As filed with the Securities and Exchange Commission on May 22, 1998
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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NORTHEAST OPTIC NETWORK, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
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)
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Copy to:
<TABLE>
<S> <C>
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
</TABLE>
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Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
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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. [ ]
---------------
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
Title of Each Class of Securities Proposed Maximum Aggregate Amount of
to be Registered Offering Price(1) Registration Fee
- ------------------------------------ ---------------------------- -----------------
<S> <C> <C> <C>
Common Stock
% Senior Discount Notes Due 2008 $10,000,000 $2,950
</TABLE>
(1) 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, as amended, 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 Discount 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 MAY 22, 1998
[RED_HERRING]
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.
[/RED_HERRING]
Shares
NorthEast Optic Network, Inc.
Common Stock
($.01 par value)
------------
Of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Equity Offering"), are being sold by
NorthEast Optic Network, Inc. ("NorthEast Optic Network" or the "Company") and
are being sold by certain selling stockholders of the Company (the
"Selling Stockholders"). The Company will not receive any proceeds from the
sale of the shares being sold by the Selling Stockholders. See "Principal and
Selling Stockholders."
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 $ and $ 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
its % Senior Discount Notes Due 2008 (the "Debt Offering" and, together with
the Equity Offering, the "Offerings") for gross proceeds of approximately $
million. The closing of each Offering is conditioned upon the closing of the
other Offering.
Application will be 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 .
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>
Price Underwriting Proceeds Proceeds to the
to Discounts and to the 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 $ .
(2) The Company and the Selling Stockholders have granted the Underwriters an
option exercisable for 30 days from the date of this Prospectus to
purchase a maximum of additional shares from the Company and an
aggregate of additional outstanding shares from the Selling
Stockholders to cover over-allotments. If the option is exercised in full,
the total Price to Public will be $ , Underwriting Discounts and
Commissions will be $ , Proceeds to the Company will be $ and
Proceeds to the Selling Stockholders will be $ .
The shares of Common Stock are being offered by the several Underwriters
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 shares of Common Stock will be made on or
about , 1998, against payment in immediately available funds.
Credit Suisse First Boston
Prospectus dated , 1998.
<PAGE>
[D] SUBJECT TO COMPLETION, DATED MAY 22, 1998
[RED_HERRING]
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.
[RED_HERRING]
$ (Gross Proceeds)
NorthEast Optic Network, Inc.
% Senior Discount Notes Due 2008
------------
NorthEast Optic Network, Inc. ("NorthEast Optic Network" or the "Company") is
offering (the "Debt Offering") $ (Gross Proceeds) of its % Senior
Discount Notes Due 2008 (the "Notes" or the "Notes") with a principal amount at
maturity of $ . The Notes will mature on , 2008. The Notes begin to
accrue interest at a rate of % per annum commencing , 2003, and
interest will be payable thereafter on and of each year. The Notes
will be issued at a substantial original issue discount ("OID"), and the
holders of the Notes will be required to include such OID in gross income for
U.S. federal income tax purposes on a constant yield to maturity basis, in
advance of the receipt of the cash payments to which such income is
attributable. See "Certain United States Federal Income Tax Consequences." The
price to investors for the Notes shown below represents a yield to maturity of
% per annum (computed on a semi-annual bond equivalent basis).
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 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 $ million principal amount at maturity of the Notes
remain 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 repurchase all or a portion of such
holder's Notes at a purchase price equal to 101% of the Accreted Value (as
defined) thereof, plus accrued and unpaid interest, if any, to the date of
repurchase.
The Notes will be senior unsecured obligations of the Company, ranking pari
passu in right of payment with all existing and future senior unsecured
indebtedness of the Company, and will be senior in right of payment to all
future subordinated indebtedness of the Company. As of March 31, 1998, after
giving effect to the Offerings (as defined) and the application of the proceeds
therefrom, the Company would have had outstanding $ million of senior
indebtedness and no subordinated indebtedness.
The Notes will be represented by one or more Global Securities (as defined)
registered in the name of the nominee of The Depository Trust Company ("DTC").
Except as provided herein, Notes in definitive form will not be issued.
Concurrently with the Debt Offering, the Company and certain shareholders of
the Company are offering shares of Common Stock (the "Equity
Offering" and, together with the Debt Offering, the "Offerings"). The
closing of each Offering is conditioned upon the closing of the other Offering.
For a discussion of certain factors that should be considered in connection
with an investment in the Notes, see "Risk Factors" beginning on page .
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 the
Public(1) Commissions Company(1)(2)
----------- --------------- ----------------
<S> <C> <C> <C>
Per Note ......... % % %
Total ............ $ $ $
</TABLE>
(1) Plus the increase in Accreted Value, if any, on the Notes from , 1998.
(2) Before deducting expenses payable by the Company estimated at $ .
The Notes are offered by the several Underwriters 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
Prospectus dated , 1998.
<PAGE>
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
-----------
NEON[RegTM] is a trademark 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), (ii)
the conversion of all outstanding shares of Series A and Series B Convertible
Preferred Stock of the Company (the "Preferred Stock") to shares of Common
Stock at the closing of the Offerings (the "Preferred Stock Conversion"), and
(iii) a for stock split of the Company's Common Stock (the
"Stock Split"). [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 approximately
1,000 route miles, or approximately 80,000 fiber miles, concentrated in the
northeastern United States, including New York and New England (the
"Northeast"). The Company believes that the Northeast, which in 1996
represented a $29.3 billion telephony services market and which 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 access to virtually any
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
four-fiber 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 and currently operates fiber optic
routes from Hartford, Connecticut to Springfield, Massachusetts and from
Nashua, New Hampshire to Portland, Maine, totaling approximately 212 route
miles, or approximately 13,700 fiber miles. The Company is currently
engineering or constructing additional routes in New York, Connecticut,
Massachusetts and New Hampshire to create a continuous fiber optic link between
White Plains, New York and Portland, Maine with access into and around Boston,
Massachusetts and numerous other major cities in the Northeast. These
additional routes are expected to be substantially completed in 1998 and will
add approximately 380 route miles, or approximately 30,800 fiber miles, to the
NEON system. The Company is also planning to complete further expansion routes
in 1999 connecting New York City, Providence and other metropolitan areas to
the NEON system. The completion of routes under construction and 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 with Northeast Utilities Service Company, a subsidiary 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 with the 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) 41.37%
and 53.53%, respectively, of the Company's capital stock.
