. If an Event of Default relating to certain events
of bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a
Note may pursue any remedy with respect to the Indenture or the Notes unless
(i) such holder has previously given the Trustee notice that an Event of
Default is continuing, (ii) holders of at least 25% in principal amount of the
outstanding Notes have requested the Trustee to pursue the remedy, (iii) such
holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt thereof and the offer of security or indemnity
and (v) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request within
such 60-day period. Subject to certain restrictions, the holders of a majority
in principal amount of the outstanding Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts with law or
the Indenture or that the Trustee determines is unduly prejudicial to the
rights of any other holder of a Note or that would involve the Trustee in
personal liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
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in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is not opposed to the interest of the holders of the
Notes. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether
the signers thereof know of any Default that occurred during the previous year.
The Company also is required to deliver to the Trustee, within 30 days after
the occurrence thereof, written notice of any event which would constitute
certain Defaults, their status and what action the Company is taking or
proposes to take in respect thereof.
Amendments and Waivers
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, no amendment may, among other
things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest
on any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the amount payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "--Optional
Redemption", (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions or
(viii) make any change in the Pledge Agreement that would adversely affect the
rights of any Noteholder.
Without the consent of any holder of the Notes, the Company and Trustee may
amend the Indenture to cure any ambiguity, omission, defect or inconsistency, to
provide for the assumption by a successor corporation of the obligations of the
Company under the Indenture, to provide for uncertificated Notes in addition to
or in place of certificated Notes (provided that the uncertificated Notes are
issued in registered form for purposes of Section 163(f) of the Code, or in a
manner such that the uncertificated Notes are described in Section 163(f)(2)(B)
of the Code), to add guarantees with respect to the Notes, to secure the Notes,
to add to the covenants of the Company for the benefit of the holders of the
Notes or to surrender any right or power conferred upon the Company, to make any
change that does not adversely affect the rights of any holder of the Notes or
to comply with any requirement of the SEC in connection with the qualification
of the Indenture under the Trust Indenture Act.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
Transfer
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.
Defeasance
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under "Change of
Control" and under the covenants described under "--Certain Covenants" (other
than the covenant
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described under "--Merger and Consolidation"), the operation of the cross
acceleration provision, the bankruptcy provisions with respect to Significant
Subsidiaries, the judgment default provision and the security default provision
described under "--Defaults" above and the limitations contained in clauses
(iii) and (iv) under "--Certain Covenants--Merger and Consolidation" above
("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "--Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under "--Certain
Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amounts and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
Concerning the Trustee
U.S. Bank Trust National Association is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; provided, however, if it acquires any conflicting interest
it must either eliminate such conflict within 90 days, apply to the SEC for
permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and is not cured), the Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any Holder of
Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the Indenture.
Governing Law
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
Certain Definitions
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such
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Person, directly or indirectly, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing. For purposes of the
provisions described under "--Certain Covenants--Limitation on Restricted
Payments", "--Certain Covenants--Limitation on Affiliate Transactions" and
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only,
"Affiliate" shall also mean any beneficial owner of Capital Stock representing
5% or more of the total voting power of the Voting Stock (on a fully diluted
basis) of the Company or of rights or warrants to purchase such Capital Stock
(whether or not currently exercisable) and any Person who would be an Affiliate
of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (iii) any
other assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary (other than, in
the case of (i), (ii) and (iii) above, (A) a disposition by a Restricted
Subsidiary to the Company or by the Company or a Restricted Subsidiary to a
Wholly Owned Subsidiary, (B) for purposes of the covenant described under
"--Certain Covenants--Limitation on Sales of Assets and Subsidiary Stock" only,
a disposition that constitutes a Restricted Payment permitted by the covenant
described under "--Certain Covenants--Limitation on Restricted Payments" or a
Permitted Investment, (C) exchanges of Telecommunications Assets for other
Telecommunications Assets where the Fair Market Value of the Telecommunications
Assets received is at least equal to the Fair Market Value of the
Telecommunications Assets disposed of or, if less, the difference is received in
cash and such cash shall be deemed to be Net Available Cash, (D) Permitted
Telecommunications Capital Asset Dispositions and (E) disposition of assets with
a fair market value of less than $250,000); provided, however, that transfers of
fiber capacity in exchange for indefeasible rights of use and long-term leases
of fiber capacity shall be treated as made in the ordinary course of business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as
at the time of determination, the present value (discounted at the interest
rate borne by the Notes, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting
purposes in accordance with GAAP, and the amount of Indebtedness represented by
such obligation shall be the capitalized amount of such obligation determined
in accordance with GAAP; and the Stated Maturity thereof shall be the date of
the last payment of rent or any other amount due under such lease prior to the
first date upon which such lease may be terminated by the lessee without
payment of a penalty.
"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any
Preferred Stock, but excluding any debt securities convertible into such
equity.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its consolidated Restricted Subsidiaries, plus, to
the extent not included in such total interest expense, and to the extent
incurred by the Company or its Restricted Subsidiaries, without duplication,
(i) interest expense attributable to capital leases and the interest expense
attributable to leases constituting part of a Sale/Leaseback Transaction,
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(ii) amortization of debt discount and debt issuance cost, (iii) capitalized
interest, (iv) non-cash interest expenses, (v) commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing, (vi) net costs associated with Hedging Obligations (including
amortization of fees), (vii) Preferred Stock dividends in respect of all
Preferred Stock held by Persons other than the Company or a Wholly Owned
Subsidiary, (viii) interest incurred in connection with Investments in
discontinued operations, (ix) interest accruing on any Indebtedness of any
other Person to the extent such Indebtedness is Guaranteed by (or secured by
the assets of) the Company or any Restricted Subsidiary and (x) the cash
contributions to any employee stock ownership plan or similar trust to the
extent such contributions are used by such plan or trust to pay interest or
fees to any Person (other than the Company) in connection with Indebtedness
Incurred by such plan or trust.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries as of such date of determination to (ii) EBITDA for the
four most recent consecutive fiscal quarters ending at least 45 days prior to
such date of determination (such four fiscal quarters being herein called the
"Reference Period"); provided, however, that
(1) if the transaction giving rise to the need to calculate the
Consolidated Leverage Ratio is an Incurrence of Indebtedness, the amount
of such Indebtedness shall be calculated after giving effect on a pro
forma basis to such Indebtedness and to the discharge of any other
Indebtedness repaid, repurchased, defeased or otherwise discharged with
the proceeds of such new Indebtedness;
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness that was outstanding
as of the end of such fiscal quarter or if any Indebtedness that was
outstanding as of the end of such fiscal quarter is to be repaid,
repurchased, defeased or otherwise discharged on the date of the
transaction giving rise to the need to calculate the Consolidated
Leverage Ratio (other than, in each case, Indebtedness Incurred under
any revolving credit agreement), the aggregate amount of Indebtedness
shall be calculated on a pro forma basis and EBITDA shall be calculated
as if the Company or such Restricted Subsidiary had not earned the
interest income, if any, actually earned during the Reference Period in
respect of cash or Temporary Cash Investments used to repay, repurchase,
defease or otherwise discharge such Indebtedness;
(3) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary shall have made any Asset Disposition, the EBITDA
for the Reference Period shall be reduced by an amount equal to the
EBITDA (if positive) directly attributable to the assets which are the
subject of such Asset Disposition for the Reference Period or increased
by an amount equal to the EBITDA (if negative) directly attributable
thereto for the Reference Period;
(4) if since the beginning of the Reference Period the Company or any
Restricted Subsidiary (by merger or otherwise) shall have made an
Investment in any Restricted Subsidiary (or any Person which becomes a
Restricted Subsidiary) or an acquisition of assets which constitutes all
or substantially all of an operating unit of a business, EBITDA for the
Reference Period shall be calculated after giving pro forma effect
thereto (including the Incurrence of any Indebtedness) as if such
Investment or acquisition occurred on the first day of the Reference
Period; and
(5) if since the beginning of the Reference Period any Person (that
subsequently became a Restricted Subsidiary or was merged with or into
the Company or any Restricted Subsidiary since the beginning of such
Reference Period) shall have made any Asset Disposition, any Investment
or acquisition of assets that would have required an adjustment pursuant
to clause (3) or (4) above if made by the Company or a Restricted
Subsidiary during the Reference Period, EBITDA for the Reference Period
shall be calculated after giving pro forma effect thereto as if such
Asset Disposition, Investment or acquisition occurred on the first day
of the Reference Period.
"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if such Person
is not a Restricted Subsidiary, except that subject to the exclusion
contained in clause (iv) below, the Company's equity in the net income of
any such Person for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted
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Subsidiary as a dividend or other distribution (subject, in the case of a
dividend or other distribution paid to a Restricted Subsidiary, to the
limitations contained in clause (iii) below);
(ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to
the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such Restricted
Subsidiary is subject to restrictions, directly or indirectly, on the
payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject
to the exclusion contained in clause (iv) below, the Company's equity in
the net income of any such Restricted Subsidiary for such period shall be
included in such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Restricted Subsidiary during such period to
the Company or another Restricted Subsidiary as a dividend or other
distribution (subject, in the case of a dividend or other distribution paid
to another Restricted Subsidiary, to the limitation contained in this
clause applicable to such other Restricted Subsidiary) and (B) the
Company's equity in a net loss of any such Restricted Subsidiary for such
period shall be included in determining such Consolidated Net Income;
(iv) any gain (but not loss) realized upon the sale or other disposition
of any assets of the Company, its consolidated Subsidiaries or any other
Person (including pursuant to any sale-and-leaseback arrangement) which is
not sold or otherwise disposed of in the ordinary course of business and
any gain (but not loss) realized upon the sale or other disposition of any
Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting principles.
Notwithstanding the foregoing, for the purposes of the covenant described
under "--Certain Covenants--Limitation on Restricted Payments" only, there
shall be excluded from Consolidated Net Income any dividends, repayments of
loans or advances or other transfers of assets from Unrestricted Subsidiaries
to the Company or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (a)(3)(D) thereof.
"Credit Agreements" means each agreement entered into by the Company or
any of its Restricted Subsidiaries providing for loans to the Company or any
such Restricted Subsidiary, as amended, extended, renewed, restated,
supplemented or otherwise modified (in whole or in part, and without limitation
as to amount, terms, conditions, covenants and other provisions) from time to
time, and any agreement (and related document) governing Indebtedness incurred
to Refinance, in whole or in part, the borrowings and commitments then
outstanding or permitted to be outstanding under such agreement whether by the
same or any other lender or group of lenders.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement designed to
protect such Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable at the option of the holder) or
upon the happening of any event (i) matures or is mandatorily redeemable
pursuant to a sinking fund obligation or otherwise, (ii) is convertible or
exchangeable at the option of the holder for Indebtedness or Disqualified Stock
or (iii) is redeemable or must be purchased, upon the occurrence of certain
events or otherwise, at the option of the holder thereof, in whole or in part,
in each case under clause (i), (ii) or (iii) on or prior to a date that is six
months following the Stated Maturity of the Notes; provided, however, that any
Capital Stock that would not constitute Disqualified Stock but for provisions
thereof giving holders thereof the right to require such Person to purchase or
redeem such Capital Stock upon the occurrence of an "asset sale" or "change of
control" occurring prior to the first anniversary of the Stated Maturity of the
Notes shall not constitute Disqualified Stock if (x) the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the terms applicable to the
Notes and described under "--Certain Covenants--Limitation on Sales of Assets
and Subsidiary Stock" and "--Certain Covenants--Change of Control" and (y) any
such requirement only becomes operative after compliance with such terms
applicable to the Notes, including the purchase of any Notes tendered pursuant
thereto.
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"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company and its consolidated Restricted Subsidiaries, (b) depreciation expense
of the Company and its consolidated Restricted Subsidiaries, (c) amortization
expense of the Company and its consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid cash item that was paid in a
prior period) and (d) all other non-cash charges of the Company and its
consolidated Restricted Subsidiaries (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash expenditures in any
future period), in each case for such period. Notwithstanding the foregoing,
the provision for taxes based on the income or profits of, and the depreciation
and amortization and non-cash charges of, a Restricted Subsidiary shall be
added to Consolidated Net Income to compute EBITDA only to the extent (and in
the same proportion) that the net income of such Restricted Subsidiary was
included in calculating Consolidated Net Income and only if a corresponding
amount would be permitted at the date of determination to be dividended to the
Company by such Restricted Subsidiary without prior approval (that has not been
obtained), pursuant to the terms of its charter and all agreements,
instruments, judgments, decrees, orders, statutes, rules and governmental
regulations applicable to such Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property
(including Capital Stock), the price that could be negotiated in an
arm's-length free market transaction, for cash, between a willing seller and a
willing buyer, neither of whom is under pressure or compulsion to complete the
transaction. Fair Market Value shall be determined by the Board of Directors of
the Company acting in good faith and shall be evidenced by a resolution of the
Board of Directors of the Company delivered to the Trustee; provided, however,
that if the Fair Market Value as determined by the Board of Directors for any
transaction or series of related transactions exceeds $5.0 million, such
determination of Fair Market Value shall be determined by a U.S. investment
banking firm nationally recognized in the United States or by a nationally
recognized expert in the U.S. telecommunications industry with experience in
valuing such assets and property.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness or other obligation of such Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise) or (ii) entered into for the purpose of
assuring in any other manner the obligee of such Indebtedness of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term "Guarantee" shall not include
endorsements for collection or deposit in the ordinary course of business. The
term "Guarantee" used as a verb has a corresponding meaning. The term
"Guarantor" shall mean any Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
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"Indebtedness" means, with respect to any Person on any date of
determination (without duplication):
(i) the principal in respect of (A) indebtedness of such Person for money
borrowed and (B) indebtedness evidenced by notes, debentures, bonds or
other similar instruments for the payment of which such Person is
responsible or liable, including, in each case, any premium on such
indebtedness to the extent such premium has become due and payable;
(ii) all Capital Lease Obligations of such Person and all Attributable
Debt in respect of Sale/Leaseback Transactions entered into by such Person;
(iii) all obligations of such Person issued or assumed as the deferred
purchase price of property, all conditional sale obligations of such Person
and all obligations of such Person under any title retention agreement (but
excluding trade accounts payable arising in the ordinary course of
business);
(iv) all obligations of such Person for the reimbursement of any obligor
on any letter of credit, banker's acceptance or similar credit transaction
(other than obligations with respect to letters of credit securing
obligations (other than obligations described in clauses (i) through (iii)
above) entered into in the ordinary course of business of such Person to
the extent such letters of credit are not drawn upon or, if and to the
extent drawn upon, such drawing is reimbursed no later than the tenth
Business Day following payment on the letter of credit);
(v) the amount of all mandatory payment obligations of such Person with
respect to the redemption, repayment or other repurchase of any
Disqualified Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock of such
Subsidiary (but excluding, in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses (i) through (v)
of other Persons and all dividends of other Persons for the payment of
which, in either case, such Person is responsible or liable, directly or
indirectly, as obligor, guarantor or otherwise, including by means of any
Guarantee;
(vii) all obligations of the type referred to in clauses (i) through (vi)
of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured; and
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided,
however, that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the amount of the liability in respect thereof
determined in accordance with GAAP.
"Interest Rate Agreement" means in respect of a Person any interest rate
swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and the
covenant described under "--Certain Covenants--Limitation on Restricted
Payments", (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an
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Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer, in each case as determined in good faith by the Board of
Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
and proceeds from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to such properties or assets or
received in any other noncash form), in each case net of (i) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred,
and all Federal, state, provincial, foreign and local taxes required to be
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien
upon or other security agreement of any kind with respect to such assets, or
which must by its terms, or in order to obtain a necessary consent to such
Asset Disposition, or by applicable law, be repaid out of the proceeds from
such Asset Disposition, (iii) all distributions and other payments required to
be made to minority interest holders in Restricted Subsidiaries as a result of
such Asset Disposition and (iv) the deduction of appropriate amounts provided
by the seller as a reserve, in accordance with GAAP, against any liabilities
associated with the property or other assets disposed in such Asset Disposition
and retained by the Company or any Restricted Subsidiary after such Asset
Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Permitted Holders" means (i) Central Maine Power Company, a Maine
corporation, and its Affiliates and (ii) Northeast Utilities, a Massachusetts
business trust and its Affiliates.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a Person
that will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of such Restricted Subsidiary is a
Related Business; (ii) another Person if as a result of such Investment such
other Person is merged or consolidated with or into, or transfers or conveys
all or substantially all its assets to, the Company or a Restricted Subsidiary;
provided, however, that such Person's primary business is a Related Business;
(iii) Temporary Cash Investments; (iv) receivables owing to the Company or any
Restricted Subsidiary if created or acquired in the ordinary course of business
and payable or dischargeable in accordance with customary trade terms;
provided, however, that such trade terms may include such concessionary trade
terms as the Company or any such Restricted Subsidiary deems reasonable under
the circumstances; (v) payroll, travel and similar advances to cover matters
that are expected at the time of such advances ultimately to be treated as
expenses for accounting purposes and that are made in the ordinary course of
business; (vi) loans or advances to employees made in the ordinary course of
business consistent with past practices of the Company or such Restricted
Subsidiary; (vii) stock, obligations or securities received in settlement of
debts created in the ordinary course of business and owing to the Company or
any Restricted Subsidiary or in satisfaction of judgments; (viii) any Person to
the extent such Investment represents either the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under "--Certain Covenants--Limitation on Sales of Assets
and Subsidiary Stock" and (ix) any Person principally engaged in a Related
Business if (a) the Company or Restricted Subsidiary, after giving effect to
such Investment, will own at least 20% of the Voting Stock of such Person and
(b) the amount of such Investment, when taken together with the aggregate
amount of all Investments made pursuant to this clause (ix) and then
outstanding, does not exceed $10 million.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment
insurance laws or similar legislation, or good faith deposits in connection
with bids, tenders, contracts (other than for the payment of Indebtedness) or
leases to which such Person is a party, or deposits to secure public or
statutory obligations of such Person or deposits of cash or United States
government bonds to secure surety or appeal bonds to which such Person is a
party, or deposits as security for contested taxes
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or import duties or for the payment of rent, in each case Incurred in the
ordinary course of business; (b) Liens imposed by law, such as carriers',
warehousemen's and mechanics' Liens, in each case for sums not yet due or being
contested in good faith by appropriate proceedings or other Liens arising out
of judgments or awards against such Person with respect to which such Person
shall then be proceeding with an appeal or other proceedings for review; (c)
Liens for property taxes not yet subject to penalties for non-payment or which
are being contested in good faith and by appropriate proceedings; (d) Liens in
favor of issuers of surety bonds or letters of credit issued pursuant to the
request of and for the account of such Person in the ordinary course of its
business; provided, however, that such letters of credit do not constitute
Indebtedness; (e) minor survey exceptions, minor encumbrances, easements or
reservations of, or rights of others for, licenses, rights-of-way, sewers,
electric lines, telegraph and telephone lines and other similar purposes, or
zoning or other restrictions as to the use of real property or Liens incidental
to the conduct of the business of such Person or to the ownership of its
properties which were not Incurred in connection with Indebtedness and which do
not in the aggregate materially adversely affect the value of said properties
or materially impair their use in the operation of the business of such Person;
(f) Liens securing Indebtedness Incurred to finance the cost (including the
cost of design, development, acquisition, construction, installation,
improvement, transportation and integration) of any property, plant and
equipment, inventory or other property acquired by such Person (including
acquisitions by way of capital lease and acquisitions of Capital Stock of a
Person that becomes a Restricted Subsidiary); provided, however, that the Lien
may not extend to any other property owned by such Person or any of its
Subsidiaries at the time the Lien is Incurred, and the Indebtedness (other than
any interest thereon) secured by the Lien may not be Incurred more than 180
days after the later of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property subject
to the Lien; (g) Liens to secure Indebtedness permitted under the provisions
described in clause (b)(1) under "--Certain Covenants--Limitation on
Indebtedness"; (h) Liens existing on the Issue Date; (i) Liens on property or
shares of Capital Stock of another Person at the time such other Person becomes
a Subsidiary of such Person; provided, however, that such Liens are not
created, incurred or assumed in connection with, or in contemplation of, such
other Person becoming such a Subsidiary; provided further, however, that such
Lien may not extend to any other property owned by such Person or any of its
Subsidiaries; (j) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
merger or consolidation with or into such Person or a Subsidiary of such Person
and including Liens created by other Persons affecting any easement,
indefeasible right to use or other property right granted to the Company or any
Restricted Subsidiary; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person; (l) Liens securing
Hedging Obligations so long as such Hedging Obligations relate to Indebtedness
that is, and is permitted to be under the Indenture, secured by a Lien on the
same property securing such Hedging Obligations; (m) Liens for taxes,
assessments, government charges or claims that are being contested in good
faith by appropriate proceedings promptly instituted and diligently conducted,
if a reserve or other appropriate provision, if any, as is required in
conformity with GAAP has been made therefor; and (n) Liens arising by reason of
any judgment, decree or order of any court so long as such Lien is adequately
bonded and any appropriate legal proceeding that may have been duly initiated
for the review of such judgment, decree or order shall not have been finally
terminated or the period within which such proceedings may be initiated shall
not have expired; and (o) Liens to secure any Refinancing (or successive
Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clauses (f), (h), (i) and (j); provided, however,
that (x) such new Lien shall be limited to all or part of the same property
that secured the original Lien (plus improvements to or on such property) and
(y) the Indebtedness secured by such Lien at such time is not increased to any
amount greater than the sum of (A) the outstanding principal amount or, if
greater, committed amount of the Indebtedness described under clauses (f), (h),
(i) or (j) at the time the original Lien became a Permitted Lien and (B) an
amount necessary to pay any fees and expenses, including premiums, related to
such refinancing, refunding, extension, renewal or replacement. Notwithstanding
the foregoing, "Permitted Liens" will not include any Lien described in clauses
(f), (i) or (j) above to the extent such Lien applies to any Additional Assets
acquired directly or indirectly from Net Available Cash pursuant to the
covenant described under "--Certain Covenants--Limitation on Sale of Assets and
Subsidiary Stock." For purposes of this definition, the term "Indebtedness"
shall be deemed to include interest on such Indebtedness.
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"Permitted Telecommunications Capital Asset Disposition" means the
transfer, conveyance, sale, lease or other disposition of dark fiber, conduit
or components of the conduit system, (i) the proceeds of which are treated as
revenues by the Company in accordance with GAAP and (ii) that, in the case of
the sale of dark fiber, would not result in the Company retaining less than 24
fibers per route mile on any segment of the Company's network.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities
purchased by the Company with a portion of the net proceeds of the Debt
Offering.
"Pledge Agreement" means the Collateral Pledge and Security Agreement
dated the Issue Date, between the Company and the Trustee, governing the
disbursement of funds from the Pledge Account.
"Pledged Securities" means the securities purchased by the Company with a
portion of the net proceeds from the Debt Offering, which shall consist of U.S.
Government Obligations, to be deposited in the Pledge Account.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"Principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company (except to the extent
such Refinanced Indebtedness was guaranteed by such Subsidiary) or (y)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on the Issue
Date.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect
of its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company
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(other than a Restricted Subsidiary), including the exercise of any option to
exchange any Capital Stock (other than into Capital Stock of the Company that
is not Disqualified Stock), (iii) the purchase, repurchase, redemption,
defeasance or other acquisition or retirement for value, prior to scheduled
maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each
case due within one year of the date of acquisition) or (iv) the making of any
Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means (i) Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter Incurred, and (ii) accrued and
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company to the
extent post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and (B) indebtedness evidenced
by notes, debentures, bonds or other similar instruments for the payment of
which the Company is responsible or liable unless, in the case of (i) and (ii),
in the instrument creating or evidencing the same or pursuant to which the same
is outstanding, it is provided that such obligations are subordinate in right
of payment to the Notes; provided, however, that Senior Indebtedness shall not
include (1) any obligation of the Company to any Subsidiary, (2) any liability
for Federal, state, local or other taxes owed or owing by the Company, (3) any
accounts payable or other liability to trade creditors arising in the ordinary
course of business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness of the Company (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect to
any other Indebtedness or other obligation of the Company or (5) that portion
of any Indebtedness which at the time of Incurrence is Incurred in violation of
the Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory
redemption provision (but excluding any provision providing for the repurchase
of such security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company (whether
outstanding on the Issue Date or thereafter Incurred) which is subordinate or
junior in right of payment to the Notes pursuant to a written agreement to that
effect.
"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) constructing, creating,
developing or marketing communications related network equipment, software and
other devices for use in a telecommunications business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in clause (i) or (ii) above.
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"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States of America
or any agency thereof or obligations guaranteed by the United States of
America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and
money market deposits maturing within 180 days of the date of acquisition
thereof issued by a bank or trust company which is organized under the laws
of the United States of America, any state thereof or any foreign country
recognized by the United States, and which bank or trust company has
capital, surplus and undivided profits aggregating in excess of $50,000,000
(or the foreign currency equivalent thereof) and has outstanding debt which
is rated "A" (or such similar equivalent rating) or higher by at least one
nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30 days for
underlying securities of the types described in clause (i) above entered
into with a bank meeting the qualifications described in clause (ii) above,
(iv) investments in commercial paper, maturing not more than 90 days
after the date of acquisition, issued by a corporation (other than an
Affiliate of the Company) organized and in existence under the laws of the
United States of America or any foreign country recognized by the United
States of America with a rating at the time as of which any investment
therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and
(v) investments in securities with maturities of six months or less from
the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any
political subdivision or taxing authority thereof, and rated at least "A"
by Standard & Poor's Ratings Group or "A" by Moody's Investors Service,
Inc.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "--Certain Covenants--Limitation on
Restricted Payments." The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) if such Subsidiary had any
Indebtedness outstanding at the time of such designation, the Company could
Incur $1.00 of additional Indebtedness under paragraph (a) of the covenant
described under "--Certain Covenants--Limitation on Indebtedness" and (y) no
Default shall have occurred and be continuing. Any such designation by the Board
of Directors shall be evidenced to the Trustee by promptly filing with the
Trustee a copy of the resolution of the Board of Directors giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the
Company or one or more Wholly Owned Subsidiaries.
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[E] 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 5,500,000 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 10,562,735 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,
10,159,995 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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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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[E] CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES
The following is a summary of certain 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
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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.
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[D] CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of certain material United States federal
income tax considerations relating to the purchase, ownership and disposition
of the Notes, 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 deals only with holders that will hold the Notes as "capital
assets" (within the meaning of Section 1221) and does not address tax
considerations that may be relevant to a particular investor in light of such
investor's personal investment circumstances, nor does the discussion address
special rules applicable to certain types of investors subject to special
treatment under the Code (including, without limitation, financial
institutions, broker-dealers, regulated investment companies, life insurance
companies, tax-exempt organizations, foreign corporations, non-resident aliens,
dealers in securities or currencies, persons that will hold Notes as a position
in a hedging transaction, "straddle" or "conversion transaction" for tax
purposes, or persons that have a "functional currency" other than the U.S.
dollar.) This summary discusses the tax considerations applicable to the
initial purchasers of the Notes who purchase the Notes at their "original issue
price" as defined in Section 1273 of the Code and does not discuss the tax
considerations applicable to subsequent purchasers of the Notes. The Company
has not sought any ruling from the Internal Revenue Service ("IRS") with
respect to the statements made and the conclusions reached in the following
summary, and there can been no assurance that the IRS will agree with such
statements and their conclusions. No consideration of any aspects of state,
local or foreign taxation is included herein. INVESTORS CONSIDERING THE
PURCHASE OF NOTES SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE
APPLICATION OF THE UNITED STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR
SITUATIONS AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL OR FOREIGN TAXING JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
United States Holders
As used herein, the term "United States Holder" means the beneficial owner
of a Note that for United States federal income tax purposes is (i) a citizen
or resident of the United States, (ii) a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, (iii) an estate the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust if (a) a court within the United States is able to exercise primary
supervision over the administration of the trust and (b) one or more U.S.
persons have the authority to control all substantial decisions of the trust.
Stated Interest
A United States Holder will recognize ordinary income when it receives or
accrues interest on the Notes in accordance with such United States Holder's
method of tax accounting. A United States Holder may be entitled to treat
interest income on the Notes as "investment income" for purposes of computing
certain limitations concerning the deductibility of investment interest
expense.
Disposition of the Notes
Generally, upon the sale or exchange or redemption of a Note, a United
States Holder will realize taxable gain or loss equal to the difference between
the amount of cash or other property received by the United States Holder in
exchange for such Note (except to the extent such amount realized is
attributable to accrued but unpaid interest which will be taxable as ordinary
interest income) and such holder's adjusted tax basis in such Note. A United
States Holder's adjusted tax basis in a Note will initially equal the cost of
the Note to such holder and will be decreased by the amount of any principal
payments received by such holder in respect of such Note. Any gain or loss upon
a sale or other disposition of a Note will generally be capital gain or loss.
At the time of sale or exchange or redemption, any such gain will be taxed to a
United States Holder who is a natural person at a maximum rate of 20 percent
(10 percent, if such holder is in a 15 percent bracket) if the Note is held for
more than 18 months and at a maximum rate of 28 percent (15 percent if such
holder is in a 15 percent bracket) if the Note is held for more than 12 months
but not more than 18 months. Under proposed legislation, the 20% maximum rate
would apply to Notes held for more than 12 months by a United States Holder who
is a natural person, but there can be no assurance that such legislation will
be enacted.
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Information Reporting and Backup Withholding
A United States Holder may be subject, under certain circumstances, to
backup withholding at a 31 percent rate with respect to payments received with
respect to the Notes. This withholding generally applies only if the United
States Holder (i) fails to furnish his social security or taxpayer
identification number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that he has failed to report properly payments of interest
and dividends and the service has notified the Company that he is subject to
withholding or (iv) fails under certain circumstances to provide a certified
statement, signed under penalty of perjury, that the TIN provided is his
correct number and that he is not subject to backup withholding. Any amount
withheld from a payment to a United States Holder under the backup withholding
rules is allowable as a credit against such holder's federal income tax
liability, provided that the required information is furnished to the IRS.
Certain holders (including, among others, corporations and foreign individuals
who comply with certain certification requirements described below under
"Non-United States Holders") are not subject to backup withholding. United
States Holders should consult their tax advisors as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption.
The Company will furnish to the IRS and to record holders of the Notes (to
whom it is required to furnish such information) information relating to the
amount of interest.
Non-United States Holders
As used herein, the term "Non-United States Holder" means any beneficial
owner of a Note that is not a United States Holder.
The following discussion is a summary of certain U.S. federal income tax
consequences to a Non-United States Holder of a Note.
Stated Interest
Generally, any interest paid to a Non-United States Holder of a Note will
not be subject to U.S. federal income or withholding tax, provided that (i) the
holder is not (A) a direct or indirect owner of 10% or more of the total voting
power of all voting stock of the Company or (B) a controlled foreign
corporation related to the Company through stock ownership, (ii) such interest
payments are not effectively connected with the conduct by the Non-United
States Holder of a trade or business within the United States and (iii) the
Company (or its paying agent) receives certain information from the holder
certifying under penalties of perjury that such holder is a Non-United States
Holder.
If these conditions are not satisfied a Non-United States Holder generally
would be subject to U.S. withholding tax at a flat rate of 30% (or lower
applicable treaty rate) on interest payments on the Notes.
Sale, Exchange or Redemption of the Notes
Except as provided below and subject to the discussion concerning backup
withholding, a Non-United States Holder of a Note will generally not be subject
to United States federal income tax or withholding tax on any gain realized on
the sale, exchange or redemption of the Note 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,
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 or (3) the Holder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates.
Information and Backup Withholding
The Treasury regulations provide that backup withholding and information
reporting will not apply to payments of principal, premium, if any, and
interest on the Notes by the Company to a Non-United States Holder, if the
holder certifies as to its non-U.S. status under penalties of perjury or
otherwise establishes an exemption (provided that neither the Company nor their
paying agents has actual knowledge that the holder is a United States person or
that the conditions of any other exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of the Notes to or
through the United States office of any broker, U.S. or foreign, will be
subject to information reporting and possibly backup withholding unless the
owner certifies as to its non-U.S. status under penalty of perjury or otherwise
establishes an exemption, provided that the broker does not
90
<PAGE>
have actual knowledge that the holder is a U.S. person or that the conditions
of any other exemption are not, in fact, satisfied. The payment of the proceeds
from the disposition of a Note to or through a non-U.S. office of a non-U.S.
broker that is not a U.S. related person will not be subject to information
reporting or backup withholding. For this purpose, a "U.S. related person" is
(i) a "controlled foreign corporation" for U.S. federal income tax purposes or
(ii) a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of a
United States trade or business.
In the case of the payment of proceeds from the disposition of Notes to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
Non-United States Holder and the broker has no knowledge to the contrary.
Backup withholding will not apply to payments made through foreign offices of a
broker that is not a U.S. person or a U.S. related person (absent actual
knowledge that the payee is a U.S. person).
The United States Department of the Treasury recently promulgated final
regulations regarding the information reporting and backup reporting rules
discussed above. In general, the final regulations do not significantly alter
the substantive information reporting and backup withholding requirements but
rather unify current certification procedures and forms and clarify reliance
standards. In addition, the final regulations permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The final regulations are generally effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective purchasers of the Notes should consult their own tax advisors
concerning the effect of such regulations on their particular situations.
91
<PAGE>
[E] UNDERWRITING
Under the terms and subject to the conditions contained in the
Underwriting Agreement dated , 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 .........
Warburg Dillon Read LLC ........................ ---------
Total ........................................ 5,500,000
=========
</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 825,000 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 $ per share
and the Underwriters and such dealers may allow a discount of $ 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 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
92
<PAGE>
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.
Application has been made to list the shares of Common Stock 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 will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in determining the initial public offering
price will be 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.
93
<PAGE>
[D] UNDERWRITING
Under the terms and subject to the conditions contained in the
Underwriting Agreement dated , 1998 (the "Underwriting
Agreement"), the underwriters named below (the "Underwriters") have severally
but not jointly agreed to purchase from the Company the following respective
principal amounts of the Notes:
<TABLE>
<CAPTION>
Principal
Underwriter Amount
- --------------------------------------------------- ----------
<S> <C>
Credit Suisse First Boston Corporation ......... $
Warburg Dillon Read LLC ........................ ---------
Total ........................................ $
=========
</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 securities offered hereby
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 the non-defaulting Underwriter may be increased or the Underwriting
Agreement may be terminated.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public initially at the price set forth on
the cover page of this Prospectus, and to certain dealers (who may include the
Underwriters) at such price less a concession of % of the principal amount,
and the Underwriters and such dealers may allow a discount of % of the
principal amount 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 Underwriters.
The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the principal amount
being offered hereby.
The Company has 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 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 exceed a specified maximum.
Syndicate covering transactions involve purchases of the Notes in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Notes 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 Notes to be higher
than it would otherwise be in the absence of such transactions.
94
<PAGE>
[D] NOTICE TO CANADIAN RESIDENTS
Resale Restrictions
The distribution of the Notes in Canada is being made only on a private
placement basis exempt from the requirement that the Company prepare and file a
prospectus with the securities regulatory authorities in each province where
trades of Notes are effected. Accordingly, any resale of the Notes 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 Notes.
Representations of Purchasers
Each purchaser of the Notes in Canada who receives a purchase confirmation
will be deemed to represent to the Company and the dealer from whom such
purchase confirmation is received that (i) such purchaser is entitled under
applicable provincial securities laws to purchase such Notes 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 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 Notes 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 Notes
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 Notes acquired on the same date and under the same
prospectus exemption.
Taxation and Eligibility for Investment
Canadian purchasers of Notes should consult their own legal and tax
advisors with respect to the tax consequences of an investment in the Notes in
their particular circumstances and with respect to the eligibility of the Notes
for investment by the purchaser under relevant Canadian Legislation.
95
<PAGE>
[E] 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.
96
<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 6,338 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.
97
<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
</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)
Deferred 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 12) ............................................ 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, 9 and 10)
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 .............................................................. 8,595 541,431 541,431
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 9,847,060 9,553,906
------------ ------------ ------------
$ 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 (Note 2) ...................... 104,223 260,619 1,137,943 108,358 247,386
Selling, general and administrative ......... 358,761 900,808 1,002,232 207,383 225,122
Depreciation and amortization ............... 24,175 24,168 552,862 29,879 302,013
---------- ------------ ------------ ---------- ----------
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 common stock
warrants ......................... -- -- -- -- -- --
Issuance of Series A
convertible preferred stock 57,144 571 -- -- -- --
Net loss .......................... -- -- -- -- -- --
------ ---- ------- ------ ------- ------
Balance, December 31, 1997 ......... 78,324 783 962,734 9,627 248,828 2,848
Net loss (unaudited) .............. -- -- -- -- -- --
------ ---- ------- ------ ------- ------
Balance, March 31, 1998
(unaudited) ....................... 78,324 $783 962,734 $9,627 248,828 $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 common stock
warrants ......................... 532,836 -- -- 532,836
Issuance of Series A
convertible preferred stock -- 799,445 -- 800,016
Net loss .......................... -- -- (960,026) (960,026)
-------- ----------- ----------- ----------
Balance, December 31, 1997 ......... 541,431 11,817,216 (2,524,845) 9,847,060
Net loss (unaudited) .............. -- -- (293,154) (293,154)
-------- ----------- ----------- ----------
Balance, March 31, 1998
(unaudited) ....................... $541,431 $11,817,216 $(2,817,999) $9,553,906
======== =========== =========== ==========
</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 29,879 302,013
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) (1,030,173) 657,881
------------ ------------- ------------ ------------ ------------
Cash Flows from Investing
Activities:
Purchases of property and
equipment ....................... (16,303) (17,480) (7,397) 3,108 (22,591)
Purchases of communications
network ......................... (4,580,598) (6,693,602) (5,602,062) (3,981,620) (3,274,471)
Increase in construction
accounts payable ................ 3,843,430 (3,361,122) 716,985 229,294 1,587,222
Increase in intangible assets ..... (22,801) (27,816) (3,188,792) (55,567) (243,413)
------------ ------------- ------------ ------------ ------------
Net cash used in investing
activities ..................... $ (776,272) $ (10,100,020) $ (8,081,266) $ (3,804,785) $ (1,953,253)
------------ ------------- ------------ ------------ ------------
</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:
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 ............. 1,099,870 14,926,603 4,868,220 3,428,162 1,429,174
---------- ----------- ------------ ------------ ----------
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. The Company has
accounted for its ownership interest in these entities as consolidated entities
with minority interest due to its ownership/control in each of the
subsidiaries.
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 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.
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)
(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.
(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>
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)
(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 11). 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 7(d)) have been excluded from diluted weighted
average shares.
(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
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)
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 8).
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. Approximately
$350,400 and $785,500 was included in accrued right-of-way fees--related party
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.
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 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>
(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>
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 (Continued)
(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 9)). 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 7(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.
(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 7(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>
F-13
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(6) 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.
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.
F-14
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(6) STOCKHOLDERS' EQUITY (Continued)
(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.
(7) 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:
<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
F-15
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(7) STOCK-BASED COMPENSATION (Continued)
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.
(d) Warrants
From August 1994 to October 1995, the Company issued warrants to ATTI (see
Note 2) for the purchase of 4,580 shares of the Company's common stock at an
exercise price of $.15 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.
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 13).
F-16
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(8) 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.
(9) 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.
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.
(10) 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>
F-17
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(11) 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
------ ------ ------ ------ -----
Customer A ......... 100% 98% 10% --% --%
<S> <C> <C> <C> <C> <C>
Customer B ......... -- -- 69 -- 76
Customer C ......... -- -- -- -- 10
</TABLE>
(12) 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>
(13) SUBSEQUENT EVENTS
(a) Reorganization
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) 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.
On July 8, 1998, the Company entered into a Restructuring and Contribution
Agreement with 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,
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
interest. 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 $48,000,000 to reflect the Company's exchange
of membership interest (acquisition) related to NU's minority interest in the
subsidiaries (NECOM LLC and FiveCom LLC), in accordance with AICPA Accounting
F-18
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(13) SUBSEQUENT EVENTS (Continued)
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 ($3,890,936); a
net loss of ($3,632,829); and a basic and diluted loss per share of $12.75.
(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 331/3% 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-19
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(13) 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) Boston Edison Company/New England Electric System 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 Agreement"), and a Fiber Optic Use Agreement with BecoCom, Inc., a
subsidiary of Boston Edison Company (the "Beco 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 Agreement and the
Beco Agreement have an initial term of 20 years, with the potential to
negotiate for up to two additional, consecutive five-year extensions.
F-20
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(14) 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.
<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 ......... 207,383 445,930 172,554 176,365 225,122
Depreciation and amortization ............... 29,879 135,204 137,936 249,843 302,013
---------- ---------- ---------- ---------- ----------
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-21
<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.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
Common Carrier .................... A government defined group of private companies offering
telecommunications services or facilities to the general public on a non-
discriminatory basis.
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.
</TABLE>
G-2
<PAGE>
<TABLE>
<S> <C>
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.
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).
</TABLE>
G-3
<PAGE>
<TABLE>
<S> <C>
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.
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.
</TABLE>
G-4
<PAGE>
<TABLE>
<S> <C>
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-5
<PAGE>
- --------------------------------------------------------------------------------
[E] 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 12
Debt Offering 21
Use of Proceeds 22
Dividend Policy 22
Dilution 23
Capitalization 24
Selected Consolidated Financial and
Operating Data 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 28
Business 32
Management 48
Certain Transactions 52
Principal and Selling Stockholders 54
Description of Capital Stock 58
Description of Certain Indebtedness 60
Shares Eligible for Future Sale 85
Certain United States Federal Tax
Consequences 87
Underwriting 92
Notice to Canadian Residents 96
Legal Matters 97
Experts 97
Additional Information 97
Index to Consolidated Financial Statements F-1
Glossary G-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of this prospectus), 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.
[COMPANY LOGO]
NorthEast Optic
Network Inc.
5,500,000 Shares
Common Stock
($.01 par value)
P R O S P E C T U S
Credit Suisse First Boston
Warburg Dillon Read LLC
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[D] 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 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 12
Equity Offering 21
Use of Proceeds 22
Capitalization 24
Selected Consolidated Financial and
Operating Data 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 28
Business 32
Management 48
Certain Transactions 52
Principal Stockholders 56
Description of Capital Stock 58
Description of the Notes 61
Certain United States Federal Income Tax
Consequences 89
Underwriting 94
Notice to Canadian Residents 95
Legal Matters 97
Experts 97
Additional Information 97
Index to Consolidated Financial Statements F-1
Glossary G-1
</TABLE>
------------------------
Until , 1998 (90 days after the date of this prospectus), all
dealers effecting transactions in the Notes, whether or not participating in
this distribution, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
[COMPANY LOGO]
NorthEast Optic
Network, Inc.