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
3
<PAGE>
significant advantages, including: (i) potentially ubiquitous inter-city and
intra-city coverage in the local electric utility's service territory,
including throughout downtown areas and directly into 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, including railroad beds, streets
and highways, (iv) highly desirable redundant and 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 currently intends to target only 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. Carrier customers typically lease fiber optic
capacity under multi-year contracts with which they enhance or develop 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 communication 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-1, 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 in the marketplace that the Company
expects to occur in the communications industry. Because of the geographic
flexibility and virtual ubiquity of the electric utility ROWs used in
construction of the NEON system, the Company expects that it will be able to
provide fiber optic connectivity for its carrier customers to and from
virtually any location in the NEON service territory, including intra-city
local loop facilities, inter-city long-haul or short-haul facilities, or a
combination of both.
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 $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."
4
<PAGE>
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 five million in 1993 to as
many as 62 million by the end of 1997. The Company believes that the growth of
communications traffic in the Northeast will be enhanced by the high population
density, income and education levels, number of phone lines per household and
other favorable demographic characteristics of the region. 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 develop 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 for market entrants in a number of
communications industry segments, 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. As a
result, many carriers are unable to establish secure redundant routing when all
the carriers' routes run within the same ROWs. 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.
Expected 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
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 approximately 92% of the RBOCs' networks
currently are comprised of copper cable located on antiquated infrastructure.
The RBOCs 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,
5
<PAGE>
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 Internet Protocol ("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 most of the Northeast's key Local Access Transport Areas ("LATAs").
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 local exchange carrier ("LEC") access and egress
charges, which often comprise the largest component of the IXCs' transmission
costs. For this reason, IXCs are seeking less costly, alternative local access
within LATAs. One alternative for the IXCs is to carry their traffic deeper
into the region's telecommunications base and to hand off their traffic at a
LEC host switch, which is located much closer to the end-user than the tandem
switch, or to terminate their traffic directly at the customer's premises.
Similarly, the Company believes that LECs with inter-LATA traffic, including
the RBOCs when they are permitted to provide long-distance traffic, desire to
minimize the transportation costs imposed by 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, can provide such local
access 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' service
territory, including throughout downtown areas and directly into 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 NU and CMP, 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, rather than numerous municipalities, transit
authorities and governmental agencies.
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 in advance of the provision of services. To date,
the Company has entered into contracts with five carriers, including Brooks
Fiber/ WorldCom, Teleport/AT&T, MCI/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-assembled 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, cut tracks, install conduits and ducts
and erect towers and poles prior to installation. In
6
<PAGE>
addition, the Company's electric utility ROWs 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 up to 144 to
432 fiber optic strands on future installations, depending on the anticipated
demand for a particular route. 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.
Build 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 four-fiber ring
architecture on primarily 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 using Nortel's DWDM optronics and forward error correction technology at
high optical carrier ("OC") levels that enable the highest commercially
available transmission capacity (OC-192) and data integrity level (10-15 Bit
Error Rate). The NEON system can also accommodate advanced communications
applications such as Frame Relay, ATM and IP.
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 $29.3 billion telephony services
market and which has one of the highest 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 Northeast market is dependent in
part upon antiquated communications 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 coverage.
Leverage Management Experience. The Company's management team includes
individuals with significant experience in the telecommunications and utility
industries which will be important in the buildout of the NEON system. Victor
Colantonio, the Company's founder and President, has 25 years of experience in
the telecommunications industry having previously served as President of
International Communications Services Corp. and Murray International Inc.
providers of network services to AT&T, Southern New England Telecommunications
Corporation ("SNET") and Sprint, among others. The Company's Chairman and Chief
Executive Officer, Richard Crabtree, has 27 years of utility experience
including serving as Chief Financial Officer to CMP. William Fennell, the
Company's Chief Financial Officer and Treasurer, held several positions at GTE
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 a provider
of network systems.
Leverage Utility Relationships. The Company intends to leverage its
relationships with NU and CMP. 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 facilitate new customer contracts with such carriers, (ii) the
Company outsources substantially all of its engineering and design, maintenance
and repair requirements to NU and CMP, 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) NU
and CMP have significant resources and experience in the engineering and
construction of large transmission and distribution networks and (iv) the
Company's experience with NU and CMP creates opportunities to establish
relationships with other electric utility companies. The Company is currently
in the process of developing relationships with additional electric utilities.
The Company's principal executive offices are located at 391 Totten Pond
Road, Suite 401, Waltham, Massachusetts 02154, and its telephone number is
(781) 890-6868.
7
<PAGE>
[D] The Debt Offering
<TABLE>
<S> <C>
Issuer .......................... NorthEast Optic Network, Inc.
Securities Offered .............. $ principal amount at maturity of % Senior Discount
Notes Due 2008.
Gross Proceeds .................. $ .
Maturity Date ................... , 2008.
Yield and Interest .............. The issue price per Note represents a yield to maturity on the
Notes of % (computed on a semi-annual bond equivalent
basis) calculated from the Issue Date (as defined). No interest
will accrue on the Notes prior to , 2003. Thereafter,
interest will accrue at a rate of % per annum and will be
payable on and of each year, commencing ,
2004.
Original Issue Discount ......... The Notes are being offered at an original issue discount
("OID") for United States federal income tax purposes equal to
the excess of the principal amount at maturity of the Notes over
the Issue Price (as defined). Each holder of a Note must include
such OID in gross income for U.S. federal income tax purposes
in advance of the receipt of the cash payments to which such
income is attributable. See "Certain United States Federal
Income Tax Consequences."