$165,000,000
% Senior Notes
Due 2008
P R O S P E C T U S
Credit Suisse First Boston
Warburg Dillon Read LLC
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount to Be
Paid
-------------
<S> <C>
SEC registration fee ............................. $ 74,797
NASD filing fee .................................. $ 25,355
Nasdaq National Market Listing Fee ............... $ 95,000
Printing, mailing and engraving expenses ......... $ 250,000
Legal fees and expenses .......................... $ 390,000
Accounting fees and expenses ..................... $ 300,000
Transfer agent and registrar fees ................ $ 10,000
Trustee fees ..................................... $ 7,000
Miscellaneous expenses ........................... $ 47,848
----------
Total ........................................... $1,200,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
The Delaware General Corporation Law and the Registrant's Certificate of
Incorporation and By-Laws provide for indemnification of the Registrant's
directors and officers for liabilities and expenses that they may incur in such
capacities. In general, directors and officers are indemnified with respect to
actions taken in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of the Registrant, and with respect to any
criminal action or proceeding, actions that the indemnitee had no reasonable
cause to believe were unlawful. Reference is made to the Registrant's Form of
Amended and Restated Certificate of Incorporation and Form of Amended and
Restated By-Laws to be filed as Exhibits hereto.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as an Exhibit hereto.
The Company has obtained directors' and officers' liability insurance.
Item 15. Recent Sales of Unregistered Securities
Set forth in chronological order is information regarding shares of Common
Stock and Preferred Stock issued, shares of Membership Interest and Sharing
Ratios issued, warrants issued and options granted by the Company since January
1, 1995 (without giving effect to the Company's 2.5-for-1 reverse stock split
to be effected prior to the closing of this offering). Further included is the
consideration, if any, received by the Company for such shares, Sharing Ratios,
warrants and options and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), or rule of the Securities and
Exchange Commission under which exemption from registration was claimed.
1. On April 30, 1996, the Company sold a total of 405,024 shares of Series
B Convertible Preferred Stock to MaineCom for an aggregate purchase price of
$10,000,000 pursuant to the terms of a Stock Subscription Agreement dated
November 22, 1995, as amended, among the Company and MaineCom (the "Series B
Stock Subscription Agreement").
2. On May 23, 1996, the Company issued 40 shares of Membership Interests
representing a 40% interest in a subsidiary of the Company to Mode 1 for an
aggregate capital contribution of $5,333,000. These Membership Interests were
subsequently exchanged for shares of the Company's Series B Convertible
Preferred Stock.
II-1
<PAGE>
3. On May 23, 1996, the Company issued 1,000 shares of Membership Interest
in a subsidiary of the Company to MaineCom for an aggregate capital
contribution of $1.00. These shares were subsequently cancelled.
4. On May 23, 1996, the Company issued a warrant expiring on April 30,
2001 to purchase 2,656 shares of Membership Interest in a subsidiary of the
Company at an exercise price of $125.84 per share to Oppenheimer & Co., Inc.
("Oppenheimer") in connection with its engagement as the Company's placement
agent. This Warrant was subsequently exchanged for warrants to purchase shares
of the Company's Series B Convertible Preferred Stock.
5. On May 23, 1996, the Company issued 5,153 shares of Membership Interest
in a subsidiary of the Company to Northeast Utilities for an aggregate capital
contribution of $653,333. These shares were subsequently cancelled in exchange
for shares of the Company's Series B Convertible Preferred Stock.
6. On May 23, 1996, the Company issued 162,060 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
7. On July 11, 1996, the Company issued 5,835 shares of Membership
Interest in a subsidiary of the Company to Mode 1 for an aggregate capital
contribution of $666,667. These shares were subsequently cancelled in exchange
for shares of the Company's Series B Convertible Preferred Stock.
8. On July 11, 1996, the Company issued 203,131 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
9. On October 28, 1996, the Company issued 1,318 shares of Membership
Interest in a subsidiary of the Company to two employees, as compensation,
pursuant to the provisions of their employment agreements. These shares were
subsequently cancelled in exchange for shares of the Company's Series B
Convertible Preferred Stock.
10. On October 28, 1996, the Company issued 192,519 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
11. On January 17, 1997, the Company issued 66.67 shares of Membership
Interest in a subsidiary of the Company representing a 66.67% interest in the
Company to MaineCom for an aggregate capital contribution of $1,750,088. These
Membership Interests were subsequently exchanged for shares of the Company's
Series B Convertible Preferred Stock.
12. On March 6, 1997, the Company sold a total of 57,144 shares of Series
A Convertible Preferred Stock to an employee and two institutional investors
for an aggregate purchase price of $800,016.
13. On June 30, 1997, the Company issued a warrant expiring August 9, 2000
to purchase 206 shares of Common Stock at an exercise price of $0.15 per share
to ATTI in connection with the execution of an equipment lease.
14. On June 30, 1997, the Company issued a warrant expiring October 11,
2000 to purchase 132 shares of Common Stock at an exercise price of $0.15 per
share to ATTI in connection with the execution of an equipment lease.
15. On October 7, 1997, the Company issued a five-year warrant to CMP to
purchase 5,876 shares of Membership Interest in a subsidiary of the Company, at
an exercise price of $0.01 per share, in connection with the execution of a
Construction Loan Agreement dated October 7, 1997 between the Company and
Central Maine Power Company. This Warrant has been exercised, and the
Membership Interests exchanged for shares of the Company's Series B Convertible
Preferred Stock.
16. On April 17, 1998, the Company issued 5,876 shares of Membership
Interest in a subsidiary of the Company to Central Maine Power Company in
connection with the exercise of warrants for the purchase of such shares for an
aggregate consideration of $58.76. These shares were subsequently exchanged for
shares of the Company's Series B Convertible Preferred Stock.
II-2
<PAGE>
17. On April 17, 1998, the Company issued 645 shares of Membership
Interest in a subsidiary of the Company to Mode 1 Communications, Inc. pursuant
to the anti-dilution provisions of a Letter Agreement dated February 23, 1996,
as amended, between the Company and such investor. Accordingly, the Company did
not receive any consideration for such shares. These shares were subsequently
cancelled in exchange for shares of the Company's Series B Convertible
Preferred Stock.
18. On April 17, 1998, the Company issued 785,268 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
19. On July 8, 1998, the Company issued a warrant expiring on April 30,
2001 to purchase 65,167 shares of Series B Convertible Preferred Stock at an
exercise price of $5.13 per share to Oppenheimer in exchange for its warrants
to purchase shares of Membership Interest in a subsidiary of the Company.
20. On July 8, 1998, the Company issued 2,455,441 shares of Series B
Convertible Preferred Stock to two employees and three institutional investors
in exchange for 118,665 shares of Membership Interest in one subsidiary of the
Company and 106.67 Membership Interests in another subsidiary of the Company.
21. On July 8, 1998, the Company issued 229,761 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
Certain of the transactions described above involved promoters, directors,
officers and 5% Stockholders of the Company. See "Certain Transactions."
The Company's 1994 Stock Option Plan was adopted by the Board of Directors
and approved by the stockholders of the Company as of December 2, 1994. As of
June 30, 1998, options to purchase 1,540 shares of Common Stock had been
exercised for an aggregate consideration of $385.00 and no options to purchase
shares of Common Stock were outstanding under such plan.
The Company's 1998 Stock Incentive Plan was adopted by the Board of
Directors on May 18, 1998 and approved by the stockholders of the Company on
May 26, 1998. As of June 30, 1998, no options to purchase shares of Common
Stock had been exercised and 1,705,272 options to purchase shares of Common
Stock were outstanding under such plan.
The securities issued in the foregoing transactions were either (i)
offered and sold in reliance upon exemptions from Securities Act registration
set forth in Sections 3(b) and 4(2) of the Securities Act, or any regulations
promulgated thereunder, relating to sales by an issuer not involving any public
offering, or (ii) in the case of certain options to purchase shares of Common
Stock and shares of Common Stock issued upon the exercise of such options, such
offers and sales were made in reliance upon an exemption from registration
under Rule 701 of the Securities Act. No underwriters were involved in the
foregoing sales of securities.
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<S> <C>
(a) Exhibits
*1.1 Form of Underwriting Agreement for Debt Offering.
*1.2 Form of Underwriting Agreement for Equity Offering.
3.1 Restated Certificate of Incorporation of Registrant as currently in effect.
*3.2 Form of Restated Certificate of Incorporation of Registrant to be filed on or immediately subsequent to
the date of the closing of the Offering contemplated by this Registration Statement.
**3.3 Bylaws of Registrant, as amended to date.
*3.4 Form of Bylaws of Registrant to be effective on or immediately subsequent to the date of the
closing of the Offering contemplated by this Registration Statement.
4.1 Specimen certificate for the Registrant's Common Stock.
*4.2 Form of Indenture Agreement.
*4.3 Form of % Senior Notes Due 2008
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
*5.1 Opinion of Hale and Dorr LLP
*10.1 1998 Stock Incentive Plan.
10.2 [Reserved]
**10.3 Stock Subscription Agreement dated November 22, 1995, as amended on April 30, 1996, between
the Registrant and MaineCom Services.
10.4 Form of Restructuring and Contribution Agreement dated July 8, 1998.
**10.5 Common Stock Warrant dated May 23, 1996 issued to Oppenheimer & Co., Inc.
**10.6 Common Stock Purchase Warrant dated August 19, 1994 issued to Applied Telecommunications
Technologies, Inc. ("ATTI") and assigned to Applied Telecommunications Technologies IV N.V.
("ATT IV").
**10.7 Common Stock Purchase Warrant dated February 15, 1995 issued to ATTI and assigned to ATT IV.
**10.8 Common Stock Purchase Warrant dated April 3, 1995 issued to ATTI and assigned to ATT IV.
**10.9 Common Stock Purchase Warrant dated June 30, 1997 issued to ATT IV.
**10.10 Common Stock Purchase Warrant dated June 30, 1997 issued to ATT IV.
**10.11 Warrant dated October 7, 1997 issued to Central Maine Power Company.
**10.12 Equipment Lease dated August 19, 1994 between the Registrant and Applied Telecommunications
Technologies, Inc. ("ATTI").
**10.13 Equipment Lease dated February 15, 1995 between the Registrant and ATTI.
**10.14 Equipment Lease dated April 3, 1995 between the Registrant and ATTI.
**+10.15 Master Services Agreement dated January 1, 1994 between the Registrant and MCI
Telecommunications Corporation ("MCI").
**+10.16 Fiber Optic Use Agreement dated January 2, 1997 between the Registrant and MCI.
**+10.17 Letter Agreement dated March 1, 1996 between the Registrant and Brooks Fiber Communications
of Massachusetts, Inc.
**+10.18 Fiber Optic Lease Agreement dated March 31, 1998 between the Registrant and Sprint
Communications Company L.P.
**+10.19 Aerial License Agreement dated October 28, 1996 between the Registrant and New England
Telephone and Telegraph Company and Western Massachusetts Electric Company.
**+10.20 Fiber Optic Use Agreement dated September 10, 1997 between the Registrant and New England
Fiber Communications LLC.
**+10.21 Fiber Optic Use Agreement dated November 18, 1997 between the Registrant and Teleport
Communications Boston.
10.22 Network Products Purchase Agreement dated March 18, 1998 between the Registrant and Northern
Telecom Inc.
10.23 Support Services Agreement dated as of April 30, 1996 between the Registrant and MaineCom
Services.
**+10.24 Amended and Restated Agreement for the Provision of Fiber Optic Facilities and Services dated as
of February 27, 1998 and effective as of September 27, 1994 among the Registrant and the
Northeast Utilities Services Company ("NUSC"), The Connecticut Light and Power Company
("CLPC"), Western Massachusetts Electric Company ("WMEC") and Public Service Company
of New Hampshire ("PSCNH") (Phase One).
**10.25 Short Form Agreement for the Provision of Fiber Optic Facilities and Services entered into on
February 27, 1998 among the Registrant and NUSC, CLPC, WMEC and PSCNH (Phase One).
**+10.26 Amended and Restated Agreement for the Provision of Fiber Optic Facilities and Services dated as of
February 27, 1998 among the Registrant and NUSC, CLPC, WMEC and PSCNH (Phase Two).
**10.27 Short Form Agreement for the Provision of Fiber Optic Facilities and Services entered into on
February 27, 1998 among the Registrant and NUSC, CLPC, WMEC and PSCNH (Phase Two).
**10.28 Standard Form of Duct Agreement.
10.29 Construction Contract dated August 14, 1996 between the Registrant and Seaward Corporation.
10.30 Employment Agreement dated October 15, 1997 between the Registrant and Victor Colantonio.
**10.31 Employment Agreement dated September 29, 1994 between the Registrant and Michael A. Musen.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
10.32 Employment Agreement dated May 4, 1998 between the Registrant and James D. Mack, Jr.
**10.33 Loan Agreement dated November 22, 1995 between the Registrant and Central Maine Power
Company.
**10.34 Construction Loan Agreement dated October 7, 1997 between the Registrant and Central Maine
Power Company.
**10.35 Construction Loan Agreement dated March 11, 1997 between FiveCom of Maine, Inc. and Peoples
Heritage Savings Bank.
*+10.36 Agreement dated January 17, 1997 between Registrant and E/Pro Engineering and Environmental
Consulting for the ADSS Cable Project.
*+10.37 Agreement for the Provision of Fiber Optic Facilities and Services dated January 7, 1997 between
Central Maine Power Company and the Registrant.
*10.38 Employment Agreement dated July 7, 1998 between the Registrant and William F. Fennell.
10.39 Employment Agreement dated July 1, 1998 between the Registrant and Richard A. Crabtree.
*+10.40 IRU Agreement dated July 7, 1998 between the Registrant and QWEST Communications
Corporation.
*+10.41 Fiber Optic Lease Agreement dated July 2, 1998 between the Registrant and NEES
Communications, Inc.
*+10.42 Fiber Optic Use Agreement dated July 2, 1998 between the Registrant and BecoCom.
12.1 Schedule of Earnings to Fixed Charges.
21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
*23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
**24.1 Power of Attorney (see page II-6).
*25 Statement of Trustee's Eligibility and Qualification.
27 Financial Data Schedule.
99 Consent of Katherine D. Courage.
</TABLE>
- ---------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment to be requested.
(b) Financial Statement Schedules
All financial schedules, other than that listed above, have been omitted
because the information required to be set forth therein is not applicable or
is shown in the Financial Statements or Notes thereto.
Item 17. Undertakings.
The Registrant will provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registration of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE>
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein and the Offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, NorthEast Optic Network, Inc., a corporation organized and existing
under the laws of the State of Delaware, has duly caused this amendment to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on this 8th day of July, 1998.
NORTHEAST OPTIC NETWORK, INC.
By /s/ Richard A. Crabtree
-------------------------
Richard A. Crabtree
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following person in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ------------------------------- ------------------------------------------------ -------------
<S> <C> <C>
/s/ Richard A. Crabtree Chairman of the Board of Directors
------------------------- and Chief Executive Officer
Richard A. Crabtree (Principal Executive Officer) July 8, 1998
*
------------------------- President, Chairman of the Company and Director
Victor Colantonio July 8, 1998
* Chief Financial Officer
------------------------- and Treasurer
William F. Fennell (Principal Financial and Accounting Officer) July 8, 1998
*
-------------------------
John H. Forsgren Director July 8, 1998
*
-------------------------
David Marsh Director July 8, 1998
-------------------------
F. Michael McClain Director
*
-------------------------
Gary D. Simon Director July 8, 1998
*By: /s/ Richard A. Crabtree
----------------------------
Richard A. Crabtree
Attorney-in-Fact
</TABLE>
II-7
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NORTHEAST OPTIC NETWORK, INC.
NorthEast Optic Network, Inc., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. That the Corporation filed its original Certificate of Incorporation
with the Secretary of State of the State of Delaware on May 14, 1998.
2. By written consent of the Board of Directors of the Corporation, a
resolution was adopted, pursuant to Sections 141(f), 242 and 245 of the General
Corporation Law of the State of Delaware, setting forth an Amended and Restated
Certificate of Incorporation of the Corporation and declaring said Amended and
Restated Certificate of Incorporation advisable. The stockholders of the
Corporation duly approved said proposed Amended and Restated Certificate of
Incorporation by unanimous written consent in accordance with Sections 228, 242
and 245 of the General Corporation Law of the State of Delaware. The resolution
setting forth the Amended and Restated Certificate of Incorporation is as
follows:
RESOLVED: That the Certificate of Incorporation of the Corporation, be and
hereby is amended and restated in its entirety so that the same
shall read as follows:
FIRST. The name of the Corporation is: NorthEast Optic Network, Inc.
SECOND. The address of its registered office in the State of Delaware
is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington,
County of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or
promoted by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 36,776,331 shares, consisting of
(i) 30,000,000 shares of Common Stock, $0.01 par value per share ("Common
Stock"),
<PAGE>
and (ii) 6,776,331 shares of Preferred Stock, $0.01 par value per share
("Preferred Stock"), of which 277,960 shares shall be designated "Series A
Convertible Preferred Stock" (the "Series A Preferred Stock"), 4,498,371 shares
shall be designated "Series B Convertible Preferred Stock" (the "Series B
Preferred Stock") and the balance of which may be issued from time to time in
one or more series as set forth in Part B of this Article FOURTH.
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
1. General. The voting, dividend and liquidation rights of the holders
of the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote for
each share held at all meetings of stockholders (and written actions in lieu of
meetings). There shall be no cumulative voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
Preferred Stock may be issued from time to time in one or more series,
each of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may
2
<PAGE>
be redeemed, purchased or acquired by the Corporation may be reissued except as
otherwise provided by law. Different series of Preferred Stock shall not be
construed to constitute different classes of shares for the purposes of voting
by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from
time to time to issue the Preferred Stock in one or more series, and in
connection with the creation of any such series, by resolution or resolutions
providing for the issue of the shares thereof, to determine and fix such voting
powers, full or limited, or no voting powers, and such designations, preferences
and relative participating, optional or other special rights, and
qualifications, limitations or restrictions thereof, including without
limitation thereof, dividend rights, conversion rights, redemption privileges
and liquidation preferences, as shall be stated and expressed in such
resolutions, all to the full extent now or hereafter permitted by the General
Corporation Law of Delaware. Without limiting the generality of the foregoing,
the resolutions providing for issuance of any series of Preferred Stock may
provide that such series shall be superior or rank equally or be junior to the
Preferred Stock of any other series to the extent permitted by law. Except as
otherwise provided in this Certificate of Incorporation, no vote of the holders
of the Preferred Stock or Common Stock shall be a prerequisite to the
designation or issuance of any shares of any series of the Preferred Stock
authorized by and complying with the conditions of this Certificate of
Incorporation, the right to have such vote being expressly waived by all present
and future holders of the capital stock of the Corporation.
C. SERIES A CONVERTIBLE PREFERRED STOCK
The rights, preferences, powers, privileges and restrictions,
qualifications and limitations granted to or imposed upon the shares of Series A
Preferred Stock shall be as set forth in this Part C of this Article FOURTH.
1. Dividends.
(a) The holders of shares of Series A Preferred Stock shall be
entitled to receive dividends of $1.00 per share per annum (subject to
appropriate adjustment in the event of any stock dividend, stock split,
combination or other similar recapitalization affecting such shares), payable
when and as declared by the Board of Directors of the Corporation. The right to
receive dividends on Series A Preferred Stock shall be noncumulative, and no
right to dividends shall accrue by reason of the fact that no dividend has been
declared on the Series A Preferred Stock in any prior year.
(b) The Corporation shall not declare or pay any dividends or
other distributions (as defined below) on shares of Common Stock until the
holders of the
3
<PAGE>
Series A Preferred Stock then outstanding shall have first received a dividend
at the rate specified in paragraph (a) of this Section 1.
(c) For purposes of this Section 1, unless the context
requires otherwise, "distribution" shall mean the transfer of cash or property
without consideration, whether by way of dividend or otherwise, payable other
than in Common Stock or other securities of the Corporation, or the purchase or
redemption of shares of the Corporation (other than repurchases of Common Stock
held by employees or directors of, or consultants to, the Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase at a price equal to the original issue price of such shares and
other than redemptions in liquidation or dissolution of the Corporation) for
cash or property, including any such transfer, purchase or redemption by a
subsidiary of this Corporation.
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
Consolidations and Asset Sales.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series A
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, after and
subject to the payment in full of all amounts required to be distributed to the
holders of any other class or series of stock of the Corporation ranking on
liquidation prior and in preference to the Series A Preferred Stock
(collectively referred to as "Senior Preferred Stock"), but before any payment
shall be made to the holders of Common Stock or any other class or series of
stock ranking on liquidation junior to the Series A Preferred Stock (such Common
Stock and other stock being collectively referred to as "Junior Stock") by
reason of their ownership thereof, an amount equal to the greater of (i) $6.65
per share (subject to appropriate adjustment in the event of any stock dividend,
stock split, combination or other similar recapitalization affecting such
shares), plus any dividends declared or accrued but unpaid thereon, or (ii) such
amount per share as would have been payable had each such share been converted
into Common Stock pursuant to Section 4 immediately prior to such liquidation,
dissolution or winding up. The rights of the holders of Series A Preferred Stock
to receive such amounts on liquidation shall be pari passu with the comparable
rights of the holders of Series B Preferred Stock (as set forth in subsection
D.2(a) of this Article FOURTH). If upon any such liquidation, dissolution or
winding up of the Corporation the remaining assets of the Corporation available
for distribution to its stockholders shall be insufficient to pay the holders of
shares of Series A Preferred Stock and Series B Preferred Stock the full amount
to which they shall be entitled, the holders of shares of Series A Preferred
Stock and Series B Preferred Stock and any class or series of stock ranking on
liquidation on a parity with the Series A Preferred Stock and Series B Preferred
Stock shall share ratably in any distribution of the remaining assets and funds
of the Corporation in proportion to the respective
4
<PAGE>
amounts which would otherwise be payable in respect of the shares held by them
upon such distribution if all amounts payable on or with respect to such shares
were paid in full.
(b) After the payment of all preferential amounts required to
be paid to the holders of Senior Preferred Stock, Series A Preferred Stock,
Series B Preferred Stock and any other class or series of stock of the
Corporation ranking on liquidation on a parity with the Series A Preferred Stock
and Series B Preferred Stock, upon the dissolution, liquidation or winding up of
the Corporation, the holders of shares of Junior Stock then outstanding shall be
entitled to receive the remaining assets and funds of the Corporation available
for distribution to its stockholders.
(c) In the event of any merger or consolidation of the
Corporation into or with another corporation (except one in which the holders of
capital stock of the Corporation immediately prior to such merger or
consolidation continue to hold at least 80% by voting power of the capital stock
of the surviving corporation), or the sale of all or substantially all the
assets of the Corporation, if the holders of at least 51% of the then
outstanding shares of Series A Preferred Stock so elect by giving written notice
thereof to the Corporation at least three days before the effective date of such
event, then such merger, consolidation or asset sale shall be deemed to be a
liquidation of the Corporation, and all consideration payable to the
stockholders of the Corporation (in the case of a merger or consolidation), or
all consideration payable to the Corporation, together with all other available
assets of the Corporation (in the case of an asset sale), shall be distributed
to the holders of capital stock of the Corporation in accordance with
Subsections 2(a) and 2(b) above. The Corporation shall promptly provide to the
holders of shares of Series A Preferred Stock such information concerning the
terms of such merger, consolidation or asset sale and the value of the assets of
the Corporation as may reasonably be requested by the holders of Series A
Preferred Stock in order to assist them in determining whether to make such an
election. If the holders of the Series A Preferred Stock make such an election,
the Corporation shall use its best efforts to amend the agreement or plan of
merger or consolidation to adjust the rate at which the shares of capital stock
of the Corporation are converted into or exchanged for cash, new securities or
other property to give effect to such election. The amount deemed distributed to
the holders of Series A Preferred Stock upon any such merger or consolidation
shall be the cash or the value of the property, rights or securities distributed
to such holders by the acquiring person, firm or other entity. The value of such
property, rights or other securities shall be determined in good faith by the
Board of Directors of the Corporation. If no notice of the election permitted by
this Subsection (c) is given, the provisions of Subsection 4(i) shall apply.
3. Voting.
5
<PAGE>
(a) Each holder of outstanding shares of Series A Preferred
Stock shall be entitled to the number of votes equal to the number of whole
shares of Common Stock into which the shares of Series A Preferred Stock held by
such holder are then convertible (as adjusted from time to time pursuant to
Section 4 hereof), at each meeting of stockholders of the Corporation (and
written actions of stockholders in lieu of meetings) with respect to any and all
matters presented to the stockholders of the Corporation for their action or
consideration. Except as provided by law, by the provisions of Subsection 3(b)
below or by the provisions establishing any other series of Series Preferred
Stock, holders of Series A Preferred Stock and of any other outstanding series
of Series Preferred Stock shall vote together with the holders of Common Stock
as a single class.
(b) The Corporation shall not amend, alter or repeal the
preferences, special rights or other powers of the Series A Preferred Stock so
as to affect adversely the Series A Preferred Stock, without the written consent
or affirmative vote of the holders of a majority of the then outstanding shares
of Series A Preferred Stock, given in writing or by vote at a meeting,
consenting or voting (as the case may be) separately as a class. For this
purpose, without limiting the generality of the foregoing, the authorization of
any shares of capital stock with preference or priority over the Series A
Preferred Stock as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Corporation
shall be deemed to affect adversely the Series A Preferred Stock, and the
authorization of any shares of capital stock on a parity with Series A Preferred
Stock as to the right to receive either dividends or amounts distributable upon
liquidation, dissolution or winding up of the Corporation shall not be deemed to
affect adversely the Series A Preferred Stock. The number of authorized shares
of Series A Preferred Stock may be increased or decreased (but not below the
number of shares then outstanding) by the directors of the Corporation pursuant
to Section 151 of the General Corporation Law of Delaware or by the affirmative
vote of the holders of a majority of the then outstanding shares of the Common
Stock, Series A Preferred Stock and all other classes or series of stock of the
Corporation entitled to vote thereon, voting as a single class.
4. Optional Conversion. The holders of the Series A Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock
shall be convertible, at the option of the holder thereof, at any time and from
time to time, and without the payment of additional consideration by the holder
thereof, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing $6.65 by the Conversion Price (as defined below) in
effect at the time of conversion. The "Conversion Price" shall initially be
$6.65. Such initial Conversion Price, and the rate at which shares of Series A
Preferred Stock may be converted into shares of Common Stock, shall be subject
to adjustment as provided below.
6
<PAGE>
In the event of a liquidation of the Corporation, the Conversion Rights
shall terminate at the close of business on the first full day preceding the
date fixed for the payment of any amounts distributable on liquidation to the
holders of Series A Preferred Stock.
(b) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series A Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price.
(c) Mechanics of Conversion.
(i) In order for a holder of Series A Preferred
Stock to convert shares of Series A Preferred Stock into shares of Common Stock,
such holder shall surrender the certificate or certificates for such shares of
Series A Preferred Stock, at the office of the transfer agent for the Series A
Preferred Stock (or at the principal office of the Corporation if the
Corporation serves as its own transfer agent), together with written notice that
such holder elects to convert all or any number of the shares of the Series A
Preferred Stock represented by such certificate or certificates. Such notice
shall state such holder's name or the names of the nominees in which such holder
wishes the certificate or certificates for shares of Common Stock to be issued.
If required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by a written instrument or instruments of transfer, in
form satisfactory to the Corporation, duly executed by the registered holder or
his or its attorney duly authorized in writing. The date of receipt of such
certificates and notice by the transfer agent (or by the Corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Series A
Preferred Stock, or to his or its nominees, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled,
together with cash in lieu of any fraction of a share.
(ii) The Corporation shall at all times when the
Series A Preferred Stock shall be outstanding, reserve and keep available out of
its authorized but unissued stock, for the purpose of effecting the conversion
of the Series A Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Series A Preferred Stock. Before taking any action which
would cause an adjustment reducing the Conversion Price below the then par value
of the shares of Common Stock issuable upon conversion of the Series A Preferred
Stock, the Corporation will take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Price.
7
<PAGE>
(iii) Upon any such conversion, no adjustment to
the Conversion Price shall be made for any declared or accrued but unpaid
dividends on the Series A Preferred Stock surrendered for conversion or on the
Common Stock delivered upon conversion.
(iv) All shares of Series A Preferred Stock which
shall have been surrendered for conversion as herein provided shall no longer be
deemed to be outstanding and all rights with respect to such shares, including
the rights, if any, to receive notices and to vote, shall immediately cease and
terminate on the Conversion Date, except only the right of the holders thereof
to receive shares of Common Stock in exchange therefor and payment of any
dividends declared or accrued but unpaid thereon. Any shares of Series A
Preferred Stock so converted shall be retired and cancelled and shall not be
reissued, and the Corporation (without the need for stockholder action) may from
time to time take such appropriate action as may be necessary to reduce the
authorized Series A Preferred Stock accordingly.
(v) The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issuance or delivery of
shares of Common Stock upon conversion of shares of Series A Preferred Stock
pursuant to this Section 4. The Corporation shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of shares of Common Stock in a name other than that in
which the shares of Series A Preferred Stock so converted were registered, and
no such issuance or delivery shall be made unless and until the person or entity
requesting such issuance has paid to the Corporation the amount of any such tax
or has established, to the satisfaction of the Corporation, that such tax has
been paid.
(d) Adjustments to Conversion Price for Diluting Issues:
(i) Special Definitions. For purposes of this
ubsection 4(d), the following definitions shall apply:
(A) "Option" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire Common Stock or
Convertible Securities, excluding options described in subsection 4(d)(i)(D)(IV)
below.
(B) "Original Issue Date" shall mean the
date on which a share of Series A Preferred Stock was first issued.
(C) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
8
<PAGE>
(D) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Subsection
4(d)(iii) below, deemed to be issued) by the Corporation after the Original
Issue Date, other than shares of Common Stock issued or issuable:
(I) upon conversion of shares
of any convertible
preferred stock of the
Corporation outstanding
from time to time;
(II) as a dividend or
distribution on Series A
Preferred Stock;
(III) by reason of a dividend,
stock split, split-up or
other distribution on
shares of Common Stock that
is covered by Subsection
4(e) or 4(f) below; or
(IV) to employees or directors
of, or consultants to, the
Corporation pursuant to a
plan adopted by the Board
of Directors of the
Corporation.
(ii) No Adjustment of Conversion Price. No
adjustment in the number of shares of Common Stock into which the Series A
Preferred Stock is convertible shall be made, by adjustment in the applicable
Conversion Price thereof: (a) unless the consideration per share (determined
pursuant to Subsection 4(d)(v)) for an Additional Share of Common Stock issued
or deemed to be issued by the Corporation is less than the applicable Conversion
Price in effect on the date of, and immediately prior to, the issue of such
Additional Shares, or (b) if prior to such issuance, the Corporation receives
written notice from the holders of at least 51% of the then outstanding shares
of Series A Preferred Stock agreeing that no such adjustment shall be made as
the result of the issuance of Additional Shares of Common Stock.
(iii) Issue of Securities Deemed Issue of
Additional Shares of Common Stock. If the Corporation at any time or from time
to time after the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares of Common Stock (as set forth in
the instrument relating thereto without regard to any provision contained
therein for a subsequent adjustment of such number) issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the
9
<PAGE>
time of such issue or, in case such a record date shall have been fixed, as of
the close of business on such record date, provided that Additional Shares of
Common Stock shall not be deemed to have been issued unless the consideration
per share (determined pursuant to Subsection 4(d)(v) hereof) of such Additional
Shares of Common Stock would be less than the applicable Conversion Price in
effect on the date of and immediately prior to such issue, or such record date,
as the case may be, and provided further that in any such case in which
Additional Shares of Common Stock are deemed to be issued:
(A) No further adjustment in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common Stock upon the exercise of such Options or
conversion or exchange of such Convertible Securities;
(B) If such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase
becoming effective, be recomputed to reflect such increase insofar as it affects
such Options or the rights of conversion or exchange under such Convertible
Securities;
(C) Upon the expiration or termination
of any unexercised Option, the Conversion Price shall not be readjusted, but the
Additional Shares of Common Stock deemed issued as the result of the original
issue of such Option shall not be deemed issued for the purposes of any
subsequent adjustment of the Conversion Price;
(D) In the event of any change in the
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of any Option or Convertible Security, including, but not limited to, a
change resulting from the anti-dilution provisions thereof, the Conversion Price
then in effect shall forthwith be readjusted to such Conversion Price as would
have obtained had the adjustment which was made upon the issuance of such Option
or Convertible Security not exercised or converted prior to such change been
made upon the basis of such change; and
(E) No readjustment pursuant to clause (B)
or (D) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (i) the Conversion Price on the original
adjustment date, or (ii) the Conversion Price that would have resulted from any
issuances of Additional Shares of Common Stock between the original adjustment
date and such readjustment date.
10
<PAGE>
(iv) Adjustment of Conversion Price Upon Issuance
of Additional Shares of Common Stock. In the event the Corporation shall at any
time after the Original Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Subsection 4(d)(iii), but excluding shares issued as a dividend or distribution
as provided in Subsection 4(f) or upon a stock split or combination as provided
in Subsection 4(e)), without consideration or for a consideration per share less
than the applicable Conversion Price in effect on the date of and immediately
prior to such issue, then and in such event, such Conversion Price shall be
reduced, concurrently with such issue, to a price (calculated to the nearest
cent) determined by multiplying such Conversion Price by a fraction, (A) the
numerator of which shall be (1) the number of shares of Common Stock outstanding
immediately prior to such issue plus (2) the number of shares of Common Stock
which the aggregate consideration received or to be received by the Corporation
for the total number of Additional Shares of Common Stock so issued would
purchase at such Conversion Price; and (B) the denominator of which shall be the
number of shares of Common Stock outstanding immediately prior to such issue
plus the number of such Additional Shares of Common Stock so issued; provided
that, (i) for the purpose of this Subsection 4(d)(iv), all shares of Common
Stock issuable upon exercise or conversion of Options or Convertible Securities
outstanding immediately prior to such issue shall be deemed to be outstanding
(other than shares excluded from the definition of "Additional Shares of Common
Stock" by virtue of clause (IV) of Subsection 4(d)(i)(D)), and (ii) the number
of shares of Common Stock deemed issuable upon conversion of such outstanding
Options and Convertible Securities shall not give effect to any adjustments to
the conversion price or conversion rate of such Options or Convertible
Securities resulting from the issuance of Additional Shares of Common Stock that
is the subject of this calculation.
Notwithstanding the foregoing, the applicable Conversion Price shall
not be so reduced at such time if the amount of such reduction would be an
amount less than $.05, but any such amount shall be carried forward and
reduction with respect thereto made at the time of and together with any
subsequent reduction which, together with such amount and any other amount or
amounts so carried forward, shall aggregate $.05 or more.
(v) Determination of Consideration. For
purposes of this Subsection 4(d), the consideration received by the Corporation
for the issue of any Additional Shares of Common Stock shall be computed as
follows:
11
<PAGE>
(A) Cash and Property: Such consideration
shall:
(I) insofar as it consists of
cash, be computed at the aggregate of cash received by the Corporation,
excluding amounts paid or payable for accrued interest or accrued dividends;
(II) insofar as it consists of
property other than cash, be computed at the fair market value thereof at the
time of such issue, as determined in good faith by the Board of Directors; and
(III) in the event Additional Shares
of Common Stock are issued together with other shares or securities or other
assets of the Corporation for consideration which covers both, be the proportion
of such consideration so received, computed as provided in clauses (I) and (II)
above, as determined in good faith by the Board of Directors.
(B) Options and Convertible Securities.
The consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Subsection 4(d) (iii),
relating to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any,
received or receivable by the Corporation as consideration for the issue of such
Options or Convertible Securities, plus the minimum aggregate amount of
additional consideration (as set forth in the instruments relating thereto,
without regard to any provision contained therein for a subsequent adjustment of
such consideration) payable to the Corporation upon the exercise of such Options
or the conversion or exchange of such Convertible Securities, or in the case of
Options for Convertible Securities, the exercise of such Options for Convertible
Securities and the conversion or exchange of such Convertible Securities, by
(y) the maximum number of shares of
Common Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such number)
issuable upon the exercise of such Options or the conversion or exchange of such
Convertible Securities.
(vi) Multiple Closing Dates. In the event the
Corporation shall issue on more than one date Additional Shares of Common Stock
which are comprised of shares of the same series or class of Preferred Stock,
and such issuance dates occur within a period of no more than 120 days, then the
Conversion Price shall be adjusted only once on account of such issuances, with
such adjustment to occur upon the final such issuance and to give effect to all
such issuances as if they occurred on the date of the final such issuance.
12
<PAGE>
(e) Adjustment for Stock Splits and Combinations. If the
Corporation shall at any time or from time to time after the Original Issue Date
effect a subdivision of the outstanding Common Stock, the Conversion Price then
in effect immediately before that subdivision shall be proportionately
decreased. If the Corporation shall at any time or from time to time after the
Original Issue Date effect a subdivision of the Series A Preferred Stock, the
Conversion Price then in effect immediately before that subdivision shall be
proportionately increased. If the Corporation shall at any time or from time to
time after the Original Issue Date combine the outstanding shares of Common
Stock, the Conversion Price then in effect immediately before the combination
shall be proportionately increased. If the Corporation shall at any time or from
time to time after the Original Issue Date combine the outstanding shares of
Series A Preferred Stock, the Conversion Price then in effect immediately before
the combination shall be proportionately decreased. Any adjustment under this
paragraph shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the
event the Corporation at any time, or from time to time after the Original Issue
Date shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Conversion
Price for the Series A Preferred Stock then in effect shall be decreased as of
the time of such issuance or, in the event such a record date shall have been
fixed, as of the close of business on such record date, by multiplying the
Conversion Price for the Series A Preferred Stock then in effect by a fraction:
(1) the numerator of which shall be the
total number of shares of Common Stock issued and
outstanding immediately prior to the time of such
issuance or the close of business on such record
date, and
(2) the denominator of which shall be the
total number of shares of Common Stock issued and
outstanding immediately prior to the time of such
issuance or the close of business on such record date
plus the number of shares of Common Stock issuable in
payment of such dividend or distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price for the Series A Preferred Stock shall be
recomputed accordingly as of the close of business on such record date and
thereafter the Conversion Price for the Series A Preferred Stock shall be
adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions; and provided further, however, that no such
adjustment shall be made if the holders of Series A Preferred
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<PAGE>
Stock simultaneously receive a dividend or other distribution of shares of
Common Stock in a number equal to the number of shares of Common Stock as they
would have received if all outstanding shares of Series A Preferred Stock had
been converted into Common Stock on the date of such event.
(g) Adjustments for Other Dividends and Distributions. In the
event the Corporation at any time or from time to time after the Original Issue
Date for the Series A Preferred Stock shall make or issue, or fix a record date
for the determination of holders of Common Stock entitled to receive, a dividend
or other distribution payable in securities of the Corporation other than shares
of Common Stock, then and in each such event provision shall be made so that the
holders of the Series A Preferred Stock shall receive upon conversion thereof in
addition to the number of shares of Common Stock receivable thereupon, the
amount of securities of the Corporation that they would have received had the
Series A Preferred Stock been converted into Common Stock on the date of such
event and had they thereafter, during the period from the date of such event to
and including the conversion date, retained such securities receivable by them
as aforesaid during such period, giving application to all adjustments called
for during such period under this paragraph with respect to the rights of the
holders of the Series A Preferred Stock; and provided further, however, that no
such adjustment shall be made if the holders of Series A Preferred Stock
simultaneously receive a dividend or other distribution of such securities in an
amount equal to the amount of such securities as they would have received if all
outstanding shares of Series A Preferred Stock had been converted into Common
Stock on the date of such event.
(h) Adjustment for Reclassification, Exchange, or
Substitution. If the Common Stock issuable upon the conversion of the Series A
Preferred Stock shall be changed into the same or a different number of shares
of any class or classes of stock, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
shares or stock dividend provided for above, or a reorganization, merger,
consolidation, or sale of assets provided for below), then and in each such
event the holder of each such share of Series A Preferred Stock shall have the
right thereafter to convert such share into the kind and amount of shares of
stock and other securities and property receivable upon such reorganization,
reclassification, or other change, by holders of the number of shares of Common
Stock into which such shares of Series A Preferred Stock might have been
converted immediately prior to such reorganization, reclassification, or change,
all subject to further adjustment as provided herein.
(i) Adjustment for Merger or Reorganization, etc. In case of
any consolidation or merger of the Corporation with or into another corporation
or the sale of all or substantially all of the assets of the Corporation to
another corporation (other than a consolidation, merger or sale which is covered
by Subsection 2(c)), each share of Series A Preferred Stock shall thereafter be
convertible (or shall be converted
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<PAGE>
into a security which shall be convertible) into the kind and amount of shares
of stock or other securities or property to which a holder of the number of
shares of Common Stock of the Corporation deliverable upon conversion of such
Series A Preferred Stock would have been entitled upon such consolidation,
merger or sale; and, in such case, appropriate adjustment (as determined in good
faith by the Board of Directors) shall be made in the application of the
provisions in this Section 4 set forth with respect to the rights and interest
thereafter of the holders of the Series A Preferred Stock, to the end that the
provisions set forth in this Section 4 (including provisions with respect to
changes in and other adjustments of the Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other property thereafter deliverable upon the conversion of the Series A
Preferred Stock.
(j) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series A Preferred Stock against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series A Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series A Preferred Stock, furnish or cause to be furnished
to such holder a similar certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price then in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which then
would be received upon the conversion of Series A Preferred Stock.
(l) Notice of Record Date. In the event:
(i) that the Corporation declares a dividend (or
any other distribution) on its Common Stock
payable in Common Stock or other securities
of the Corporation;
(ii) that the Corporation subdivides or combines
its outstanding shares of Common Stock;
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<PAGE>
(iii) of any reclassification of the Common Stock
of the Corporation (other than a subdivision
or combination of its outstanding shares of
Common Stock or a stock dividend or stock
distribution thereon), or of any
consolidation or merger of the Corporation
into or with another corporation, or of the
sale of all or substantially all of the
assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution,
liquidation or winding up of the
Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series A Preferred Stock, and shall cause to
be mailed to the holders of the Series A Preferred Stock at their last addresses
as shown on the records of the Corporation or such transfer agent, at least ten
days prior to the date specified in (A) below or twenty days before the date
specified in (B) below, a notice stating
(A) the record date of such dividend, distribution,
subdivision or combination, or, if a record is not to
be taken, the date as of which the holders of Common
Stock of record to be entitled to such dividend,
distribution, subdivision or combination are to be
determined, or
(B) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation
or winding up is expected to become effective, and
the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange
their shares of Common Stock for securities or other
property deliverable upon such reclassification,
consolidation, merger, sale, dissolution or winding
up.