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 principal
amount at maturity 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 $ million principal amount
at maturity 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 will be entitled to
require the Company to repurchase all or a portion of such
Holder's Notes at a purchase price equal to 101% of the
Accreted Value (as defined) thereof, plus accrued and unpaid
interest to the date of repurchase. See "Risk Factors--Purchase
of Notes Upon Change of Control" and "Description of the
Notes--Change of Control."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Ranking ............................ The Notes will be senior unsecured senior obligations of the
Company and will rank pari passu in right of payment with all
existing and future senior unsecured indebtedness of the
Company and will be senior in right of payment to all future
subordinated indebtedness of the Company. As of March 31,
1998, after giving effect to the Offerings and the application of
the proceeds therefrom, the Company would have had
outstanding $ million of senior 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
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 and consolidations. All these limitations and
prohibitions, however, are subject to a number of important
qualifications and exceptions. See "Description of the
Notes--Certain Covenants."
Use of Proceeds .................... The net proceeds to the Company from the Offerings will be
used for capital expenditures associated with the continued
construction and expansion of the NEON system, to repay
outstanding debt and for working capital and other general
corporate purposes. See "Use of Proceeds."
Concurrent Equity Offering ......... Concurrently with the Debt Offering, the Company and certain
shareholders of the Company are offering shares
( 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.
</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."
9
<PAGE>
[E] THE EQUITY OFFERING
<TABLE>
<S> <C>
Common Stock offered:
By the Company ...................... shares
By the Selling Stockholders ......... shares
-----
Total .............................. shares (1)
=====
Common Stock to be outstanding after
the Equity Offering ................. shares (1)(2)
Use of Proceeds ...................... The net proceeds to the Company from the Offerings will be
used for capital expenditures associated with the continued
construction and expansion of the NEON system, to repay
outstanding debt and for working capital 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.
Concurrent Debt Offering ............. Concurrently with the Equity Offering, the Company is offering
its % Senior Discount Notes Due 2008 (the "Notes") by a
separate prospectus. The closing of each Offering is conditioned
on the closing of the other Offering.
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) shares of Common Stock issuable upon the exercise of
stock options outstanding as of March 31, 1998 with an exercise price of
$ per share, (ii) an additional shares of Common Stock
reserved for future issuance under the Company's 1998 Stock Incentive Plan
and (iii) shares of Common Stock issuable upon the exercise of
warrants outstanding as of March 31, 1998 with an exercise price of $
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."
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The selected 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 selected 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.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
--------------------------------------------- ---------------------------
1995 1996 1997(3) 1997 1998(3)
------------- --------------- --------------- ------------- -------------
<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 .................... -- 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 ..... (4.28) (6.22) (8.43) (1.04) (2.57)
Basic and diluted weighted average
shares outstanding ................. 113,831 113,894 113,931 113,931 113,931
Other Financial Data:
EBITDA(1) ............................ $ (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 to fixed
charges(5) ......................... -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, 1997 March 31, 1998
----------------------------------------------- ----------------------------------------------
Pro Forma Pro Forma
As Adjusted As Adjusted
Actual As Adjusted(2) (2)(3) Actual As Adjusted(2) (2)(3)
---------------- ---------------- ------------- ---------------- ---------------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ........... $ (1,989,606) $ (1,989,606) $ (3,949,848) $ (3,949,848) $
Total assets .............. 23,461,000 76,577,888 26,183,672 79,300,560
Long-term debt,
including current
maturities .............. 2,118,905 2,118,905 1,987,577 1,987,577
Note payable to related
party ................... 2,100,000 2,100,000 3,975,000 3,975,000
Total liabilities ......... 8,275,154 8,275,154 11,605,478 11,605,478
Minority interest(4) ...... 5,338,786 -- 5,024,288 --
Stockholders equity ....... 9,847,060 68,302,734 9,553,906 67,695,082
</TABLE>
- ---------------------
(1) EBITDA is defined herein as net loss before interest income (expense), 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
11
<PAGE>
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.
(2) Adjusted to give effect to the Reorganization. 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). The intangible asset will be amortized over 30 years, reflecting
assignment of value to goodwill to the rights-of-way, which have 30 year
terms. If the Reorganization had occurred as of January 1, 1997 the pro
forma impact on the Company's Statement of Operations for the year ended
December 31, 1997 would reflect amortization of $1,603,087, a net loss of
$(2,563,113) and a loss per share of $ . The pro forma impact on the
Company's Statement of Operations for the quarter ended March 31, 1998
would reflect amortization of $400,772, a net loss of $(693,926) and a
loss per share of $ .
(3) Adjusted to give effect to (i) the Offerings and the application of the
estimated net proceeds therefrom, (ii) the conversion of the Company's
Preferred Stock into an aggregate of shares of Common Stock upon
the closing of the Offering and (iii) the Reorganization.
(4) Minority interest consists of the interests of members other than CMP in
FiveCom LLC, NECOM LLC and FiveCom of Maine LLC. Changes in minority
interest reflect such other members' capital adjusted by their portion of
the net loss.
(5) For purposes of calculating the ratio of earnings 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 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 $(431,579),
$(1,206,438), $(3,123,787), $(376,612) and $(878,731), respectively. For
the year ended December 31, 1997 and for the three months March 31, 1998,
on a pro forma basis after giving effect to the Debt Offering, the
Company's earnings would have been insufficient to cover fixed charges by
approximately $ and $ , respectively.
12
<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 21% of the route 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'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 its 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 operating 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's
operations have resulted in 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 financing 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, (ii) obtaining required governmental permits and
certifications where necessary and (iii) delays or disruptions resulting from
physical damage, power loss, defective equipment 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 from third parties, including electric
utilities and transit authorities to install fiber optic cables. In particular,
the
13
<PAGE>
Company has not yet obtained the necessary ROWs to or within the planned
Boston, Massachusetts segment of the NEON system, the planned segment of the
system from White Plains, New York to Manhattan or the planned segment in and
around Rhode Island. Nor has the Company yet obtained the necessary ROWs to
expand the NEON system to encompass the planned New York local loop or the
extensions therefrom into New Jersey. There can be no assurance that the
Company will be successful in obtaining such agreements on acceptable terms.