5. Mandatory Conversion.
(a) Upon the closing of the sale of shares of Common Stock, at
a price of at least $10.00 per share (subject to appropriate adjustment for
stock splits, stock dividends, combinations and other similar recapitalizations
affecting such shares), in a public offering pursuant to an effective
registration statement under the Securities Act of 1933, as amended, resulting
in at least $5,000,000 of gross proceeds to the Corporation (the "Mandatory
Conversion Date"), (i) all outstanding shares of Series A Preferred Stock shall
automatically be converted into shares of Common Stock, at the then effective
conversion rate and (ii) the number of authorized shares of Preferred Stock
shall be automatically reduced by the number of shares of Preferred Stock that
had been designated as Series A Preferred Stock, and all
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<PAGE>
provisions included under the caption "Series A Convertible Preferred Stock,"
and all references to the Series A Preferred Stock, shall be deleted and shall
be of no further force or effect.
(b) All holders of record of shares of Series A Preferred
Stock will be given written notice of the Mandatory Conversion Date and the
place designated for mandatory conversion of all such shares of Series A
Preferred Stock pursuant to this Section 5. Such notice shall be sent by first
class or registered mail, postage prepaid, to each record holder of Series A
Preferred Stock at such holder's address last shown on the records of the
transfer agent for the Series A Preferred Stock (or the records of the
Corporation, if it serves as its own transfer agent). Upon receipt of such
notice, each holder of shares of Series A Preferred Stock shall surrender his or
its certificate or certificates for all such shares to the Corporation at the
place designated in such notice, and shall thereafter receive certificates for
the number of shares of Common Stock to which such holder is entitled pursuant
to this Section 5. On the Mandatory Conversion Date, all rights with respect to
the Series A Preferred Stock so converted, including the rights, if any, to
receive notices and vote, will terminate, except only the rights of the holders
thereof, upon surrender of their certificate or certificates therefor, to
receive certificates for the number of shares of Common Stock into which such
Series A Preferred Stock has been converted, and payment of any declared or
accrued but unpaid dividends thereon (all of which shall be deemed to be
declared by the Board of Directors on the Mandatory Conversion Date). If so
required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by written instrument or instruments of transfer, in
form satisfactory to the Corporation, duly executed by the registered holder or
by his or its attorney duly authorized in writing. As soon as practicable after
the Mandatory Conversion Date and the surrender of the certificate or
certificates for Series A Preferred Stock, the Corporation shall cause to be
issued and delivered to such holder, or on his or its written order, a
certificate or certificates for the number of full shares of Common Stock
issuable on such conversion in accordance with the provisions hereof and cash as
provided in Subsection 4(b) in respect of any fraction of a share of Common
Stock otherwise issuable upon such conversion.
(c) All certificates evidencing shares of Series A Preferred
Stock which are required to be surrendered for conversion in accordance with the
provisions hereof shall, from and after the Mandatory Conversion Date, be deemed
to have been retired and cancelled and the shares of Series A Preferred Stock
represented thereby converted into Common Stock for all purposes,
notwithstanding the failure of the holder or holders thereof to surrender such
certificates on or prior to such date. The Corporation may thereafter take such
appropriate action (without the need for stockholder action) as may be necessary
to reduce the authorized Series A Preferred Stock accordingly.
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<PAGE>
D. SERIES B CONVERTIBLE PREFERRED STOCK
The rights, preferences, powers, privileges and restrictions,
qualifications and limitations granted to or imposed upon the shares of Series B
Preferred Stock shall be as set forth in this Part D of this Article FOURTH.
1. Dividends.
(a) The holders of shares of Series B Preferred Stock shall be
entitled to receive dividends, payable when and as declared by the Board of
Directors of the Corporation for the Common Stock, and at the same rate per
share as the Common Stock (subject to appropriate adjustment in the event of any
stock dividend, stock split, combination or other similar recapitalization
affecting such shares). The right to receive dividends on Series B Preferred
Stock shall be non-cumulative, and no right to dividends shall accrue by reason
of the fact that no dividend has been declared on the Series B Preferred Stock
in any prior year.
(b) The Corporation shall not pay any dividends or other
distributions (as defined below) on shares of Common Stock until the holders of
the Series B Preferred Stock then outstanding shall have first received a
dividend at the rate specified in paragraph (a) of this Section 1.
(c) For purposes of this Section 1, unless the context
requires otherwise, "distribution" shall mean the transfer of cash or property
without consideration, whether by way of dividend or otherwise, payable other
than in Common Stock or other securities of the Corporation, or the purchase or
redemption of shares of the Corporation (other than repurchases of Common Stock
held by employees or directors of, or consultants to, the Corporation upon
termination of their employment or services pursuant to agreements providing for
such repurchase at a price equal to the original issue price of such shares and
other than redemptions in liquidation or dissolution of the Corporation) for
cash or property, including any such transfer, purchase or redemption by a
subsidiary of this Corporation.
2. Liquidation, Dissolution or Winding Up; Certain Mergers,
Consolidations and Asset Sales.
(a) In the event of any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the holders of shares of Series B
Preferred Stock then outstanding shall be entitled to be paid out of the assets
of the Corporation available for distribution to its stockholders, after and
subject to the payment in full of all amounts required to be distributed to the
holders of any other class or series of stock of the Corporation ranking on
liquidation prior and in preference to the Series B Preferred Stock
(collectively referred to as "Senior Preferred Stock"), but before any payment
shall be made to the holders of Common Stock or
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<PAGE>
any other class or series of stock ranking on liquidation junior to the Series B
Preferred Stock (such Common Stock and other stock being collectively referred
to as "Junior Stock") by reason of their ownership thereof, an amount equal to
the greater of (i) $5.06 per share (subject to appropriate adjustment in the
event of any stock dividend, stock split, combination or other similar
recapitalization affecting such shares), plus any dividends declared or accrued
but unpaid thereon, or (ii) such amount per share as would have been payable had
each such share been converted into Common Stock pursuant to Section 4
immediately prior to such liquidation, dissolution or winding up. The rights of
the holders of Series B Preferred Stock to receive such amounts on liquidation
shall be pari passu with the comparable rights of the holders of Series A
Preferred Stock (as set forth in subsection C.2(a) of this Article FOURTH). If
upon any such liquidation, dissolution or winding up of the Corporation the
remaining assets of the Corporation available for distribution to its
stockholders shall be insufficient to pay the holders of shares of Series B
Preferred Stock and Series A Preferred Stock the full amount to which they shall
be entitled, the holders of shares of Series B Preferred Stock and Series A
Preferred Stock and any class or series of stock ranking on liquidation on a
parity with the Series B Preferred Stock and the Series A Preferred Stock shall
share ratably in any distribution of the remaining assets and funds of the
Corporation in proportion to the respective amounts which would otherwise be
payable in respect of the shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full.
(b) After the payment of all preferential amounts required to
be paid to the holders of Senior Preferred Stock, Series B Preferred Stock,
Series A Preferred Stock and any other class or series of stock of the
Corporation ranking on liquidation on a parity with the Series B Preferred Stock
and Series A Preferred Stock, upon the dissolution, liquidation or winding up of
the Corporation, the holders of shares of Junior Stock then outstanding shall be
entitled to receive the remaining assets and funds of the Corporation available
for distribution to its stockholders until the amount distributed to holders of
each share of Common Stock equals the amount per share distributed pursuant to
Section 2(a) above. Any assets and funds available thereafter shall be
distributed to the holders of all shares of Junior Stock and Series B Preferred
Stock and any Senior Preferred Stock with similar rights, ratably in accordance
with the number of shares held, without regard to the type, class or series of
stock.
(c) In the event of any merger or consolidation of the
Corporation into or with another entity (except one in which the holders of
capital stock of the Corporation immediately prior to such merger or
consolidation continue to hold at least 80% by voting power of the equity
interests of the surviving entity), or the sale of all or substantially all the
assets of the Corporation, if the holders of at least 51% of the then
outstanding shares of Series B Preferred Stock so elect by giving written notice
thereof to the Corporation at least three days before the effective date of such
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<PAGE>
event, then such merger, consolidation or asset sale shall be deemed to be a
liquidation of the Corporation, and all consideration payable to the
stockholders of the Corporation (in the case of a merger or consolidation), or
all consideration payable to the Corporation, together with all other available
assets of the Corporation (in the case of an asset sale), shall be distributed
to the holders of capital stock of the Corporation in accordance with
Subsections 2(a) and 2(b) above. The Corporation shall promptly provide to the
holders of shares of Series B Preferred Stock such information concerning the
terms of such merger, consolidation or asset sale and the value of the assets of
the Corporation as may reasonably be requested by the holders of Series B
Preferred Stock in order to assist them in determining whether to make such an
election. If the holders of the Series B Preferred Stock make such an election,
the Corporation shall use its best efforts to amend the agreement or plan of
merger or consolidation to adjust the rate at which the shares of capital stock
of the Corporation are converted into or exchanged for cash, new securities or
other property to give effect to such election. The amount deemed distributed to
the holders of Series B Preferred Stock upon any such merger or consolidation
shall be the cash or the value of the property, rights or securities distributed
to such holders by the acquiring person, firm or other entity. The value of such
property, rights or other securities shall be determined in good faith by the
Board of Directors of the Corporation. If no notice of the election permitted by
this Subsection (c) is given, the provisions of Subsection 4(i) shall apply.
3. Voting.
(a) Each holder of outstanding shares of Series B Preferred
Stock shall be entitled to the number of votes equal to the number of whole
shares of Common Stock into which the shares of Series B Preferred Stock held by
such holder are then convertible (as adjusted from time to time pursuant to
Section 4 hereof), at each meeting of stockholders of the Corporation (and
written actions of stockholders in lieu of meetings) with respect to any and all
matters presented to the stockholders of the Corporation for their action or
consideration. Except as provided by law, by the provisions of Sections 3(b) or
7 below, by the provisions of Article IX of the Stock Subscription Agreement
dated as of November 22, 1995 by and between MaineCom Services and FiveCom,
Inc., as amended (with all references therein to the "Issuer" being deemed to be
references to the Corporation), or by the provisions establishing any other
series of Series Preferred Stock, holders of Series B Preferred Stock and of any
other outstanding series of Series Preferred Stock shall vote together with the
holders of Common Stock as a single class.
(b) The Corporation shall not amend, alter or repeal the
preferences, special rights or other powers of the Series B Preferred Stock so
as to affect adversely the Series B Preferred Stock, without the written consent
or affirmative vote of the holders of a majority of the then outstanding shares
of Series B Preferred Stock, given in writing or by vote at a meeting,
consenting or voting (as the case may be)
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<PAGE>
separately as a class. For this purpose, without limiting the generality of the
foregoing, the authorization of any shares of capital stock with preference or
priority over the Series B Preferred Stock, or on a parity with Series B
Preferred Stock, as to the right to receive either dividends or amounts
distributable upon liquidation, dissolution or winding up of the Corporation
shall be deemed to affect adversely the Series B Preferred Stock.
4. Optional Conversion. The holders of the Series B Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series B Preferred Stock
shall be convertible, at the option of the holder thereof, at any time and from
time to time, and without the payment of additional consideration by the holder
thereof, into such number of fully paid and nonassessable shares of Common Stock
as is determined by dividing $5.06 by the Conversion Price (as defined below) in
effect at the time of conversion. The "Conversion Price" shall initially be
$5.06. Such initial Conversion Price, and the rate at which shares of Series B
Preferred Stock may be converted into shares of Common Stock, shall be subject
to adjustment as provided below.
In the event of a liquidation of the Corporation, the Conversion Rights
shall terminate at the close of business on the first full day preceding the
date fixed for the payment of any amounts distributable on liquidation to the
holders of Series B Preferred Stock.
(b) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series B Preferred Stock. In lieu of any
fractional shares to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
effective Conversion Price.
(c) Mechanics of Conversion.
(i) In order for a holder of Series B Preferred
Stock to convert shares of Series B Preferred Stock into shares of Common Stock,
such holder shall surrender the certificate or certificates for such shares of
Series B Preferred Stock, at the office of the transfer agent for the Series B
Preferred Stock (or at the principal office of the Corporation if the
Corporation serves as its own transfer agent), together with written notice that
such holder elects to convert all or any number of the shares of the Series B
Preferred Stock represented by such certificate or certificates. Such notice
shall state such holder's name or the names of the nominees in which such holder
wishes the certificate or certificates for shares of Common Stock to be issued.
If required by the Corporation or the transfer agent, certificates surrendered
for conversion shall be endorsed or accompanied by a written instrument or
instruments of transfer, in form satisfactory to the Corporation, duly executed
by the registered holder or his or its attorney duly authorized in writing. The
date of receipt of such
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<PAGE>
certificates and notice by the transfer agent (or by the Corporation if the
Corporation serves as its own transfer agent) shall be the conversion date
("Conversion Date"). The Corporation shall, as soon as practicable after the
Conversion Date, issue and deliver at such office to such holder of Series B
Preferred Stock, or to his or its nominees, a certificate or certificates for
the number of shares of Common Stock to which such holder shall be entitled,
together with cash in lieu of any fraction of a share.
(ii) The Corporation shall at all times when the
Series B Preferred Stock shall be outstanding, reserve and keep available out of
its authorized but unissued stock, for the purpose of effecting the conversion
of the Series B Preferred Stock, such number of its duly authorized shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding Series B Preferred Stock. Before taking any action which
would cause an adjustment reducing the Conversion Price below the then par value
of the shares of Common Stock issuable upon conversion of the Series B Preferred
Stock, the Corporation will take any corporate action which may, in the opinion
of its counsel, be necessary in order that the Corporation may validly and
legally issue fully paid and nonassessable shares of Common Stock at such
adjusted Conversion Price.
(iii) Upon any such conversion, no adjustment to
the Conversion Price shall be made for any declared or accrued but unpaid
dividends on the Series B Preferred Stock surrendered for conversion or on the
Common Stock delivered upon conversion.
(iv) All shares of Series B Preferred Stock which
shall have been surrendered for conversion as herein provided shall no longer be
deemed to be outstanding and all rights with respect to such shares, including
the rights, if any, to receive notices and to vote, shall immediately cease and
terminate on the Conversion Date, except only the right of the holders thereof
to receive shares of Common Stock in exchange therefor and payment of any
dividends declared or accrued but unpaid thereon. Any shares of Series B
Preferred Stock so converted shall be retired and canceled and shall not be
reissued, and the Corporation (without the need for stockholder action) may from
time to time take such appropriate action as may be necessary to reduce the
authorized Series B Preferred Stock accordingly.
(v) The Corporation shall pay any and all issue
and other taxes that may be payable in respect of any issuance or delivery of
shares of Common Stock upon conversion of shares of Series B Preferred Stock
pursuant to this Section 4. The Corporation shall not, however, be required to
pay any tax which may be payable in respect of any transfer involved in the
issuance and delivery of shares of Common Stock in a name other than that in
which the shares of Series B Preferred Stock so converted were registered, and
no such issuance or delivery shall be made unless and until the person or entity
requesting such issuance has paid to the
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<PAGE>
Corporation the amount of any such tax or has established, to the satisfaction
of the Corporation, that such tax has been paid.
(d) Adjustments to Conversion Price for Diluting Issues:
(i) Special Definitions. For purposes of the
remainder of this Section 4, the following definitions shall apply:
(A) "Option" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire Common Stock or
Convertible Securities.
(B) "Original Issue Date" shall mean the
date on which a share of Series B Preferred Stock was first issued.
(C) "Convertible Securities" shall mean any
evidences of indebtedness, shares or other securities directly or indirectly
convertible into or exchangeable for Common Stock.
(D) "Additional Shares of Common Stock"
shall mean all shares of Common Stock issued (or, pursuant to Subsection 4
(d)(iii) below, deemed to be issued) by the Corporation after the Original Issue
Date, other than shares of Common Stock issued or issuable:
(I) upon conversion of shares
of any convertible
preferred stock of the
Corporation outstanding
from time to time;
(II) as a dividend or
distribution on Series B
Preferred Stock;
(III) by reason of a dividend,
stock split, split-up or
other distribution on
shares of Common Stock that
is covered by Subsection
4(e) or 4(f) below;
(IV) except for the shares issued
by the Corporation in respect
of the shares referenced in
Section 3.4(e) of the Stock
Subscription Agreement dated
as of November 22, 1995
entered into by FiveCom,
Inc., a Massachusetts
corporation, to employees or
directors of, or consultants
to, the Corporation pursuant
to a plan adopted
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<PAGE>
by the Board of Directors of
the Corporation; or
(V) upon exercise of options or
warrants when an equal
number of shares of Common
Stock are transferred to
the Corporation by holders
of previously outstanding
shares of Common Stock, so
that net result of
exercising is no net
increase in the number of
outstanding shares of
Common Stock.
(ii) No Adjustment of Conversion Price. No
adjustment in the number of shares of Common Stock into which the Series B
Preferred Stock is convertible shall be made, by adjustment in the applicable
Conversion Price thereof: (a) unless the consideration per share (determined
pursuant to Subsection 4 (d) (v)) for an Additional Share of Common Stock issued
or deemed to be issued by the Corporation is less than the applicable Conversion
Price in effect on the date of, and immediately prior to, the issue of such
Additional Shares, or (b) if prior to such issuance, the Corporation receives
written notice from the holders of at least 51% of the then outstanding shares
of Series B Preferred Stock agreeing that no such adjustment shall be made as
the result of the issuance of Additional Shares of Common Stock.
(iii) Issue of Securities Deemed Issue of
Additional Shares of Common Stock. If the Corporation at any time or from time
to time after the Original Issue Date shall issue any Options or Convertible
Securities or shall fix a record date for the determination of holders of any
class of securities entitled to receive any such Options or Convertible
Securities, then the maximum number of shares of Common Stock (as set forth in
the instrument relating thereto without regard to any provision contained
therein for a subsequent adjustment of such number) issuable upon the exercise
of such Options or, in the case of Convertible Securities and Options therefor,
the conversion or exchange of such Convertible Securities, shall be deemed to be
Additional Shares of Common Stock issued as of the time of such issue or, in
case such a record date shall have been fixed, as of the close of business on
such record date, provided that Additional Shares of Common Stock shall not be
deemed to have been issued unless the consideration per share (determined
pursuant to Subsection 4 (d)(v) hereof) of such Additional Shares of Common
Stock would be less than the applicable Conversion Price in effect on the date
of and immediately prior to such issue, or such record date, as the case may be,
and provided further that in any such case in which Additional Shares of Common
Stock are deemed to be issued:
(A) No further adjustment in the
Conversion Price shall be made upon the subsequent issue of Convertible
Securities or shares of Common
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<PAGE>
Stock upon the exercise of such Options or conversion or exchange of such
Convertible Securities;
(B) If such Options or Convertible
Securities by their terms provide, with the passage of time or otherwise, for
any increase in the consideration payable to the Corporation, upon the exercise,
conversion or exchange thereof, the Conversion Price computed upon the original
issue thereof (or upon the occurrence of a record date with respect thereto),
and any subsequent adjustments based thereon, shall, upon any such increase
becoming effective, be recomputed to reflect such increase insofar as it affects
such Options or the rights of conversion or exchange under such Convertible
Securities;
(C) Upon the expiration or termination
of any unexercised Option, the Conversion Price shall not be readjusted, but the
Additional Shares of Common Stock deemed issued as the result of the original
issue of such Option shall not be deemed issued for the purposes of any
subsequent adjustment of the Conversion Price;
(D) In the event of any change in the
number of shares of Common Stock issuable upon the exercise, conversion or
exchange of any Option or Convertible Security, including, but not limited to, a
change resulting from the anti-dilution provisions thereof, the Conversion Price
then in effect shall forthwith be readjusted to such Conversion Price as would
have obtained had the adjustment which was made upon the issuance of such Option
or Convertible Security not exercised or converted prior to such change been
made upon the basis of such change; and
(E) No readjustment pursuant to clause (B)
or (D) above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (i) the Conversion Price on the original
adjustment date, or (ii) the Conversion Price that would have resulted from any
issuances of Additional Shares of Common Stock between the original adjustment
date and such readjustment date.
(iv) Adjustment of Conversion Price Upon Issuance
of Additional Shares of Common Stock. In the event the Corporation shall at any
time after the Original Issue Date issue Additional Shares of Common Stock
(including Additional Shares of Common Stock deemed to be issued pursuant to
Subsection 4 (d) (iii), but excluding shares issued as a dividend or
distribution as provided in Subsection 4 (f) or upon a stock split or
combination as provided in Subsection 4(e)), without consideration or for a
consideration per share less than the applicable Conversion Price in effect on
the date of and immediately prior to such issue, then and in such event, such
Conversion Price shall be reduced, concurrently with such issue, to a price
(calculated to the nearest cent) determined by multiplying such Conversion Price
by a fraction, (A) the numerator of which shall be (1) the number of
25
<PAGE>
shares of Common Stock outstanding immediately prior to such issue plus (2) the
number of shares of Common Stock which the aggregate consideration received or
to be received by the Corporation for the total number of Additional Shares of
Common Stock so issued would purchase at such Conversion Price; and (B) the
denominator of which shall be the number of shares of Common Stock outstanding
immediately prior to such issue plus the number of such Additional Shares of
Common Stock so issued; provided that, (i) for the purpose of this Subsection 4
(d)(iv), all shares of Common Stock issuable upon exercise or conversion of
Options or Convertible Securities outstanding immediately prior to such issue
shall be deemed to be outstanding, (other than shares excluded from the
definition of "Additional Shares of Common Stock" by virtue of clauses (IV) or
(V) of Subsection 4 (d)(i)(D)), and (ii) the number of shares of Common Stock
deemed issuable upon conversion of such outstanding Options and Convertible
Securities shall not give effect to any adjustments to the conversion price or
conversion rate of such Options or Convertible Securities resulting from the
issuance of Additional Shares of Common Stock that is the subject of this
calculation.
Notwithstanding the foregoing, the applicable Conversion Price shall
not be so reduced at such time if the amount of such reduction would be an
amount less than $.05, but any such amount shall be carried forward and
reduction with respect thereto made at the time of and together with any
subsequent reduction which, together with such amount and any other amount or
amounts so carried forward, shall aggregate $.05 or more.
(v) Determination of Consideration. For
purposes of this Subsection 4(d), the consideration received by the Corporation
for the issue of any Additional Shares of Common Stock shall be computed as
follows:
(A) Cash and Property: Such consideration
shall:
(I) insofar as it consists of
cash, be computed at the
aggregate of cash received
by the Corporation,
excluding amounts paid or
payable for accrued
interest or accrued
dividends;
(II) insofar as it consists of
property other than cash,
be computed at the fair
market value thereof at the
time of such issue, as
determined in good faith by
the Board of Directors; and
(III) in the event Additional
Shares of Common Stock are
issued together with other
shares or
26
<PAGE>
securities or other assets
of the Corporation for
consideration which covers
both, be the proportion of
such consideration so
received, computed as
provided in clauses (I) and
(II) above, as determined
in good faith by the Board
of Directors.
(B) Options and Convertible Securities.
The consideration per share received by the Corporation for Additional Shares of
Common Stock deemed to have been issued pursuant to Subsection 4 (d) (iii),
relating to Options and Convertible Securities, shall be determined by dividing
(x) the total amount, if any,
received or receivable by
the Corporation as
consideration for the issue
of such Options or
Convertible Securities,
plus the minimum aggregate
amount of additional
consideration (as set forth
in the instruments relating
thereto, without regard to
any provision contained
therein for a subsequent
adjustment of such
consideration) payable to
the Corporation upon the
exercise of such Options or
the conversion or exchange
of such Convertible
Securities, or in the case
of Options for Convertible
Securities, the exercise of
such Options for
Convertible Securities and
the conversion or exchange
of such Convertible
Securities, by
(y) the maximum number of
shares of Common Stock (as
set forth in the
instruments relating
thereto, without regard to
any provision contained
therein for a subsequent
adjustment of such number)
issuable upon the exercise
of such Options or the
conversion or exchange of
such Convertible
Securities.
(vi) Multiple Closing Dates. In the event the
Corporation shall issue on more than one date Additional Shares of Common Stock
which are comprised of shares of the same series or class of Preferred Stock,
and such issuance dates occur within a period of no more than 120 days, then the
Conversion Price shall be adjusted only once on account of such issuances, with
such adjustment to occur upon the final such issuance and to give effect to all
such issuances as if they occurred on the date of the final such issuance.
27
<PAGE>
(e) Adjustment for Stock Splits and Combinations. If the
Corporation shall at any time or from time to time after the Original Issue Date
effect a subdivision of the outstanding Common Stock, the Conversion Price then
in effect immediately before that subdivision shall be proportionately
decreased. If the Corporation shall at any time or from time to time after the
Original Issue Date effect a subdivision of the Series B Preferred Stock, the
Conversion Price then in effect immediately before that subdivision shall be
proportionately increased. If the Corporation shall at any time or from time to
time after the Original Issue Date combine the outstanding shares of Common
Stock, the Conversion Price then in effect immediately before the combination
shall be proportionately increased. If the Corporation shall at any time or from
time to time after the original Issue Date combine the outstanding shares of
Series B Preferred Stock, the Conversion Price then in effect immediately before
the combination shall be proportionately decreased. Any adjustment under this
paragraph shall become effective at the close of business on the date the
subdivision or combination becomes effective.
(f) Adjustment for Certain Dividends and Distributions. In the
event the Corporation at any time, or from time to time after the Original Issue
Date shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable in
additional shares of Common Stock, then and in each such event the Conversion
Price for the Series B Preferred Stock then in effect shall be decreased as of
the time of such issuance or, in the event such a record date shall have been
fixed, as of the close of business on such record date, by multiplying the
Conversion Price for the Series B Preferred Stock then in effect by a fraction:
(1) the numerator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution;
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the Conversion Price for the Series B Preferred Stock shall be
recomputed accordingly as of the close of business on such record date and
thereafter the Conversion Price for the Series B Preferred Stock shall be
adjusted pursuant to this paragraph as of the time of actual payment of such
dividends or distributions; and provided further, however, that no such
adjustment shall be made if the holders of Series B Preferred Stock
simultaneously receive a dividend or other distribution of shares of Common
Stock in a number equal to the number of shares of Common Stock as they would
28
<PAGE>
have received if all outstanding shares of Series B Preferred Stock had been
converted into Common Stock on the date of such event.
(g) Adjustments for Other Dividends and Distributions. In the
event the Corporation at any time or from time to time after the Original Issue
Date shall make or issue, or fix a record date for the determination of holders
of Common Stock entitled to receive, a dividend or other distribution payable in
securities of the Corporation other than shares of Common Stock, then and in
each such event provision shall be made so that the holders of the Series B
Preferred Stock shall receive upon conversion thereof in addition to the number
of shares of Common Stock receivable thereupon, the amount of securities of the
Corporation that they would have received had the Series B Preferred Stock been
converted into Common Stock on the date of such event and had they thereafter,
during the period from the date of such event to and including the conversion
date, retained such securities receivable by them as aforesaid during such
period, giving application to all adjustments called for during such period
under this paragraph with respect to the rights of the holders of the Series B
Preferred Stock; and provided further, however, that no such adjustment shall be
made if the holders of Series B Preferred Stock simultaneously receive a
dividend or other distribution of such securities in an amount equal to the
amount of such securities as they would have received if all outstanding shares
of Series B Preferred Stock had been converted into Common Stock on the date of
such event.
(h) Adjustment for Reclassification, Exchange, or
Substitution. If the Common Stock issuable upon the conversion of the Series B
Preferred Stock shall be changed into the same or a different number of shares
of any class or classes of stock, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
shares or stock dividend provided for above, or a reorganization, merger,
consolidation, or sale of assets provided for below), then and in each such
event the holder of each such share of Series B Preferred Stock shall have the
right thereafter to convert such share into the kind and amount of shares of
stock and other securities and property receivable upon such reorganization,
reclassification, or other change, by holders of the number of shares of Common
Stock into which such shares of Series B Preferred Stock might have been
converted immediately prior to such reorganization, reclassification, or change,
all subject to further adjustment as provided herein.
(i) Adjustment for Merger or Reorganization, etc. In case of
any consolidation or merger of the Corporation with or into another entity or
the sale of all or substantially all of the assets of the Corporation to another
entity or person (other than a consolidation, merger or sale which is covered by
Subsection 2(c)), each share of Series B Preferred Stock shall thereafter be
convertible (or shall be converted into a security which shall be convertible)
into the kind and amount of shares of stock or other securities or property to
which a holder of the number of shares of
29
<PAGE>
Common Stock of the Corporation deliverable upon conversion of such Series B
Preferred Stock would have been entitled upon such consolidation, merger or
sale; and, in such case, appropriate adjustment (as determined in good faith by
the Board of Directors) shall be made in the application of the provisions in
this Section 4 set forth with respect to the rights and interest thereafter of
the holders of the Series B Preferred Stock, to the end that the provisions set
forth in this Section 4 (including provisions with respect to changes in and
other adjustments of the Conversion Price) shall thereafter be applicable, as
nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Series B Preferred
Stock.
(j) No Impairment. The Corporation will not, by amendment of
its Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all the provisions
of this Section 4 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series B Preferred Stock against impairment.
(k) Certificate as to Adjustments. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Section 4,
the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and furnish to each holder of
Series B Preferred Stock a certificate setting forth such adjustment or
readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B Preferred Stock, furnish or cause to be furnished
to such holder a similar certificate setting forth (i) such adjustments and
readjustments, (ii) the Conversion Price then in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which then
would be received upon the conversion of Series B Preferred Stock.
(l) Notice of Record Date. In the event:
(i) that the Corporation declares a dividend (or
any other distribution) on its Common Stock payable in Common Stock or other
securities of the Corporation;
(ii) that the Corporation subdivides or combines
its outstanding shares of Common Stock;
(iii) of any reclassification of the Common Stock
of the Corporation (other than a subdivision or combination of its outstanding
shares of
30
<PAGE>
Common Stock or a stock dividend or stock distribution thereon), or of any
consolidation or merger of the Corporation into or with another entity, or of
the sale of all or substantially all of the assets of the Corporation; or
(iv) of the involuntary or voluntary dissolution,
liquidation or winding up of the Corporation;
then the Corporation shall cause to be filed at its principal office or at the
office of the transfer agent of the Series B Preferred Stock, and shall cause to
be mailed to the holders of the Series B Preferred Stock at their last addresses
as shown on the records of the Corporation or such transfer agent, at least ten
days before the date specified in (A) below or twenty days before the date
specified in (B) below, a notice stating
(A) the record date of such dividend,
distribution, subdivision or combination, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distribution, subdivision or combination are to be determined, or
(B) the date on which such reclassification,
consolidation, merger, sale, dissolution, liquidation or winding up is expected
to become effective, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities or other property deliverable upon such reclassification,
consolidation, merger, sale, dissolution or winding up.
5. Mandatory Conversion.
(a) Upon (i) the closing of the sale of shares of Common
Stock, at a price of at least the Minimum Price per share stated in subsection
5(b) below (subject to appropriate adjustment for stock splits, stock dividends,
combinations and other similar events affecting such shares as provided in
Section 4), in a public offering pursuant to an effective registration statement
under the Securities Act of 1933, as amended (the "Act"), resulting in at least
$10,000,000 of gross proceeds to the Corporation or (ii) the tenth (10th)
anniversary of April 30, 1996 (the "Series B Issuance Date") (the earlier of (i)
and (ii) shall be called the "Mandatory Conversion Date"), (y) all outstanding
shares of Series B Preferred Stock shall automatically be converted into shares
of Common Stock, at the then effective conversion rate provided in Section 4 and
(z) the number of authorized shares of Preferred Stock shall be automatically
reduced by the number of shares of Preferred Stock that had been designated as
Series B Preferred Stock, and all provisions included under the caption Series B
Convertible Preferred Stock," and all references to the Series B Preferred
Stock, shall be deleted and shall be of no further force or effect.
31
<PAGE>
(b) The "Minimum Price" for purposes of Section 5(a) above
shall be as follows:
Time period between the Series B Minimum percentage of
Issuance Date and the closing of the the applicable Conversion
public offering Price
- -------------------------------------------- -------------------------
Less than 1 year 130%
Between 1 and 2 years 140%
More than 2 years 150%
(c) All holders of record of shares of Series B Preferred
Stock will be given written notice of the Mandatory Conversion Date and the
place designated for mandatory conversion of all such shares of Series B
Preferred Stock pursuant to this Section 5. Such notice shall be sent by first
class or registered mail, postage prepaid, to each record holder of Series B
Preferred Stock at such holder's address last shown on the records of the
transfer agent for the Series B Preferred Stock (or the records of the
Corporation, if it serves as its own transfer agent). Upon receipt of such
notice, each holder of shares of Series B Preferred Stock shall surrender his or
its certificate or certificates for all such shares to the Corporation at the
place designated in such notice, and shall thereafter receive certificates for
the number of shares of Common Stock to which such holder is entitled pursuant
to this Section 5. On the Mandatory Conversion Date, all rights with respect to
the Series B Preferred Stock so converted, including the rights, if any, to
receive notices and vote, will terminate, except only the rights of the holders
thereof, upon surrender of their certificate or certificates therefor, to
receive certificates for the number of shares of Common Stock into which such
Series B Preferred Stock has been converted, and payment of any declared or
accrued but unpaid dividends thereon (all of which shall be deemed to be
declared by the Board of Directors on the Mandatory Conversion Date). If so
required by the Corporation, certificates surrendered for conversion shall be
endorsed or accompanied by written instrument or instruments of transfer, in
form satisfactory to the Corporation, duly executed by the registered holder or
by his or its attorney duly authorized in writing. As soon as practicable after
the Mandatory Conversion Date and the surrender of the certificate or
certificates for Series B Preferred Stock, the Corporation shall cause to be
issued and delivered to such holder, or on his or its written order, a
certificate or certificates for the number of full shares of Common Stock
issuable on such conversion in accordance with the provisions hereof and cash as
provided in Subsection 4(b) in respect of any fraction of a share of Common
Stock otherwise issuable upon such conversion.
(d) All certificates evidencing shares of Series B Preferred
Stock which are required to be surrendered for conversion in accordance with the
provisions hereof shall, from and after the Mandatory Conversion Date, be deemed
to have been retired and canceled and the shares of Series B Preferred Stock
represented
32
<PAGE>
thereby converted into Common Stock for all purposes, notwithstanding the
failure of the holder or holders thereof to surrender such certificates on or
prior to such date. The Corporation may thereafter take such appropriate action
(without the need for stockholder action) as may be necessary to reduce the
authorized Series B Preferred Stock accordingly.
6. Interpretation. Both the Corporation and the initial Series B Holder
were represented by counsel in the drafting of this part D, and waive, to the
extent permitted by law, any presumption of interpreting ambiguities against the
drafter.
7. Board Representation. The Series B Holders shall be entitled to
elect, voting as a class, that number of directors which is in the same
proportion to the total number of directors as the proportion of voting shares
held by the Series B Holders at such time, assuming conversion of all
outstanding shares of Series B Preferred Stock to Common. So long as the
proportion of voting shares held by the Series B Holders is over 35%, any
fractions shall be rounded up in favor of the Series B Holders.
8. Index of Definitions of Terms Used in this Part D.
--------------------------------------------------
Term Section
---- -------
Act 5(a)
Additional Shares of Common
Stock 4(d)
Conversion Date 4(c)(i)
Conversion Price 4(a)
Conversion Rights 4, introductory paragraph
Convertible Securities 4(d)
Distribution 1(c)
Junior Stock 2(a)
Mandatory Conversion Price 5(a)
Minimum Price 5(b)
Option 4(d)
33
<PAGE>
Original Issue Date 4(d)
Senior Preferred Stock 2(a)
Series B Issuance Date 5(a)
Series B Preferred Stock introductory paragraph
FIFTH. The name and mailing address of the sole incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
Victor Colantonio 391 Totten Pond Road
Suite 401
Waltham, MA 02154
SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt,
amend or repeal the By-Laws of the Corporation.
SEVENTH. Except to the extent that the General Corporation Law of
Delaware prohibits the elimination or limitation of liability of directors for
breaches of fiduciary duty, no director of the Corporation shall be personally
liable to the Corporation or its stockholders for monetary damages for any
breach of fiduciary duty as a director, notwithstanding any provision of law
imposing such liability. No amendment to or repeal of this provision shall apply
to or have any effect on the liability or alleged liability of any director of
the Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
EIGHTH. The Corporation shall, to the fullest extent permitted by
Section 145 of the General Corporation Law of Delaware, as amended from time to
time, indemnify each person who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, by reason of the fact
that he is or was, or has agreed to become, a director or officer of the
Corporation, or is or was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan) (all such persons being referred to
hereafter as an "Indemnitee"), or by reason of any action alleged to have been
taken or omitted in such capacity, against all expenses (including attorneys'
34
<PAGE>
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by or on behalf of an Indemnitee in connection with such action, suit
or proceeding and any appeal therefrom.
As a condition precedent to his right to be indemnified, the Indemnitee
must notify the Corporation in writing as soon as practicable of any action,
suit, proceeding or investigation involving him for which indemnity will or
could be sought. With respect to any action, suit, proceeding or investigation
of which the Corporation is so notified, the Corporation will be entitled to
participate therein at its own expense and/or to assume the defense thereof at
its own expense, with legal counsel reasonably acceptable to the Indemnitee.
In the event that the Corporation does not assume the defense of any
action, suit, proceeding or investigation of which the Corporation receives
notice under this Article, the Corporation shall pay in advance of the final
disposition of such matter any expenses (including attorneys' fees) incurred by
an Indemnitee in defending a civil or criminal action, suit, proceeding or
investigation or any appeal therefrom; provided, however, that the payment of
such expenses incurred by an Indemnitee in advance of the final disposition of
such matter shall be made only upon receipt of an undertaking by or on behalf of
the Indemnitee to repay all amounts so advanced in the event that it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
by the Corporation as authorized in this Article, which undertaking shall be
accepted without reference to the financial ability of the Indemnitee to make
such repayment; and further provided that no such advancement of expenses shall
be made if it is determined that (i) the Indemnitee did not act in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Corporation, or (ii) with respect to any criminal action or
proceeding, the Indemnitee had reasonable cause to believe his conduct was
unlawful.
The Corporation shall not indemnify an Indemnitee seeking
indemnification in connection with a proceeding (or part thereof) initiated by
such Indemnitee unless the initiation thereof was approved by the Board of
Directors of the Corporation. In addition, the Corporation shall not indemnify
an Indemnitee to the extent such Indemnitee is reimbursed from the proceeds of
insurance, and in the event the Corporation makes any indemnification payments
to an Indemnitee and such Indemnitee is subsequently reimbursed from the
proceeds of insurance, such Indemnitee shall promptly refund such
indemnification payments to the Corporation to the extent of such insurance
reimbursement.
All determinations hereunder as to the entitlement of an Indemnitee to
indemnification or advancement of expenses shall be made in each instance by (a)
a majority vote of the directors of the Corporation consisting of persons who
are not at that time parties to the action, suit or proceeding in question
("disinterested directors"), whether or not a quorum, (b) a majority vote of a
quorum of the
35
<PAGE>
outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum shall consist of stockholders who are not
at that time parties to the action, suit or proceeding in question, (c)
independent legal counsel (who may, to the extent permitted by law, be regular
legal counsel to the Corporation), or (d) a court of competent jurisdiction.
The indemnification rights provided in this Article (i) shall not be
deemed exclusive of any other rights to which an Indemnitee may be entitled
under any law, agreement or vote of stockholders or disinterested directors or
otherwise, and (ii) shall inure to the benefit of the heirs, executors and
administrators of the Indemnitees. The Corporation may, to the extent authorized
from time to time by its Board of Directors, grant indemnification rights to
other employees or agents of the Corporation or other persons serving the
Corporation and such rights may be equivalent to, or greater or less than, those
set forth in this Article.
NINTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Amended and Restated Certificate of Incorporation to be
signed by its President this 7th day of July, 1998.
NORTHEAST OPTIC NETWORK, INC.
By: /s/ Victor Colantonio
---------------------------------------
Victor Colantonio, President
36
Exhibit 4.1
[NorthEast Optic Network, Inc. Logo]
NUMBER SHARES
NOPT
NorthEast Optic Network, Inc.
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS TRANSFERABLE IN BOSTON, MASSACHUSETTS OR NEW YORK, NEW YORK
COMMON STOCK SEE REVERSE SIDE FOR
CERTAIN DEFINITIONS
This Certifies that CUSIP
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
PAR VALUE $.01 PER SHARE, OF
NorthEast Optic Network, Inc.
(herein called the "Corporation"), transferable on the books of the Corporation
by the holder hereof in person or by duly authorized attorney upon surrender of
this Certificate properly endorsed. This Certificate and the shares represented
hereby are subject to the laws of the State of Delaware and to the Amended and
Restated Certificate of Incorporation and the By-laws of the Corporaton, each as
from time to time amended.
This certificate is not valid unless countersigned and registered by the
Transfer Agent and Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
/s/ William Fennell /s/ Richard Crabtree
--------------- ---------------------
Treasurer CHAIRMAN OF THE BOARD
NorthEast Optic Network, Inc.
[SEAL]
1998
DELAWARE
COUNTERSIGNED AND REGISTERED:
BankBoston, N.A.
TRANSFER AGENT
AND REGISTRAR
BY
AUTHORIZED SIGNATURE
<PAGE>
NorthEast Optic Network, Inc.
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OR SERIES OF STOCK. A
COPY OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING,
OPTIONAL OR OTHER SPECIAL RIGHTS OF EACH CLASS OF STOCK OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS WILL BE FURNISHED BY THE CORPORATION UPON WRITTEN REQUEST AND WITHOUT
CHARGE.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT -________Custodian________
TEN ENT - as tenants by the entireties (Cost) (Minor)
JT TEN - as joint tenants with right under Uniform Gifts to Minors
of survivorship and not as Act______________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED________________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
_______________________________________
| |
| |
|_____________________________________|_________________________________________
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING
POSTAL ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________Shares
of the common stock represented by the within Certificate and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated__________________________ X________________________________________
NOTICE: The Signature to this assignment
must correspond with the name as written
upon the face of the Certificate in
every particular, without alteration or
enlargement, or any change whatever.
Signature(s) Guaranteed:________________________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
Exhibit 10.4
RESTRUCTURING AND CONTRIBUTION AGREEMENT
RESTRUCTURING AND CONTRIBUTION AGREEMENT, dated as of ______________, 1998,
by and among FiveCom, Inc., a Massachusetts corporation ("FiveCom MA"),
NorthEast Optic Network, Inc., a Delaware corporation ("NEON"), FiveCom LLC, a
Massachusetts limited liability company ("FiveCom LLC"), FiveCom of Maine LLC, a
Massachusetts limited liability company ("FM LLC"), FiveCom of Maine, Inc., a
Delaware corporation ("FM Inc."), NECOM LLC, a Massachusetts limited liability
company ("NE LLC"), Mode 1 Communications, Inc., a Connecticut corporation
("Mode 1"), MaineCom Services, a Maine corporation ("MaineCom"), Central Maine
Power Company, an investor-owned utility and Maine corporation ("CMP"), Victor
Colantonio and Michael Musen.