The Company is currently in negotiations with several electric utilities to
install extensions to the NEON system and with certain transit authorities to
install redundant NEON system paths. If the Company is unable to reach
agreement with the foregoing parties on terms acceptable to the Company, 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 route extensions or other rights under its agreement with such entity
may be adversly affected.
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 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 their own competing systems in the Company's markets. The
Company has incurred and will continue to incur significant operating expenses,
has made and will continue to make significant capital investments and has
entered into equipment supply contracts and service arrangements, in each case
based upon certain expectations as to the anticipated customer demand for the
Company's services in its markets. Accordingly, the failure of the Company to
attract and retain sufficient communications carriers for its services would
materially and adversely affect the Company's business, financial condition and
results of operations.
The Company's business strategy assumes that its current and future
revenues will come from its services to communications carriers, which are
limited in number. Therefore, dissatisfaction with the Company's services by a
relatively few number of communications carriers could have a material adverse
effect on the Company's business, financial condition and results of
operations. For the year ended December 31, 1997, the Company's two largest
customers accounted for 69% and 10% of total revenues, respectively, and for
the three months ended March 31, 1998, the Company's two largest customers
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 base, 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 and convey to the
holder greater ownership attributes than do leases. 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 ownership 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
14
<PAGE>
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
only has a limited easement in such property, the IRUs granted to the Company
may be alleged to be insufficient for the Company's uses. Although the Company
believes that its existing IRUs are sufficient for the Company's purposes,
there may be disputes from time to time over the scope of the related
easements. If any such dispute cannot be satisfactorily resolved, including by
the Company obtaining its own easement, the Company might be required to
reroute portions of the NEON system, which would result in additional costs and
possible delays in constructing and operating the NEON system.
The NU Agreements and the CMP Agreement contain provisions which
acknowledge the right of NU and CMP, respectively, to make the provision of
electrical services to their own customers their top priority; NU and CMP are
required only to exercise "reasonable care" with respect to the Company's
facilities and are otherwise free to 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, the Company's construction efforts are constrained by the ability
of NU and CMP to shut down certain segments of their transmission facilities in
order to permit construction crews to work safely. The Company has experienced
construction delays in the past as a result of the ability of NU to shut down
segments of its facilities scheduled for fiber installation and may experience
such delays in the future.
Some of the agreements that the Company enters into to construct and
operate the NEON system may be 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 large end-users with private
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, Southern New England Telecommunications Corporation, WorldCom,
Teleport and MFS Communications Company Inc.) and of other carriers (such as
IXC Communications, Qwest Communications International Inc., Metromedia Fiber
Network Inc., Level 3 and RCN Inc.) who are planning to own or lease additional
networks which, if constructed, could employ advanced technology comparable to
that of the NEON system.
NU and CMP each own or have the irrevocable right to use 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
15
<PAGE>
Company's ROWs are nonexclusive in that other service providers could install
competing networks using the same ROWs.
In the future, the Company may be subject to more intense competition due
to the development of new technologies, an increased supply of domestic and
international transmission capacity, the consolidation in the industry among
local and long distance service providers and the effects of deregulation
resulting from the Telecommunications Act of 1996. The introduction of new
products or emergence of new technologies may reduce the cost or increase the
supply of certain services similar to those provided by the Company. The
Company cannot predict which of many possible future product and service
offerings will be crucial to maintain its competitive position or what
expenditures will be required to develop profitably and provide such products
and services.
Regulatory Risks
Regulation of the telecommunications industry is changing rapidly.
Existing and future federal, state and local governmental regulations will
greatly influence the viability of the Company. Consequently, undesirable
regulatory changes could adversely affect the Company's business, financial
conditions and results of operations. For instance, 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 subsidiaries in New York and
Connecticut, the Company cannot predict the future regulatory status of its
business. In addition, ILECs 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. For a more
detailed discussion of the regulatory environment in which the Company conducts
its business, see "Business--Regulation".
The regulatory environment also varies substantially from state to state.
At present, the Company does not anticipate that the regulatory requirements to
which it will be subject in New England and New York will have any material
adverse effect on its operations, although the Company may 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. In some
jurisdictions, the Company's pricing flexibility for intrastate services may be
limited because of regulation, although the Company's direct competitors will
be subject to similar restrictions.
Rapid Technological Changes
The telecommunications industry is subject to rapid and significant
changes in technology. For instance, recent technological advances permit
substantial increases in transmission capacity of both new and existing fiber,
and the introduction of new products or emergence of new technologies may
reduce the cost or increase the supply of certain services similar to those
provided by the Company. While the Company believes that, for the foreseeable
future, technological changes will neither materially affect the continued use
of fiber optic cable nor materially 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 Limited Source 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 is
dependent primarily on Lucent Technologies, Inc. ("Lucent") for its supply of
fiber optic glass. The Company's arrangements with Lucent have provided it with
a supply of fiber optic glass at a price and on terms acceptable to the
Company. 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 currently obtained from a single or limited source, changes in the
pricing arrangements with its suppliers or delay in transitioning a replacement
supplier's product into the NEON system could disrupt the Company's operations
and have a material adverse effect on the Company's business, financial
condition and results of operations.
16
<PAGE>
Pricing Pressures and Industry Capacity
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 it 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 other 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 superior reliability, capacity and security via its
network. The Company's network and networks upon which it depends are subject
to physical damage, power loss, capacity limitations, software defects,
breaches of security and other disruptions 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 damages in the event of a disruption in service, which damages
could be substantial and could have a material adverse effect on the Company's
business, financial condition and results of operations.