RECITALS:
1. The members of FiveCom LLC (other than FiveCom MA), and the members of
FM LLC and NE LLC (other than FiveCom LLC), desire to assign their membership
interests in such limited liability companies to FiveCom MA for shares of the
Series B Convertible Preferred Stock, $.05 par value per share (the "Series B
Stock"), of FiveCom MA;
2. FiveCom LLC desires to merge with and into FiveCom MA, FiveCom MA
desires that FiveCom LLC merge with and into FiveCom MA, and the members of
FiveCom LLC and the Board of Directors of FiveCom MA have adopted or will adopt
pursuant hereto, resolutions approving this Agreement and such merger pursuant
to the terms hereof;
3. NE LLC desires to merge with and into FiveCom MA, FiveCom MA desires
that NE LLC merge with and into FiveCom MA, and the members of NE LLC and the
Board of Directors of FiveCom MA have adopted, or will adopt pursuant hereto,
resolutions approving this Agreement and such merger pursuant to the terms
hereof;
4. FM LLC desires to merge with and into FM Inc., FM Inc. desires that FM
LLC merge with and into FM Inc., and the members of FM LLC and the Board of
Directors of FM Inc. have adopted, or will adopt pursuant hereto, resolutions
approving this Agreement and such merger pursuant to the terms hereof;
5. FiveCom MA is a corporation duly organized and existing under the laws
of the Commonwealth of Massachusetts and is authorized to issue (i) 5,000,000
shares of Common Stock, $.05 par value per share ("Common Stock"), of which
115,371 shares are issued and outstanding as of the date hereof, (ii) 200,000
shares of
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Series A Convertible Preferred Stock, $.05 par value per share ("Series A
Stock"), of which 78,324 shares are issued and outstanding as of the date
hereof, and (iii) 4,500,000 shares of Series B Stock, of which 1,977,763 shares
are issued and outstanding as of the date hereof;
6. NEON is a corporation duly organized and existing under the laws of the
State of Delaware and is authorized to issue 30,000,000 shares of Common Stock,
$.01 par value per share ("NEON Common Stock"), of which 1,000 shares are issued
and outstanding as of the date hereof, and 6,776,331 shares of Preferred Stock,
$.01 par value per share, of which (i) 277,960 shares have been designed as
Series A Convertible Preferred Stock, $.01 par value per share ("NEON Series A
Stock"), of which no shares are issued and outstanding as of the date hereof,
and (ii) 4,498,371 shares have been designated as Series B Convertible Preferred
Stock, $.01 par value per share ("NEON Series B Stock"), of which no shares are
issued and outstanding as of the date hereof;
7. FiveCom MA desires to merge with and into NEON, NEON desires that
FiveCom MA be merged with and into NEON, and the Boards of Directors and
stockholders of FiveCom MA and NEON have adopted resolutions approving this
Agreement and such merger pursuant to the terms hereof;
8. The parties hereto intend that the foregoing contributions of LLC
interests to FiveCom MA qualify as "tax free contributions" pursuant to Section
351 of the Internal Revenue Code.
NOW THEREFORE, in consideration of the foregoing premises and the
undertakings herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
ARTICLE I
CONTRIBUTION OF MEMBERSHIP INTERESTS
1.1 Contribution of Membership Interests in FiveCom LLC.
(a) CMP hereby contributes, assigns, conveys and transfers to FiveCom
MA, and its successors and assigns, 99.9% of its shares of the Membership
Interests (as that term is defined in the Amended and Restated Operating
Agreement of FiveCom LLC, dated as of May 23, 1996, as amended to date (as
amended, the "FiveCom LLC Agreement")) of FiveCom LLC, including, without
limitation, all allocations of profits and losses, and distributions of cash or
other property, represented by such Membership Interests, and other rights
otherwise accruing to CMP by virtue of owning such Membership Interests, in
exchange for 144,172 shares
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of the Series B Stock of FiveCom MA; FiveCom MA hereby agrees to issue such
shares to CMP promptly upon the Contribution Effective Date (as defined in
Section 1.5). CMP makes the representations, warranties and covenants with
respect to such Membership Interests as are set forth in Section 1.4 of this
Article I. FiveCom MA hereby accepts the contribution and assignment of such
Membership Interests and agrees to become substituted as a member of FiveCom LLC
to the extent of such Membership Interests and to be bound by and perform all of
the obligations of a Member under the FiveCom LLC Agreement, and to pay or
perform all of the obligations of CMP arising thereunder in respect of such
Membership Interests from and after the date hereof. FiveCom MA hereby
acknowledges that CMP retains .1% of its shares of the Membership Interests in
FiveCom LLC after the contribution and assignment described in this Section 1.1
(the "CMP Retained Interest").
(b) Mode 1 hereby contributes, assigns, conveys and transfers to
FiveCom MA, and its successors and assigns, all of its shares of the Membership
Interests (as that term is defined in the FiveCom LLC Agreement) of FiveCom LLC,
including, without limitation, all allocations of profits and losses, and
distributions of cash or other property, represented by such Membership
Interests, and other rights otherwise accruing to Mode 1 by virtue of owning
such Membership Interests, in exchange for 285,425 shares of the Series B Stock
of FiveCom MA; FiveCom MA hereby agrees to issue such shares to Mode 1 promptly
upon the Contribution Effective Date. Mode 1 makes the representations,
warranties and covenants with respect to such Membership Interests as are set
forth in Section 1.4 of this Article I. FiveCom MA hereby accepts the
contribution and assignment of such Membership Interests and agrees to become
substituted as a member of FiveCom LLC to the extent of such Membership
Interests and to be bound by and perform all of the obligations of a Member
under the FiveCom LLC Agreement, and to pay or perform all of the obligations of
Mode 1 arising thereunder in respect of such Membership Interests from and after
the date hereof.
(c) Mr. Colantonio hereby contributes, assigns, conveys and transfers
to FiveCom MA, and its successors and assigns, all of his shares of the
Membership Interests (as that term is defined in the FiveCom LLC Agreement) of
FiveCom LLC, including, without limitation, all allocations of profits and
losses, and distributions of cash or other property, represented by such
Membership Interests, and other rights otherwise accruing to Mr. Colantonio by
virtue of owning such Membership Interests, in exchange for 17,788 shares of the
Series B Stock of FiveCom MA; FiveCom MA hereby agrees to issue such shares to
Mr. Colantonio promptly upon the Contribution Effective Date. Mr. Colantonio
makes the representations, warranties and covenants with respect to such
Membership Interests as are set forth in Section 1.4 of this Article I. FiveCom
MA hereby accepts the contribution and assignment of such Membership Interests
and agrees to become substituted as a member of FiveCom LLC to the extent of
such Membership Interests and to be bound by and perform all of the obligations
of a Member under the FiveCom LLC Agreement, and to pay or
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perform all of the obligations of Mr. Colantonio arising thereunder in respect
of such Membership Interests from and after the date hereof.
(d) Mr. Musen hereby contributes, assigns, conveys and transfers to
FiveCom MA, and its successors and assigns, all of his shares of the Membership
Interests (as that term is defined in the FiveCom LLC Agreement) of FiveCom LLC,
including, without limitation, all allocations of profits and losses, and
distributions of cash or other property, represented by such Membership
Interests, and other rights otherwise accruing to Mr. Musen by virtue of owning
such Membership Interests, in exchange for 14,549 shares of the Series B Stock
of FiveCom MA; FiveCom MA hereby agrees to issue such shares to Mr. Musen
promptly upon the Contribution Effective Date. Mr. Musen makes the
representations, warranties and covenants with respect to such Membership
Interests as are set forth in Section 1.4 of this Article I. FiveCom MA hereby
accepts the contribution and assignment of such Membership Interests and agrees
to become substituted as a member of FiveCom LLC to the extent of such
Membership Interests and to be bound by and perform all of the obligations of a
Member under the FiveCom LLC Agreement, and to pay or perform all of the
obligations of Mr. Musen arising thereunder in respect of such Membership
Interests from and after the date hereof.
(e) By their execution of this Agreement, which shall be deemed to be a
Written Action of Members in Lieu of a Meeting in accordance with Section 6.10
of the FiveCom LLC Agreement, each of FiveCom MA, CMP, Mode 1, Mr. Colantonio
and Mr. Musen, being all of the Members of FiveCom LLC (before giving effect to
the transactions contemplated by Article II of this Agreement), hereby (i)
consents to the disposition of Membership Interests (as that term is defined in
the FiveCom LLC Agreement) of FiveCom LLC in the manner provided herein, (ii)
waives compliance with the provisions of such Section 11.1 by each other Member
(as that term is defined in the FiveCom LLC Agreement), and, (iii) effective
upon the Contribution Effective Date, permanently and irrevocably waives its
rights under Article 16 of the FiveCom LLC Agreement.
1.2 Assignment of Membership Interests in NE LLC.
(a) Mode 1 hereby contributes, assigns, conveys and transfers to
FiveCom MA, and its successors and assigns, 99.9% of its shares of the
Membership Interests (as that term is defined in the Amended and Restated
Operating Agreement of NE LLC, dated as of July 11, 1996, as amended to date (as
amended, the "NE LLC Agreement")) of NE LLC, including, without limitation, all
allocations of profits and losses, and distributions of cash or other property,
represented by such Membership Interests, and other rights otherwise accruing to
Mode 1 by virtue of owning such Membership Interests, in exchange for 1,711,381
shares of the Series B Stock of FiveCom MA; FiveCom MA hereby agrees to issue
such shares to Mode 1 promptly upon the Contribution Effective Date. Mode 1
makes the representations, warranties
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and covenants with respect to such Membership Interests as are set forth in
Section 1.4 of this Article I. FiveCom MA hereby accepts the contribution and
assignment of such Membership Interests and agrees to become substituted as a
member of NE LLC to the extent of such Membership Interests and to be bound by
and perform all of the obligations of a Member under the NE LLC Agreement, and
to pay or perform all of the obligations of Mode 1 arising thereunder in respect
of such Membership Interests from and after the date hereof. FiveCom MA hereby
acknowledges that Mode 1 retains .1% of its Membership Interests in NE LLC after
the contribution and assignment described in this Section 1.2 (the "Mode 1
Retained Interest").
(b) By their execution of this Agreement, which shall be deemed to be a
Written Action of Members in Lieu of a Meeting in accordance with Section 6.10
of the NE LLC Agreement, each of FiveCom LLC and Mode 1, being all of the
Members of NE LLC (before giving effect to the transactions contemplated by
Article II of this Agreement), hereby (i) consents to the disposition of
Membership Interests (as that term is defined in the NE LLC Agreement) of NE LLC
in the manner provided herein, (ii) waives compliance with the provisions of
such Section 11.1 by each other Member (as that term is defined in the NE LLC
Agreement), to the extent applicable, and, (iii) effective upon the Contribution
Effective Date, permanently and irrevocably waives its rights under Article 16
of the NE LLC Agreement.
1.3 Contribution of Membership Interests in FM LLC.
(a) MaineCom hereby contributes assigns, conveys and transfers to
FiveCom MA, and its successors and assigns, 99.9% of its shares of the
Membership Interests (as that term is defined in the Operating Agreement of FM
LLC, dated as of January 17, 1997 (the "FM LLC Agreement")) of FM LLC,
including, without limitation, all allocations of profits and losses, and
distributions of cash or other property, represented by such Membership
Interests, and other rights otherwise accruing to MaineCom by virtue of owning
such Membership Interests, in exchange for 282,126 shares of the Series B Stock
of FiveCom MA; FiveCom MA hereby agrees to issue such shares to MaineCom
promptly upon the Contribution Effective Date. MaineCom makes the
representations, warranties and covenants with respect to such Membership
Interests as are set forth in Section 1.4 of this Article I. FiveCom MA hereby
accepts the contribution and assignment of such Membership Interests and agrees
to become substituted as a member of FM LLC to the extent of such Membership
Interests and to be bound by and perform all of the obligations of a Member
under the FM LLC Agreement, and to pay or perform all of the obligations of
MaineCom arising thereunder in respect of such Membership Interests from and
after the date hereof. FiveCom MA hereby acknowledges that MaineCom retains .1%
of its Membership Interests in FM LLC after the contribution and assignment
described in this Section 1.3 (the "MaineCom Retained Interest").
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(b) By their execution of this Agreement, which shall be deemed to be a
Written Action of Members in Lieu of a Meeting in accordance with Section 6.10
of the FM LLC Agreement, each of FiveCom LLC and MaineCom, being all of the
Members of FM LLC (before giving effect to the transactions contemplated by
Article II of this Agreement), hereby (i) consents to the disposition of
Membership Interests (as that term is defined in the FM LLC Agreement) of FM LLC
in the manner provided herein, (ii) waives compliance with the provisions of
such Section 11.1 by each other Member (as that term is defined in the FM LLC
Agreement), to the extent applicable, and, (iii) effective upon the Contribution
Effective Date, permanently and irrevocably waives its rights under Article 16
of the FM LLC Agreement.
1.4 Representations, Warranties and Covenants with Respect to Interests.
Each of CMP, Mode 1, Mr. Colantonio, Mr. Musen and MaineCom (each, a "Member"
for purposes of this Section 1.4), individually and not jointly or severally,
makes the following representations, warranties and covenants with respect to
its Membership Interests (as defined in the FiveCom LLC Agreement, the NE LLC
Agreement and the FM LLC Agreement, as the case may be) in FiveCom LLC, NE LLC
and FM LLC, respectively:
(a) the Member owns, or, upon the Contribution Effective Date will own,
the Membership Interests free and clear of all mortgages, pledges, liens,
charges, encumbrances, claims or other security arrangements or obligations to
other persons, of whatever kind or character (provided that, MaineCom's
Membership Interest in FM LLC and Mode 1's Membership Interests in NE LLC are
subject to pledges in favor of People's Heritage Savings Bank and CMP,
respectively, which pledges will be released effective upon the issuance of
Series B Stock of FiveCom MA in consideration of the contribution of such
interests to FiveCom MA pursuant to the terms of this Agreement, and such
interests will be contributed free and clear of any lien);
(b) the Member has full power and legal right and authority to
contribute, assign and transfer title to the Membership Interests;
(c) the Member will defend such title to the Membership Interests from
and against all claims and demands whatsoever, at law or in equity, of all
persons;
(d) the Member will execute and deliver such further instruments and do
such further acts and things as may be required to admit FiveCom MA as a
substitute member of FiveCom LLC, NE LLC or FM LLC, as the case may be, and to
reflect the Membership Interests contributed and assigned to FiveCom MA hereby;
and
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(e) the Member will indemnify and save FiveCom MA harmless from any and
all claims, demands, actions, causes of action, suits, proceedings, damages,
liabilities and costs and expenses of every nature whatsoever arising out of or
relating to any breach of the representations, warranties, covenants and
agreements contained in this Section 1.4.
1.5 Effectiveness of Contribution of Interests. The contribution and
assignment of Membership Interests contemplated by this Article I shall be
deemed to be effective immediately prior to the mergers contemplated by Articles
II and III of this Agreement (the "Contribution Effective Date").
ARTICLE II
MERGERS OF FIVECOM LLC AND NE LLC
2.1 Merger. The merger of FiveCom LLC into FiveCom MA shall herein be
referred to as the "FiveCom Merger," and the merger of NE LLC into FiveCom MA
shall herein be referred to as the "NE Merger." All references herein to a
"Company" shall mean FiveCom LLC for purposes of the FiveCom Merger, and NE LLC
for purposes of the NE Merger. All references herein to the "Surviving Company"
shall mean FiveCom MA for purposes of both the FiveCom Merger and the NE Merger.
Pursuant to the FiveCom Merger and the NE Merger, each Company shall be merged
into the Surviving Company pursuant to Section 83A of the Massachusetts Business
Corporation Law and Section 59 of the Massachusetts Limited Liability Company
Act. The Surviving Company shall survive the respective mergers herein
contemplated and shall continue to be governed by the laws of the Commonwealth
of Massachusetts. The separate existence of each Company shall cease forthwith
upon the Effective Date (as defined below in this Article II).
2.2 Member Approval. By their execution of this Agreement, which shall be
deemed to be a Written Action of Members in Lieu of a Meeting in accordance with
Section 6.10 of each of the FiveCom LLC Agreement and the NE LLC Agreement, as
the case may be, (i) as the sole members of FiveCom LLC (after giving effect to
the transactions contemplated by Article II of this Agreement), each of FiveCom
MA and CMP hereby adopt this Agreement and approve the FiveCom Merger pursuant
to the terms described herein and the distribution of the assets of FiveCom LLC
to FiveCom MA pursuant thereto, and permanently and irrevocably waive any rights
they may have under Section 11.1 and Article 16 of the FiveCom LLC Agreement
with respect to the FiveCom Merger, and authorize the Manager (as that term is
defined in the FiveCom LLC Agreement) to execute and deliver any agreements,
certificates, instruments or other documents, and to take any other actions,
necessary to carry into effect the intent of this Agreement, and (ii) as the
sole members of NE LLC (after giving effect to the transactions contemplated by
Article II
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of this Agreement), each of FiveCom MA and Mode 1 hereby adopt this Agreement
approve the NE Merger pursuant to the terms described herein and the
distribution of the assets of NE LLC to FiveCom MA pursuant thereto, permanently
and irrevocably waive any rights they may have under Section 11.1 and Article 16
of the NE LLC Agreement with respect to the NE Merger, and authorize the Manager
(as that term is defined in the NE LLC Agreement) to execute and deliver any
agreements, certificates, instruments or other documents, and to take any other
actions, necessary to carry into effect the intent of this Agreement.
2.3 Effective Date. Each of the FiveCom Merger and the NE Merger shall be
effective upon the filing of Articles and Certificates of Merger with the
Secretary of State of the Commonwealth of Massachusetts. The time of such
effectiveness shall be referred to in this Article II as the "Effective Date."
The filing of such Articles and Certificates of Merger shall be made as soon as
practicable after all required third party consents and approvals have been
obtained, and shall be made in such manner as will cause the Effective Date of
the FiveCom Merger to be immediately prior to the Effective Date of the NE
Merger.
2.4 Membership Interests in Each Company; Effect on LLC Agreements. On each
Effective Date, by virtue of the FiveCom Merger and the NE Merger, as the case
may be, and without any action on the part of the holders thereof, each
outstanding membership interest in each Company (including the CMP Retained
Interest and the Mode 1 Retained Interest) shall be cancelled (it being
understood and agreed that the shares of Series B Stock issued to CMP and Mode 1
pursuant to Sections 1.1(a), 1.1(b) and 1.2 of this Agreement, were also issued
in consideration of the cancellation of such retained interests). Effective as
of each Effective Date, each of the FiveCom LLC Agreement and the NE LLC
Agreement are hereby terminated and shall be of no further force or effect.
2.5 Capital Stock of the Surviving Company. The capital stock of the
Surviving Company shall be unaffected by the FiveCom Merger and the NE Merger.
2.6 Succession. On each Effective Date, the Surviving Company shall succeed
to all of the rights, privileges, debts, liabilities, powers and property of
each Company in the manner of and as more fully set forth in Section 62 of the
Massachusetts Limited Liability Company Act. Without limiting the foregoing,
upon each Effective Date, all property, rights, privileges, franchises, patents,
trademarks, licenses, registrations, and other assets of every kind and
description of each Company shall be transferred to, vested in and devolved upon
the Surviving Company without further act or deed and all property, rights, and
every other interest of each Company and the Surviving Company shall be as
effectively the property of the Surviving Company as they were of each Company
and the Surviving Company, respectively. All rights of creditors of each Company
and all liens upon any property of each Company shall be preserved unimpaired,
and all
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debts, liabilities and duties of each Company shall attach to the Surviving
Company and may be enforced against it to the same extent as if said debts,
liabilities and duties had been incurred or contracted by it. Without limiting
the foregoing, the warrant to purchase of the Membership Interests in FiveCom
LLC held by Oppenheimer & Co., Inc. (the "OpCo LLC Warrant") shall evidence the
right to purchase 65,167 shares of the Series B Stock of the Surviving Company
at an exercise price of $5.13 per share, and the Surviving Company shall execute
and deliver a new warrant to Oppenheimer & Co., Inc. upon surrender of the OpCo
LLC Warrant.
2.7 Articles of Organization and By-Laws. The Articles of Organization of
the Surviving Company in effect on each Effective Date shall continue to be the
Articles of Organization of the Surviving Company until further amended in
accordance with the provisions thereof and applicable law. The By-Laws of the
Surviving Company in effect on each Effective Date shall continue to be the
By-Laws of the Surviving Company until amended in accordance with the provisions
thereof and applicable law.
2.8 Directors and Officers. The members of the Board of Directors and the
officers of the Surviving Company on each Effective Date shall continue in
office until the expiration of their respective terms of office and until their
successors have been elected and qualified.
2.9 Further Assurances. From time to time, as and when required by the
Surviving Company or by its successors and assigns, there shall be executed and
delivered on behalf of each Company such deeds and other instruments, and there
shall be taken or caused to be taken by it such further and other action, as
shall be appropriate or necessary in order to vest or perfect in or to confirm
of record or otherwise in the Surviving Company the title to and possession of
all the property, interests, assets, rights, privileges, immunities, powers,
franchises and authority of each Company, and otherwise to carry out the
purposes of this Agreement, and the managers, officers and members of each
Company are fully authorized in the name and on behalf of each Company or
otherwise to take any and all such action and to execute and deliver any and all
such deeds and other instruments.
ARTICLE III
MERGER OF FM LLC WITH AND INTO FM INC.
3.1 Merger. The merger of FM LLC into FM Inc. shall herein be referred to
as the "FM Merger." FM LLC shall be merged with and into FM Inc. in accordance
with Section 59 of the Massachusetts Limited Liability Company Act and Section
264 of the Delaware General Corporation Law. FM Inc. shall survive the merger
herein contemplated and shall continue to be governed by the laws of the State
of Delaware.
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The separate existence of FM LLC shall cease forthwith upon the Effective Date
(as defined below in this Article III).
3.2 Member Approval; Consents and Waivers. By their execution of this
Agreement, which shall be deemed to be a Written Action of Members in Lieu of a
Meeting in accordance with Section 6.10 of the FM LLC Agreement, each of FiveCom
MA and MaineCom, being all of the members of FM LLC (after giving effect to the
contribution and assignment of Membership Interests contemplated by Article II
hereof) hereby (i) adopts this Agreement and approves the FM Merger pursuant to
the terms described herein, and the distribution of the assets of FM LLC to FM
Inc. pursuant thereto, and (ii) authorizes the Manager (as that term is defined
in the FM LLC Agreement) of FM LLC to execute and deliver any agreements,
certificates, instruments or other documents, and to take any other actions,
necessary to carry into effect the intent of this Agreement.
3.3 Effective Date. The FM Merger shall be effective upon the filing of a
Certificate of Merger with the Secretary of State of the Commonwealth of
Massachusetts and a Certificate of Merger with the Secretary of State of the
State of Delaware. The time of such effectiveness shall herein be referred to in
this Article III as the "Effective Date."
3.4 Membership Interests in FM LLC; Effect on LLC Agreement. On the
Effective Date, by virtue of the FM Merger, and without any action on the part
of the holders thereof, (i) all of the outstanding shares of Membership
Interests in FM LLC (including the MaineCom Retained Interest) shall, in the
aggregate, be converted into the right to receive 1,000 shares of the Common
Stock, $.01 par value per share, of FM Inc. ("FM Common Stock"), and (ii) in
consideration of the shares of Series B Stock issued to it pursuant to Section
1.3.(a), MaineCom hereby contributes to FiveCom MA all shares of FM Common Stock
issuable in respect of the MaineCom Retained Interest as a result of the FM
Merger. Effective as of the Effective Date, the FM LLC Agreement is hereby
terminated and shall be of no further force or effect.
3.5 Capital Stock of FM Inc. Except as otherwise set forth in Section 3.4,
the authorized, issued and outstanding capital stock of FM Inc. shall be
unaffected by the FM Merger.
3.6 Succession. On the Effective Date, FM Inc. shall succeed to all of the
rights, privileges, debts, liabilities, powers and property of FM LLC in the
manner of and as more fully set forth in Section 264 of the Delaware General
Corporation Law and Section 62 of the Massachusetts Limited Liability Company
Act. Without limiting the foregoing, upon the Effective Date, all property,
rights, privileges, franchises, patents, trademarks, licenses, registrations,
and other assets of every kind and description of FM LLC shall be transferred
to, vested in and devolved upon FM Inc. without further act or deed and all
property, rights, and every other interest of
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FM LLC and FM Inc. shall be as effectively the property of FM Inc. as they were
of FM LLC and FM Inc. All rights of creditors of FM LLC and all liens upon any
property of FM LLC shall be preserved unimpaired, and all debts, liabilities and
duties of FM LLC shall attach to FM Inc. and may be enforced against it to the
same extent as if said debts, liabilities and duties had been incurred or
contracted by it.
3.7 Certificate of Incorporation and By-Laws. The Certificate of
Incorporation of FM Inc. in effect on the Effective Date shall continue to be
the Certificate of Incorporation of FM Inc. until further amended in accordance
with the provisions thereof and applicable law. The By-Laws of FM Inc. in effect
on each Effective Date shall continue to be the By-Laws of FM Inc. until amended
in accordance with the provisions thereof and applicable law.
3.8 Directors and Officers. The members of the Board of Directors and the
officers of FM Inc. on the Effective Date shall continue in office until the
expiration of their respective terms of office and until their successors have
been elected and qualified.
3.9 Further Assurances. From time to time, as and when required by FM Inc.
or by its successors and assigns, there shall be executed and delivered on
behalf of FM Inc. such deeds and other instruments, and there shall be taken or
caused to be taken by it such further and other action, as shall be appropriate
or necessary in order to vest or perfect in or to confirm of record or otherwise
in FM Inc. the title to and possession of all the property, interests, assets,
rights, privileges, immunities, powers, franchises and authority of FM LLC, and
otherwise to carry out the purposes of this Agreement, and the managers,
officers and members of FM LLC are fully authorized in the name and on behalf of
FM LLC or otherwise to take any and all such action and to execute and deliver
any and all such deeds and other instruments.
ARTICLE IV
MERGER OF FIVECOM MA WITH AND INTO NEON
4.1 Merger. The merger of FiveCom MA into NEON shall herein be referred to
as the "Parent Merger". FiveCom MA shall be merged into NEON pursuant to Section
79 of the Massachusetts Business Corporaton Law and Section 252 of the General
Corporation Law of Delaware. NEON shall survive the merger herein contemplated
and shall continue to be governed by the laws of the State of Delaware. The
separate corporate existence of FiveCom MA shall cease forthwith upon the
Effective Date (as defined below in this Article IV).
4.2 Stockholder Approval. As soon as practicable after the execution of
this Agreement, FiveCom MA shall, if necessary under the Business Corporation
Law
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of Massachusetts, submit this Agreement to its stockholders for approval. The
failure of the stockholders of FiveCom MA to approve the Parent Merger shall not
affect the validity of any of the other transactions contemplated by this
Agreement.
4.3 Effective Date. The Parent Merger shall be effective upon the filing of
Articles of Merger with the Secretary of State of the Commonwealth of
Massachusetts and a Certificate of Merger with the Secretary of State of the
State of Delaware, which filings shall be made as soon as practicable after all
required stockholder approvals and other third party consents and approvals have
been obtained. The time of such effectiveness shall be referred to in this
Article IV as the "Effective Date." The filing of such Articles and Certificates
of Merger shall be made in such manner as will cause the Effective Date of the
Parent Merger to be immediately after the Effective Date of the NE Merger.
4.4 Capital Stock of FiveCom MA. Except as otherwise set forth in Section
4.10, on the Effective Date, by virtue of the Parent Merger and without any
action on the part of the holders thereof, (i) each share of Common Stock of
FiveCom MA issued and outstanding immediately prior thereto shall cease to exist
and shall be changed and converted into one fully paid and non-assessable share
of NEON Common Stock, (ii) each option or warrant to purchase shares of Common
Stock or Series B Stock of FiveCom MA shall be converted into an option purchase
the same number of shares of NEON Common Stock or NEON Series B Stock, (iii)
each share of the Series A Stock of FiveCom MA issued and outstanding
immediately prior thereto shall cease to exist and shall be changed and
converted into 3.54887218 fully paid and non-assessable share(s) of NEON Series
A Stock, and (iv) each share of the Series B Stock of FiveCom MA issued and
outstanding immediately prior thereto shall cease to exist and shall be changed
and converted into one fully paid and non-assessable share of NEON Series B
Stock. Any calculation hereunder resulting in a fractional share shall be
truncated to the nearest whole share.
4.5 Common Stock of NEON. On the Effective Date, by virtue of the Parent
Merger and without any action on the part of the holder thereof, each share of
NEON Common Stock issued and outstanding immediately prior thereto shall be
cancelled.
4.6 Stock Certificates. On and after the Effective Date, all of the
outstanding certificates which prior to that time represented shares of the
Common Stock, Series A Stock and Series B Stock of FiveCom MA shall be deemed
for all purposes to evidence ownership of and to represent the shares of NEON
into which the shares of FiveCom MA represented by such certificates have been
converted as herein provided. The registered owner on the books and records of
FiveCom MA or its transfer agent of any such outstanding stock certificate
shall, until such certificate shall have been surrendered for transfer or
conversion or otherwise accounted for to NEON or its transfer agent, have and be
entitled to exercise any voting and other
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rights with respect to and to receive any dividend and other distributions upon
the shares of NEON evidenced by such outstanding certificate as above provided.
4.7 Succession. On the Effective Date, NEON shall succeed to all of the
rights, privileges, debts, liabilities, powers and property of FiveCom MA in the
manner of and as more fully set forth in Section 259 of the General Corporation
Law of Delaware. Without limiting the foregoing, upon the Effective Date, all
property, rights, privileges, franchises, patents, trademarks, licenses,
registrations, and other assets of every kind and description of FiveCom MA
shall be transferred to, vested in and devolved upon NEON without further act or
deed and all property, rights, and every other interest of FiveCom MA and NEON
shall be as effectively the property of NEON as they were of FiveCom MA and
NEON, respectively. All rights of creditors of FiveCom MA and all liens upon any
property of FiveCom MA shall be preserved unimpaired, and all debts, liabilities
and duties of FiveCom MA, including, without limitation, all liabilities and
duties of FiveCom MA under its employee stock plans shall attach to NEON and may
be enforced against it to the same extent as if said debts, liabilities and
duties had been incurred or contracted by it.
4.8 Certificate of Incorporation and By-Laws. The Certificate of
Incorporation of NEON in effect on the Effective Date shall continue to be the
Certificate of Incorporation of NEON until further amended in accordance with
the provisions thereof and applicable law. The By-Laws of NEON in effect on the
Effective Date shall continue to be the By-Laws of NEON until amended in
accordance with the provisions thereof and applicable law.
4.9 Directors and Officers. The members of the Board of Directors and the
officers of NEON on the Effective Date shall continue in office until the
expiration of their respective terms of office and until their successors have
been elected and qualified.
4.10 Further Assurances. From time to time, as and when required by NEON or
by its successors and assigns, there shall be executed and delivered on behalf
of FiveCom MA such deeds and other instruments, and there shall be taken or
caused to be taken by it such further and other action, as shall be appropriate
or necessary in order to vest or perfect in or to confirm of record or otherwise
in NEON the title to and possession of all the property, interests, assets,
rights, privileges, immunities, powers, franchises and authority of FiveCom MA,
and otherwise to carry out the purposes of this Agreement, and the officers and
directors of FiveCom MA are fully authorized in the name and on behalf of
FiveCom MA or otherwise to take any and all such action and to execute and
deliver any and all such deeds and other instruments.
4.11 Dissenting Shares. For purposes of this Article IV, "Dissenting
Shares" means shares of the capital stock of FiveCom MA held as of the Effective
Date by a
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stockholder who has not voted such shares in favor of adoption of this Agreement
and with respect to which appraisal shall have been duly demanded and perfected
in accordance with Section 86 of the Massachusetts Business Corporation Law and
not effectively withdrawn or forfeited prior to the Effective Date. Dissenting
Shares shall not represent the right to receive the consideration set forth in
Section 4.4 of this Agreement unless the holder of such shares shall have
forfeited his right to appraisal under the Massachusetts General Corporation Law
or withdrawn, with the consent of NEON, his demand for appraisal. If such
stockholder has so forfeited or withdrawn his right to appraisal of Dissenting
Shares, then, as of the occurrence of such event, such holder's Dissenting
Shares shall cease to be Dissenting Shares and shall represent the right to
receive the consideration set forth in Section 4.4 of this Agreement. If the
holders of more than 1% of the outstanding capital stock of FiveCom MA properly
exercise their dissenters' rights, then FiveCom MA and NEON may elect to abandon
the Parent Merger.
ARTICLE V
CERTAIN REPRESENTATIONS, WARRANTIES AND COVENANTS
5.1 Representations, Warranties and Covenants of FiveCom MA.
--------------------------------------------------------
5.1.1 Capitalization. FiveCom MA represents and warrants to MaineCom,
CMP, Mode 1, Mr. Colantonio and Mr. Musen that its authorized, issued and
outstanding capital stock is as set forth in Recital 5 of this Agreement as of
the date hereof.
5.1.2 Indemnification. FiveCom MA hereby agrees to indemnify and save
harmless each of MaineCom, CMP, Mode 1, Mr. Colantonio and Mr. Musen from any
and all claims, demands, actions, causes of action, suits, proceedings, damages,
liabilities and costs and expenses of every nature whatsoever arising out of or
relating to (i) any liability attributable to such person's Membership Interests
(as that term is defined in the FiveCom LLC Agreement, the FM LLC Agreement or
the NE LLC Agreement, as the case may be) in FiveCom LLC, FM LLC or NE LLC, as
the case may be in respect of the operations, events or activities of such
entities from and after the date hereof, and (ii) any breach of its
representations, warranties, covenants and agreements contained in this Section
5.1.
5.2 Representations, Warranties and Covenants of NEON.
--------------------------------------------------
5.2.1 Capitalization. NEON represents and warrants to MaineCom, CMP,
Mode 1, Mr. Colantonio and Mr. Musen that its authorized, issued and outstanding
capital stock is as set forth in Recital 6 of this Agreement as of the date
hereof and (ii) attached as Exhibit A to this Agreement is a true, correct and
complete
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<PAGE>
copy of its Amended and Restated Certificate of Incorporation as in effect as of
the date hereof.
5.2.2 Indemnification. FiveCom MA hereby agrees to indemnify and save
harmless each of MaineCom, CMP, Mode 1, Mr. Colantonio and Mr. Musen from any
and all claims, demands, actions, causes of action, suits, proceedings, damages,
liabilities and costs and expenses of every nature whatsoever arising out of or
relating to any breach of its representations, warranties, covenants and
agreements contained in this Section 5.2.
5.3 Capital Stock in NEON. Each of MaineCom, CMP, Mode 1, Mr. Colantonio
and Mr. Musen each hereby agree that Exhibit B to this Agreement sets forth a
fair and correct statement of the number of shares of the capital stock of NEON
to be held by each of them as a result of the transactions contemplated by this
Agreement, and that such shares, when issued in accordance with the terms
hereof, shall satisfy in full all preemptive rights, antidilution rights and/or
rights of first refusal whatsoever, held by any of them on or prior to the date
hereof, including, but not limited to, any such rights under (i) the Articles of
Organization of FiveCom MA, as amended to date, (ii) that certain Stock
Subscription Agreement between FiveCom MA and MaineCom, dated as of November 22,
1995 and as amended to date (the "Stock Subscription Agreement"), (iii) the
FiveCom LLC Agreement, (iv) the FM LLC Agreement, (v) the NE LLC Agreement, (vi)
any employment agreement, warrant, option or other right to acquire equity
interests of any of FiveCom MA, FiveCom LLC, FM LLC or NE LLC.
5.4 Waiver of Preemptive Rights. MaineCom hereby waives its preemptive
rights under Section 9.1 of the Stock Subscription Agreement with respect to the
issuance of all shares of Series B Stock by FiveCom MA pursuant to this
Agreement, and, effective upon the later to occur of (i) the Effective Date of
the Parent Merger and (ii) the closing of the initial underwritten public
offering of NEON Common Stock, hereby permanently and irrevocably waives such
rights.
5.5 Consents to Assignment.
-----------------------
5.5.1 System Management Agreement. Pursuant to Section 14.6 of the
System Management Agreement, dated January 13, 1997, by and between FM LLC and
FiveCom LLC, (i) FM LLC hereby consents to the assignment of the rights and
obligations of FiveCom LLC thereunder to FiveCom MA and from FiveCom MA to NEON,
and (ii) FiveCom LLC, FiveCom MA and NEON hereby consent to the assignment of
the rights and obligations of FM LLC thereunder to FM Inc.
5.5.2 CMP Fiber Agreement. Pursuant to Sections 32.1 and 32.2 of the
Agreement for the Provision of Fiber Optic Facilities and Services by and
between
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<PAGE>
CMP and FM LLC, CMP hereby consents to the assignment of such agreement by FM
LLC to FM Inc
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<PAGE>
ARTICLE VI
MISCELLANEOUS
6.1 Abandonment. At any time prior to the first of any Effective Date, this
Agreement may be terminated and the transactions contemplated hereby may be
abandoned by the parties, notwithstanding approval of this Agreement by the
stockholders or members of the respective parties.
6.2 Amendment. This Agreement may be amended by the parties at any time
prior to the Effective Date of any Merger, provided that an amendment made
subsequent to the approval of this Agreement by the stockholders or members (as
the case may be) of any party shall not (i) alter or change the amount or kind
of shares, securities, cash, property and/or rights to be received in exchange
for or on conversion of all or any of the shares of any class or series thereof
of such party, (ii) alter or change any term of the Certificate of Incorporation
of NEON to be effected by the Parent Merger or (iii) alter or change any of the
terms and conditions of this Agreement if such alteration or change would
adversely affect the holders of any class or series of the stock of such
corporation.
6.3 Governing Law. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Delaware, except where the provisions of the Massachusetts Business
Corporation Law or the Massachusetts Limited Liability Company Act apply by
their terms or are explicitly stated to apply herein.
6.4 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed on its behalf by its officers or managers thereunto duly authorized,
as of the date first above written.
FIVECOM, INC.
(a Massachusetts corporation)
ATTEST: By:_________________________________
Victor Colantonio, President
__________________________
William Fennell, Treasurer
NORTHEAST OPTIC NETWORK, INC.
(a Delaware corporation)
ATTEST: By:_________________________________
Victor Colantonio, President
__________________________
William Fennell, Treasurer
FIVECOM LLC
By: FiveCom, Inc. (a Massachusetts
corporation), its Manager
By:_________________________________
Victor Colantonio, President
FIVECOM OF MAINE LLC
By: FiveCom, Inc. (a Massachusetts
corporation), its Manager
By:________________________________
Victor Colantonio, President
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<PAGE>
FIVECOM OF MAINE, INC.
(a Delaware corporation)
ATTEST: By:_____________________________
Victor Colantonio, President
__________________________
William Fennell, Treasurer
NECOM LLC
By: FiveCom, Inc. (a Massachusetts
corporation), its Manager
By:____________________________
Victor Colantonio, President
CENTRAL MAINE POWER COMPANY
By:________________________________
Its:_______________________________
MAINECOM SERVICES
By:________________________________
Its:_______________________________
MODE 1 COMMUNICATIONS, INC.
By:________________________________
Its:_______________________________
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<PAGE>
___________________________________
Victor Colantonio
___________________________________
Michael Musen
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<PAGE>
CERTIFICATIONS
The undersigned Clerk of FiveCom, Inc., a Massachusetts corporation
("FiveCom MA"), hereby certifies as Clerk of FiveCom MA, that the provisions of
Article IV of the Restructuring and Contribution Agreement to which this
certificate is attached, was duly adopted pursuant to the provisions of the
Massachusetts Business Corporation Law by a vote of the majority of the issued
and outstanding shares of Common Stock and Series B Convertible Preferred Stock
of FiveCom MA, voting together as a class, and by vote of a majority of the
issued and outstanding shares of Series A Convertible Preferred Stock of FiveCom
MA, voting as a separate class, which provisions of Article IV of the
Restructuring and Contribution Agreement were thereby adopted as the act of the
shareholders of FiveCom MA and the duly adopted agreement and act of FiveCom MA.
WITNESS my hand this ____ day of _______, 1998.
____________________________________
Michael A. Musen
The undersigned Secretary of NorthEast Optic Network, Inc., a Delaware
corporation ("NEON"), hereby certifies as Secretary of NEON, that the provisions
of Article IV of the Restructuring and Contribution Agreement to which this
certificate is attached, was duly adopted pursuant to Section 228 of the
Delaware General Corporation Law by written consent of the sole shareholder
holding 1,000 shares of the capital stock of NEON, same being all of the shares
issued and outstanding and entitled to vote, which provisions of Article IV of
the Restructuring and Contribution Agreement were thereby adopted as the act of
the sole shareholder of NEON and the duly adopted agreement and act of NEON.
WITNESS my hand this ____ day of _______, 1998.
____________________________________
Michael A. Musen
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<PAGE>
The undersigned Secretary of FiveCom of Maine, Inc., a Delaware corporation
("FM Inc."), hereby certifies as Secretary of FM Inc., that the provisions of
Article IV of the Restructuring and Contribution Agreement to which this
certificate is attached, was duly adopted pursuant to Section 228 of the
Delaware General Corporation Law by written consent of the sole shareholder
holding 1,000 shares of the capital stock of FM Inc., same being all of the
shares issued and outstanding and entitled to vote, which provisions of Article
IV of the Restructuring and Contribution Agreement were thereby adopted as the
act of the sole shareholder of FM Inc. and the duly adopted agreement and act of
FM Inc.
WITNESS my hand this ____ day of _______, 1998.
____________________________________
William Fennell
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<PAGE>
EXHIBIT A
---------
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
NORTHEAST OPTIC NETWORK, INC.
<PAGE>
EXHIBIT B
---------
POST-REORGANIZATION CAPITALIZATION
Exhibit 10.22
NETWORK PRODUCTS PURCHASE AGREEMENT
Northern Telecom Inc., a Delaware corporation having offices at 405 Windward
Parkway, Alpharetta, Georgia 30004 ("Nortel") and FiveCom Inc., a Massachusetts
corporation, and FiveCom affiliates: FiveCom LLC; FiveCom of Maine LLC; and
NECOM LLC (all of the foregoing collectively referred to as "Buyer") having its
principal place of business at 391 Totten Fond Road, Suite 401, Waltham,
Massachusetts 02154-2014 agree as follows:
1. SCOPE
1.1 Certain terms used in this Agreement shall be defined as set
forth in Exhibit A.
1.2 The terms and conditions of this Agreement shall apply to the
purchase by Buyer and the sale by Nortel of Equipment and
Services and the licensing of Software furnished in connection
with such Equipment. The terms and conditions contained in a
Product Attachment shall modify and/or supplement the other
terms and conditions of this Agreement, only with respect to
the Product Line and Services described in the Product
Attachment.
1.3 All Products and Services obtained by Buyer pursuant to this
Agreement shall be obtained by Buyer solely for initial use by
Buyer in its internal business to provide services available
through its networks, and not as stock in trade or inventory
which is intended for resale by Buyer to any third party as
new and unused material. All such Products shall be installed
in the United States.
2. TERM
2.1 This Agreement shall be in effect during the period that any
Product Attachment is in effect. Each Product Attachment shall
be in effect during its Product Attachment Term. This
Agreement or any part thereof may be terminated in accordance
with the express provisions of this Agreement concerning
termination or by written agreement of the parties.
2.2 The termination of this Agreement or any part thereof shall
not affect the obligations of either party thereunder which
have not been fully performed with respect to any accepted
Order, unless such Order is expressly terminated in accordance
with this Agreement or by written agreement of the parties.
<PAGE>
3. ORDERING
All purchases pursuant to this Agreement shall be made by means of
Orders issued from time to time by Buyer and accepted by Nortel in
writing within fifteen (15) days. Otherwise, any such Order shall be
deemed to be void. All Orders shall reference this Agreement and the
applicable Product Attachment and shall be governed solely by the terms
and conditions set forth herein as modified and/or supplemented
pursuant to Section 1.2 by the terms and conditions of any applicable
Product Attachments.
4. PRICES
4.1 The prices, charges, and fees applicable to Orders shall be
set forth in the appropriate Product Attachments and may be
revised in accordance with the provisions stated therein.
Buyer shall pay transportation charges, including insurance,
in accordance with the applicable Product Attachment.
4.2 Until the total of all prices, charges and fees for Products
and related Services furnished hereunder shall have been paid
to Nortel, Buyer shall cooperate with Nortel in perfecting
Nortel's purchase money security interest in such Products and
Buyer shall promptly execute all documents and take all
actions required by Nortel in connection therewith. Buyer
shall not sell, lease or otherwise transfer such Products or
any portion thereof or allow any liens or encumbrances to
attach to such Products or any portion thereof prior to
payment in full to Nortel of the total of all such prices,
charges, and fees.
5. TERMS OF PAYMENT
5.1 The amounts payable for Products and/or Services may be
invoiced by Nortel to Buyer in accordance with the applicable
Product Attachments. All amounts payable and properly invoiced
pursuant to this Agreement shall be paid by Buyer to Nortel
within thirty (30) days from the date of Nortel's invoice in
accordance with the payment instructions contained in such
invoice.
5.2 Overdue payments, excluding those which are the subject of a
good faith dispute, shall be subject to interest charges,
calculated daily commencing on the 31st day after the date of
the invoice, at one and one half percent (1 1/2%) per month or
such lesser rate as may be the maximum permissible rate under
applicable law.
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<PAGE>
6. TAXES
6.1 Buyer shall promptly pay the applicable governmental or taxing
authority, or upon proof of Nortel's payment to such
governmental or taxing authority, Buyer shall promptly pay to
Nortel, all legitimate taxes and charges including interest
and penalties, which may be imposed by any federal, state, or
local governmental or taxing authority ("Authority") related
to the purchase, license, ownership, possession, use,
operation and/or relocation of any Equipment, Software, or
Services furnished by Nortel pursuant to this Agreement,
excluding, however, all taxes computed upon the net income of
Nortel (hereinafter referred to as "Taxes"). If penalties and
interest on such Taxes are assessed due to Buyer's delay in
payment after timely receiving the bills from the Authority or
Nortel for such Taxes to enable Buyer's timely payment, then
Buyer shall promptly pay the penalties and interest charges on
such Taxes attributable to Buyer's delay in payment.
7. RISK OF LOSS, TITLE
7.1 Risk of loss or damage to Products shall pass to Buyer upon
delivery to the loading dock at the installation site or other
delivery location specified by Buyer in its Order, and Buyer
shall keep such Products fully insured for the total amount
then due Nortel for such Products. Buyer shall cause its
insurers with respect to such Products to name Nortel as loss
payee as Nortel's interests may appear.
7.2 Good title to Equipment furnished hereunder which shall be
free and clear of all liens and encumbrances shall vest in
Buyer upon full payment by Buyer of the total prices, charges
and fees payable by Buyer for such Equipment and any related
Software or Services furnished by Nortel in connection with
such Equipment.
7.3 Buyer shall receive a license to use Software subject to the
terms set forth in Exhibit B.
8. TESTING, TURNOVER AND ACCEPTANCE
8.1 If Nortel installs any Products furnished hereunder, the
rights and obligations of the parties with respect to testing,
turnover and acceptance of such Products shall be as set forth
in the applicable Product Attachment.
8.2 If Nortel does not install Products furnished hereunder,
Nortel shall prior to delivery of the Products perform such
factory tests as Nortel
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<PAGE>
determines to be appropriate in order to confirm that such
Products shall be in accordance with the applicable
Specifications. Buyer shall be deemed to have accepted the
Products upon completion of such tests.
8.3 In the event that Buyer places Products into
revenue-generating service, such Products shall be deemed to
have been accepted by Buyer without limitation or restriction.
9. DISCLAIMERS OF WARRANTIES AND REMEDIES
THE WARRANTIES AND REMEDIES SET FORTH IN EXHIBIT D AND IN ANY PRODUCT
ATTACHMENT CONSTITUTE THE ONLY WARRANTIES OF NORTEL WITH RESPECT TO THE
PRODUCTS AND SERVICES AND BUYER'S EXCLUSIVE REMEDIES IN THE EVENT SUCH
WARRANTIES ARE BREACHED. THEY ARE IN LIEU OF ALL OTHER WARRANTIES,
WRITTEN OR ORAL, STATUTORY, EXPRESS OR IMPLIED, INCLUDING, WITHOUT
LIMITATION ANY WARRANTY OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR
PURPOSE. NORTEL SHALL NOT BE LIABLE FOR ANY INCIDENTAL OR CONSEQUENTIAL
DAMAGES OF ANY NATURE WHATSOEVER, BEFORE OR AFTER THE PLACING OF ANY
PRODUCT INTO SERVICE.
10. LIABILITY FOR BODILY INJURY, PROPERTY DAMAGE AND PATENT
INFRINGEMENT
10.1 A party hereto shall defend the other party against any suit,
claim, or proceeding brought against the other party for
direct damages due to bodily injuries (including death) or
damage to tangible property which allegedly result from the
negligence or willful misconduct of the defending party in the
performance of this Agreement. The defending party shall pay
all litigation costs, reasonable attorney's fees, settlement
payments and such direct damages awarded or resulting from any
such suit, claim or proceeding.
10.2 Nortel shall defend Buyer against any suit, claim or
proceeding brought against Buyer alleging that any Products,
excluding Vendor Items, furnished hereunder infringe any
United States patent. Nortel shall pay all litigation costs,
reasonable attorney's fees, settlement payments and any
damages awarded or resulting from any such suit, claim or
proceeding. With respect to Vendor Items, Nortel shall assign
any rights with respect to infringement of U.S. patents
granted to Nortel by the supplier of such Vendor Items to the
extent of Nortel's right to do so.
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<PAGE>
10.3 The party entitled to defense pursuant to Section 10.1 or 10.2
shall promptly advise the party required to provide such
defense of the applicable suit, claim, or proceeding and shall
cooperate with such party in the defense or settlement
thereof. The party required to provide such defense shall have
sole control of the defense of the applicable suit, claim, or
proceeding and of all negotiations for its settlement or
compromise.
10.4 Upon providing the Customer with notice of a potential or
actual infringement claim, Nortel may (or in the case of an
injunction, shall), at Nortel's option, either procure a right
to use, replace or modify, or require the return of the
affected Product for a refund of its depreciation cost.
10.5 The obligations of Nortel hereunder with respect to any suit,
claim, or proceeding described in Section 10.2 shall not apply
with respect to Products which are (a) manufactured or
supplied by Nortel in accordance with any design or any
special instruction furnished by Buyer, (b) used by Buyer in a
manner or for a purpose not contemplated by this Agreement,
(c) located by Buyer outside the United States, or (d) used by
Buyer in combination with other products not provided by
Nortel, including, without limitation, any software developed
solely by Buyer through the permitted use of Products
furnished hereunder, provided the infringement arises from
such combination or the use thereof. Buyer shall indemnify and
hold Nortel harmless against any loss, cost, expense, damage,
settlement or other liability, including, but not limited to,
attorneys' fees, which may be incurred by Nortel with respect
to any suit, claim, or proceeding described in this Section
10.5.
10.6 The provisions of Sections 10.2 through 10.5 state the entire
liability of Nortel and its suppliers and the exclusive remedy
of Buyer with respect to any suits, claims, or proceedings of
the nature described in Section 10.2. Nortel's total
cumulative liability, pursuant to Sections 10.2 shall for each
infringement claim not exceed one hundred percent (100%) of
the purchase price of the Product giving rise to such claim.
10.7 Each party's respective obligations pursuant to this Section
shall survive any termination of this Agreement.
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<PAGE>
11. REMEDIES AND LIMITATION OF LIABILITY
11.1 Nortel shall have the right to suspend its performance by
written notice to Buyer and forthwith remove and take
possession of all Products that shall have been delivered to
Buyer, if, prior to payment to Nortel of any amounts due
pursuant to this Agreement with respect to such Products,
Buyer shall (a) become insolvent or bankrupt or cease, be
unable, or admit in writing its inability, to pay all debts as
they mature, or make a general assignment for the benefit of,
or enter into any arrangement with, creditors, (b) authorize,
apply for, or consent to the appointment of, a receiver,
trustee, or liquidator of all or a substantial part of its
assets or have proceedings seeking such appointment commenced
against it which are not terminated within ninety (90) days of
such commencement, or (c) file a voluntary petition under any
bankruptcy or insolvency law or under the reorganization or
arrangement provisions of the United States Bankruptcy Code or
any similar law of any jurisdiction or have proceedings under
any such law instituted against it which are not terminated
within ninety (90) days of such commencement.
11.2 In the event of any material breach of this Agreement which
shall continue for thirty (30) or more days after written
notice of such breach (including a reasonably detailed
statement of the nature of such breach) shall have been given
to the breaching party by the aggrieved party, the aggrieved
party shall be entitled at its option to avail itself of any
and all remedies available at law or equity, except as
otherwise provided in this Agreement.
11.3 Nothing contained in Section 11.2 or elsewhere in this
Agreement shall make Nortel liable for any incidental,
indirect, consequential or special damages of any nature
whatsoever for any breach of this Agreement whether the claims
for such damages arise in tort, contract, or otherwise, or
shall increase the liability of Nortel under Section 9 or 10
or Exhibit D beyond that prescribed therein.
11.4 Nortel shall not be liable for any additional costs, expenses,
losses or damages resulting from errors, acts or omissions of
Buyer, including, but not limited to, inaccuracy,
incompleteness or untimeliness in the provision of information
by Buyer to Nortel or fulfillment by Buyer of any of its
obligations under this Agreement. Buyer shall pay Nortel the
amount of any such costs, expenses, losses or damage incurred
by Nortel.
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<PAGE>
11.5 The limitations on Nortel's liability and other obligations
set forth in Sections 9, 10, and 11 shall survive any
termination of this Agreement.
12. FORCE MAJEURE
If the performance by a party of any of its obligations under this
Agreement shall be interfered with by reason of any circumstances
beyond the reasonable control of that party, including without
limitation, unavailability of supplies or sources of energy, power
failure, breakdown of machinery, or labor difficulties, including
without limitation, strikes, slowdowns, picketing or boycotts, then
that party shall be excused from such performance for a period equal to
the delay resulting from the applicable circumstances and such
additional period as may be reasonably necessary to allow that party to
resume its performance. With respect to labor difficulties as described
above, a party shall not be obligated to accede to any demands being
made by employees or other personnel.
13. CONFIDENTIAL INFORMATION
13.1 Each party which receives the other party's Confidential
Information shall use reasonable care to hold such
Confidential Information in confidence and not disclose such
Confidential Information to anyone other than to its employees
and employees of its affiliates with a need to know. A party
that receives the other party's Confidential Information shall
not reproduce such Confidential Information, except to the
extent reasonably required for the performance of its
obligations pursuant to this Agreement and in connection with
any permitted use of such Confidential Information.
13.2 Buyer shall take reasonable care to use Nortel's Confidential
Information only for study, operating, or maintenance purposes
in connection with Buyer's use of Products furnished by Nortel
pursuant to this Agreement.
13.3 Nortel shall take reasonable care to use Buyer's Confidential
Information only to perform Nortel's obligations to provide
Products and/or Services to Buyer, provided Nortel may use any
of Buyer's Confidential Information for the development,
manufacture, marketing and maintenance of new products and/or
services and/or changes or modifications to the existing
Products and/or Services, which Nortel may, in either case,
provide to third parties without restriction.
13.4 The obligations of either party pursuant to this Section 13
shall not extend to any Confidential Information which
recipient can demonstrate through written documentation was
already known to the recipient
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<PAGE>
prior to its disclosure to the recipient, was known or
generally available to the public at the time of disclosure to
the recipient, becomes known or generally available to the
public (other than by act of the recipient) subsequent to its
disclosure to the recipient, is disclosed or made available in
writing to the recipient by a third party having a bona fide
right to do so, or is required to be disclosed by process of
law, provided that the recipient shall notify the disclosing
party promptly upon any request or demand for such disclosure.
13.5 The parties' obligations pursuant to this Section 13 shall
survive any termination of this Agreement.
14. BUYER'S RESPONSIBILITIES
14.1 All sites at which the Products shall be delivered or
installed shall be prepared by Buyer in accordance with
Nortel's standards, including, without limitation,
environmental requirements.
14.2 Buyer shall provide Nortel-designated personnel access to the
Products during the times deemed necessary by Nortel to
install, maintain and service the Products in accordance with
Nortel's obligations. Nortel personnel shall comply with
Buyer's reasonable site and security regulations, provided
Nortel receives written notice of any such regulations
reasonably in advance of the arrival of Nortel's personnel at
the site.
14.3 Buyer shall provide reasonable working space and facilities,
including heat, light, ventilation, telephones, electrical
current, trash removal and other necessary utilities for use
by Nortel-designated maintenance personnel, and adequate
secure storage space, if required by Nortel, for Products and
materials. Buyer shall also provide adequate security for the
Products while on Buyer's site.
14.4 Buyer shall obtain all necessary governmental permits
applicable to Buyer in connection with the installation,
operation, and maintenance of Products furnished hereunder,
excluding any applicable permits required in the normal course
of Nortel's doing business.
14.5 Any information which Nortel reasonably requests from Buyer
and which is necessary for Nortel to properly install or
maintain the Products shall be provided by Buyer to Nortel in
a timely fashion and in a form reasonably specified by Nortel.
-8-
<PAGE>
15. HAZARDOUS MATERIALS
15.1 Prior to issuing any Order for Services to be performed at
Buyer's facilities, Buyer shall identify and notify Nortel in
writing of the existence of all Hazardous Materials which
Nortel may encounter during the performance of such Services,
including, without limitation, any Hazardous Materials
contained within any equipment to be removed by Nortel.
15.2 If Buyer breaches its obligations pursuant to Section 15.1,
(a) Nortel may discontinue the performance of the appropriate
Services until all the applicable Hazardous Materials have
been removed or abated to Nortel's satisfaction by Buyer at
Buyer's sole expense, and (b) Buyer shall defend, indemnify
and hold Nortel harmless from any and all damages, claims,
losses, liabilities and expenses, including, without
limitation, attorneys' fees, which arise out of Buyer's breach
of such obligations. Buyer's obligations pursuant to this
Section 15.2 shall survive any termination of this Agreement.
16. SUBCONTRACTING
Nortel may subcontract any of its obligations under this Agreement, but
no such subcontract shall relieve Nortel of primary responsibility for
performance of its obligations.
17. REGULATORY COMPLIANCE
In the event of any change in the Specifications or Nortel's
manufacturing or delivery processes for any Products as a result of the
imposition of requirements by any government, Nortel may upon notice to
Buyer, increase its prices, charges and fees to cover the added costs
and expenses directly and indirectly incurred by Nortel as a result of
such change.
18. GENERAL
18.1 If any of the provisions of this Agreement shall be invalid or
unenforceable under applicable law and a party deems such
provisions to be material, that party may terminate this
Agreement upon notice to the other party. Otherwise, such
invalidity or unenforceability shall not invalidate or render
this Agreement unenforceable, but this Agreement shall be
construed as if not containing the particular invalid or
unenforceable provision and the rights and obligations of the
parties shall be construed and enforced accordingly.
-9-
<PAGE>
18.2 A party shall not release without the prior written approval
of the other party any advertising or other publicity relating
to this Agreement wherein such other party may reasonably be
identified. In addition each party shall take reasonable
precautions to keep the existence and the contents of this
Agreement confidential so long as this Agreement remains in
effect and for a period of three (3) years thereafter, except
as may be reasonably required to enforce this Agreement or by
law.
18.3 The construction, interpretation and performance of this
Agreement shall be governed by the laws of the Commonwealth of
Massachusetts, except for its rules with respect to the
conflict of laws.
18.4 Neither party may assign or transfer this Agreement or any of
its rights hereunder without the prior written consent of the
other party, such consent not to be unreasonably withheld,
except Buyer's consent shall not be required for any
assignment or transfer by Nortel (a) to any Affiliate of all
or any part of this Agreement or of Nortel's rights hereunder,
or (b) to any third party of Nortel's right to receive any
monies which may become due to Nortel pursuant to this
Agreement.
18.5 Notices and other communications shall be transmitted in
writing by certified United States Mail, postage prepaid,
return receipt requested, by guaranteed overnight delivery, or
by facsimile addressed to the parties as follows:
To Buyer: FiveCom Inc.
391 Totten Pond Road
Waltham, Massachusetts 02154-2014
Attention: Michael Musen, Vice-President
Facsimile: 781-890-8404
To Nortel: Northern Telecom Inc.
5405 Windward Parkway
Alpharetta, Georgia 30004
Attention: ____________
Facsimile: (_)___________
In addition, notices submitted by Buyer to Nortel specific to
any Product Attachment shall be delivered to the address
stated in the applicable Product Attachment along with a copy
submitted to Nortel at the address stated above.
Any notice or communication sent under this Agreement shall be
deemed given upon receipt, as evidenced by the United States
Postal Service return receipt Mail if given by certified
United States Mail, on
-10-
<PAGE>
the following business day if sent by guaranteed overnight
delivery, or on the transmission date if given by facsimile
during the receiving party's normal business hours.
The address information listed for a party in this Section or
any Product Attachment may be changed from time to time by
that party by giving notice to the other as provided above.
18.6 In the event of a conflict between the provisions of this
Agreement which are not contained in a Product Attachment and
the provisions of a Product Attachment, the provisions of the
Product Attachment shall prevail with respect to the Product
Line and Services described in that Product Attachment.
18.7 All headings used herein are for index and reference purposes
only, and shall not be given any substantive effect. This
Agreement has been created jointly by the parties, and no rule
of construction requiring interpretation against the drafter
of this Agreement shall apply in its interpretation.
18.8 Buyer shall not export any technical data received from Nortel
pursuant to this Agreement, or release any such technical data
with the knowledge or intent that such technical data will be
exported or transmitted to any country or to foreign nationals
of any country, except in accordance with applicable U.S. law
concerning the exporting of such technical data. Buyer shall
obtain all authorizations from the U.S. government in
accordance with applicable law prior to exporting or
transmitting any such technical data as described above.
18.9 Any changes to this Agreement may only be effected if agreed
upon in writing by duly authorized representatives of the
parties hereto. No agency, partnership, joint venture, or
other similar business relationship shall be or is created by
this Agreement.
-11-
<PAGE>
18.10 This Agreement, including all Product Attachments and Exhibits
constitutes the entire agreement of the parties with respect
to the subject matter hereof.
NORTHERN TELECOM, INC. FIVECOM, INC.
By: /s/ G. P. Strange By: /s/Victor Colantonio
--------------------------------- ---------------------------
(Signature) (Signature)
Name: /s/ G. P. Strange Name: Victor Colantonio
------------------------------ -------------------------
(Print) (Print)
Title: Vice President Title: President
----------------------------- ------------------------
Date: March 23, 1998 Date: March 18, 1998
------------------------------ -------------------------
FIVECOM LLC FIVECOM OF MAINE LLC
by its Manager FiveCom, Inc. by its Manager FiveCom, Inc.
By: /s/Victor Colantonio By: /s/Victor Colantonio
-------------------------------- ---------------------------
(Signature) (Signature)
Name: Victor Colantonio Name: Victor Colantonio
------------------------------ -------------------------
(Print) (Print)
Title: President Title: President
----------------------------- ------------------------
Date: March 18, 1998 Date: March 18, 1998
------------------------------ -------------------------
NECOM LLC
by its Manager FiveCom, Inc.
By: /s/Victor Colantonio
--------------------------------
(Signature)
Name: Victor Colantonio
------------------------------
(Print)
Title: President
-----------------------------
Date: March 18, 1998
------------------------------
-12-
<PAGE>
-13-
<PAGE>
EXHIBIT A
---------
DEFINITIONS
-----------
As used in the Agreement (as defined below), the following initially capitalized
terms shall have the following meanings:
"Affiliate" shall mean Nortel's parent corporation, Northern Telecom Limited and
any corporation controlled directly or indirectly by Northern Telecom Limited
through the ownership or control of shares or other securities in such
corporation.
"Agreement" shall mean the Agreement to which this Exhibit is attached, and all
Exhibits and Product Attachments.
"Confidential Information" shall mean all information, including, without
limitation, specifications, drawings, documentation, know-how and pricing
information, of every kind or description which may be disclosed by either party
or an Affiliate to the other party in connection with this Agreement, provided
the disclosing party shall clearly mark any such information which is disclosed
in writing as the confidential property of the disclosing party and the
disclosing party shall identify the confidential nature of any such information
which it orally discloses at the time of such disclosure and shall provide a
written summary of the orally disclosed information to the recipient within
fifteen (15) days of such disclosure.
"Equipment" shall mean the hardware listed or otherwise identified in, or
pursuant to, any Product Attachment.
"Exhibits" shall mean Exhibits A, B, C, and D attached hereto, and any
additional Exhibits which Nortel and Buyer subsequently agree in writing shall
be incorporated into, and made a part of the Agreement by reference.
"Hazardous Materials" shall mean any pollutants or dangerous, toxic or hazardous
substances (including, without limitation, asbestos) as defined in, or pursuant
to, the OSHA Hazard Communication Standard (29 CFR Part 1910, Subpart Z), the
Resource Conservation and Recovery Act of 1976 (42 USC Section 6901, et seq.),
the Toxic Substances Control Act (15 USC Section 2601, et seq.), the
Comprehensive Environmental Response Compensation and Liability Act (42 USC
Section 9601, et seq.), and any other federal, state or local environmental law,
ordinance, rule or regulation.
"Order" shall mean a written purchase order issued by Buyer to Nortel. Each
Order shall specify on the face of the Order the types and quantities of
Products and/or Services to be furnished by Nortel pursuant to the Order, the
applicable prices, charges and/or fees with respect to such Products and/or
Services, Buyer's facility to
-14-
<PAGE>
which the Products are to be delivered, the delivery and/or completion schedule,
and any other information which may be required to be included in an Order in
accordance with the provisions of this Agreement.
"Product Attachments" shall mean any Product Attachments which the parties agree
in writing shall be incorporated into, and made a part of, this Agreement.
"Product Attachment Term" shall mean the period specified in a Product
Attachment during which that Product Attachment shall be in effect.
"Product Line" shall mean the Products described in and which may be furnished
pursuant to a specific Product Attachment.
"Products" shall mean any Equipment and/or Software which may be provided under
this Agreement.
"Services" shall mean all services listed or otherwise identified in, or
pursuant to, any Product Attachment which may be purchased from or provided by
Nortel and which are associated with the Product Line described in that Product
Attachment.
"Software" shall mean (a) programs in machine-readable code or firmware which
(i) are owned by, or licensed to, Nortel or any of its Affiliates, (ii) reside
in Equipment memories, tapes, disks or other media, and (iii) provide basic
logic operating instructions and user-related application instructions, and (b)
documentation associated with any such programs which may be furnished by Nortel
to Buyer from time to time.
"Specifications" shall mean, with respect to any Product Line, the
specifications identified in the applicable Product Attachment, provided Nortel
shall have the right at its sole discretion to modify, change or amend such
specifications at any time.
"Third Party Software Vendor" shall mean any supplier of programs contained in
the Software which is not an Affiliate.
"Vendor Items" shall mean, with respect to a Product Line, those portions of the
Product which are identified in the applicable Product Attachment as Vendor
Items.
"Warranty Period" shall mean, with respect to a Product Line, the Warranty
Period specified in the applicable Product Attachment.
-15-
<PAGE>
EXHIBIT B
---------
SOFTWARE LICENSE
----------------
1. Buyer acknowledges that the Software may contain programs which have been
supplied by, and are proprietary to, Third Party Software Vendors. In
addition to the terms and conditions herein, Buyer shall abide by any
additional terms and conditions provided by Nortel to Buyer with respect to
any Software provided by any Third Party Software Vendor.
2. Upon Buyer's payment to Nortel of the applicable fees with respect to any
Software furnished to Buyer pursuant to this Agreement, Buyer shall be
granted a personal, non-exclusive, paid-up license to use the version of the
Software furnished to Buyer only in conjunction with Buyer's use of the
Equipment with respect to which such Software was furnished for the life of
that Equipment as it may be repaired or modified. Buyer shall be granted no
title or ownership rights to the Software, which rights shall remain in
Nortel or its suppliers.
3. As a condition precedent to this license and to the supply of Software by
Nortel pursuant to the Agreement, Nortel requires Buyer to give proper
assurances to Nortel for the protection of the Software. Accordingly, all
Software supplied by Nortel under or in implementation of the Agreement
shall be treated by Buyer as the exclusive property, and as proprietary and
a TRADE SECRET, of Nortel and/or its suppliers, as appropriate, and Buyer
shall: a) hold the Software, including, without limitation, any methods or
concepts utilized therein in confidence for the benefit of Nortel and/or its
suppliers, as appropriate; b) not provide or make the Software available to
any person except to its employees on a 'need to know' basis; c) not
reproduce, copy, or modify the Software in whole or in part except as
authorized by Nortel; d) not attempt to decompile, reverse engineer,
disassemble, reverse translate, or in any other manner decode the Software;
e) issue adequate instructions to all persons, and take all actions
reasonably necessary to satisfy Buyer's obligations under this license; and
f) forthwith return to Nortel, or with Nortel's consent destroy, any
magnetic tape, disc, semiconductor device or other memory device or system
and/or documentation or other material, including, but not limited to all
printed material furnished by Nortel to Buyer which shall be replaced,
modified or updated.
4. The obligations of Buyer hereunder shall not extend to any information or
data relating to the Software which is now available to the general public
or becomes available by reason of acts or failures to act not attributable
to Buyer.
-16-
<PAGE>
5. Buyer shall not assign this license or sublicense any rights herein granted
to any other party without Nortel's prior written consent.
6. Buyer shall indemnify and hold Nortel and its suppliers, as appropriate,
harmless from any loss or damage resulting from a breach of this Exhibit B.
The obligations of Buyer under this Exhibit B shall survive the termination
of the Agreement and shall continue if the Software is removed from service.
-17-
<PAGE>
EXHIBIT C
---------
STORAGE
-------
If Buyer notifies Nortel prior to the scheduled shipment date of Products that
Buyer does not wish to receive such Products on the date agreed by the parties,
or the installation site or other delivery location is not prepared in
sufficient time for Nortel to make delivery in accordance with such date, or
Buyer fails to take delivery of any portion of such Products, Nortel may place
the applicable Products in storage. In that event Buyer shall be liable for all
additional costs thereby incurred by Nortel. Delivery by Nortel of any Products
to a storage location as provided above shall be deemed to constitute delivery
of the Products to Buyer for purposes of this Agreement, including, without
limitation, provisions for payment, invoicing, passage of risk of loss, and
commencement of the Warranty Period.
-18-
<PAGE>
EXHIBIT D
---------
LIMITED WARRANTIES AND REMEDIES
-------------------------------
1. Nortel warrants that the Equipment supplied hereunder will under normal use
and service be free from defective material and faulty workmanship and will
conform to the applicable Specifications for the Warranty Period specified
in the Product Attachment with respect to such Equipment. The foregoing
warranty shall not apply to items normally consumed in operation, such as,
but not limited to, lamps and fuses or to Vendor Items. Any installation
Services performed by Nortel with respect to such Equipment shall be free
from defects in workmanship for the Warranty Period set forth in the
applicable Product Attachment.
2. Nortel's sole obligation and Buyer's exclusive remedy under the warranty set
forth in Section 1 above shall be limited to the replacement or repair, at
Nortel's option and expense, of the defective Equipment, or correction of
the defective installation Services. Replacement Equipment may be new or
reconditioned at Nortel's option.
3. Nortel warrants that any Software licensed by Nortel to Buyer under this
Agreement shall function during the Warranty Period of the Equipment with
respect to which such Software is furnished without any material, service-
affecting nonconformance to the applicable Specifications, provided that
Buyer shall have paid all Software support fees specified in the applicable
Product Attachment. If the Software fails to so function, Buyer's sole
remedy and Nortel's sole obligation under this warranty is for Nortel to
correct such failure through, at Nortel's option, the replacement or
modification of the Software or such other actions as Nortel reasonably
determines to be appropriate.
4. Unless otherwise stated in a Product Attachment, (a) Nortel's warranties in
Section 3 above shall only apply to the portion of the Software actually
developed by Nortel or its Affiliates, (b) all other Software shall be
provided by Nortel "AS IS," (c) Nortel shall assign to Buyer on a
nonexclusive basis any warranty on such other Software provided to Nortel by
the developer of such other Software to the extent of Nortel's legal right
to do so.
5. The obligations and remedies set forth in Sections 1, 2, and 3 above shall
be conditional upon: the Equipment not having been altered or repaired, the
Software not having been modified, and the Products not having been
installed outside the United States; any defect or nonconformance not being
the result of mishandling, abuse, misuse, improper storage, improper
performance of installation, other services, maintenance or operation by
other than Nortel (including use in conjunction with any product which is
incompatible with the
-19-
<PAGE>
applicable Equipment or Software or of inferior performance), and/or any
error, act, or omission of Buyer described in Section 11.4; the Product not
having been damaged by fire, explosion, power failure, power surge, or other
power irregularity, lightning, failure to comply with all applicable
environmental requirements for the Products specified by Nortel or any other
applicable supplier, such as but not limited to temperature or humidity
ranges, or any act of God, nature or public enemy; and written notice of the
defect having been given to Nortel within the applicable Warranty Period.
6. The performance by Nortel of any of its obligations described in Section 2
or 3 of this Exhibit D shall not extend the applicable Warranty Period
except to the extent specified in the applicable Product Attachment.
7. Upon expiration of the applicable Warranty Period for Equipment furnished
hereunder, repair and replacement Service for such Equipment shall be
available to Buyer from Nortel in accordance with Nortel's then-current
terms, conditions and prices. Such repair and replacement Service and notice
of any discontinuance of such repair and replacement Service shall be
available for a minimum period set forth in the Product Attachment
applicable to such Equipment. This provision shall survive the expiration of
this Agreement.
8. Unless Nortel elects to repair or replace defective Equipment at Buyer's
facility, all Equipment to be repaired or replaced, whether in or out of
warranty, shall be packed by Buyer in accordance with Nortel's instructions
stated in the applicable Product Attachment and shipped at Buyer's expense
and risk of loss to a location designated by Nortel. Replacement Equipment
shall be returned to Buyer at Nortel's expense and risk of loss. Buyer shall
ship the defective Equipment to Nortel within thirty (30) days of receipt of
the replacement Equipment. In the event Nortel fails to receive such
defective Equipment within such thirty (30) day period, Nortel shall invoice
Buyer for the replacement Equipment at the then-current price in effect
therefor.
9. With respect to any Vendor Item furnished by Nortel to Buyer pursuant to
this Agreement, Nortel shall assign to Buyer on a nonexclusive basis any
warranty granted by the party that supplied such Vendor Item to Nortel to
the extent of Nortel's right to do so.
10. Neither Nortel nor Nortel's suppliers, as appropriate, shall have any
responsibility for warranties offered by Buyer to any of its customers.
Buyer shall indemnify Nortel and Nortel's suppliers, as appropriate, with
respect thereto.
-20-
Exhibit 10.23
SUPPORT SERVICES AGREEMENT
BETWEEN
FIVECOM, INC.
AND
MAINECOM SERVICES
Effective April 30, 1996
<PAGE>
This agreement is made as of April 30, 1996, by and between MaineCom
Services ("MaineCom"), a Maine corporation having its principal place of
business in Augusta, Maine, and FiveCom, Inc. ("FiveCom"), a Massachusetts
corporation with its principal place of business in Waltham, Massachusetts.
MaineCom and FiveCom are singularly a "Party" and collectively "the Parties."
WHEREAS, the Parties are willing to provide services from and to one
another;
NOW THEREFORE, it is hereby agreed as follows:
ARTICLE I - GENERAL SCOPE OF SERVICES
The Parties shall provide support services to each other as described
in purchase orders that are issued from time to time and accepted in writing by
the Party to be charged.
ARTICLE II - PAYMENT FOR SERVICES
The purchase order shall state the cost for the service(s) to be
provided. The stated cost shall be no less than the marginal cost of the
activity (e.g. labor, expenses, and/or material) contracted for. The Parties
shall submit itemized invoices for services rendered to the other, including
taxes that may be applicable to such services pursuant to the terms and
conditions of the purchase orders. Bills for services rendered shall be
presented on a monthly basis, unless other arrangements are agreed to for a
specific activity or order. All invoices shall have adequate documentation to
justify all charges, including labor, expenses, and material. Unless otherwise
agreed, invoices shall be paid in full within thirty (30) days to the extent
that costs are not disputed. Simple annual interest at the prime rate then in
effect at The First National Bank of Boston, plus 1.5%, shall accrue on any
undisputed invoice items not paid by the due date.
ARTICLE III - DISPUTE RESOLUTION
Each party shall have the right to send notice to the other indicating
it disputes an interpretation of this Agreement or a matter relating to an
amount billed. In the event of a dispute, the Parties shall make reasonable and
prompt efforts to settle the matter between themselves within fifteen (15) days
of the notice of dispute. If a resolution is not forthcoming within that time,
the parties agree that the question shall be finally resolved by an award of
arbitrators who shall be certified by the American Arbitration Association named
as follows:
(i) the Party sharing one side of the dispute shall name an arbitrator
and give written notice thereof to the Party sharing the other side of the
dispute;
<PAGE>
(ii) the Party sharing the other side of the dispute shall, within
fourteen (14) days of receipt of such written notice, name an arbitrator; and
(iii) the arbitrator so named shall within fifteen (15) days after
naming of the latter of them, select an additional arbitrator. If such
additional arbitrator is not selected within fifteen (15) days of the
appointment of the latter of the arbitrators, the Party sharing either side of
the dispute may seek to appoint such third arbitrator by applying to the
American Arbitration Association. The arbitrators shall proceed promptly to hear
and determine the matter in controversy. The arbitration shall be conducted in
accordance with the Commercial Arbitration Rules of the American Arbitration
Association. The arbitrators shall be instructed that their decision must be
made within forty-five (45) days after the appointment of the third arbitrator,
subject to any reasonable delay due to unforeseen circumstances.
The decision of the arbitrators shall be in writing and signed by the
arbitrators or a majority of them and shall be final and binding upon the
Parties, and the Parties shall abide by the decision and perform the terms and
conditions thereof. Unless otherwise determined by the arbitrators, the fees and
expenses of the arbitrators shall be borne by the Party losing in these dispute
resolution procedures, or if no Party prevails in full, as allocated by the
arbitrators based on the relative merits of the Parties' positions. Judgment
upon the award rendered may be in any court having jurisdiction or application
may be made to such court for a judicial acceptance of the award and an order of
enforcement, as the case may be. All arbitration shall be conducted in
Portsmouth, New Hampshire, unless the Parties agree otherwise.
ARTICLE IV - TERM OF CONTRACT
This Agreement shall commence on the date first written above and
continue until terminated in writing by either party. The date of termination
shall be no less than two (2) months after the non-terminating party has
received notice of the termination. The parties will negotiate completion or
cessation of any work in progress at the time of the termination notice, with
the non-terminating Party having the right to complete as much work as can be
reasonably and ably done by the date of termination. Any materials or purchases
financially committed or prepaid at the time of the notice of termination will
be honored by the other party.
The Parties agree that MaineCom has incurred costs since November 22,
1995 on behalf of FiveCom related to the Stock Subscription Agreement, as
amended, and the FiveCom closing which predate the date of this Agreement. The
Parties therefore also agree that MaineCom shall present invoices to FiveCom for
reimbursement of these costs, with the understanding that the costs billed will
meet the conditions stated above.
<PAGE>
ARTICLE V - CHANGES
No waiver, alteration, amendment, consent, or modification of any of
the provisions of this Agreement shall be binding unless in writing and signed
by a duly authorized representative of both Parties.
ARTICLE VI - ASSIGNMENT
Either party my assign any of its rights or obligations hereunder upon
receipt of the prior written consent of the other.
ARTICLE VII - FORCE MAJEURE
Force Majeure means an event that is beyond the reasonable control of,
and without the fault or negligence of, the party claiming Force Majeure, which
delays, hinders or prevents performance of that Party's obligations under this
Agreement. Neither party shall be liable to the other for loss or damage
resulting from (i) any delay in performance, in whole or in part, or (ii)
non-performance of its contractual obligations, in whole or in part, insofar as
such delay or non-performance is caused by Force Majeure, provided that the
party invoking Force Majeure provides written notice to the other party of such
invocation and of the circumstances giving rise to such condition. To the extent
possible, each Party shall take reasonable steps to correct or alleviate the
circumstances that led to the Force Majeure event.
ARTICLE VIII - INSURANCE AND INDEMNIFICATION
The Parties will maintain the following coverage, naming the other
Party to this Agreement as an additional insured, as applicable:
(a) Workers' Compensation Insurance that complies with the
provisions of applicable state law.
(b) Employer's Liability Insurance with limits not less than
$1,000,000 each occurrence;
(c) General Liability Insurance with limits not less than
$1,000,000 combined bodily injury and property damage
liability; and
(d) Automobile Liability Insurance with limits not less than
$1,000,000 combined bodily injury and property damage.
Each party shall indemnify, and hold harmless the other, its directors,
officers, employees, contractors, agents, successors, and assigns from and
against, any actions, penalties, claims, costs (including, but not limited to,
reasonable attorney's fees), or damages of any nature arising out of or related
to the services performed pursuant to this Agreement and shall defend the other
from such claims.
<PAGE>
ARTICLE IX - GENERAL LIMITATIONS OF LIABILITY AND WAIVER
Services provided by the Parties hereunder shall be performed in a
prudent, professional and workmanlike manner; products provided shall meet all
performance criteria as specified in the purchase order. If any such service or
product fails to conform to those standards, the Party claiming default shall
provide the other Party with the opportunity to perform the service, if
practicable; and, if not practicable, the Party claiming default may complete
the services itself, or at its election, have such services performed by a third
party at the expense of the other Party. The non-defaulting Party, in addition
to other remedies provided for herein, can seek claims for direct, incidental,
indirect, consequential, or other damages of any nature connected with or
resulting from non-performance of this Agreement, including other remedies
available by law.
ARTICLE X - NOTICE
All communications and notices by MaineCom to FiveCom under this
Agreement shall be sent by fax with the original mailed, first class, as
follows:
FiveCom, Inc. Fax 617-890-8404
391 Totten Pond Road
Suite 401
Waltham, Massachusetts 02154
Attn.: Controller
All communications and notices by FiveCom to MaineCom under this Agreement shall
be sent to and addressed as follows:
MaineCom Services Fax 207-621-4511
41 Anthony Avenue
Augusta, Maine 04330
Attn.: Mark E. Curtis
Either party may at any time change its address by providing notice to the
other.
ARTICLE XI - CHOICE OF LAW
Orders placed from FiveCom to MaineCom shall be governed by and
construed in accordance with the laws of the Commonwealth of Massachusetts;
orders placed from MaineCom to FiveCom shall be governed by and construed in
accordance with the laws of the State of Maine.
<PAGE>
ARTICLE XII - MISCELLANEOUS
This Agreement constitutes the entire Agreement between the Parties for
the services offered hereunder, and supersedes all prior representations and
Agreements, whether written or oral, between the Parties as to such services.
WHEREOF, the Parties hereto have caused this Agreement to be executed
in duplicate by their duly authorized representatives, to become effective as of
the date first written above.
MaineCom Services FiveCom, Inc.