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, on a pro forma basis after giving effect to the Offerings,
the Company and its subsidiaries would have had outstanding $ million of
indebtedness and the Company's ratio of total debt to total capitalization
would have been %. [D]Although the Indenture will contain certain limitations
on the ability of the Company and its subsidiaries to incur additional
Indebtedness (as defined), 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 2004, 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
17
<PAGE>
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, the Company's pro forma fixed charges would have exceeded the Company's
earnings by $ and $ , respectively. 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] Priority of Secured Debt
The Notes will be unsecured and 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, 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.
Concentration of Stock Ownership; Potential Conflicts of Interest
After consummation of the Offerings, MaineCom Services ("MaineCom"), an
affiliate of Central Maine Power Company ("CMP"), and Mode 1 Communications,
Inc. ("Mode 1"), an affiliate of Northeast Utilities ("NU"), will beneficially
own or control, in the aggregate, more than 50% 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
its existing ROW agreement and agreements for the engineering and construction
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 an agreement dated May , 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
18
<PAGE>
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--Shareholder Agreement."
[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" 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. See
"Dividend Policy."
[E] Shares Eligible for Future Sale
Upon consummation of the Equity Offering, shares of Common Stock will
be outstanding (shares if the Underwriters' over-allotment option is exercised
in full), of which will be freely tradeable (shares if the Underwriters'
over-allotment option is exercised in full). Of the remaining shares, shares
are held by MaineCom and Mode 1 who, together with the Company and its officers
and directors, have entered into an agreement 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 Agreement"). Upon expiration of such 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, as amended (the
"Securities Act"). At April 30, 1998, there were outstanding stock options to
purchase a total of shares of Common Stock, of which options for
shares will be exercisable 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 $ per share
(representing the midpoint of the estimated price range), dilution to new
investors would be $ 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."
19
<PAGE>
[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 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] Consequences of Original Issue Discount on Notes
The Notes will be issued at a substantial discount from their principal
amount. Consequently, purchasers of the Notes generally will be required to
include amounts in gross income for federal tax purposes in advance of receipt
of the cash payments to which the income is attributable, and generally no cash
payments of interest will be made until , 2004. See "Certain United States
Federal Income Tax Consequences" for a more detailed discussion of the federal
income tax consequences to purchasers of the Notes.
If a bankruptcy proceeding is commenced by or against the Company under
the United States Bankruptcy Code after the issuance of the Notes, the claim of
a holder of Notes may be limited to an amount equal to the sum of (i) the
initial offering price for the Notes and (ii) that portion of the original
issue discount that is not deemed to constitute "unmatured interest" for
purposes of the United States Bankruptcy Code. Any original issue discount that
was not amortized as of the commencement of any such bankruptcy proceeding
would constitute "unmatured interest."
[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 Accreted Amount thereof, plus accrued and
unpaid interest 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 or to
seek the admission thereof to trading in The Nasdaq Stock Market, Inc., 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.
Historically, the market for non-investment grade debt has been subject to
disruptions that has caused substantial volatility in the prices of 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.
20
<PAGE>
[D] EQUITY OFFERING
Concurrently with the Debt Offering, the Company and certain selling
stockholders of the Company (the "Selling Stockholders") are offering
shares of Common Stock to the public in the Equity Offering. In addition, as
part of the Equity Offering the Company and the Selling Stockholders have
granted the underwriters thereof an option to purchase up to 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.
[E] DEBT OFFERING
Concurrently with the Equity Offering, the Company is offering its %
Senior Discount Notes Due 2008 to the public in the Debt Offering for gross
proceeds of $ million. The indenture under which the Notes will be
issued will contain certain covenants that, among other things, will limit (i)
the incurrence of additional Indebtedness by the Company and its Restricted
Subsidiaries (as defined), (ii) the payment of dividends and other restricted
payments by the Company and its Restricted Subsidiaries, (iii) the creation of
restrictions on distributions from Restricted Subsidiaries, (iv) asset sales,
(v) transactions with affiliates, (vi) sales or issuances of Restricted
Subsidiary capital stock, (vii) the incurrence of liens and the entering into
of sale/leaseback transactions and (viii) mergers and consolidations. 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. See "Description of Certain Indebtedness."
21
<PAGE>
USE OF PROCEEDS
[E] The net proceeds to the Company from the Equity Offering are estimated
to be approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full), assuming an initial public
offering price of $ 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 $ million, after deducting the estimated underwriting
discount and offering expenses. Pending the foregoing uses, the net proceeds of
the Offerings will be invested in short-term, investment-grade securities.
[D] The net proceeds to the Company from the Debt Offering are estimated
to be approximately $ 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 $ million ($ million
if the underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $ per share and after deducting the
estimated underwriting discount and offering expenses. Pending the foregoing
uses, the net proceeds of the Offerings will be invested in short-term,
investment-grade securities.
The Company intends to use the net proceeds of the Offerings, estimated to
be $ , for capital expenditures associated with the continued
construction and expansion of the NEON system, to repay certain indebtedness
and for working capital and general corporate purposes. Such indebtedness to be
repaid includes approximately $ of principal plus accrued interest
under the Company's Construction Loan Agreement with CMP (the "CMP Loan
Agreement") and approximately $ of principal, 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 9.25%, respectively, and matures in 2002 and 2007,
respectively.
[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, the Company
had a net tangible book value of approximately $10,870,000 or $ 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
$ 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 $ or $ per share. This
represents an immediate increase in net tangible book value of $ per share
to the existing stockholders and an immediate dilution of $ per share to
new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price ........................... $
Net tangible book value as of March 31, 1998 ................... $
Increase attributable to net proceeds to the
Company of the Equity Offering ...............................
Pro forma net tangible book value after the Equity Offering .....
----------
Dilution to new investors ....................................... $
==========
</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 $ 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) ......... % $ % $
New investors(2) ....................
-------- --- --------- ---
Total ............................. 100% $ 100%
======== === ========= ===
</TABLE>
- ---------------------
(1) Excludes options outstanding as of March 31, 1998 to purchase shares
of Common Stock with an exercise price of $ per share and warrants
outstanding as of March 31, 1998 to purchase shares of Common Stock
with an exercise price of $ 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 , or approximately
% of the total number of shares of Common Stock outstanding after the
Equity Offering (or shares and approximately % if the Underwriters
over-allotment option is exercised in full), and will increase the number
of shares held by new investors to , or approximately % of the
total number of shares of Common Stock outstanding after the Equity
Offering (or shares and approximately % 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 basis reflecting (A) the conversion of the Company's Preferred
Stock into an aggregate of shares of Common Stock upon the closing of the
Offerings, (B) a for stock split of the Company's Common Stock and
(C) 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 $ 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 $
============ ============ ==========
Short-term borrowings .............................. $ 399,401 $ 399,401 $
Note payable to related party ...................... 3,975,000 3,975,000
Long-term debt (less current portion) .............. 1,588,176 1,588,176
% Senior Discount Notes Due 2008 ................. -- --
------------ ------------ ----------
Total debt ..................................... 5,962,577 5,962,577
------------ ------------ ----------
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)(3) ............... 3,916 2,779 --
Series B convertible preferred stock (4,500,000 and
4,498,371 shares authorized and 962,734 and
4,498,371 issued and outstanding, actual and as
adjusted, respectively) (1)(2) .................. 48,137 44,984 --
Common stock (4,000,000, 30,000,000 and
30,000,000 shares authorized and 113,931,
113,931 and shares issued and
outstanding, actual, as adjusted and pro forma
as adjusted, respectively) (2)(4) ............... 5,696 1,139
Warrants (1)(5) ................................... 541,431 8,595 --
Additional paid-in-capital (2)(5)(6) .............. 11,772,725 65,431,296
Accumulated deficit ............................... (2,817,999) (2,817,999)
------------ ------------ ----------
Total stockholders' equity ..................... 9,553,906 62,670,794
------------ ------------ ----------
Total capitalization ......................... $ 20,540,771 $ 68,633,371 $
============ ============ ==========
</TABLE>
- ---------------------
(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 3,535,637 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 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 stated capital 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.
24
<PAGE>
(3) 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.
(4) Excludes (i) shares of Common Stock issuable upon the exercise of stock
options outstanding as of March 31, 1998 with an exercise price of $
per share, (ii) an additional shares of Common Stock reserved for
future issuance under the Company's 1998 Stock Incentive Plan, and (iii)
shares of Common Stock issuable upon the exercise of warrants
outstanding as of March 31, 1998 with an exercise price of $ per
share.
(5) The exercise of the CMP warrant ultimately 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.
(6) 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).
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, 1997 and 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
----------- ------------- ------------- --------------- ---------------
<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 ................................. -- -- -- 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 .................. (17.25) (6.20) (4.28) (6.22) (8.43)
Basic and diluted weighted average shares
outstanding ...................................... 212 32,698 113,831 113,894 113,931
Other Financial Data:
EBITDA(1) ......................................... (2,460) (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 to fixed charges(4) ............. -- -- -- -- --
<CAPTION>
Three Months Ended
March 31,
---------------------------
1997 1998
------------- -------------
<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 ................................. 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 .................. (1.04) (2.57)
Basic and diluted weighted average shares
outstanding ...................................... 113,931 113,931
Other Financial Data:
EBITDA(1) ......................................... (178,121) (6,647)
Capital expenditures .............................. 3,978,512 3,297,062
Ratio of earnings to fixed charges(4) ............. -- --
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------------------------------------------
As
1993 1994 1995 1996 1997(1) Adjusted(2)
------------ ------------- ---------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ................. $ (9,165) $ (29,141) $ (4,526,664) $ 3,209,234 $ (1,989,606) $(1,989,606)
Total assets .................... 63,612 165,081 4,774,827 16,369,663 23,461,000 76,577,888
Note payable to related
party .......................... 5,000 -- -- -- 2,100,000 2,100,000
Long-term debt, including
current maturities ............. -- 348,198 932,713 927,021 2,118,905 2,118,905
Total liabilities ............... 23,213 478,332 5,574,589 2,332,963 8,275,154 8.275,154
Minority interest ............... -- -- -- 6,312,554 5,338,786 --
Stockholders equity (deficit) 40,399 (313,251) (799,762) 7,724,146 9,847,060 68,302,734
<CAPTION>
As of March 31, 1998
-----------------------------------------------
Pro Forma Pro Forma
As As As
Adjusted (3) Actual Adjusted(2) Adjusted (3)
-------------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
Balance Sheet Data:
Working capital ................. $ (3,949,848) $ (3,949,848) $
Total assets .................... 26,056,672 79,300,560
Note payable to related
party ........................... 3,975,000 3,975,000
Long-term debt, including
current maturities .............. 1,987,577 1,987,577
Total liabilities ............... 11,605,478 11,605,478
Minority interest ............... 5,024,288 --
Stockholders equity (deficit) 9,553,906 67,695,082
</TABLE>
- ---------------------
(1) EBITDA is defined herein as net loss before interest income (expense), 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.
26
<PAGE>
(2) Adjusted to give effect to the Reorganization. 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). 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. If the Reorganization had occurred as of January 1, 1997
the pro forma impact on the Company's Statement of Operations for the year
ended December 31, 1997 would reflect amortization of $1,603,087, a net
loss of $(2,563,113) and a loss per share of $ . The pro forma
impact on the Company's Statement of Operations for the quarter ended
March 31, 1998 would reflect amortization of $400,772, a net loss of
$(693,926) and a loss per share of $ .
(3) Adjusted to give effect to (i) the Offerings and the application of the
estimated net proceeds therefrom based on an assumed initial public
offering price of $ per share, (ii) the conversion of the Company's
Preferred Stock into an aggregate of shares of Common Stock upon the
closing of the Offerings and (iii) the Reorganization. The Proforma net
loss would be $ for 1997 and $ for the first quarter of
1998 reflecting the additional interest expense from the issuance of the
__% Senior Discount Notes.
(4) For purposes of calculating the ratio of earnings 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),
$(175,439), $(431,579), $(1,206,438), $(3,123,787), $(376,612) and
$(878,731), respectively. For the year ended December 31, 1997 and for the
three months ended March 31, 1998, on a pro forma basis after giving effect
to the Debt Offering, the Company's earnings would have been insufficient to
cover fixed charges by approximately $ and $ , respectively.