/s/ Mark E. Curtis /s/ Victor Colantonio
- ------------------------------- -------------------------------
Mark E. Curtis, President Victor Colantonio, President
Exhibit 10.29
NECOM LLC
---------
GENERAL TERMS
AND CONDITIONS
<PAGE>
<TABLE>
<S> <C> <C>
1. GENERAL STATEMENT........................................................................................5
2. DEFINITIONS..............................................................................................5
3. PRIORITY OF DOCUMENTS....................................................................................6
4. DESIGN DRAWINGS AND INSTRUCTIONS.........................................................................6
5. INDEPENDENT CONTRACTOR...................................................................................7
6. INFORMATION TO BE PROVIDED BY THE CONTRACTOR.............................................................7
7. OWNERSHIP AND TITLE TO THE WORK AND DOCUMENTS............................................................7
8. FAMILIARITY WITH WORK....................................................................................8
9. MATERIALS AND EQUIPMENT..................................................................................8
10. EMPLOYEES................................................................................................8
11. INFRINGEMENT OF PROPRIETARY RIGHTS.......................................................................9
12. SURVEYS.................................................................................................10
13. PERMITS, LICENSES AND REGULATIONS.......................................................................10
14. PROTECTION OF THE PUBLIC AND OF WORK AND PROPERTY.......................................................10
15. INSPECTION AND AUDIT....................................................................................11
16. PROGRAM MANAGEMENT......................................................................................12
17. DISCREPANCIES...........................................................................................12
18. CHANGES IN THE WORK.....................................................................................12
19. TIME AND ORDER OF COMPLETION; DELAYS AND EXTENSION OF TIME..............................................13
20. INTERFERENCE WITH OPERATIONS............................................................................13
21. FORCE MAJEURE...........................................................................................14
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22. CLAIMS..................................................................................................15
23. DEDUCTIONS FOR UNCORRECTED WORK.........................................................................15
24. CORRECTION OF WORK BEFORE FINAL PAYMENT.................................................................15
25. SUSPENSION OF WORK......................................................................................15
26. THE OWNER'S RIGHT TO TERMINATE CONTRACT FOR CAUSE.......................................................16
27. DEFAULT.................................................................................................16
28. TERMINATION FOR OWNER'S CONVENIENCE.....................................................................17
29. REMOVAL OF EQUIPMENT....................................................................................17
30. RESPONSIBILITY FOR WORK.................................................................................17
31. TAXES...................................................................................................18
32. PAYMENTS WITHHELD PRIOR TO FINAL ACCEPTANCE OF WORK.....................................................18
33. PARTIAL COMPLETION AND ACCEPTANCE.......................................................................19
34. FINAL ACCEPTANCE AND PAYMENT............................................................................19
35. CONTRACTOR'S INSURANCE..................................................................................20
36. INSURANCE TO PROTECT THE WORK...........................................................................23
37. GUARANTEE OF WORK.......................................................................................23
38. SURETY BONDS............................................................................................25
39. WAIVER OF MECHANIC'S LIENS..............................................................................25
40. PROPRIETARY INFORMATION.................................................................................25
41. RIGHTS OF VARIOUS INTERESTS.............................................................................26
42. LABOR RELATIONS.........................................................................................27
43. SEPARATE CONTRACTS......................................................................................27
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44. SUBCONTRACTORS..........................................................................................27
45. OWNER'S REPRESENTATIVE STATUS...........................................................................28
46. OWNER'S REPRESENTATIVE DECISIONS........................................................................28
48. CLEANING UP.............................................................................................30
49. MONTHLY PAYMENTS........................................................................................30
50. SAFETY PRACTICES........................................................................................30
51. INDEMNIFICATION AND LIABILITY...........................................................................31
52. ASSIGNMENT..............................................................................................32
53. SEVERABILITY............................................................................................32
54. WAIVERS.................................................................................................32
55. APPLICABLE LAW..........................................................................................32
56. RIGHT TO AUDIT..........................................................................................32
57. CONDITION PRECEDENT TO PERFORMANCE......................................................................33
58. EXERCISE OF RIGHTS......................................................................................33
59. NOTICES.................................................................................................34
60. NOTICE TO PROCEED.......................................................................................35
61. COMPLETE AGREEMENT......................................................................................35
</TABLE>
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1. GENERAL STATEMENT
This Contract covers the Contractor's performance of Work for the Owner, as
provided hereunder, including all Supplemental Addendum and all General and
Special Terms and Conditions pertaining to the Work of the Contractor.
1.1 This agreement made this 14th day of August, 1996, by and between
FiveCom LLC with a principal place of business at 391 Totten Pond Road,
Suite 40151 Waltham, Massachusetts 02154, hereinafter referred to as
Owner and Seaward Corporation, with a principal place of business at
Route 236 Kittery, Maine 03904, hereinafter referred to as the
Contractor.
2. DEFINITIONS
2.1 "Contract Documents" consist of the following listed documents
(including any documents that are referenced in the following
documents):
2.1.1 General Terms and Conditions including Special Terms
and Conditions (the Agreement);
2.1.2 Specification Number T95-4 dated July 20, 1995, the
General Terms and Conditions included in this document are
specifically excluded;
2.1.3 Addendum Numbered 1 through 4;
2.1.4 Contractor's proposal dated May 9, 1996;
2.1.5 Contractor's letters to Northeast Utilities Systems
dated May 9, June 6, July 1 and July 22, 1996.
2.1.6 Approved Change Orders incorporated in any of the
documents before and subject to proper Notice hereafter.
2.2 "Owner" means NECOM LLC; FiveCom LLC, an affiliated company of
FiveCom, Inc., is agent for NECOM LLC. The term "Owner" includes
FiveCom, Inc., FiveCom LLC and NECOM LLC.
2.3 "Contractor" is the bidder who has been issued this Contract to
execute the Work.
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2.4 "Owner's Representative" is the individual person designated by the
Owner to represent the Owner in the execution of the Contract. See
Special Terms and Conditions.
2.5 "Subcontractor" means anyone other than the Owner who furnishes,
under an agreement with the Contractor, labor, materials, or equipment.
The term does not include any person who furnishes services of a
personal nature as an employee.
2.6 "Work" means the furnishing of the goods and services described in
the Contract, and Special Terms and Conditions, including all labor,
supervision, materials, equipment, and all else whatsoever necessary
for carrying out all duties, operations, and obligations required of
the Contractor by the Contract.
2.7 "Extra Work" means such labor, supervision, materials, equipment,
services, and all else whatsoever as may be ordered by Owner in
addition to that Work called for in the Contract Documents.
2.8 "Substantial Completion" means the date when the Work is
sufficiently completed in accordance with the Contract Documents,
including change orders, so that Owner can use the Work for the purpose
for which it was intended.
3. PRIORITY OF DOCUMENTS
3.1 In the event of conflict among the Contract Documents, the order of
supremacy, subject to Special Terms and Conditions shall be based on:
3.1.1 A document with a more recent date will take priority
over a document with an older date;
3.1.2 The General Terms and Conditions will have priority over
the drawings.
4. DESIGN DRAWINGS AND INSTRUCTIONS
4.1 The Owner is responsible for the design, the drawings,
specifications and other instructions. The Owner will furnish free of
charge drawings and instructions which represent the requirements of
the Work to be performed under the Contract. In the case of lump-sum
contracts, drawings and instructions which represent the Work to be
done will be furnished prior to the time of entering into the Contract.
Owner may, during the life of the Contract, issue additional
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instructions by means of drawings or other media to provide
clarification of requirements or in accordance with Section 18 to
indicate changes in the work.
5. INDEPENDENT CONTRACTOR
5.1 The Contractor, its employees, Subcontractors and those under its
control shall perform all Work as independent contractors, and shall
not be deemed to be the employees or agents of the Owner for any
purpose whatsoever.
5.2 This Contract is not intended to create nor shall it be construed
to create any partnership, joint venture, employment or agency
relationship between Contractor and Owner, and no party hereto shall be
liable for the payment or performance of any debts, obligations, or
liabilities of the other party, unless expressly assumed in writing
herein or otherwise. Each party retains full control over the
employment, direction, compensation and discharge of its employees, and
will be solely responsible for all compensation of such employees,
including social security, withholding and worker's compensation
responsibilities.
6. INFORMATION TO BE PROVIDED BY THE CONTRACTOR
6.1 The Contractor shall submit at such time as may be requested by
Owner, schedules which show the order in which Contractor proposes to
carry on the Work, with dates at which Contractor will start the
several parts of the Work, and estimated dates of completion of the
several parts.
6.2 If required by the Owner, Contractor shall provide a breakdown of
the cost of the Work, based on a list of cost items that will be
furnished by Owner.
7. OWNERSHIP AND TITLE TO THE WORK AND DOCUMENTS
7.1 The Owner shall have absolute legal and beneficial ownership of the
Work and the material related thereto.
7.2 The Owner shall own all drawings provided to the Contractor for
this Work. Drawings and specifications furnished by Owner are the
property of Owner and shall not be reused on other work. With the
exception of the set included with the Contract documents, all drawings
and specifications are to be returned to Owner on request at the
completion of the Work.
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8. FAMILIARITY WITH WORK
8.1 Such information as Owner may have given to Contractor to assist
him in properly evaluating the amount and character of the Work
required hereunder, such as information as to subsoil conditions in the
vicinity of the Work, topography, or location and condition of existing
structures and equipment to which the Work hereunder may be attached or
which may interfere therewith, was given as being the best factual
information available to Owner, without the assumption of
responsibility for its accuracy or for any conclusions that Contractor
might draw therefrom.
8.2 The Contractor, by careful examination, shall satisfy itself as to
the nature and location of the work, the character of equipment, and
facilities needed prior to and during the execution of the work, the
general and local conditions, and all other matters which can in any
way affect the work under this contract.
8.3 The Contractor shall be responsible for the verification of
existing dimensions affecting the Work. No allowance will be made, and
no responsibility will be assumed by Owner for any failure of
Contractor to estimate correctly any difficulty attendant to the
execution of the Work or to verify any dimension affecting the Work.
9. MATERIALS AND EQUIPMENT
9.1 Unless otherwise stipulated, the Contractor shall provide and pay
for all materials, labor, tools, equipment, transportation, sanitary
facilities, and all other facilities necessary for the execution and
the completion of the Work. Unless otherwise specified, all materials
incorporated permanently in the Work shall be new and shall meet the
requirements of the specifications and drawings. Unless otherwise
specified, workmanship and materials shall be of best commercial
quality. The Contractor shall, if requested by Owner, furnish
satisfactory evidence as to the kind and quality of materials. All Work
not so conforming will be considered defective.
10. EMPLOYEES
10.1 In connection with its performance of each Contract, Contractor
shall comply with the applicable provisions of Executive Order 11246
and the regulations issued pursuant thereto (generally Part 6-1 of
Title 41 of the Code of Federal Regulations), unless exempted by said
regulations, particularly the provisions of the Equal Opportunity
Clause (41 CFR Section 6- 1.4(a)), which are incorporated
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herein by reference; the provisions and regulations pertaining to
nondiscrimination and affirmative action in employment (41 CFR Sections
60-1.4, 1.40, 1.41 and 1.42), and the filing of Standard Form 100 EE-1.
Contractor certifies, in accordance with the requirements of 41 CFR
Section 6-1.8, that its facilities for employees are not segregated. In
addition, Contractor shall comply with the provisions of the
Affirmative Action Clause for Handicapped Workers (41 CFR Section
6-741.4), and for Disabled Veterans and Veterans of the Vietnam Era (41
CFR Section 6-250.4), which are also incorporated herein by reference.
10.2 Contractor shall at all times enforce strict discipline and good
order among its employees, and shall seek to avoid employing on the
Work any unfit person or anyone not skilled in the work assigned.
Contractor shall, if requested to do so by the Owner, remove from the
job site any employee whom the Owner determines to be incompetent or
undesirable.
11. INFRINGEMENT OF PROPRIETARY RIGHTS
11.1 Contractor shall indemnify, defend, and hold harmless the Owner,
its employees, agents and affiliates from any and all liabilities,
penalties, damages, claims, actions, or proceedings based upon any
allegation that any portion or all of the Work furnished under a
Contract, or any use thereof for purposes intended by a Contract
constitutes an infringement of any patent, copyright, trademark, or
other proprietary interest.
11.2 If Owner provides Contractor notice of a claim of infringement
with respect to any Contractor furnished material and equipment, or
Information used in connection with the Work (collectively, the
"Product") or the Owner's use of all or any portion of the Product is
enjoined due to such claim of infringement, Contractor shall promptly
and at its sole expense either (i) procure for the Owner the right to
continue using the Product or (ii) replace the Product with
non-infringing and functionally equivalent Product, (iii) modify the
Product so that it becomes non-infringing and functionally equivalent,
or (iv) takes such other action as is necessary to assure the Owner's
uninterrupted use of the Work.
11.3 Contractor shall not be liable for indemnification to the Owner to
the extent infringement results from (i) design requirements included
in the Work at the specific, written direction of the Owner, or (ii)
because of use or operation of the Work by the Owner in violation of
the written instruction provided as part of the Work by Contractor, its
Subcontractors or suppliers.
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12. SURVEYS
12.1 Unless otherwise specified, the Owner will furnish all land
surveys and establish all base lines for locating the principal
component parts of the Work together with a suitable number of bench
marks adjacent to the Work. From the information provided by Owner,
Contractor shall develop and make all detail surveys needed for
locations and other working points, lines and elevations. Contractor
shall take necessary care to preserve the base line markers, bench
marks and other survey points provided by Owner.
13. PERMITS, LICENSES AND REGULATIONS
13.1 Contractor shall comply with all applicable federal, state and
local laws and ordinances, and all lawful orders, rules, regulations of
governmental agencies.
13.2 Unless otherwise indicated, Contractor shall obtain and pay for
all necessary permits, licenses, and other forms of documentation
required to perform the Work hereunder, and upon request of Owner,
Contractor shall furnish copies thereof to Owner.
13.3 If Contractor observes that the Drawings and Specifications are at
variance with any such laws, rules, ordinances, regulations, or orders,
it shall promptly notify Owner in writing and any necessary changes
will be made as provided in the Contract for changes in the Work. The
continuance of the Work by the Contractor while aware of such
variances, whether or not reported to Owner, shall be at Contractor's
sole risk. Contractor will indemnify, defend, and hold harmless Owner,
its employees, agents, and affiliates from and against any and all
liabilities, penalties, damages, claims, actions, expenses, or
proceedings which may arise as a result of the actual or alleged
violation of any such law, ordinance, rule, regulation or order as a
result of Contractor's performance under this Contract.
14. PROTECTION OF THE PUBLIC AND OF WORK AND PROPERTY
14.1 Contractor shall provide and maintain all necessary watchmen,
barricades, warning lights, signs, flagmen, police details and other
precautions for the protection and safety of the public whether or not
reimbursable to the Contractor. Contractor shall continuously maintain
adequate protection of all Work from damage, and shall take all
necessary precautions to protect the Owner's property from injury or
loss arising in connection with this Contract. Contractor shall make
good and shall repair, at no cost to Owner, any damage resulting from
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Contractor's lack of protective precautions. Contractor shall
adequately protect adjacent private and public property. Contractor
shall exercise the utmost care and shall carry on all activities under
the supervision of properly qualified personnel and shall comply with
all Federal, state and local laws, ordinances, rules, regulations and
orders when the use or storage of explosives or other hazardous
materials or equipment if necessary for the execution of the Work.
14.2 Owner's Representative shall have the right, but not the
obligation, to direct Contractor to stop all Work if Contractor is
violating any safety rule of the Northeast Utilities Accident
Prevention Manual. No claim by the Contractor for additional payment or
an extension of time for performance will be honored by Owner as a
result of such a work stoppage.
14.3 In an emergency affecting the safety of life, of the Work, or of
property, Contractor is, without special instructions or authorization
from the Owner's Representative, hereby permitted to act at its
discretion to prevent such threatened loss or injury. Any compensation
claimed by Contractor on account of emergency work shall be determined
by agreement or by arbitration.
15. INSPECTION AND AUDIT
15.1 The Contractor will be held responsible for the acceptability of
the finished Work. The Owner's Representative shall at all times have
access to the Work and Contractor's facilities for inspection, audit
and survey purposes and the Contractor shall provide reasonable
assistance and cooperation for such inspections, audits and surveys.
15.2 Owner shall have the right to make Periodic Inspections of any
part of Contractor's operations occupying Owner's property. Owner will
give Contractor reasonable advance written Notice of any periodic
inspections, except in those instances where, in the sole judgment of
Owner, safety considerations justify the need for a Periodic Inspection
without notice. A representative of the Contractor may accompany the
Owner's representative on all Periodic Inspections. The making of
Periodic Inspections or the failure to do so shall not impose upon
Owner any liability of any kind whatsoever nor relieve Contractor of
any responsibility, obligations or liability assumed under this
Contract.
15.3 Re-examination of any Work may be ordered by Owner's
Representative, and, if so ordered, the Work must be uncovered by
Contractor. If such Work is found to be in accordance with the
Contract, Owner shall pay the cost of re-examination. If such Work is
not in accordance with the Contract, Contractor
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shall pay such cost, unless it shall be shown that the defect in the
Work was caused by another contractor employed by Owner, and in that
event, Owner shall pay such cost.
16. PROGRAM MANAGEMENT
16.1 The Contractor shall keep a competent superintendent and any
necessary assistants and other management personnel on the job site
during the performance of the Work. The superintendent shall be
authorized to act for the Contractor, and all instruction given to
him/her shall be binding as if given directly to the Contractor. The
superintendent shall give efficient supervision to the Work using the
best of skill and attention. Owner reserves the right to have a
superintendent removed from the project in the Owner's sole discretion
if the Owner determines that the superintendent fails to comply with
the Owner's specifications or standards.
16.2 The Contractor shall designate a Superintendent and the Owner
shall designate an Owner's Representative (the "Managers"). Whenever
either party is entitled to approve a matter, the Manager for the party
responsible for the matter shall notify the Manager of the other party
of the nature of such matter. The Managers shall discuss such matter,
and each Manager is authorized to approve such a matter on behalf of
his/her company.
17. DISCREPANCIES
17.1 If the Contractor, in the course of the Work, finds any
discrepancy, such as differences between the Drawings and the physical
conditions of the locality, or any errors or omissions in the Drawings
or in the layout as given by survey points and instructions, Contractor
shall immediately inform the Owner's Representative in writing, and the
Owner's Representative will promptly investigate the situation. Any
Work done after such discovery, until authorized by Owner, will be done
at the Contractor's sole risk.
18. CHANGES IN THE WORK
18.1 Except in an emergency endangering life or property, no change in
the Work shall be made unless pursuant to a written order of the Owner,
and no claim for an addition to the contract fee, labor man-hours or
any other reimbursable cost shall be valid unless the change was so
ordered.
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18.2 The Owner may make changes in drawings and specifications or
scheduling within the general scope of the Contract at any time by a
written order. If such changes add to or deduct from the Contractor's
cost of the Work, the contract fee, labor man-hours or any other
reimbursable expense, the Contractor's cost will be adjusted
accordingly and the Contractor shall proceed with the Work as changed.
All such Work shall be executed under the conditions of the original
Contract except that any claim by the Contractor for extension of time
caused thereby will be considered and decided upon when such change is
ordered.
18.3 The Owner's Representative shall have authority to verbally make
minor changes in the Work not involving extra cost, and not
inconsistent with the purpose of the Work.
19. TIME AND ORDER OF COMPLETION; DELAYS AND EXTENSION OF TIME
19.1 The time for performance stated in the Contract is "of the
essence," and Contractor covenants to complete the Work in full
accordance with the terms of the Contract within the time limits stated
therein. Contractor shall keep Owner's Representative advised of the
progress of the Work.
19.2 If Contractor is delayed in the progress of the Work for any
reason which Owner's Representative may deem to justify the delay, then
the time of completion shall be extended for such reasonable period of
time as Owner's Representative may decide.
20. INTERFERENCE WITH OPERATIONS
20.1 Contractor acknowledges that the Work will involve structures that
are part of Northeast Utilities electric transmission system and that
at all times the safe and continuous operation of the electric
transmission system is Owner's foremost priority.
20.2 Interference with normal operations of Owner's plant or equipment
shall be avoided wherever possible. Upon application by Contractor,
Owner's Representative will determine in advance whether such
interference is unavoidable and will establish the necessary procedure
therefor. Except in an emergency involving the protection of life or
property, Contractor shall not operate any of Owner's plant or
equipment or control any device except at the direction of and under
the immediate supervision of a responsible representative of Owner.
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20.3 The Contractor shall perform the Work in a manner so as to not
physically conflict or interfere with the Owner's property and any
facilities attached thereon or placed therein by joint users or others.
20.4 Contractor shall notify Owner of any condition of any Owner
structure that may require improvement to permit the structure to
support the Work.
20.5 Contractor shall not have any approval or authority to modify any
structure or any property of Owner by virtue of this Contract and shall
not do so without the written approval of Owner and Northeast
Utilities.
21. FORCE MAJEURE
21.1 Neither party shall be liable to the other for loss or damage
resulting from any delay or failure of a party to perform its
contractual obligations due to conditions or circumstances which are
not caused by that party's violation of the terms of the Contract and
are beyond that party's control, including but not limited to: acts of
God; war; acts of the public enemy; riot; civil commotion; sabotage;
Federal, state or municipal action or regulation including delays or
failure to act by any regulatory or other agency in granting permits or
licenses; strikes or other labor troubles; fire; flood; accidents;
delays, epidemics, quarantine restrictions; embargoes and other
transportation delays; damage to or destruction in whole or in part of
office equipment or manufacturing plant, to the extent such facilities
are necessary to proper performance of the party's obligations under
any Contract and alternative facilities are not reasonably available;
and inability to obtain raw materials, labor, fuel or supplies.
21.2 Any such condition of Force Majeure shall extend the time of
Contractor's performance to the extent such condition directly affects
the completion of Work required under the Contract. Contractor shall
use its best efforts to reschedule its Work to mitigate the effect of
such condition and to eliminate such condition as soon as possible.
However, unless Owner agrees to pay all direct incremental costs of
such measures, Contractor shall not be required to subcontract Work or
to work additional hours or shifts which, but for the delay, would not
have been required to meet the schedule for completing all or any
portion of the Work.
21.3 The limitations of Contractor's liability under this paragraph
shall not, however, apply to commercial impracticability.
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22. CLAIMS
22.1 If Contractor claims that any changes to the Work issued after the
date of the Contract involve extra cost and/or time under this
Contract, it shall give the Owner's Representative written notice
within ten days after receipt of such claims and changes and in any
event before proceeding to execute the changed Work, except in an
emergency endangering life or property, then the procedure shall then
be as provided for in Section 18. No such claims will be valid unless
so made.
23. DEDUCTIONS FOR UNCORRECTED WORK
23.1 If Owner deems it is not expedient to correct Work that has been
damaged or that was not done in accordance with the Contract, an
equitable deduction from payments to Contractor will be made.
24. CORRECTION OF WORK BEFORE FINAL PAYMENT
24.1 Before final payment is made and subject to Section 39, the
Contractor shall promptly remove from the premises all materials and
Work condemned by Owner's Representative as failing to meet Contract
requirements, whether incorporated in the Work or not. The Contractor
shall promptly replace or re-execute such Work in accordance with the
Contract and without expense to Owner and shall bear the expense of
making good all Work of other contractors destroyed or damaged by such
removal, replacement or re-execution. If the Contractor does not remedy
such defective or non-conforming Work within a reasonable time, the
Owner may remove it and may store or dispose of the materials and
equipment and make such repairs or replacements as are necessary, all
at the expense of the Contractor.
25. SUSPENSION OF WORK
25.1 Owner may at any time suspend the Work or any part thereof by
giving twenty-four (24) hours, notice to the Contractor in writing. The
Work shall be resumed by the Contractor within Ten (10) days after the
date fixed in the written notice from Owner to the Contractor to do so.
Owner will reimburse the Contractor for direct, reasonable expenses
incurred as a result of such suspension.
25.2 If the Work or any part thereof is stopped by notice aforesaid,
and if Owner does not give notice in writing to the Contractor to
resume work at a date within 30 days after the date fixed in the
written notice to suspend, then the Contractor
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may abandon that portion of the Work so suspended upon Ten (10) days,
prior written notice to Owner and it will be entitled to payment for
all Work done on the abandoned portion, including work in progress
commitments relating thereto.
26. THE OWNER'S RIGHT TO TERMINATE CONTRACT FOR CAUSE
26.1 Owner may without prejudice to any other right or remedy and after
giving the Contractor and its surety (if the Work is covered by a bond)
thirty (30) day written Notice, terminate the Contract, subject to
Section 35.10, and take possession of all materials, and other
facilities of any nature relating to the Work paid for by the Owner,
and the Owner may finish the Work by whatever method it chooses, in the
event that the Contractor:
26.1.1 fails to maintain the necessary insurance coverages,
and continues to fail to maintain the necessary insurance
coverages after a thirty (30) day period for Contractor to
cure such condition;
26.1.2 not provide a bond or other acceptable surety within 30
days of the date hereof, if one is required;
26.1.3 if the Contractor is adjudged bankrupt, or should make
a general assignment for the benefit of creditors, or if a
receiver should be appointed as a result of insolvency;
26.1.4 if there exists a material breach of the Contract.
26.2 In the event Owner Terminates the Contract for the reasons of this
Section 26, the Owner shall employ whatever methods, in its sole
determination, are available to the Owner to complete the Work, and
Owner shall collect any and all such costs associated thereby from
Contractor, including the right to off-set against Contractor's amounts
due and payable by Owner to Contractor.
27. DEFAULT
27.1 If either party shall allow any undisputed payment due hereunder
to be in arrears more than 30 days after Notice from the other party;
shall allow any policy of insurance provided by this Contract to expire
without renewal, or shall remain in default under any other provision
of this Contract for a period of 30 days after Notice by the other
party of such default, the party so notifying the other party may, at
its option, terminate this Contract, provided, however, that, in the
case of a default for other than failure of payment or failure to
maintain
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insurance, where the party in default proceeds with all due diligence
to cure such default and cure is not possible within said 30 days, then
the party then in default shall have such time to cure the default as
the defaulted party agrees is reasonably necessary.
28. TERMINATION FOR OWNER'S CONVENIENCE
28.1 Owner shall provide Contractor with five (5) days, prior written
Notice of Termination for Owner's Convenience. In the event that Owner
shall so terminate for Owner's convenience, Owner shall pay Contractor
a "Cancellation Fee" calculated as a percentage of the Contract price
relating to the percentage of the Work completed on the Link Segment
under construction at the time of cancellation plus the direct,
reasonable costs incurred by the Contractor to accomplish said
cancellation including the following costs to the extent that they are
not reimbursed in the percentage of Work completed as demonstrated by
the Contractor:
28.2 For reasonable costs and expenses actually incurred as a direct
result of such termination provided however in no event shall the total
payments to contractor exceed the base price under the Contract. These
costs are to include, but are not limited to such items such as bid
preparation, mobilization training, start-up, and demobilization.
28.3 The Contractor shall use its best efforts to minimize the costs of
cancellation. As a condition to the Owner's obligation to pay such
costs, the Contractor shall provide the Owner with an itemized
accounting of all costs of cancellation.
29. REMOVAL OF EQUIPMENT
29.1 Upon completion of the Contract, or in case of termination of the
Contract before completion for any reason whatsoever, the Contractor
shall within a fourteen (14) day period remove any part or all of its
equipment and supplies from the property of the Owner, failing which
the Owner shall have the right to remove such equipment and supplies
and deliver same to Contractor, at the sole expense of the Contractor.
30. RESPONSIBILITY FOR WORK
30.1 The Contractor assumes full responsibility for the acts and
omissions of all its employees and all Subcontractors, their agents and
employees, and all other persons performing any of the Work under the
Contract. Until final acceptance,
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the Contractor shall be responsible for damage to or destruction of the
Work not covered by the insurance provided under Section 35. Contractor
agrees to make no claims against the Owner for damages to the Work from
any cause except negligent or willful acts of Owner.
31. TAXES
31.1 The unit prices for construction units in this Contract include
provisions for the payment of all moneys which will be payable by the
Contractor or the Owner in connection with the construction of the Work
on account of taxes imposed by any taxing authority upon the sale,
purchase, or use of materials, supplies and equipment, or services or
labor of installation thereof, to be incorporated in the Work as part
of such construction units. The Contractor agrees to pay all such
taxes, except taxes upon the sale, purchase or use of Owner-furnished
materials, if applicable. The Contractor will furnish to the
appropriate taxing authorities all required information and reports
pertaining to the Work, except as to the Owner furnished materials.
32. PAYMENTS WITHHELD PRIOR TO FINAL ACCEPTANCE OF WORK
32.1 The Owner may withhold payment of all or part of Contractor's
invoice to such extent as may be necessary to protect itself from loss
caused by:
32.1.1 Defective Work not remedied;
32.1.2 Claims filed or reasonable evidence indicating probable
filing of claims by other parties against the Contractor or
Owner in connection with the Work;
32.1.3 Failure of the Contractor to make payments properly for
material, labor, equipment, and other obligations;
32.1.4 Damage to another contractor;
32.1.5 Reasonable doubt that the Work can be completed for the
unpaid balance of the Contract;
32.1.6 Reasonable indication that the Work will not be
completed within the Contract time;
32.1.7 Unsatisfactory prosecution of the Work by the
Contractor.
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32.2 When the above grounds are removed or the Contractor provides a
surety bond satisfactory to the Owner which will protect the Owner in
the amount withheld, payment will be made of the amounts withheld. When
deemed reasonable by the Owner, the Owner may use such funds to rectify
the situation giving rise to the withholding of funds.
33. PARTIAL COMPLETION AND ACCEPTANCE
33.1 If at any time prior to final acceptance as referred to in Section
34, any portion of Work has been completed and if Owner determines that
such portion of the Work is of value to Owner, the Owner will, if
applicable, issue to the Contractor a "Certificate of Partial
Completion," and thereupon or at any time thereafter, the Owner may
take over and use the portion of the Work described in such certificate
and may exclude Contractor therefrom. The issuance of a certificate of
partial completion will not release the Contractor or its sureties from
any obligations under the contract, unless such prior use delays the
work or increases its cost. In this event, the Contractor will be
entitled to extra compensation or extension of time, or both, as the
Owner may determine.
33.2 The Owner will release retainage to the Contractor on each line
segment after the Work on that segment is completed. If Work on a
segment has not been completed due to the Owner's inability to release
the Work to the Contractor then the Owner will release the retainage on
that segment minus the value of the Work that has not been released to
the Contractor.
34. FINAL ACCEPTANCE AND PAYMENT
34.1 Upon receipt of written notice that Work is Substantially
Completed or ready for final inspection and acceptance, Owner's
Representative will promptly make such inspection. The balance due the
Contractor, including retainage, is due and payable upon acceptance of
the Work and compliance with all billing procedures, less any amounts
withheld based upon the estimate of Owner's Representative for the fair
value of claims against the Contractor and the cost of completing any
incomplete or defective items of work.
34.2 If after the Work has been substantially completed, full
completion is materially delayed through no fault of the Contractor and
if Owner's Representative so certifies, Owner will without terminating
the Contract, make payment of the balance due for that portion of the
Work fully completed and accepted. Such payment will be made under the
terms and conditions governing
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final payment, except that it will not constitute a waiver of claims.
In such instance, all retainage shall be held by Owner until the
Contract is fully completed.
34.3 Before issuance of final payment, and subject to Section 39,
Contractor shall certify in writing to Owner that all payrolls,
material bills, and other indebtedness connected with the Work have
been paid or otherwise satisfied. In case of disputed indebtedness or
liens, if the contract does not include a payment bond, Contractor may
submit in lieu of certification of payment, a surety bond guaranteeing
payment of all such disputed amounts, including all related costs and
interest in connection with said disputed indebtedness or liens which
Owner may be required to pay upon adjudication.
34.4 Before final payment, Contractor shall furnish to Owner as-built
drawings, manufacturer's manuals and instructions as required by the
Contract.
35. CONTRACTOR'S INSURANCE
35.1 The Contractor shall purchase and maintain such insurance to
protect itself, its subcontractors, the Owner, the Owner's
Representative, and other personnel of the Owner from the claims set
forth below which may arise out of or result from operations under this
Agreement whether such operations are performed by itself or by a
subcontractor or by anyone directly or indirectly employed by any of
them, or by anyone for whose acts any of them may be liable:
35.1.1 Claims under workers' compensation, disability benefit
and other similar employee benefit acts which are applicable
to the Work to be performed.
35.1.2 Claims for damages because of bodily injury,
occupational sickness or disease, or death of his employees
under any applicable employer's liability law.
35.1.3 Claims for damages because of bodily injury or death of
any persons.
35.1.4 Claims for damages because of injury to of destruction
of tangible or real property, including loss of use or loss of
value.
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35.1.5 Claims for damages because of bodily injury or death of
any person or property damage arising out of the ownership,
maintenance, or use of any vehicle.
35.2 The Contractor's Commercial or Comprehensive General Liability
Insurance shall include premises-operation (including explosion,
collapse, and underground coverage), elevators, independent
Contractors, completed operations, environmental-pollution hazard and
blanket Contractual liability on all written Contracts, all including
broad form property damage coverage and pursuant to the Special Terms
and conditions attached hereto.
35.3 The Contractor's Commercial or Comprehensive General and
Automobile Liability Insurance, as required by Subparagraphs 35.1 and
35.2 shall be written for not less than limits of liability as follows:
35.3.1 Commercial or Comprehensive General Liability
a) Bodily Injury $2,000,000 Each Occurrence
$2,000,000 Aggregate
b) Property Damage $2,000,000 Each Occurrence
$2,000,000 Aggregate or a combined single
limit of $2,000,000 Each Occurrence
$2,000,000 Aggregate
35.3.2 Automobile Liability
a) Bodily Injury $1,000,000 Each Person
$1,000,000 Each Occurrence
b) Property Damage $1,000,000 Each Occurrence
35.3.3 Excess Liability (Umbrella Form) the minimum limit
which includes the values of the underlying coverages is
$10,000,000.
35.4 Comprehensive or Commercial General Liability Insurance may be
arranged under a single policy for the full limits required or by a
combination of underlying policies with the balance provided by an
Excess or Umbrella Liability policy.
35.5 Any such policy shall be from a responsible insurance company with
a "Best" rating of A or better, and such policies shall further provide
that not less
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than 60 days' written notice shall be given to the Owner before such
policy(ies) may be canceled, materially changed or undergo a reduction
in insurance limits provided thereby. Certificates evidencing such
policies are a condition precedent to the Owner's issuance of this
Contract and shall be delivered to the Owner with the Contractor's
execution of the Contract.
35.6 All policies other than Workers' Compensation shall be endorsed to
list FiveCom, Inc., FiveCom LLC, NECOM LLC, NU/Mode 1, and Northeast
Utilities, and its operating companies as "Additional Insured," as
their interests may appear, but only with respect to third-party
claims.
35.7 Such insurance coverage shall be primary to any other coverage
available to the Owner or its affiliates and shall not be deemed to
limit the Contractor's liability under this Contract.
35.8 All insurance shall be written on an occurrence basis. If this is
not possible, subject to the Owner's approval, coverage shall be
obtained on a claims made aggregate form; however, the carrier must
notify Owner if the limits have been materially affected by loss
payments or establishment of reserves that materially affect the
coverage, and Contractor agrees to restore the policy limits to the
required amounts.
35.9 Upon timely notice to the Contractor, Owner may require reasonable
increases in the amount of insurance coverage which will be obtained by
Contractor within 30 days after Owner's request. The Owner will pay the
direct additional cost of such insurance in accordance with the
Contract and the Contractor's obligation to provide such additional
insurance is limited to the coverages that the Contractor's carrier is
able to provide.
35.10 If the Contractor fails to maintain the necessary insurance for
any reason, Contractor shall cease all activities related to the Work
and shall not commence the Work until Contractor provides evidence to
the Owner that Contractor meets the necessary insurance coverages. If
Contractor fails to maintain the necessary insurance, Owner shall not
be liable for any of Contractor's direct or indirect cost to cease the
Work, recommence the Work, or for any costs associated with the
protection of the Work caused by the Contractor's failure to maintain
the necessary insurance.
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36. INSURANCE TO PROTECT THE WORK
36.1 Owner may purchase and maintain property insurance upon the entire
Work for the full value of the Work as of the time of any loss. This
insurance shall include as "Additional Insured" the Contractor and
Subcontractors and shall insure against loss from the perils of Fire,
Extended Coverage, and shall include "All Risk" insurance for physical
loss or damage including, without duplication of coverage, at least
theft, vandalism, malicious mischief, transit, collapse, flood, and
earthquake. The Contractor will be responsible for any deductibles
under the policy.
36.2 Owner may purchase and maintain such boiler and machinery
insurance as may be required. This insurance shall include the interest
of the Owner, the Contractor, and subcontractors in the Work; the
Contractor will be responsible for any deductibles under the policy.
36.3 Waivers of Subrogation. Owner may, at its option, self insure all
or any part of the risk of physical loss or damage to the Work.
36.3.1 The Owner and Contractor waive all rights against each
other and the Subcontractors for damage caused by perils
covered by insurance provided under this paragraph except for
the Contractor's responsibility for the deductible amounts
under such insurance. The Contractor shall require similar
waivers from all Subcontractors.
36.3.2 The Owner and Contractor waive all rights against each
other and the Subcontractors for loss or damage to any
equipment used in connection with the Work and covered by any
property insurance, except for the Contractor's responsibility
for the deductible amounts under such insurance. The
Contractor shall require similar waivers from all
Subcontractors.
37. GUARANTEE OF WORK
37.1 In the event that any defects occur in the Work performed under
the contract documents within two years of final acceptance or such
other time period as identified in the Special Conditions or Purchase
Order due to faulty materials or workmanship, the Contractor shall make
all repairs and do all necessary work to correct the defects to the
satisfaction of Owner. Unless otherwise indicated, such repairs and
corrective work shall be started within five days after Owner has
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notified Contractor of the defect and shall be completed as soon as
practicable under the circumstances at no cost to Owner.
37.2 In the event the Contractor fails to complete repairs and
corrective work after being notified as stipulated herein, Owner may
have the work done by others, and Contractor shall pay to the Owner all
costs related thereto.
37.3 The Contractor warrants that the supervisory, scientific,
engineering, architectural, and technical or professional services
provided under this Contract shall be performed by personnel who are
fully qualified and competent and whose recommendations, guidance and
performance reflect professional knowledge, judgment and performance
generally accepted and appropriate in the industry.
37.4 The Contractor, at its sole expense and prior to delivering
consumables or materials incidental to the performance of Work, shall
inspect or test the consumables or materials to assure compliance with
the requirements of the Contract. Evidence of compliance may consists
of the Contractor's testing and inspection records or those of the
manufacturer for lots of consumables or materials from which those
provided to the Owner are taken.
37.5 The Contractor shall take all reasonable steps to transfer for the
benefit of Owner all warranties or guarantees available from the
suppliers of information, materials and equipment to the Contractor,
its agents, subcontractors, or those under its control.
37.6 The Contractor warrants that it shall complete the Work in
accordance with the milestones set forth in the project schedule. To
assure such completion, the Contractor shall at its own expense, use
its best efforts to restore the Work to schedule, including but not
limited to the (i) placing its forces and those of its subcontractors
on extended working hours, (ii) assigning additional forces to the
Work, and (iii) establishing expedited, priority treatment for the
acquisition, fabrication, and delivery of the materials, equipment and
supplies necessary to complete the Work.
37.7 The foregoing warranties are subject to the following conditions:
37.7.1 The Contractor shall not be responsible for repairs,
replacement or corrections made by others, except Owner, to
the Work except upon Contractor's prior written authorization.
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37.7.2 Owner shall notify the Contractor in writing of any
breach of warranty.
37.7.3 If any defect in the Contractor's performance is latent
and not discoverable by Owner's reasonably careful inspection
during the initial warranty period, the applicable warranty
period shall be extended to a total period of five (5) years.
37.7.4 If the Contractor is required to perform repair or
replacement work hereunder, the warranty obligations of
Contractor for such repair or replacement shall be those
applicable to the original Work and shall commence as of the
date of Acceptance of such repair or replacement.
38. SURETY BONDS
38.1 The Owner may require prior to the signing of the Contract that
the Contractor furnish bond covering the faithful performance of the
Contract and the payment of all obligations arising thereunder, in such
form as the Owner may prescribe in the bidding documents and subject to
the Owner's approval of the bonding company. If such bond is required
prior to the receipt of bids, the premium shall be paid by the
Contractor; if subsequent thereto, it will be paid by the Owner. The
Owner may require additional bond if the Contract value is increased
appreciably.
39. WAIVER OF MECHANIC'S LIENS
39.1 Contractor hereby waives its rights to any mechanic's lien under
any applicable statutes or otherwise for services performed or
materials furnished in connection with the Work. Contractor shall
obtain from any Subcontractor or vendor prior to the performance of any
of the Work, a written waiver satisfactory to Owner of all such
subcontractor's or vendor's right to any such lien and shall deliver
such waiver to Owner promptly upon receipt thereof. Upon Owner's
request, Contractor shall obtain, without additional cost to Owner, a
bond satisfactory to Owner to indemnify Owner against such liens and
charges.
40. PROPRIETARY INFORMATION
40.1 Each party acknowledges that in the course of the performance of
this Contract and the Work it may have access to privileged and
proprietary information claimed to be unique, secret, and confidential,
and which constitutes the exclusive property and trade secrets of the
other ("Proprietary Information").
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This information may be presented in documents marked with a
restrictive notice or otherwise tangibly designated as proprietary or
during oral discussions, at which time representatives of the
disclosing party will specify that the information is proprietary and
shall subsequently confirm said specification in writing within five
days. Each party agrees to maintain the confidentiality of the
Proprietary Information and to use the same degree of care as it uses
with regard to its own proprietary information to prevent the
disclosure publication or unauthorized use of the Proprietary
Information. Neither party may duplicate, copy or use Proprietary
Information of the other party other than to the extent necessary to
perform this Contract. Either party shall be excused from these
nondisclosure provisions if the Proprietary Information received from
the other party has been or is subsequently made public by the other
party, is independently developed by such party, disclosed pursuant to
order by a court or government agency, or if the other party gives its
express, prior written consent to the disclosure of the Proprietary
Information.
40.2 The Contract and all documents related thereto, including the
routing of NEON, the other Owner's contracts, contracts with customers,
and customer names are deemed Proprietary Information without further
notice, and will not be disclosed.
40.3 The provisions of this Section shall not apply to reasonably
necessary disclosures in or in connection with regulatory filings or
proceedings, financial disclosures which in the good faith judgment of
the disclosing party are required by law, or disclosures that may be
reasonably necessary in connection with the performance of this
Contract.
41. RIGHTS OF VARIOUS INTERESTS
41.1 Whenever work being done by the Owner's forces or by another
contractor's forces is adjacent to Work covered by this Contract, the
respective rights of the various interests involved will be established
by the Owner, to secure the completion of the various portions of the
Work in general harmony.
41.2 If any part of the Contractor's Work depends for proper execution
or results upon work of any other contractor, the Contractor shall
inspect and promptly report to Owner's Representative any defects in
such work that render it unsuitable for such proper execution and
results. Failure to inspect and report shall constitute an acceptance
of the other contract's work as fit and proper for the reception of his
work, except as to defects which may develop in the other contractor's
work after the execution of Contractor's Work.
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41.3 Contractor agrees, upon reasonable request, to allow Owner to be
on Contractor's premises at such times as may be required for Owner to
perform any appropriate testing, inspection, maintenance and repair of
Owner's material and equipment that is located in Contractor's
Property.
41.4 To insure the proper execution of subsequent work, the Contractor
shall measure work already in place and shall report to Owner's
Representative at once any interference with work and any discrepancy
between the executed work and any drawings relative thereto.
42. LABOR RELATIONS
42.1 Notice by Owner. Owner agrees to notify Contractor immediately
whenever Owner has knowledge that a labor dispute concerning its
employees is delaying or threatens to delay Owner's timely performance
of its obligations under this Contract. Owner shall endeavor to
minimize impairment of its obligations to Contractor (by using Owner's
management personnel to perform work, or by other means) in event of a
labor dispute.
42.2 Notice by Contractor. Contractor agrees to notify Owner
immediately whenever Contractor has knowledge that a labor dispute
concerning its employees is delaying or threatens to delay Contractor's
timely performance of its obligations under this Contract. Contractor
shall endeavor to minimize impairment of its obligations to Owner (by
using Contractor's management personnel to perform work, or by other
means) in the event of labor dispute.
43. SEPARATE CONTRACTS
43.1 The Owner reserves the right to let other contracts in connection
with this project. The Contractor shall afford other contractors
reasonable opportunity for the introduction and storage of their
materials and the execution of their work and shall properly connect
and coordinate the Work with the work of others.
44. SUBCONTRACTORS
44.1 Contractor shall name all subcontractors who are proposed to
participate in the Work. The Contractor shall not make any substitution
in subcontractors without written approval from the Owner.
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44.2 The Contractor agrees that it is fully responsible to the Owner
for acts and omissions of its subcontractors and of persons either
directly or indirectly employed by them.
44.3 Nothing contained in the Contract documents shall create any
direct contractual relation between any subcontractor and the Owner.
45. OWNER'S REPRESENTATIVE STATUS
45.1 The Owner's Representative will perform technical inspection of
the Work. The Owner's Representative has authority to (i) stop the Work
whenever such stoppage may be necessary to insure the proper execution
of the Contract, (ii) reject all Work and materials which do not
conform to the Contract, (iii) decide questions which arise in the
execution of the Work and (iv) make minor changes in the Work not
involving extra cost and not inconsistent with the purpose of the Work.
46. OWNER'S REPRESENTATIVE DECISIONS
46.1 The Owner's Representative will within a reasonable time after
presentation, make decisions in writing on all claims of Contractor and
on all other matters relating to the execution and progress of the Work
or the interpretation of Contract Documents.
47. DISPUTE RESOLUTION
47.1 Arbitration. If any question shall arise in regard to the
interpretation of any provision of this Contract or as to the rights or
obligations of the parties hereunder, the question shall be referred to
the respective Managers who shall deliberate such questions for not
more than 15 days. If a resolution is not forthcoming within said
period the matter will be referred to a senior executive designated by
each party who shall, within 30 days of the request of the party
invoking these dispute resolution procedures, meet with each other to
negotiate and attempt to resolve such question in good faith. Such
senior executives may, if they so desire, consult outside experts for
assistance in arriving at such a resolution. In the event that the
resolution is not achieved within 30 days after such a request, then
the question shall be finally resolved by the award of arbitrators (all
of whom shall be arbitrators certified by the American Arbitration
Association) named as follows:
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47.1.1 the party sharing one side of the dispute shall name an
arbitrator and give written notice thereof to the party
sharing the other side of the dispute;
47.1.2 the party sharing the other side of the dispute shall,
within 14 days of receipt of such written notice, name an
arbitrator; and
47.1.3 the arbitrator so named shall within 15 days after the
naming the latter of them, select an additional arbitrator. If
such additional arbitrator is not selected within fifteen (15)
days of the appointment of the latter of the arbitrators the
party sharing either side of the dispute may seek to appoint
such third arbitrator by applying to the American Arbitration
Association. The arbitrators shall proceed promptly to hear
and determine the matter in controversy. The arbitration shall
be conducted in accordance with the Commercial Arbitration
Rules of the American Arbitration Association. The arbitrators
shall be instructed that their decision must be made within 45
days after the appointment of the third arbitrator, subject to
any reasonable delay due to unforeseen circumstances.
47.2 Award; Costs. The decision of the arbitrators shall be in writing
and signed by the arbitrators or a majority of them and shall be final
and binding on the parties, and the parties shall abide by the decision
and perform the terms and conditions thereof. Unless otherwise
determined by the arbitrators, the fees and expenses of the arbitration
shall be borne by the party losing in these dispute resolution
procedures, or if no party prevails in full, as allocated by the
arbitrators based on the relative merits of the parties' positions.
Judgment upon the award rendered may be in any court having
jurisdiction or application may be made to such court for a judicial
acceptance of the award and an order of enforcement, as the case may
be. All arbitration shall be conducted in Worcester, Massachusetts.
47.3 The Contractor shall carry on the Work and maintain the progress
schedule during any arbitration proceedings, unless otherwise agreed to
by the Owner in writing.
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48. CLEANING UP
48.1 The Contractor shall at all times keep the premises or site free
from accumulations of waste material or rubbish and shall remove at its
own expense from the Owner's property and from all public and private
property all temporary structures, rubbish and waste materials
resulting from its operations. This requirement shall not apply to
property used for permanent disposal of rubbish or waste materials in
accordance with permission of such disposal granted to the Contractor
by the Owner thereof.
48.2 If the Contractor fails to clean up the Owner may do so and the
cost thereof shall be charged to the Contractor.
49. MONTHLY PAYMENTS
49.1 Unless otherwise specified, the Contractor shall submit monthly
invoices in triplicate covering work completed under the basic Contract
and authorized extras. Subject to approval by the Owner, payments will
be made in an amount not to exceed 90% of the invoice. Retainage will
be paid after final acceptance of all parts of the Work. No payment
shall be due and the Owner may withhold from the Contractor the amount
of any claim by a third party against the Contractor based upon an
alleged failure of the Contractor to perform the work hereunder in
accordance with the provisions of the Contractor.
49.2 The Contractor shall receive payment from Owner within thirty (30)
days from the invoice date for all portions of undisputed invoices.
Owner shall pay interest on any late payment excluding (i) disputed
portions of invoice, (ii) retainage, and (iii) moneys owing and
rightfully withheld, at an interest rate equal to the prime rate as
published in the Wall Street Journal plus One Percent (1%).
50. SAFETY PRACTICES
50.1 All persons employed by the Contractor, its agents,
subcontractors, or under its control shall be instructed in and
familiar with safety rules and regulations applicable to the Work being
performed. The Contractor shall have the sole responsibility to see
that such persons are so informed and that safety practices are
followed. Copies of the Owner's safety rules are available upon
request.
50.2 While performing all Work, the Contractor, its agents,
subcontractors, and those under its -control shall fully comply with
all federal, state, and local safety rules and regulations. In
addition, when performing Work at Owner's site,
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Owner's safety rules, and Northeast Utilities Accident Prevention
Manual shall be applicable.
50.3 All persons employed by the Contractor, its agents,
subcontractors, or those under its control who carry out Work in the
vicinity of energized conductors and equipment shall be instructed by
the Contractor in approved methods of artificial resuscitation before
beginning Work.
50.4 The Contractor shall furnish Material Safety Data Sheets (MSDS) to
Owner's Representative for any product intended for use on this project
and make copies of such MSDS available for Owner's employees at a
central location at the work site. No product for which an MSDS
submittal has been requested shall be used until the MSDS has been
reviewed by Owner.
50.5 Owner shall have the authority to suspend Contractor's work
operations in and around Owner's property in the event of material
safety violations exist or are not corrected within a reasonable time
or if, in the sole judgment of Owner, at any time life threatening or
hazardous conditions arise or any unsafe practices are being followed
by Contractor, Contractor's employees, agents, or subcontractors.
50.6 The presence of Owner Representative, Owner employee(s) or
agent(s) shall not relieve Contractor of its responsibility to conduct
all of its work operations in and around Owner's property in a safe and
workmanlike manner, and in accordance with the Terms and Conditions of
this Contract.
51. INDEMNIFICATION AND LIABILITY
51.1 The Contractor and its subcontractors shall indemnify and hold
harmless the Owner, its employees, contractors, subcontractors, agents,
directors, officers, affiliates, and subsidiaries and their respective
employees, subcontractors, agents, directors and officers from any and
all damages, claims, demands or suits of any kind for injury to
persons, including death, and damage to property suffered by any person
or persons (including employees of the Contractor or any subcontractor
or any other Contractor performing any part of the Work), or by any
firm or corporation arising out of, or claimed to have arisen out of,
any acts or omissions of the Contractor, its subcontractors, agents, or
employees in the course of the Work performed.
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52. ASSIGNMENT
52.1 The Contractor has been selected by the Owner because of its
particular expertise. The Contractor shall have no right to assign the
Contract in whole or in part except upon the written consent of the
Owner. The Contractor shall not assign its right to any moneys due but
unpaid under the terms of the Contract.
52.2 The Owner shall have the unrestricted right to assign the Contract
in whole or in part provided reasonable financial assurances are given
to the Contractor by the assignee prior to the assignment.
53. SEVERABILITY
53.1 If any part of any provision of this Contract or any other
agreement, document or writing given pursuant to or in connection with
this Contract shall be invalid or unenforceable under applicable law,
said part shall be ineffective to the extent of such invalidity only,
without in any way affecting the remaining parts of said provision or
the remaining provisions of said agreement; provided, however, that if
any such ineffectiveness or enforcement of any provision of this
Contract, in the good faith judgment of either party, renders the
benefits to such party of this Contract as a whole uneconomical in
light of the obligations of such party under this Contract as a whole,
then the other party shall negotiate in good faith in an effort to
restore insofar as possible the economic benefits of this Contract to
such party.
54. WAIVERS
54.1 No waiver by any party of its rights against the other for a
particular default shall be deemed to be a waiver of rights with regard
to any other default by the other.
55. APPLICABLE LAW
55.1 This Contract shall be interpreted in all respects under the laws
of the Commonwealth of Massachusetts.
56. RIGHT TO AUDIT
56.1 Owner shall have the right to inspect and audit all of
Contractor's and any Subcontractor's books, record, correspondence,
receipts, vouchers and memoranda relating to or affecting this
Contract. Contractor and any Subcontractors shall
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preserve all such records for a period of two years following final
payment hereunder. Contractor shall provide for such right to audit by
Owner in all contracts with Subcontractors relating to this Contract.
57. CONDITION PRECEDENT TO PERFORMANCE
57.1 As a condition precedent to the performance of Work under the
Contract by the Contractor, Owner shall provide evidence, to the
satisfaction of Contractor, of its financial capacity to meet
obligations hereunder. Upon Owner's presentation of such evidence,
Contractor shall Notify Owner of the satisfaction of this condition
precedent within seven (7) days. In the event that Contractor (i) does
not Notify Owner within seven days or Owner does not satisfy Contractor
as to its financial capacity, then the parties hereto shall have no
further obligation to one another hereunder and the Contract shall be
void.
57.2 By the execution of the Contract to perform the Work, the
Contractor hereby accepts the fitness of the Owner to perform its
obligations hereunder.
58. EXERCISE OF RIGHTS
58.1 No failure or delay on the part of Owner in exercising any right,
power or privilege hereunder and no course of dealing with the
Contractor shall operate as a waiver thereof; nor shall any single or
partial exercise of any right, power or privilege hereunder preclude
any other or further exercise thereof or the exercise of any other
right, power or privilege.
-33-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
59. NOTICES
59.1 All notices authorized or required by this Contract shall be given
in writing and delivered by hand or an insured overnight courier and
shall be deemed sufficiently given, served, sent or received, with the
return or delivery receipt being deemed conclusive evidence of such
delivery, or at such time as delivery is refused by the addressee upon
presentation, to the following addresses, which may change from time to
time by such notice to either party, if to:
Mailing: Seaward Corporation
P.O. Box 1177
Portsmouth, NH 03802-1177
Physical: Route 236
Kittery, Maine 03904
Attention: Robert A. Fralley, Jr.
Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
Attention: Owner's Representative
With a copy to: Martin Kaplan, P.C.
Hale and Dorr
60 State Street
Boston, MA 02109
With a copy to: FiveCom LLC
391 Totten Pond Road
Suite 401
Waltham, MA 02154
Attention: Manager
59.2 Special Damage Notification. In the event that the Work or
material related thereto is damaged for any reason, the party
discovering such damage shall notify the other party of said damage by
telephone to Owner (800) 891-5080 or for Contractor (207) 439-5900.
59.3 Calls shall be directed to the Supervisor on Duty, and the caller
should be able to provide the following information:
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<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
Name of company/person making report;
Telephone number to call back;
Location reporting problem;
Description of problem in as much detail as possible;
Time and date the problem occurred or began; and
If appropriate, a statement that "This is an emergency" and that a
problem presents a jeopardy situation to the Work of Contractor or the
property of Owner, as the case may be.
60. NOTICE TO PROCEED
60.1 Following the execution of the Agreement by the Owner and the
Contractor, written Notice, "Notice to Proceed", shall be given by the
Owner to the Contractor. The date to start the Work is the date set
forth in the Notice to Proceed.
61. COMPLETE AGREEMENT
61.1 The Contract shall constitute the complete agreement between the
parties. All prior communications, whether oral or written, shall be
superseded by the Contract and shall not bind the parties. No change to
the Contract shall be binding upon the parties unless made in writing
and signed by both parties.
61.2 Each of the parties represents and warrants that it has full
authority to enter into and perform this Contract, that this Contract
does not conflict with any other document or agreement to which it is a
party or is bound, and that this Contract is fully enforceable in
accordance with its terms.
-35-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
Accepted this 14th day of August, 1996.
Contractor: /s/ Robert A. Fralley, Jr.
---------------------------------
Robert A. Fralley, Jr.
Seaward Corporation
P.O. Box 1177
Portsmouth, NH 03802-1177
Owner: /s/ Victor Colantonio
---------------------------------
Victor Colantonio, Manager
NECOM LLC
391 Totten Pond Road
Suite 401
Waltham, MA 02154
With a copy to: Martin Kaplan, P.C.
Hale and Dorr
60 State Street
Boston, MA 02109
With a copy to: FiveCom LLC
391 Totten Pond Road
Suite 401
Waltham, MA 02154
Attention: Owner's Representative
-36-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
NECOM LLC
---------
SPECIAL TERMS
AND CONDITIONS
1. WORK
A. The Contractor shall furnish supervision, labor, equipment,
and miscellaneous material to install a fiber optic system on
Northeast Utilities facilities in the states of Connecticut,
Massachusetts, Maine and New Hampshire. All work shall be
performed in accordance with the Contract Documents.
2. GOVERNANCE
A. The Contractor's Clarifications enclosed with its letter to
Northeast Utilities System dated May 9, 1996, will have
priority over the documents referenced in the Clarifications.
The items listed in the Contractor's Clarifications refer to
the section numbers of the General Terms and Conditions which
are a part of Specifications No. T95-4.
B. The Contractor's letter to Northeast Utilities System dated
July 1, 1996, has priority over the General Terms and
Conditions.
C. In the event there is any conflict between the aforementioned
terms and conditions and the General Terms and Conditions
which are a part of Specification No. T95-4, the General Terms
and Conditions within Specification No. T95-4 shall govern.
Notwithstanding the previous sentence, the aforementioned
general terms and conditions will govern over the General
Terms and Conditions included with the Specification Number
T954 for sections labeled (i) 2 Definitions, (ii) 3 Priority
of Documents, (iii) 26 The Owner's Right to Terminate
Contract, (iv) 28 Termination for Owner's Convenience and (v)
these Special Terms and Conditions, in the general terms and
conditions. The term "Utility" and "Utilities" stated in the
Specification No. T95-4 is defined to be the "Owner" as stated
in section 2 Definitions of the aforementioned general terms
and conditions.
-37-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
August 12, 1996
CHANGE ORDER NUMBER ONE
Agreement for NEON Project
Between the Owner: NECOM LLC
391 Totten Pond Road, Suit 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P.O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
This Change Order does not alter the scope of Work.
II. SCHEDULE
This Change Order does not alter the contract schedule.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
This Change Order does not alter the contract price or the
revised aggregate contract amount.
IV. CONTRACT TERMS AND CONDITIONS
The referenced sections of the Contract Terms and Conditions
are modified as follows:
57.1 The Owner has provided the Contractor with evidence,
to the satisfaction of Contractor, of its financial
capacity to meet the obligations of the agreement.
25.3 The Contractor will have the right to stop Work after
giving twenty-four (24) hours notice to the Owner in
writing if the Owner has not provided payment to the
Contractor within forty-five (45) days from the
invoice date for all undisputed portions of invoices.
If the Contractor stops Work for non-payment the
Owner will reimburse the Contractor for reasonable
delay costs incurred as a result of the stop Work.
The Contractor will start Work within seven (7) days
of receiving payment from the Owner for undisputed
portions of outstanding invoices.
39. The Contractor will have the right to a mechanic's
lien if the Owner should not provide payment to the
Contractor within forty-five (45) days from the
invoice date for all undisputed portions of invoices.
The Contractor will remove any mechanic's liens upon
receiving payment from the Owner for undisputed
portions of outstanding invoices.
-38-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
V. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
NECOM LLC: SEAWARD CORPORATION:
/s/ Michael A. Musen /s/ Robert A. Fralley, Jr.
--------------------------- --------------------------
Duly Authorized Duly Authorized
Date: 8/13/96 Date: 8/12/96
-------------------- --------------------
[handwritten note]: Contractor must leave worksite in an electrically and
physically safe condition.
-39-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
August 14, 1996
CHANGE ORDER NUMBER ONE
Agreement for NEON Project
Between the Owner: NECOM LLC
391 Totten Pond Road, Suit 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P.O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
This Change Order does not alter the scope of Work.
II. SCHEDULE
This Change Order does not alter the contract schedule.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
This Change Order does not alter the contract price or the
revised aggregate contract amount.
IV. CONTRACT TERMS AND CONDITIONS
The referenced sections of the Contract Terms and Conditions
are modified as follows:
57.1 The Owner has provided the Contractor with evidence,
to the satisfaction of Contractor, of its financial
capacity to meet the obligations of the agreement.
25.3 The Contractor will have the right to stop Work after
giving twenty-four (24) hours notice to the Owner in
writing if the Owner has not provided payment to the
Contractor within forty-five (45) days from the
invoice date for all undisputed portions of invoices.
If the Contractor stops Work for non-payment the
Owner will reimburse the Contractor for reasonable
delay costs incurred as a result of the stop Work. If
the Contractor stops Work due to non-payment, the
Contractor must leave the work site in an
electrically and physically safe condition. The
Contractor will start Work within seven (7) days of
receiving payment from the Owner for undisputed
portions of outstanding invoices.
39. The Contractor will have the right to a mechanic's
lien if the Owner should not provide payment to the
Contractor within forty-five (45) days from the
invoice date for all undisputed portions of invoices.
The Contractor will remove any
-40-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
mechanic's liens upon receiving payment from the
Owner for undisputed portions of outstanding
invoices.
V. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
NECOM LLC: SEAWARD CORPORATION:
/s/ Michael A. Musen /s/ Robert A. Fralley, Jr.
---------------------------- --------------------------
Duly Authorized Duly Authorized
Date: 8/14/96 Date: 8/14/96
---------------------- --------------------
-41-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
September 10, 1996
CHANGE ORDER NUMBER EIGHT
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
301 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is for any material deficiencies
that causes additional Work or causes the Contractor to perform the Work in an
interrupted or non-sequential manner. The Owner is to provide the Contractor
with sufficient time to schedule and perform the work detailed in this Change
Order without interruption to the Contract Work.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996, item 2.4.1.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley
- ------------------------- ------------------------- -------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 9/16/96 Date: 9/16/96 Date: 9/16/96
------------------- ------------------- -------------------
</TABLE>
-42-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
September 10, 1996
CHANGE ORDER NUMBER SEVEN
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is for pulling in underground
cable at any location directed by Owner. The Change is to provide the Contractor
with sufficient details and time to schedule and perform the work detailed in
this Change Order without interruption to the Contract Work.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996, Item 2.4.1.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ------------------------ ------------------------- ------------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 9/16/96 Date: 9/16/96 Date: 9/10/96
------------------ ------------------- ------------------------
</TABLE>
-43-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
September 10, 1996
CHANGE ORDER NUMBER SIX
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is for any additional work to
complete the 395 line portion of Segment One. The work on the 395 line was
completed by others prior to the Contract being awarded. The Owner is to provide
the Contractor with sufficient details and time to schedule and perform the work
detailed in this Change Order without interruption to the Contract Work.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996, Item 2.4.1.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ------------------------ ------------------------- ------------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 9/16/96 Date: 9/16/96 Date: 9/10/96
------------------ ------------------- ------------------------
</TABLE>
-44-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
September 10, 1996
CHANGE ORDER NUMBER FOUR
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is for installing and removing
cover over distribution lines in the states of Connecticut and New Hampshire.
The Contractor will be compensated for installing and removing cover each time
it is necessary to safely perform the work.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996, Item 2.4.1. The Contractor will
be paid a minimum of thirty hours per week, per bucket truck for each week that
a crew is performing work in Connecticut and New Hampshire, plus the
mobilization, demobilization and remobilization costs associated with the bucket
truck(s).
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ------------------------ ------------------------- ------------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 9/16/96 Date: 9/16/96 Date: 9/10/96
------------------ ------------------- ------------------------
</TABLE>
-45-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
September 10, 1996
CHANGE ORDER NUMBER THREE
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is for standby time waiting for
outages. Standby time is the amount of time that the Contractor waits for
outages, waits for grounds to be installed and removed and the time lost during
an outage performing work activities in an ineffective manner. The Contractor
will attempt to perform other work activities while waiting for an outage. The
Contractor will continue to work and be paid for a regular 50 hour work week
during outage conditions.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996, item 2.4.1. For the first day
the Contractor experiences standby time due to an outage in Segments One, Four,
Five and Seven, the Contractor will be paid in actual time less one hour for
labor and no equipment time. Any other time the Contractor experiences standby
time, it will be paid the actual time for labor, equipment and any other costs
detailed on the extra work time sheets. The Contractor will be paid for the
equipment assigned to the crew on standby the same number of hours that the
standby crew is paid.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ------------------------ ------------------------- ------------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 9/16/96 Date: 9/16/96 Date: 9/10/96
------------------ ------------------- ------------------------
</TABLE>
-46-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
September 10, 1996
CHANGE ORDER NUMBER TWO
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is to install and remove grounds
from the transmission and distribution lines. The Contractor will be compensated
for installing and removing grounds to safely perform the work except (1) for
the first time that the grounds are required in Segments numbered One, Three,
Four, Five, Six, Seven, Eight and Nine, and (2) when personnel grounds are
utilized as part of the work (not associated with an outage).
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rate specified in the
Contractor's revised proposal dated May 9, 1998, Item 2.4.1.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ------------------------ ------------------------- ------------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 9/16/96 Date: 9/16/96 Date: 9/10/96
------------------ ------------------- ------------------------
</TABLE>
-47-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
September 24, 1996
CHANGE ORDER NUMBER NINE
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is to install weights on the
single and double suspension type structures.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs based in the following unit prices:
Item Unit Price ($/Item)
First 50 Lbs. of Weight 100.00
Each Additional 50 Lbs. of Weight - Up to 250 Lbs. 25.00
The above unit prices are based the clipping crew being able to install
the weights at the same time the structure is being clipped.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ------------------------ ------------------------- ------------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 9/25/96 Date: 9/25/96 Date: 9/24/96
------------------ ------------------- ------------------------
</TABLE>
-48-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
November 5, 1996
CHANGE ORDER NUMBER THIRTEEN
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is for time when outages are not
provided to allow an uninterrupted work sequence. The number of hours of this
impact will be calculated by taking the number of hours worked between the start
and the end of the impact period subtracting any crew hours that the Contractor
was compensated for standby time on Change Order Three. The date and time that
the Impact begins is when the unclipping function is unable to hang blocks on
structures in a de-energized condition. The date and time that the impact ends
is when the next outage is provided in the next portion of the line. The
Contractor will continue to work and be paid for a regular 50 hour work week
during outage conditions.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor and equipment based on
the number of hours described in item I above at the rate of $299.70 per hour.
Lost time when outages are not provided to allow an uninterrupted work sequence
will be calculated for each time that more than one outage is provided into any
section of work where an outage is necessary to perform the work.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Robert A. Fralley, Jr.
- ------------------------ ------------------------- ------------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: Date: Date: 11/5/96
------------------ ------------------- ------------------------
</TABLE>
-49-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
EXHIBIT A - RATE WHEN OUTAGES ARE NOT PROVIDED TO ALLOW AN UNINTERRUPTED
WORK SEQUENCE
<TABLE>
<CAPTION>
HOURS EXTENSIONS
STRAIGHT OVER- ---------------------- -----------------
TIME TIME STR OVER STR OVER
DATE UNIT # NAME/DESCRIPTION CLASS RATE RATE TIME TIME TOTAL TIME TIME SUBTOTAL
- ---- ------ ---------------- ----- ---- ---- ---- ---- ----- ---- ---- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dicks, Frankie LM 40.00 55.00 8.0 2.0 10.0 320.00 110.00
Farrow, Arthur APL 35.00 50.00 8.0 2.0 10.0 280.00 100.00
Fogle, Eddie OPR 40.00 55.00 8.0 2.0 10.0 320.00 110.00
Landry, Christopher LM 40.00 55.00 8.0 2.0 10.0 320.00 110.00
Landry, Ernest FM 45.00 60.00 8.0 2.0 10.0 360.00 120.00
Peppin, James LM 40.00 55.00 8.0 2.0 10.0 320.00 110.00
Roberson, Larry LM 40.00 55.00 8.0 2.0 10.0 320.00 110.00
Richardson, Roland LM 40.00 55.00 8.0 2.0 10.0 320.00 110.00
Stitt, Marrion OPR 40.00 55.00 8.0 2.0 10.0 320.00 110.00
Withington, Wayne FM 45.00 80.00 8.0 2.0 10.0 360.00 120.00
Parker, Freddie Joe Super 80.00 110.00 8.0 2.0 10.0 640.00 220.00
360 Flatbed 4x4 1T w/R 025/502 15.10 8.0 2.0 10.0 151.00
394 Flatbed 4x4 1T w/R 025/502 15.10 8.0 2.0 10.0 151.00
395 Flatbed 4x4 1T w/R 025/502 15.10 8.0 2.0 10.0 151.00
396 Flatbed 4x4 1T w/R 025/502 15.10 8.0 2.0 10.0 151.00
349/10 Flatbed 4x4 21/2T w/ 065/242 28.95 8.0 2.0 10.0 269.50
/73 Wire Stand&R /502
-50-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
580/10 Carrier w/LH78 Tens 067/270 72.10 8.0 2.0 10.0 721.00
/33 Puller w/R /502
882 JD 450 Crawler 201 32.00 8.0 2.0 10.0 320.00
1028 Trlr. Mid. Pull/Tens 271/502 35.10 8.0 2.0 10.0 351.00
48"F/O w/R
1066 4-DrumPuller Dist 275/502 28.60 8.0 2.0 10.0 286.00
1733 Box Trailer 40' 441 1.10 8.0 2.0 10.0 11.00
1736 Box Trailer 40' 441 1.10 8.0 2.0 10.0 11.00
1518/1 Boom Truck w/R 084/164 60.10 8.0 2.0 10.0 601.00
832 /502
1819 ATV - 4x4 338 10.50 8.0 2.0 10.0 105.00
1820 Truck Tractor w/R 082/502 54.10 8.0 2.0 10.0 541.00
2320 Trailer Lowbed 50T 421 18.00 8.0 2.0 10.0 180.00
3Axl
2590 Bucket Truck H/R 90' 050/502 63.60 8.0 2.0 10.0 636.00
6x6 w/R
7231 Pickup 4x4 3/4T DSL 023/502 14.35 8.0 2.0 10.0 143.50
w/R
LABOR TOTAL - ONE CREW HOUR @ 30% $156.30
EQUIPMENT TOTAL - ONE CREW HOUR @ 30% $143.40
TOTAL - ONE CREW HOUR @ 30% $299.70
</TABLE>
-51-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
November 5, 1996
CHANGE ORDER NUMBER TWELVE
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is the additional cost to
install the dead-end type hardware for the ADSS wire.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's proposal dated May 9, 1998 Item 2.4.1. The Contractor will be
compensated for the dead-end and wire crews for the actual time required to
install the dead-ends. The compensation for the specialized rigging costs when
the dead- ends must be installed without a bucket is a one time rental cost of
$3,200.00. The Contractor will be provided five weeks (from October 31, 1996) to
obtain the necessary rigging prior to beginning ADSS work.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 11/8/96 Date: 11/6/96 Date: 11/5/96
----------------- ----------------- ----------------------
</TABLE>
-52-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
November 5, 1996
CHANGE ORDER NUMBER ELEVEN
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is to install an OPGW tangent
type structure when the existing structure is a dead-end type.
II. SCHEDULE
The effect of this Change Order on the schedule will BE determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for labor and equipment costs at the
unit price of one hundred dollars ($100.00) a structure to change an existing
OPGW dead-end type structure into a tangent type. This unit price is to apply in
addition to the unit price of the tangent type hardware item. The above unit
price is based on the work being performed at the same time the structure is
being unclipped.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 11/8/96 Date: 11/6/96 Date: 11/5/96
----------------- ----------------- ----------------------
</TABLE>
-53-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
CHANGE ORDER NUMBER FIFTEEN
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is for working the OPCW wire
crew overtime in order to improve the schedule.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for the additional cost associated
with working overtime at the rate of $4,100.00 per day. This rate is based on
working one ten (10) hour day per week for a maximum of five weeks. Should the
crew work less or more hours, the above rate will be prorated.
The above rate is in addition to the unit prices in the Contract.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 11/22/96 Date: Date: 11/18/96
----------------- ----------------- ----------------------
</TABLE>
-54-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
November 21, 1996
CHANGE ORDER NUMBER FOURTEEN
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of this Change Order is for make ready work that is performed
at the hourly rates in the Contract.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996 Item 2.4.1.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 11/22/96 Date: Date: 11/21/96
----------------- ----------------- ----------------------
</TABLE>
-55-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
November 21, 1996
CHANGE ORDER NUMBER SIXTEEN
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of work of this Change Order is for additional overtime, two
additional subcontract splicing and testing crews and for testing in Segment
One.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for its own splicing and testing
crew a lump sum amount of $2,000.00. The additional cost for the subcontractor's
crews will be $2,760.00 for each 96 fiber splice enclosure that the
subcontractor completes. At locations that require more or less than 96 splices
the above unit price will be prorated. The testing required for Segment One will
be done at the hourly rates in the Contract.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 11/22/96 Date: Date: 11/31/96
----------------- ----------------- ----------------------
</TABLE>
-56-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
December 6, 1996
CHANGE ORDER NUMBER EIGHTEEN
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
301 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P. O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of this Change Order is to install cable at the hourly rates
in the Contract for the segments of work directed by the Owner.
II. SCHEDULE
The effect of this Change Order on the schedule will determined after
the amount of additional work payable for this Change Order is identified and
completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996 Item 2.4.1.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 12/17/96 Date: 12/9/96 Date: 12/6/96
----------------- ----------------- ----------------------
</TABLE>
-57-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
January 15, 1997
CHANGE ORDER NUMBER TWENTY
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P.O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of this Change Order is for fiber optic testing work directed
by the Owner.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996, Item 2.4.1
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Kirby H. Gearing /s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 2/12/97 Date: 2/12/97 Date: 1/15/97
----------------- ----------------- ----------------------
</TABLE>
-58-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
January 15, 1997
CHANGE ORDER NUMBER NINETEEN
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P.O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of this Change Order is for repair and replacement work in
Segment One directed by the owner.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
III. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs detailed on the extra work time sheets at the rates specified in the
Contractor's revised proposal dated May 9, 1996, Item 2.4.1 and/or at the unit
prices stated in the Contract and Change Orders.
IV. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: Date: Date: 1/15/97
----------------- ----------------- ----------------------
</TABLE>
-59-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
February 26, 1997
CHANGE ORDER NUMBER TWENTY-ONE
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P.O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of this Change Order is for the revised schedule on Segment
Four as stated in the Contractor's Letter Number 61.
II. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The Contractor will be compensated for all labor, equipment and any
other costs as stated in the Contractor's Letter Number 61.
III. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Arthur E. Rivers /s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: 2/27/97 Date: Date: 2/26/97
----------------- ----------------- ----------------------
</TABLE>
-60-
<PAGE>
Revision #8, August 8, 1996
Issuing Date: 08/08/96
August 1, 1997
CHANGE ORDER NUMBER TWENTY-TWO
Agreement for NEON Project dated August 14, 1996
Between the Owner: NECOM LLC
391 Totten Pond Road, Suite 401
Waltham, MA 02154
And,
Contractor: Seaward Corporation
P.O. Box 1177
Portsmouth, NH 03802-1177
I. SCOPE OF WORK
The scope of this Change Order is for all future field fusion splicing
work, bid item number three.
II. SCHEDULE
The effect of this Change Order on the schedule will be determined
after the amount of additional work payable for this Change Order is identified
and completed.
II. PAYMENT/REVISED AGGREGATE CONTRACT AMOUNT
The scope of this Change Order is to perform future field fusion
splicing work for the unit price of twenty dollars ($20.00) per splice.
III. PRECEDENCE
This Change Order takes precedence over any other Contract Document.
<TABLE>
<CAPTION>
NECOM LLC: NORTHEAST UTILITIES: SEAWARD CORPORATION:
<S> <C> <C>
/s/ Robert A. Fralley, Jr.
- ----------------------- ----------------------- ----------------------------
Duly Authorized Duly Authorized Duly Authorized
Date: Date: Date: 8/1/97
----------------- ----------------- ----------------------
</TABLE>
-61-
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 15th day of October, 1997, by
and among FiveCom, Inc., a Massachusetts corporation with its principal place of
business in Waltham, Massachusetts (hereinafter referred to as the "Company"),
MaineCom Services, a Maine corporation with its principal place of business in
Augusta, Maine (hereinafter referred to as "MaineCom"), and Victor Colantonio of
Newton, Massachusetts (hereinafter referred to as the "Executive").
WHEREAS, the Company recognizes that the Executive is a valued employee
because of his knowledge of the Company's affairs and his experience and
leadership capabilities, and desires to encourage his continued employment with
the Company to assure itself of the continuing advantage of that knowledge,
experience and leadership for the benefit of customers and shareholders,
particularly during a period of transition in various aspects of the Company's
business and in the event of a Change of Control; and
WHEREAS, the Executive desires to serve in the employ of the Company on
a full-time basis for the period provided in this Employment Agreement
(hereinafter referred to as the "Agreement") on the terms and conditions
hereinafter set forth; and
WHEREAS, the Company and the Executive wish to set forth the terms and
conditions under which such employment will occur.
NOW, THEREFORE, in consideration of the continued offer of employment
by the Company and the continued acceptance of employment by the Executive, and
the
-1-
<PAGE>
mutual promises and covenants contained herein, the Company and the Executive
hereby agree as follows:
1. Term of Agreement.
a. Term. The term of this Agreement shall begin on October 15, 1997
(hereinafter referred to as the "Effective Date") and shall expire on October
14, 2000; provided, however, that on October 15, 2000 and each succeeding
October 15 thereafter, the term of this Agreement shall automatically extend one
year unless not later than the immediately preceding April 1 either the Company
or the Executive shall have given written notice that such party does not wish
to extend the term of the Agreement; and provided further, that if a Change of
Control occurs during the term of this Agreement or any extension thereof, this
Agreement shall be automatically extended and shall thereafter expire 36
calendar months after the date of said Change of Control.
b. Expiration. Notwithstanding anything to the contrary in this Section
1, except as to vested benefits, this Agreement and all obligations hereunder
shall terminate on the earliest to occur of (i) the date of the Executive's
death, (ii) thirty (30) days after the Company gives notice to the Executive
that the Company is terminating the Executive's employment for reason of Total
Disability or Cause; or (iii) the applicable term of the Agreement as specified
in Section 1.a above.
2. Definitions. The following terms shall have the meanings set forth
below:
"Affiliate" means a person that directly or indirectly through
one or more intermediaries controls, is controlled by, or is under common
control with, the Company.
"Board" means the Board of Directors of the Company.
-2-
<PAGE>
"Cause" means any of the following events or occurrences:
(i) Any act of material dishonesty taken by, or committed at the
direction of, the Executive.
(ii) Any illegal or unethical conduct which would impair the
Executive's ability to perform his duties under this Agreement
or would impair the business reputation of the Company.
(iii) Conviction of a felony.
(iv) The continued failure of the Executive to perform his
responsibilities and duties under this Agreement in a
satisfactory manner, after demand for performance has been
delivered in writing to the Executive specifying the manner in
which the Company believes that the Executive is not
performing.
"Change of Control" with respect to MaineCom, the Company, or FiveCom
LLC, a majority-owned affiliate of the Company, means the occurrence of any of
the following events:
(i) Any corporation, partnership, limited liability company or any
other form of entity, whether business or governmental, or any
person (other than Central Maine Power Company or any
Affiliate or any trustee or other fiduciary holding securities
under an employee benefit plan of Central Maine Power Company
or any Affiliate), is or becomes the beneficial owner, as
described in Rule 13d-3 under the Securities Exchange Act of
1934, as amended, directly or indirectly, of stock of
MaineCom, the
-3-
<PAGE>
Company or FiveCom LLC, as applicable, representing fifty
percent (50%) or more of the combined voting power of the then
outstanding stock eligible to vote of MaineCom, the Company or
FiveCom LLC, as applicable.
(ii) The stockholders of MaineCom, the Company or FiveCom LLC, as
applicable, approve a merger, sale of interest or
consolidation of MaineCom, the Company or FiveCom LLC, as
applicable, with or to any other entity or person, other
than a sale of interest, merger or consolidation which would
result in the voting stock of MaineCom, the Company or
FiveCom LLC, as applicable, outstanding immediately prior
thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of
the surviving entity) more than fifty percent (50%) of the
combined voting power of the outstanding voting stock of
MaineCom, the Company or FiveCom LLC, as applicable, or such
surviving entity immediately after such sale of interest,
merger or consolidation provided, that a merger or
consolidation effected to implement a recapitalization (or
similar transaction) in which no entity or person (as
hereinabove defined) acquires more than fifty percent (50%)
of the combined voting power of the outstanding voting stock
of MaineCom, the Company or FiveCom LLC, as applicable,
shall not constitute a Change of Control thereof.
-4-
<PAGE>
(iii) The stockholders of MaineCom, the Company or FiveCom LLC, as
applicable, approve a plan of complete liquidation of
MaineCom, the Company or FiveCom LLC, as applicable, or an
agreement for the sale, lease, exchange or other disposition
of all or substantially all of its assets (or any transaction
having a similar effect).
"Constructive Discharge" means, so long as no Change of Control has
occurred, any reduction in the Executive's annual base salary in effect as of
the Effective Date of this Agreement, and also means, on or after a Change of
Control:
(i) any reduction in the Executive's annual base salary in effect
as of the Effective Date of this Agreement, or as the same may
be increased from time to time;
(ii) a substantial reduction in the nature or scope of the
Executive's responsibilities, duties or authority from those
described in Section 3.c of this Agreement;
(iii) a material adverse change in the Executive's title or
position; or
(iv) relocation of the Executive's place of employment from the
Company's principal executive offices to a place more than
twenty-five (25) miles from Waltham, Massachusetts with the
Executive's consent.
"Severance Benefits" means the benefits set forth in Section 5.a or 5.c
of this Agreement.
"Total Disability" means the complete and permanent inability of the
Executive to perform all of his duties under this Agreement on a full-time basis
for a period of at
-5-
<PAGE>
least six (6) consecutive months, as determined upon the basis of such evidence,
which may include independent medical reports and data.
3. Employment.
a. Position. The Company hereby agrees to continue its employment of
the Executive in the capacity of President, and the Executive hereby agrees to
remain in the employ of the Company for the period beginning on the Effective
Date and ending on the date on which the Executive's employment is terminated in
accordance with this Agreement (the "Employment Period"). This Agreement shall
not restrict in any way the right of the Company to terminate the Executive's
employment at whatever time and for whatever reason it deems appropriate, nor
shall it limit the right of the Executive to terminate employment at any time
for whatever reason he deems appropriate.
b. Performance. The Executive agrees that during the Employment Period
he shall devote substantially all his business attention and time to the
business and affairs of the Company, and use his best efforts to perform
faithfully and efficiently the duties and responsibilities of the Executive
under this Agreement. It is expressly understood that (i) the Executive may
devote a reasonable amount of time to such industry associations and charitable
and civic endeavors as shall not materially interfere with the services that the
Executive is required to render under this Agreement, and (ii) the Executive may
service as a member of one or more boards of directors of companies that are not
affiliated with the Company and do not compete with the Company or any of its
Affiliates so long as such membership does not materially interfere with the
Executive's duties hereunder.
-6-
<PAGE>
c. Job Duties. The following listing of job duties shall represent the
Executive's primary responsibilities. Such responsibilities may be expanded and,
so long as no Change of Control has occurred, may be decreased as the business
needs of the Company require. The Executive's primary job responsibilities shall
include but not be limited to, development of the Company's business including
but not limited to opening new markets, public image, sales, marketing and
customer relations. The Executive's duties do not include the duties of Chief
Executive Officer of the Company.
4. Compensation and Benefits.
a. During the Employment Period, the Executive shall be
compensated as follows:
(i) Salary. The Executive shall receive an annual base salary, the
amount of which shall be reviewed regularly and determined
from time to time, but which shall not be less than
$150,000.00. His salary shall be payable in accordance with
Company payroll practices.
(ii) Participation in Executive Plans. He shall be entitled to
participate in any and all plans and programs maintained by
the Company from time to time to provide benefits for its
executives, including without limitation any short-term or
long-term incentive plan or program, in accordance with the
terms and conditions of any such plan or program or the
administrative guidelines relating thereto, as may be amended
from time to time; provided, however, that nothing contained
in this part (ii) shall limit the
-7-
<PAGE>
authority and discretion of the Board to make the
determinations and decisions required or permitted by any such
plan or program.
(iii) Participation in Salaried Employee Plans. The Executive shall
be entitled to participate in any and all plans and programs
maintained by the Company from time to time to provide
benefits for its salaried employees generally, including
without limitation any savings and investment, stock
purchase or group medical, dental, life, accident or
disability insurance plan or program, subject to all
eligibility requirements of general applicability, to the
extent that executives are not excluded from participation
therein under the terms thereof or under the terms of any
executive plan or program or any approval or adoption
thereof; provided, however, that during the term of this
Agreement, medical insurance coverage in an amount no less
than that provided as of the Effective Date hereof shall be
provided to the Executive.
(iv) Other Fringe Benefits. The Executive shall be entitled to all
fringe benefits generally provided by the Company at any
time to its full-time salaried employees, including without
limitation three weeks annual paid vacation, holidays and
sick leave but excluding severance pay, in accordance with
generally applicable Company policies with respect to such
benefits. The Executive shall be entitled to the use of a
Company vehicle on substantially the same in terms and
conditions as are in effect on the Effective Date of this
Agreement.
-8-
<PAGE>
(v) In recognition of the Executive's ownership of shares of the
common stock of the Company and shares of a membership
interest in FiveCom LLC, MaineCom agrees that if warrants
for the purchase of 5,875 shares of a membership interest
issue or to be issued by FiveCom LLC to Central Maine Power
Company, a Maine corporation which holds 100 percent of the
common stock of MaineCom, are exercised, and if the
Executive does not voluntarily terminate employment with the
Company prior to October 14, 2000, MaineCom shall, at the
time of such exercise, transfer to the Executive such number
of shares of the Company's Series A Preferred Stock as shall
return his beneficial interest in FiveCom LLC to the level
that existed immediately prior to such exercise, excluding
any other issuances of equity or equity rights by FiveCom
LLC at any time on or after the Executive Date of this
Agreement. If the Executive acquires any additional equity
interest or equity rights in the Company or FiveCom LLC on
or after the Effective Date hereof, such additional interest
or rights shall not be protected or otherwise taken into
account under the foregoing provision.
b. Withholding. All compensation payable under this Section 4 shall be
subject to normal payroll deductions for withholding income taxes, social
security taxes and the like.