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 approximately
1,000 route miles, or approximately 80,000 fiber miles, concentrated in the
northeastern United States, including New York and New England (the
"Northeast").
The Company has already completed and currently operates fiber optic
routes from Hartford, Connecticut to Springfield, Massachusetts and from
Nashua, New Hampshire to Portland, Maine, totaling approximately 212 route
miles, or approximately 13,700 fiber miles. The Company is currently
engineering or constructing additional routes in New York, Connecticut,
Massachusetts and New Hampshire to create a continuous fiber optic link between
White Plains, New York and Portland, Maine with access into and around Boston,
Massachusetts and numerous other major cities in the Northeast. These
additional routes are expected to be substantially completed in 1998 and will
add approximately 380 route miles, or approximately 30,800 fiber miles, to the
NEON system. The Company is also planning to complete further expansion routes
in 1999 connecting New York City, Providence and other metropolitan areas to
the NEON system. The completion of routes under construction and 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 through the leasing of capacity on its
network and 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. The interests of the minority owners of these subsidiaries is
reflected on the Company's balance sheet as minority interest in consolidated
subsidiaries. As a result of the Reorganization, the 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 one customer. The Company began recognizing revenues under
recurring lease arrangements in the third quarter of 1997.
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.
28
<PAGE>
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
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 expenses, 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
$186,478 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 $69,504 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 right-of-way fees 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.
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.
29
<PAGE>
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 $13,733 for the year ended December 31, 1996 from
$42,598 for the year ended December 31, 1995. The decrease resulted from the
reduced need for services from the Company's sole customer. Revenue was
generated primarily from service fees to one 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 1996. 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 fiber optic network 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 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 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 prepayment 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 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
30
<PAGE>
Peoples Heritage Bank. Upon the repayment of the loan from Peoples Heritage
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,
$10,020,000 and $776,272 in the periods ended March 31, 1998, December 31,
1997, December 31, 1996 and December 31, 1995, respectively. Cash requirements
in all the years 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
capital expenditures will be approximately $65 million in 1998, relating to the
build-out of its fiber optic network. Cash provided by operations will not be
sufficient to fund the expansion and development of the network 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 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.
31
<PAGE>
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 approximately
1,000 route miles, or approximately 80,000 fiber miles, concentrated in the
Northeast. The Company believes that the Northeast, which in 1996 represented a
$29.3 billion telephony services market and which 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 access to virtually any 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 four-fiber 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 and currently operates fiber optic
routes from Hartford, Connecticut to Springfield, Massachusetts and from
Nashua, New Hampshire to Portland, Maine, totaling approximately 212 route
miles, or approximately 13,700 fiber miles. The Company is currently
engineering or constructing additional routes in New York, Connecticut,
Massachusetts and New Hampshire to create a continuous fiber optic link between
White Plains, New York and Portland, Maine with access into and around Boston,
Massachusetts and numerous other major cities in the Northeast. These
additional routes are expected to be substantially completed in 1998 and will
add approximately 380 route miles, or approximately 30,800 fiber miles, to the
NEON system. The Company is also planning to complete further expansion routes
in 1999 connecting New York City, Providence and other metropolitan areas to
the NEON system. The completion of routes under construction and 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 Northeast Utilities Service Company, a subsidiary 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) 41.37% and 53.53%, respectively, of the Company's capital stock.
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) potentially ubiquitous inter-city and
intra-city coverage in the local electric utility's service territory,
including throughout downtown areas and directly into 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, including railroad beds, streets
and highways, (iv) highly desirable redundant and 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 currently intends to target only 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
32
<PAGE>
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. Carrier customers typically lease fiber optic
capacity under multi-year contracts with which they enhance or develop 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 communication 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-1, 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 in the marketplace that the Company
expects to occur in the communications industry. Because of the geographic
flexibility and virtual ubiquity of the electric utility ROWs used in
construction of the NEON system, the Company expects that it will be able to
provide fiber optic connectivity for its carrier customers to and from
virtually any location in the NEON service territory, including intra-city
local loop facilities, inter-city long-haul or short-haul facilities, or a
combination of both.
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 "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 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 five million in 1993 to as
many as 62 million by the end of 1997. The Company believes that the growth of
communications traffic in the Northeast will be enhanced by the high population
density, income and education levels, number of phone lines per household and
other favorable demographic characteristics of the region. With its advanced
fiber optic transmission capacity, the Company believes that it will be
well-positioned to capitalize on this growth.
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<PAGE>
Capacity Required by New Entrants. Competition and deregulation are
attracting new entrants to the telecommunications market. The 1996 Act allows
the 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 develop
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 for market entrants in a number of communications industry
segments, 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. As a
result, many carriers are unable to establish secure redundant routing when all
the carriers' routes run within the same ROWs. 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.
Expected 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 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
approximately 92% of the RBOCs' networks currently are comprised of copper
cable located on antiquated infrastructure. The RBOCs 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 most of the Northeast's key LATAs. 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 an LEC
access and egress charges, which often comprise the largest component of the
IXCs' transmission costs. For this reason, IXCs are seeking less costly,
alternative local access within LATAs. One alternative for the IXCs is to carry
their traffic deeper into the region's telecommunications base and to hand off
their traffic at a LEC host switch, which is located much closer to the
end-user than the tandem switch, or to terminate their traffic directly at the
customer's premises. Similarly, the Company believes that LECs with inter-LATA
traffic, including the RBOCs when they are permitted to provide long-distance
traffic, desire to minimize the transportation costs imposed by 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, can
provide such local access and regional transport.
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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' service
territory, including throughout downtown areas and directly into 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 NU and CMP, 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, rather than numerous municipalities, transit
authorities and governmental agencies.