5. Severance Benefits.
-9-
<PAGE>
a. Change of Control. If, on or after a Change of Control, the
Executive's employment with the Company is terminated during the Employment
Period by the Company and/or any successor for any reason other than death,
Total Disability or Cause, or by the Executive within twelve (12) calendar
months of a Constructive Discharge, Severance Benefits shall be provided as
follows:
(i) The Company and MaineCom shall pay the Executive, in one lump
sum cash payment, within sixty (60) days following the date of
termination of employment as defined in Section 6 below, an
amount equal to 2.99 times the Executive's then-current base
salary.
(ii) The Company and MaineCom shall provide the Executive with
so-called COBRA medical continuation coverage paid by the
Company for a period up to eighteen (18) months, or until the
Executive obtains coverage under another group medical plan
with another employer, whichever occurs first.
(iii) The Company and MaineCom shall pay a fee to an independent
outplacement firm selected by the Executive for outplacement
services in an amount equal to the actual fee for such
services up to a total of $10,000.
(iv) The obligations of the Company and MaineCom under parts (i),
(ii) and (iii) of this Section 5.a shall be joint and several.
b. Parachute Provision. Notwithstanding the provisions of
Section 5.a hereof, if, in the opinion of tax counsel selected by the Company's
independent auditors,
(i) the Severance Benefits set forth in said Section 5.a and any
payments or benefits otherwise payable to the Executive would
constitute "parachute
-10-
<PAGE>
payments" within the meaning of Section 280G(b)(2) of the
Internal Revenue Code of 1986, as amended (the "Code") (said
Severance Benefits and other payments or benefits being
hereinafter collectively referred to as "Total Payments"), and
(ii) the aggregate present value of the Total Payments would exceed
2.99 times the Executive's base amount, as defined in Section
280G(b)(3) of the Code,
then, such portion of the Severance Benefits described in Section 5.a hereof as,
in the opinion of said tax counsel, constitute "parachute payments" shall be
reduced as directed by tax counsel so that the aggregate present value of the
Total Payments is equal to 2.99 times the Executive's base amount. The tax
counsel selected pursuant to this Section 5.b may consult with tax counsel for
the Executive, but shall have complete, sole and final discretion to determine
which Severance Benefits shall be reduced and the amounts of the required
reductions. For purposes of this Section 5.b, the Executive's base amount and
the value of the Total Payments shall be determined by the Company's independent
auditors in accordance with the principles of Section 280G of the Code and based
upon the advice of tax counsel selected thereby.
c. No Change of Control. If no Change of Control has occurred, and the
Executive's employment with the Company is terminated during the Employment
Period either (i) by the Company for any reason other than death, Total
Disability or Cause, or (ii) by the Executive within six (6) calendar months of
a Constructive Discharge, the Company shall pay the Executive, in one lump sum
payment within sixty (60) days following the date of termination of employment
as defined in Section 6 below, an
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<PAGE>
amount equal to one (1) times the Executive's annual base salary in effect on
the date immediately preceding the date of termination, or preceding the date of
a Constructive Discharge attributable to a base salary reduction if applicable.
6. Date of Termination. For purposes of this Agreement, the date of
termination of the Executive's employment shall be the date notice is given to
the Executive by the Company and/or any successor or, in the case of a
Constructive Discharge, the date set forth in a written notice given to the
Company or any successor by the Executive, provided that the Executive gives
such notice within twelve (12) calendar months of the Constructive Discharge in
the case of a Change of Control, and within six (6) calendar months of the
Constructive Discharge in other cases, and specifies therein the event
constituting the Constructive Discharge.
7. Taxes.
a. Gross-Up Amount. In the event that any portion of the Severance
Benefits provided in Section 5 is subject to tax under Code ss.4999, or any
successor provision thereto (the "Excise Tax"), the Company shall pay to the
Executive an additional amount (the "Gross-Up Amount") which, after payment of
all federal and State income taxes thereon (assuming the Executive is at the
highest marginal federal and applicable State income tax rate in effect on the
date of payment of the Gross-Up Amount) and payment of any Excise Tax on the
Gross-Up Amount, is equal to the Excise Tax payable by the Executive on such
portion of the Severance Benefits. Any Gross-Up Amount payable hereunder shall
be paid by the Company coincident with the payment of the Severance Benefits
described in Section 5.a of this Agreement.
-12-
<PAGE>
b. Tax Withholding. All amounts payable to the Executive under this
Agreement shall be subject to applicable withholding of income, wage and other
taxes.
8. Non-Competition, Confidentiality and Cooperation.
a. The Executive agrees that:
(i) During the Employment Period and for one (1) year after the
termination of the Executive's employment with the Company
for any reason other than a Change of Control, the Executive
shall not serve as a director, officer, employee, partner or
consultant or in any other capacity in any business that is
a competitor of the Company, or solicit Company employees
for employment or other participation in any such business,
or take any other action intended to advance the interests
of such business; provided, however, that this Section
8.a(i) shall not apply after the termination of the
Executive's employment if the Executive voluntarily
terminates employment and is not eligible to receive a
Severance Benefit under Section 5.c above.
(ii) During and after the Executive's employment with the Company,
he shall not divulge or appropriate to his own use or the use
of others any secret, proprietary or confidential information
or knowledge pertaining to the business of the Company, or any
of its Affiliates, obtained during his employment with the
Company.
-13-
<PAGE>
(iii) During the Employment Period, he shall support the Company's
interests and efforts in all regulatory, administrative,
judicial or other proceedings affecting the Company and,
after the termination of his employment with the Company, he
shall use best efforts to comply with all reasonable
requests of the Company that he cooperate with the Company,
whether by giving testimony or otherwise, in regulatory,
administrative, judicial or other proceedings affecting the
Company except any proceeding in which he may be in a
position adverse to that of the Company. After the
termination of employment, the Company shall reimburse the
Executive for his reasonable expenses and his time, at a
reasonable rate to be determined, for the Executive's
cooperation with the Company in any such proceeding.
(iv) The term "Company" as used in this Section 8 shall include
FiveCom, Inc., any Affiliate of FiveCom, Inc. (determined as
of the date of termination), any successor to the business or
operations of FiveCom, Inc., and any business entity spun-off,
divested, or distributed to shareholders which shall continue
the operations of FiveCom, Inc.
The provisions of this Section 8 shall survive the expiration or termination of
this Agreement. The Executive agrees that the Company shall be entitled to
injunctive relief to prevent any breach or threatened breach of these
provisions. In the event of a failure to comply with part (i), (ii) or (iii) of
this Section 8, the Executive agrees that the
-14-
<PAGE>
Company shall have no further obligations to pay the Executive any Severance
Benefits under Section 5.c. of this Agreement.
9. No Mitigation. The Executive shall not be required to mitigate the
amount of any payment provided for in this Agreement by seeking other
employment.
10. Assignment. This Agreement and the rights and obligations of the
Company hereunder shall inure to the benefit of and shall be binding upon the
successors and assigns of the Company, including without limitation any
corporation or other entity acquiring all or substantially all of the business
or assets of the Company whether by operation of law or otherwise. This
Agreement and the rights of the Executive hereunder shall not be assignable by
the Executive, and any assignment by the Executive shall be null and void.
11. Arbitration. Any dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Augusta, Maine, in accordance with the rules of the American Arbitration
Association then in effect. The pendency of any such dispute or controversy
shall not affect any rights or obligations under this Agreement. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
12. Waiver; Amendment. The failure of either party to enforce, or any
delay in enforcing, any rights under this Agreement shall not be deemed to be a
waiver of such rights, unless such waiver is an express written waiver which has
been signed by the waiving party. Waiver of any one breach shall not be deemed
to be a waiver of any other breach of the same or any other provision hereof.
This Agreement can be
-15-
<PAGE>
amended only by written instrument signed by each party hereto and no course of
dealing or practice or failure to enforce or delay in enforcing any rights
hereunder may be claimed to have effected an amendment of this Agreement.
13. Singular Contract. This Agreement is a singular agreement between
the Executive and the Company, and is not part of a general "plan" or "program"
for employees as a group. This Agreement shall, under no circumstances, be
deemed to be an "employee welfare benefit plan" or an "employee pension benefit
plan" as defined in the Employee Retirement Income Security Act of 1974
(hereinafter referred to as "ERISA"). Notwithstanding, the Company may submit a
letter to the Department of Labor indicating the possible establishment of a
so-called unfunded "top hat" plan for the benefit of a select group of
management and highly compensated employees to avoid the costs and uncertainties
which may occur in the event of a Department of Labor audit and challenge
relative to compliance with any allegedly applicable provisions of ERISA. The
Executive specifically acknowledges and agrees that the filing of the so-called
"top hat" letter notice by the Company shall not be construed or interpreted as
an admission on the part of the Company that this Agreement constitutes an ERISA
plan, and the Company hereby categorically states, and the Executive hereby
agrees, that this Agreement is an ad hoc individual contract with the Executive.
14. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by first-class, registered
or certified mail or hand-delivered to the Executive at the last residence
address he has provided
-16-
<PAGE>
to the Company or, in the case of the Company, at its principal executive
offices to the attention of the Corporate Secretary.
15. Titles and Captions. The section and paragraph titles and captions
contained herein are for convenience only and shall not be held to explain,
modify, amplify, or aid in the interpretation, construction or meaning of the
provisions of this Agreement.
16. Miscellaneous. This Agreement shall be construed and enforced in
accordance with the laws of the State of Maine. In the event that any provisions
of this Agreement shall be held to be invalid, the other provisions hereof shall
remain in full force and effect.
17. Entire Agreement. The terms of this Agreement are intended by the
parties to be the final expression of their agreement with respect to the
employment of the Executive by the Company and may not be contradicted by
evidence of any prior or contemporaneous oral or written agreement.
-17-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the Effective Date written above.
WITNESS:
/s/ Richard A. Crabtree /s/ Victor Colantonio
- ------------------------------- --------------------------------
Victor Colantonio
WITNESS: FIVECOM, INC.
/s/ Joe Fay /s/ Richard A. Crabtree
- ------------------------------- -----------------------------------
By: Richard A. Crabtree
Chairman of the Board
and Chief Executive Officer
WITNESS: MAINECOM SERVICES
/s/ Joe Fay /s/ Richard A. Crabtree
- ------------------------------- -----------------------------------
By: Richard A. Crabtree
President
-18-
Exhibit 10.32
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 4th day of May, 1998, by and among
FiveCom, Inc., a Massachusetts corporation with its principal place of business
in Waltham, Massachusetts (hereinafter referred to as the "Company"), and James
Mack of Sudbury, Massachusetts (hereinafter referred to as the "Employee").
WHEREAS, the Company desires to employ the Employee; and
WHEREAS, the Employee desires to serve in the employ of the Company on a
full-time basis for the period provided in this Employment Agreement
(hereinafter referred to as the "Agreement") on the terms and conditions
hereinafter set forth; and
WHEREAS, the Company and the Employee wish to set forth the terms and
conditions under which such employment will occur.
NOW, THEREFORE, in consideration of the offer of employment by the Company
and the acceptance of employment by the Employee, and the mutual promises and
covenants contained herein, the Company and the Employee hereby agree as
follows:
1. Term of Agreement.
------------------
(a) Term. The term of this Agreement shall begin on April 30, 1998
(hereinafter referred to as the "Effective Date") and shall expire on April 30,
2001.
(b) Expiration. Notwithstanding anything to the contrary in this Section
1, except as to vested benefits, this Agreement and all obligations hereunder
shall terminate on the earliest to occur of (i) the date of the Employee's
death, (ii) 30
<PAGE>
days after the Company gives notice to the Employee that the Company is
terminating the Employee's employment for reason of Total Disability or Cause
(as defined below); or (iii) the applicable term of the Agreement as specified
in Section 1(a) above.
2. Definitions. The following terms shall have the meanings set forth
below:
"Affiliate" means a person that directly or indirectly through one or more
intermediaries controls, is controlled by, or is under common control with, the
Company.
"Board" means the Board of Directors of the Company.
"Cause" means any of the following events or occurrences:
(i) Any act of material dishonesty taken by, or committed at the
direction of, the Employee.
(ii) Any illegal or unethical conduct which would impair the
business reputation of the Company.
(iii) Conviction of a felony.
(iv) The continued failure of the Employee to perform his
responsibilities and duties under this Agreement in a
satisfactory manner, 30 days after demand for performance
has been delivered in writing to the Employee specifying the
manner in which the Company believes that the Employee is
not performing.
2
<PAGE>
"Constructive Discharge" means:
(i) any reduction in the Employee's annual base salary in effect
as of the Effective Date of this Agreement, or as the same
may be increased from time to time;
(ii) a substantial reduction in the nature or scope of the
Employee's responsibilities, duties or authority from those
described in Section 3(c) of this Agreement;
(iii) a material adverse change in the Employee's title or
position; or
(iv) relocation of the Employee's place of employment from the
Company's principal Employee offices to a place more than 50
miles from Waltham, Massachusetts without the Employee's
consent.
"Severance Benefits" means the benefits set forth in Section 5 of this
Agreement.
"Total Disability" means the complete and permanent inability of the
Employee to perform all of his duties under this Agreement on a full-time basis
for a period of at least three consecutive months, as determined upon the basis
of reasonable evidence, which may include independent medical reports and data.
3. Employment.
-----------
(a) Position. The Company hereby agrees to employ the Employee in the
capacity of Vice President - Sales, and the Employee hereby agrees to be so
employed by the Company for the period beginning on the Effective Date and
ending
3
<PAGE>
on the date on which the Employee's employment is terminated in accordance with
this Agreement (the "Employment Period").
(b) Performance. The Employee agrees that during the Employment Period
he shall devote substantially all his business attention and time to the
business and affairs of the Company, and use his best efforts to perform
faithfully and efficiently the duties and responsibilities of the Employee under
this Agreement. It is expressly understood that (i) the Employee may devote a
reasonable amount of time to such industry associations and charitable and civic
endeavors as shall not interfere with the services that the Employee is required
to render under this Agreement, and (ii) the Employee may serve as a member of
one or more boards of directors of companies that are not affiliated with the
Company and do not compete with the Company or any of its Affiliates so long as
such membership does not materially interfere with the Employee's duties
hereunder.
(c) Job Duties. The following listing of job duties shall represent the
Employee's primary responsibilities. Such responsibilities may be expanded or
decreased as the business needs of the Company require. The Employee's primary
job responsibilities shall include but not be limited to, development of the
sales aspect of the Company's business including but not limited to opening new
markets, public image, sales, marketing and customer relations.
4. Compensation and Benefits.
--------------------------
(a) During the Employment Period, the Employee shall be compensated as
follows:
4
<PAGE>
(i) Salary. The Employee shall receive an annual base salary,
the amount of which shall be reviewed regularly and
determined from time to time, but which shall not be less
than $150,000. His salary shall be payable in accordance
with the Company's usual payroll practices.
(ii) Bonus. The Employee shall be eligible to receive an annual
bonus, which bonus shall be comprised of an earned incentive
based upon the achievement of sales targets established by
the Company and goals and awards determined by the Board of
Directors in its sole discretion, provided that, if the
Employee has achieved the sales targets and other goals
established for him by the Company and the Board of
Directors, then the sum of (A) the Employee's then current
annual base salary, plus (B) any bonuses awarded pursuant to
this Section 4(a)(ii), plus (C) the value of the portion of
the option described in Section 4(a)(vi) which becomes
exercisable in any given contract year shall not be less
than $300,000. For purposes of this Section 4(a)(ii), the
value of the portion of the option described in Section
4(a)(vi) which becomes exercisable in a given contract year
shall be the product of (X) the number of shares as to which
such option becomes
5
<PAGE>
exercisable in such year and (Y) the difference between the
exercise price per share of such option and the fair market
value per share of the Company's Common Stock as of the end
of such year. For purposes of this Section 4(a)(ii), the
fair market value of a share of the Company's Common Stock
shall be equal to the last reported sales price for such
Common Stock on the Nasdaq National Market or other national
securities exchange on the day in question or, if the
Company's Common Stock is not then publicly traded, as
determined in good faith by the Board of Directors.
(iii) Participation in Salaried Employee Plans. The Employee
shall be entitled to participate in any and all plans and
programs maintained by the Company from time to time to
provide benefits for its salaried employees generally,
including without limitation any savings and investment,
stock option and stock purchase or group medical, dental,
life, accident or disability insurance plan or program,
subject to all eligibility requirements of general
applicability, to the extent that Employees are not excluded
from participation therein under the terms thereof or under
the terms of any Employee plan or program or any approval or
adoption thereof.
6
<PAGE>
(iv) Other Fringe Benefits. The Employee shall be entitled to all
fringe benefits generally provided by the Company at any
time to its full-time salaried employees, including without
limitation three weeks annual paid vacation, holidays and
sick leave but excluding severance pay, in accordance with
generally applicable Company policies with respect to such
benefits.
(v) The Company shall grant options to the Employee to purchase
shares of the Common Stock of the Company substantially on
the terms set forth on Exhibit A to this Agreement.
(b) Withholding. All compensation payable under this Section 4 shall be
subject to normal payroll deductions for withholding income taxes, social
security taxes and the like.
5. Severance Benefits. If the Employee's employment with the Company is
terminated during the Employment Period either (i) by the Company for any reason
other than death, Total Disability or Cause, or (ii) by the Employee within six
calendar months of a Constructive Discharge, the Company shall pay the Employee,
in one lump sum payment within 60 days following the date of termination of
employment as defined in Section 6 below, an amount equal to one times the
Employee's annual base salary in effect on the date immediately preceding the
date
7
<PAGE>
of termination, or preceding the date of a Constructive Discharge attributable
to a base salary reduction if applicable.
6. Date of Termination. For purposes of this Agreement, the date of
termination of the Employee's employment shall be the date notice is given to
the Employee by the Company and/or any successor or, in the case of a
Constructive Discharge, the date set forth in a written notice given to the
Company or any successor by the Employee, provided that the Employee gives such
notice within six calendar months of the Constructive Discharge, and specifies
therein the event constituting the Constructive Discharge.
7. Taxes. All amounts payable to the Employee under this Agreement shall be
subject to applicable withholding of income, wage and other taxes.
8. Non-Competition, Confidentiality and Cooperation.
-------------------------------------------------
(a) The Employee agrees that:
(i) During the Employment Period and for one year after the
termination of the Employee's employment with the Company
for any reason, the Employee shall not serve as a director,
officer, employee, partner or consultant or in any other
capacity in any business that is a competitor of the
Company, or solicit Company employees for employment or
other participation in any such business, or take any other
action intended to advance the interests of such business.
8
<PAGE>
(ii) During and after the Employee's employment with the Company,
he shall not divulge or appropriate to his own use or the
use of others any secret, proprietary or confidential
information or knowledge pertaining to the business of the
Company, or any of its Affiliates, obtained during his
employment with the Company.
(iii) During the Employment Period, he shall support the
Company's interests and efforts in all regulatory,
administrative, judicial or other proceedings affecting the
Company and, after the termination of his employment with
the Company, he shall use best efforts to comply with all
reasonable requests of the Company that he cooperate with
the Company, whether by giving testimony or otherwise, in
regulatory, administrative, judicial or other proceedings
affecting the Company except any proceeding in which he may
be in a position adverse to that of the Company. After the
termination of employment, the Company shall reimburse the
Employee for his reasonable expenses and his time, at a
reasonable rate to be determined, for the Employee's
cooperation with the Company in any such proceeding.
9
<PAGE>
(iv) The term "Company" as used in this Section 8 shall include
the Company, any Affiliate of the Company (determined as of
the date of termination), any successor to the business or
operations of the Company, and any business entity spun-
off, divested, or distributed to shareholders which shall
continue the operations of the Company. The provisions of
this Section 8 shall survive the expiration or termination
of this Agreement. The Employee agrees that the Company
shall be entitled to injunctive relief to prevent any breach
or threatened breach of these provisions. In the event of a
failure to comply with part (i), (ii) or (iii) of this
Section 8, the Employee agrees that the Company shall have
no further obligations to pay the Employee any Severance
Benefits under Section 5 of this Agreement.
9. No Mitigation. The Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment.
10. Assignment. This Agreement and the rights and obligations of the
Company hereunder shall inure to the benefit of and shall be binding upon the
successors and assigns of the Company, including without limitation any
corporation or other entity acquiring all or substantially all of the business
or assets of the Company whether by operation of law or otherwise. This
Agreement and the rights
10
<PAGE>
of the Employee hereunder shall not be assignable by the Employee, and any
assignment by the Employee shall be null and void.
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Boston,
Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. The pendency of any such dispute or controversy
shall not affect any rights or obligations under this Agreement. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
12. Waiver; Amendment. The failure of either party to enforce, or any delay
in enforcing, any rights under this Agreement shall not be deemed to be a waiver
of such rights, unless such waiver is an express written waiver which has been
signed by the waiving party. Waiver of any one breach shall not be deemed to be
a waiver of any other breach of the same or any other provision hereof. This
Agreement can be amended only by written instrument signed by each party hereto
and no course of dealing or practice or failure to enforce or delay in enforcing
any rights hereunder may be claimed to have effected an amendment of this
Agreement.
13. Singular Contract. This Agreement is a singular agreement between the
Employee and the Company, and is not part of a general "plan" or "program" for
employees as a group. This Agreement shall, under no circumstances, be deemed to
be an "employee welfare benefit plan" or an "employee pension benefit plan" as
defined in the Employment Retirement Income Security Act of 1974 (hereinafter
referred to as "ERISA"). Notwithstanding, the Company may submit a letter to the
11
<PAGE>
Department of Labor indicating the possible establishment of a so-called
unfunded "top hat" plan for the benefit of a select group of management and
highly compensated employees to avoid the costs and uncertainties which may
occur in the event of a Department of Labor audit and challenge relative to
compliance with any allegedly applicable provisions of ERISA. The Employee
specifically acknowledges and agrees that the filing of the so-called "top hat"
letter notice by the Company shall not be construed or interpreted as an
admission on the part of the Company that this Agreement constitutes an ERISA
plan, and the Company hereby categorically states, and the Employee hereby
agrees, that this Agreement is an ad hoc individual contract with the Employee.
14. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by first-class, registered
or certified mail or hand-delivered to the Employee at the last residence
address he has provided to the Company or, in the case of the Company, at its
principal Employee offices to the attention of the Corporation Secretary.
15. Titles and Captions. The section and paragraph titles and captions
contained herein are for convenience only and shall not be held to explain,
modify, amplify, or aid in the interpretation, construction or meaning of the
provisions of this Agreement.
16. Miscellaneous. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Massachusetts. In the event that
12
<PAGE>
any provisions of this Agreement shall be held to be invalid, the other
provisions hereof shall remain in full force and effect.
17. Entire Agreement. The terms of this Agreement are intended by the
parties to be the final expression of their agreement with respect to the
employment of the Employee by the Company and may not be contradicted by
evidence of any prior or contemporaneous oral or written agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the Effective Date written above.
THE COMPANY:
WITNESS: FIVECOM, INC.
/s/ [illegible] /s/ Victor Colantonio
___________________________ _____________________________________
By: Victor Colantonio
President
THE EMPLOYEE:
WITNESS:
/s/ [illegible] /s/ James Mack
___________________________ _____________________________________
James Mack
13
<PAGE>
EXHIBIT A
---------
STOCK OPTION TERMS
At such time as the Company adopts a new employee stock option plan, the
Company shall grant to the Employee an option to purchase up to 1% of the
portion of the Common Stock of the Company reserved for issuance pursuant to
option grants under such stock option plan, which option shall become
exercisable (i) as to 50% of the number of shares subject to such option on the
first anniversary of the date of this Agreement, (ii) an additional 25% of the
number of shares subject to such option on the second anniversary of the date of
this Agreement and (iii) an additional 25% of the number of shares subject to
such option on the third anniversary of the date of this Agreement. This option
shall be evidenced by an Option Agreement on customary terms and conditions
(including the condition that vesting occur only for so long as the Employee is
employed by the Company) and shall be granted under and subject to the terms and
conditions of one of the Company's employee stock option plans. This option
shall have an exercise price equal to the price at which the Company's Common
Stock is first offered to the public.
14
Exhibit 10.39
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this first day of July, 1998, by and
among FiveCom, Inc., a Massachusetts corporation with its principal place of
business in Waltham, Massachusetts (hereinafter referred to as the "Company"),
and Richard A. Crabtree of Waldoboro, Maine (hereinafter referred to as the
"Employee").
WHEREAS, the Company desires to employ the Employee; and
WHEREAS, the Employee desires to serve in the employ of the Company on a
full-time basis for the period provided in this Employment Agreement
(hereinafter referred to as the "Agreement") on the terms and conditions
hereinafter set forth; and
WHEREAS, the Company and the Employee wish to set forth the terms and
conditions under which such employment will occur.
NOW, THEREFORE, in consideration of the offer of employment by the Company
and the acceptance of employment by the Employee, and the mutual promises and
covenants contained herein, the Company and the Employee hereby agree as
follows:
1. Term of Agreement.
------------------
(a) Term. The term of this Agreement shall begin on July 1, 1998
(hereinafter referred to as the "Effective Date") and shall expire on December
31, 1998, provided that, if each of the parties hereto gives written notice to
the other party, at least 30 days prior to such date, of its desire to continue
this Agreement, this Agreement shall continue until December 31, 2001.
<PAGE>
(b) Expiration. Notwithstanding anything to the contrary in this Section
1, except as to vested benefits, this Agreement and all obligations hereunder
shall terminate on the earliest to occur of (i) the date of the Employee's
death, (ii) 30 days after the Company gives notice to the Employee that the
Company is terminating the Employee's employment for reason of Total Disability
or Cause (as defined below); or (iii) the expiration of the applicable term of
the Agreement as specified in Section 1(a) above.
2. Definitions. The following terms shall have the meanings set forth
below:
"Affiliate" means a person that directly or indirectly through one or
more intermediaries controls, is controlled by, or is under common control with,
the Company.
"Board" means the Board of Directors of the Company.
"Cause" means any of the following events or occurrences:
(i) Any act of material dishonesty taken by, or committed at the
direction of, the Employee.
(ii) Any illegal or unethical conduct which would impair the
business reputation of the Company.
(iii) Conviction of a felony.
(iv) The continued failure of the Employee to perform his
responsibilities and duties under this Agreement in a
satisfactory manner, 30 days after demand for performance
has been
2
<PAGE>
delivered in writing to the Employee specifying the manner
in which the Company believes that the Employee is not
performing.
"Constructive Discharge" means:
(i) any reduction in the Employee's annual base salary in effect
as of the Effective Date of this Agreement, or as the same
may be increased from time to time;
(ii) a substantial reduction in the nature or scope of the
Employee's responsibilities, duties or authority from those
described in Section 3(c) of this Agreement; or
(iii) a material adverse change in the Employee's title or
position.
"Severance Benefits" means the benefits set forth in Section 5 of this
Agreement.
"Total Disability" means the complete and permanent inability of the
Employee to perform all of his duties under this Agreement on a full-time basis
for a period of at least six consecutive months, as determined upon the basis of
reasonable evidence, which may include independent medical reports and data.
3. Employment.
-----------
(a) Position. The Company hereby agrees to employ the Employee in the
capacity of Chairman of the Board of Directors and Chief Executive Officer, and
in such other capacities as the Board of Directors may, from time to time,
assign to him, and the Employee hereby agrees to be so employed by the Company
for the period beginning on the Effective Date and ending on the date on which
the
3
<PAGE>
Employee's employment is terminated in accordance with this Agreement (the
"Employment Period"). This Agreement shall not restrict in any way the right of
the Company to terminate the Employee's employment at whatever time and for
whatever reason it deems appropriate (subject to the Company's obligations under
Section 5 of this Agreement), nor shall it limit the right of the Employee to
terminate employment at any time for whatever reason he deems appropriate.
(b) Performance. The Employee agrees that during the Employment Period
he shall devote substantially all his business attention and time to the
business and affairs of the Company, and use his best efforts to perform
faithfully and efficiently the duties and responsibilities of the Employee under
this Agreement. Without limiting the foregoing, the Employee agrees to devote
his full attention to his position during the Employment Period and to resign
any position that he holds with MaineCom Services effective upon the Company's
initial public offering of Common Stock (or the initial public offering of
Common Stock of the Company's successor, as the case may be). It is expressly
understood that (i) the Employee may devote a reasonable amount of time to such
industry associations and charitable and civic endeavors as shall not interfere
with the services that the Employee is required to render under this Agreement,
and (ii) the Employee may serve as a member of one or more boards of directors
of companies that are not affiliated with the Company and do not compete with
the Company or any of its Affiliates so long as such membership does not
materially interfere with the Employee's duties hereunder.
4
<PAGE>
(c) Job Duties. The following listing of job duties shall represent the
Employee's primary responsibilities. Such responsibilities may be expanded or
decreased as the business needs of the Company require. The Employee's primary
job responsibilities shall include but not be limited to,the exercise of the
highest executive authority for the guidance, development and management of all
aspects of the Company's business.
4. Compensation and Benefits.
--------------------------
(a) During the Employment Period, the Employee shall be compensated as
follows:
(i) Salary. The Employee shall receive an annual base salary,
the amount of which shall be reviewed regularly and
determined from time to time, but which shall not be less
than $200,000. His salary shall be payable in accordance
with the Company's usual payroll practices. In the event
that this Agreement is extended beyond December 31, 1998 in
accordance with the provisions of Section 1(a), then the
Board of Directors shall consider whether, in its sole
discretion, such salary should be increased.
(ii) Bonus. The Employee shall be eligible to participate in an
executive incentive plan adopted by the Company, which among
other things, will provide an opportunity for the Employee
to earn an annual target incentive of 35% of his
5
<PAGE>
base salary, as determined by the Board of Directors in its
sole discretion.
(iii) Participation in Salaried Employee Plans. The Employee
shall be entitled to participate in any and all plans and
programs maintained by the Company from time to time to
provide benefits for its salaried employees generally,
including without limitation any savings and investment,
stock option and stock purchase or group medical, dental,
life, accident or disability insurance plan or program,
subject to all eligibility requirements of general
applicability, to the extent that Employees are not excluded
from participation therein under the terms thereof or under
the terms of any Employee plan or program or any approval or
adoption thereof.
(iv) Other Fringe Benefits. The Employee shall be entitled to all
fringe benefits generally provided by the Company at any
time to its full-time salaries employees, including without
limitation three weeks annual paid vacation, holidays and
sick leave but excluding severance pay, in accordance with
generally applicable Company policies with respect to such
benefits. In addition, the Company shall provide the
Employee with the use of a vehicle, at the
6
<PAGE>
Company's expense, of like quality with the vehicles
provided to other senior executives of the Company. Finally,
the Company will provide the Employee with the use of an
apartment, at the Company's expense, until December 31,
1998.
(v) The Company shall grant options to the Employee to purchase
shares of the Common Stock of the Company substantially on
the terms set forth on Exhibit A to this Agreement.
(b) Withholding. All compensation payable under this Section 4 shall be
subject to normal payroll deductions for withholding income taxes, social
security taxes and the like.
5. Severance Benefits. If the Employee's employment with the Company is
terminated during the Employment Period either (i) by the Company for any reason
other than death, Total Disability or Cause, or (ii) by the Employee within six
calendar months of a Constructive Discharge, the Company shall pay the Employee,
in one lump sum payment within 60 days following the date of termination of
employment as defined in Section 6 below, an amount equal to one times the
Employee's annual base salary in effect on the date immediately preceding the
date of termination, or preceding the date of a Constructive Discharge
attributable to a base salary reduction if applicable.
7
<PAGE>
6. Date of Termination. For purposes of this Agreement, the date of
termination of the Employee's employment shall be the date notice is given to
the Employee by the Company and/or any successor or, in the case of a
Constructive Discharge, the date set forth in a written notice given to the
Company or any successor by the Employee, provided that the Employee gives such
notice within six calendar months of the Constructive Discharge, and specifies
therein the event constituting the Constructive Discharge.
7. Taxes. All amounts payable to the Employee under this Agreement shall be
subject to applicable withholding of income, wage and other taxes.
8. Non-Competition, Confidentiality and Cooperation.
-------------------------------------------------
(a) The Employee agrees that:
(i) During the Employment Period and for one year after the
termination of the Employee's employment with the Company
for any reason, the Employee shall not serve as a director,
officer, employee, partner or consultant or in any other
capacity in any business that is a competitor of the
Company, or solicit Company employees for employment or
other participation in any such business, or take any other
action intended to advance the interests of such business.
(ii) During and after the Employee's employment with the Company,
he shall not divulge or appropriate to his own
8
<PAGE>
use or the use of others any secret, proprietary or
confidential information or knowledge pertaining to the
business of the Company, or any of its Affiliates, obtained
during his employment with the Company.
(iii) During the Employment Period, he shall support the
Company's interests and efforts in all regulatory,
administrative, judicial or other proceedings affecting the
Company and, after the termination of his employment with
the Company, he shall use best efforts to comply with all
reasonable requests of the Company that he cooperate with
the Company, whether by giving testimony or otherwise, in
regulatory, administrative, judicial or other proceedings
affecting the Company except any proceeding in which he may
be in a position adverse to that of the Company. After the
termination of employment, the Company shall reimburse the
Employee for his reasonable expenses and his time, at a
reasonable rate to be determined, for the Employee's
cooperation with the Company in any such proceeding.
(iv) The term "Company" as used in this Section 8 shall include
the Company, any Affiliate of the Company (determined as of
the date of termination), any successor to the business or
9
<PAGE>
operations of the Company, and any business entity spun-
off, divested, or distributed to shareholders which shall
continue the operations of the Company. The provisions of
this Section 8 shall survive the expiration or termination
of this Agreement. The Employee agrees that the Company
shall be entitled to injunctive relief to prevent any breach
or threatened breach of these provisions. In the event of a
failure to comply with part (i), (ii) or (iii) of this
Section 8, the Employee agrees that the Company shall have
no further obligations to pay the Employee any Severance
Benefits under Section 5 of this Agreement.
9. No Mitigation. The Employee shall not be required to mitigate the amount
of any payment provided for in this Agreement by seeking other employment.
10. Assignment. This Agreement and the rights and obligations of the
Company hereunder shall inure to the benefit of and shall be binding upon the
successors and assigns of the Company, including without limitation any
corporation or other entity acquiring all or substantially all of the business
or assets of the Company whether by operation of law or otherwise. This
Agreement and the rights of the Employee hereunder shall not be assignable by
the Employee, and any assignment by the Employee shall be null and void.
10
<PAGE>
11. Arbitration. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in Boston,
Massachusetts, in accordance with the rules of the American Arbitration
Association then in effect. The pendency of any such dispute or controversy
shall not affect any rights or obligations under this Agreement. Judgment may be
entered on the arbitrator's award in any court having jurisdiction.
12. Waiver; Amendment. The failure of either party to enforce, or any delay
in enforcing, any rights under this Agreement shall not be deemed to be a waiver
of such rights, unless such waiver is an express written waiver which has been
signed by the waiving party. Waiver of any one breach shall not be deemed to be
a waiver of any other breach of the same or any other provision hereof. This
Agreement can be amended only by written instrument signed by each party hereto
and no course of dealing or practice or failure to enforce or delay in enforcing
any rights hereunder may be claimed to have effected an amendment of this
Agreement.
13. Singular Contract. This Agreement is a singular agreement between the
Employee and the Company, and is not part of a general "plan" or "program" for
employees as a group. This Agreement shall, under no circumstances, be deemed to
be an "employee welfare benefit plan" or an "employee pension benefit plan" as
defined in the Employment Retirement Income Security Act of 1974 (hereinafter
referred to as "ERISA"). Notwithstanding, the Company may submit a letter to the
Department of Labor indicating the possible establishment of a so-called
unfunded "top hat" plan for the benefit of a select group of management and
highly
11
<PAGE>
compensated employees to avoid the costs and uncertainties which may occur in
the event of a Department of Labor audit and challenge relative to compliance
with any allegedly applicable provisions of ERISA. The Employee specifically
acknowledges and agrees that the filing of the so-called "top hat" letter notice
by the Company shall not be construed or interpreted as an admission on the part
of the Company that this Agreement constitutes an ERISA plan, and the Company
hereby categorically states, and the Employee hereby agrees, that this Agreement
is an ad hoc individual contract with the Employee.
14. Notices. Any notice required or permitted to be given under this
Agreement shall be sufficient if in writing and sent by first-class, registered
or certified mail or hand-delivered to the Employee at the last residence
address he has provided to the Company or, in the case of the Company, at its
principal Employee offices to the attention of the Corporation Secretary.
15. Titles and Captions. The section and paragraph titles and captions
contained herein are for convenience only and shall not be held to explain,
modify, amplify, or aid in the interpretation, construction or meaning of the
provisions of this Agreement.
16. Miscellaneous. This Agreement shall be construed and enforced in
accordance with the laws of the Commonwealth of Massachusetts. In the event that
any provisions of this Agreement shall be held to be invalid, the other
provisions hereof shall remain in full force and effect.
12
<PAGE>
17. Entire Agreement. The terms of this Agreement are intended by the
parties to be the final expression of their agreement with respect to the
employment of the Employee by the Company and may not be contradicted by
evidence of any prior or contemporaneous oral or written agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the Effective Date written above.
THE COMPANY:
WITNESS: FIVECOM, INC.
/s/ Anna Stranieri /s/ Victor Colantonio
_________________________________ ___________________________________
By: Victor Colantonio
President
THE EMPLOYEE:
WITNESS:
/s/ Elizal Arcani /s/ Richard A. Crabtree
_________________________________ ___________________________________
Richard A. Crabtree
13
<PAGE>
EXHIBIT A
---------
STOCK OPTION TERMS
The Company shall grant to the Employee an option under the Company's 1998
Stock Incentive Plan to purchase up to a number of shares of the Company's
Common Stock which is equivalent to 4% of the issued and outstanding Common
Stock of the Company on a fully-diluted basis, as of the closing of, and after
giving effect to, the IPO (but not including the exercise, if any, of the
over-allotment option granted to the underwriters in connection with the IPO),
which option shall be conditioned upon the closing of the IPO and shall become
exercisable as to (i) 1/3 of the number of shares subject to such option on the
first anniversary of the Effective Date, (ii) an additional 1/3 of the number of
shares subject to such option on the second anniversary of the Effective Date,
(iii) and an additional 1/3 of the number of shares subject to such option on
the third anniversary of the Effective Date. This option shall be evidenced by
an Option Agreement on customary terms and conditions (including the condition
that vesting occur only for so long as the Employee is employed by the Company)
and shall be granted under and subject to the terms and conditions of the
Company's 1998 Stock Incentive Plan. This option shall have an exercise price
equal to the price at which the Company's Common Stock is offered to the public
in the IPO. For purposes of this Exhibit A, the "Company" shall mean FiveCom,
Inc. or the successor corporation resulting from the reorganization of FiveCom,
Inc. and its subsidiaries and the reincorporation of FiveCom, Inc. in Delaware.
14
Computation of Ratios
Ratio of Earnings to Fixed Charges
<TABLE>
<CAPTION>
Year Ended December 31,
1993 1994 1995
------ ------ ------
<S> <C> <C> <C>
EARNINGS
ADD:
Pretax income from
continuing operations ......... (3,657) (202,710) (486,962)
Fixed charges .................. -- 27,271 169,821
Amortization of capitalized
interest ...................... -- -- --
------ -------- --------
(3,657) (175,439) (317,141)
SUBTRACT:
Interest capitalized ........... 114,438
Minority interest in pre-tax
income of subs that have not
incurred fixed charges ........ -- -- --
------ -------- --------
-- -- 114,438
Total Earnings ............... (3,657) (175,439) (431,579)
FIXED CHARGES
Interest expensed .............. -- 27,271 42,401
Interest capitalized ........... -- -- 114,438
Amortization of debt
financing costs ............... -- -- 12,982
------ -------- --------
Total Fixed Charges .......... -- 27,271 169,821
Ratio of earnings to
fixed charges ............... -- (6.43) (2.54)
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
1996 1997 1997 1998
---- ---- -------- ----
<S> <C> <C> <C> <C>
EARNINGS
ADD:
Pretax income from
continuing operations ......... (1,045,984) (2,301,226) (288,982) (684,652)
Fixed charges .................. 268,086 309,082 39,807 116,756
Amortization of capitalized
interest ...................... -- 4,814 -- 1,793
---------- ---------- -------- --------
(777,898) (1,987,330) (249,175) (566,103)
SUBTRACT:
Interest capitalized ........... 180,501 142,457 35,452 20,205
Minority interest in pre-tax
income of subs that have not
incurred fixed charges ........ 248,039 994,000 91,985 292,423
---------- ---------- -------- --------
428,540 1,136,457 127,437 312,628
Total Earnings ............... (1,206,438) (3,123,787) (376,612) (878,731)
FIXED CHARGES
Interest expensed .............. 75,365 141,811 -- 91,816
Interest capitalized ........... 180,501 142,457 35,452 20,205
Amortization of debt
financing costs ............... 12,220 24,814 4,355 4,735
---------- ---------- -------- --------
Total Fixed Charges .......... 268,086 309,082 39,807 116,756
Ratio of earnings to
fixed charges ............... (4.50) (10.11) (9.46) (7.53)
</TABLE>
Exhibit 21.1
Subsidiaries of the Registrant:
AlexisCom, Inc., a Delaware Corporation
BretteCom, Inc., a Delaware Corporation
FiveCom of Maine, Inc., a Delaware Corporation
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
July 7, 1998
Exhibit 99
CONSENT OF DIRECTOR DESIGNEE
Pursuant to Item 401(a)(2) of Regulation S-K, I consent to be named as a
director designee in this Registration Statement.
Signature: /s/ Katherine D. Courage
-----------------------------
Name: Katherine D. Courage
Date: July 7, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001062233
<NAME> NorthEast Optic Network, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 1,098,452 1,232,254
<SECURITIES> 0 0
<RECEIVABLES> 1,034,391 168,740
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,515,149 2,006,262
<PP&E> 16,972,533 20,269,596
<DEPRECIATION> 437,830 640,173
<TOTAL-ASSETS> 23,461,000 26,183,672
<CURRENT-LIABILITIES> 5,978,160 7,506,645
<BONDS> 0 0
0 0
10,410 10,410
<COMMON> 2,848 2,848
<OTHER-SE> 9,833,802 9,540,648
<TOTAL-LIABILITY-AND-EQUITY> 23,461,000 26,183,672
<SALES> 0 0
<TOTAL-REVENUES> 394,704 151,363
<CGS> 1,137,943 247,386
<TOTAL-COSTS> 2,693,037 774,521
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 141,811 91,816
<INCOME-PRETAX> (1,221,026) (370,154)
<INCOME-TAX> (261,000) (77,000)
<INCOME-CONTINUING> (960,026) (293,154)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (960,026) (293,154)
<EPS-PRIMARY> (3.37) (1.03)
<EPS-DILUTED> (3.37) (1.03)
</TABLE>