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 in advance of the provision of services. To date,
the Company has entered into contracts with five carriers, including Brooks
Fiber/WorldCom, Teleport/AT&T, MCI/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-assembled 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, cut tracks, install conduits and ducts
and erect towers and poles prior to installation. In addition, the Company's
electric utility ROWs 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 up to 144 to 432 fiber optic strands on future
installations, depending on the anticipated demand for a particular route. 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.
Build 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 four-fiber 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 using Nortel's DWDM optronics and forward error correction technology at
high OC levels that enable the highest commercially available transmission
capacity (OC-192) and data integrity level (10(-15) Bit Error Rate). The NEON
system can also accommodate advanced communications applications such as Frame
Relay, ATM and IP.
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 $29.3 billion telephony services
market and which has one of the highest concentrations of businesses,
universities, phone lines,
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<PAGE>
personal computers and television sets in the country, is a region
characterized by significant and growing demand for broadband communications
infrastructure. The Northeast market is dependent in part upon antiquated
communications 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 coverage.
Leverage Management Experience. The Company's management team includes
individuals with significant experience in the telecommunications and utility
industries which will be important in the buildout of the NEON System. Victor
Colantonio, the Company's founder and President, has 25 years experience in the
telecommunications industry having previously served as President of
International Communications Services Corp. and Murray International Inc.,
providers of network services to AT&T, Southern New England Telecommunications
Corporation ("SNET") and Sprint, among others. The Company's Chairman and Chief
Executive Officer, Richard Crabtree, has 27 years of utility experience
including serving as Chief Financial Officer of CMP. William Fennell, the
Company's Chief Financial Officer and Treasurer, held several positions at GTE
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 a provider
of network systems.
Leverage Utility Relationships. The Company intends to leverage its
relationships with NU and CMP. 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, maintenance
and repair requirements to NU and CMP, 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) NU
and CMP have significant resources and experience in the engineering and
construction of large transmission and distribution networks and (iv) the
Company's experience with NU and CMP creates opportunities to establish
relationships with other electric utility companies. The Company is currently
in the process of developing relationships with additional 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 and currently operates fiber optic routes from Portland, Maine to
Nashua, New Hampshire and Springfield, Massachusetts to Hartford, Connecticut
totalling approximately 212 route miles, or approximately 13,700 fiber miles.
The Company is currently engineering or constructing additional routes in New
York, Connecticut, Massachusetts and New Hampshire, to create a continuous
fiber optic link between White Plains, New York and Portland, Maine with access
into and around Boston, Massachusetts and numerous other major cities in the
Northeast. These additional routes are expected to be completed in 1998 and
will add approximately 380 route miles, or approximately 30,800 fiber miles, to
the NEON system. The Company is planning to complete further expansion routes
in 1999 connecting New York City, Providence and other metropolitan areas to
the NEON system. Upon completion of routes under construction or currently
planned, the NEON system will extend over 1,000 route miles or over 80,000
fiber miles, 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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<PAGE>
The following table lists major service areas the Company expects to
connect to the NEON system: their expected dates of completion, information
concerning route and fiber miles per state and the population of each service
area:
<TABLE>
<CAPTION>
Estimated Estimated
Number of Population of
Estimated Estimated POPs, Tandem Service Areas
Route Fiber Switches and Passed by the Major Expected
State Miles Miles Central Offices NEON System Service Areas Completion
- ----------------------- ----------- ----------- ----------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Connecticut ........... 296 18,250 62 2,990,000 Hartford Completed
Stamford 1998
New London 1998
New Haven 1999
Bridgeport 1999
Maine ................. 60 4,000 15 425,000 Portland Completed
Massachusetts ......... 235 14,842 55 4,750,000 Springfield Completed
Boston 1998
Amherst 1998
Framingham 1999
New Hampshire ......... 205 12,100 34 920,000 Nashua Completed
Manchester Completed
Dover Completed
Portsmouth 1998
Keene 1998
New York .............. 144 29,481 25 8,190,000 Westchester 1998
New York City 1999
Rhode Island .......... 70 842 14 996,000 Providence 1999
--- ------ -- ---------
Total ................ 1,010 79,515 205 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, namely, those along
railbeds and highways, because electric utility ROWs provide near-ubiquitous
coverage at lower cost and because deviations from railbed or highway 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 rail beds and highways 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 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 up to 144 fiber strands in future sheath
designs. The second method is to install new all dielectric (non-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 up to 432 fiber strands in future designs. Finally, in
underground utility conduits, the Company uses conventional optical cable made
for underground conditions.
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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 432 fiber optic strands per cable depending on anticipated
demand for the particular route. 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. See "Risk Factors--Rapid Technological Change."
The Company offers end-to-end fiber optic capacity utilizing
bi-directional SONET four-fiber 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, and a summary of the status
of the Company's efforts to obtain the additional ROWs required for the system.
In addition to the agreements set forth below, the Company 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.
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
NU and four of its operating subsidiaries 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 27, 1998 along with an IRU in the ROWs themselves (collectively,
the "NU System"). NU and the Company both agreed to use their best efforts to
complete installation of the NU System by September 27, 1999. The Company
agreed to pay the cost of installing the cable and to utilize NU's engineering
staff in carrying out the installation. The Company is allowed to treat as its
own property for tax and accounting purposes that portion of the NU System for
which NU holds title. Under the Agreements, the Company agreed to pay to NU an
annual fee beginning in 2004, and a percentage of the gross revenues of the
Company generated by the NU System upon achieving certain revenues.
A portion of the NU System, composed 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 27, 1999, NU is not permitted to
assign any fibers or resell capacity on NUNet to certain specified carriers
except for certain limited purposes. After September 27, 2001, NU will be free
to use NUNet to compete with the Company.
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<PAGE>
Under the NU Agreements, if the Company wishes to extend the NEON system
along certain routes, or 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
singlemode fibers in such segment on terms no less favorable to those provided
to NU.
The NU Agreements have an initial term of 30 years and expire on September
27, 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 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 27, 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 as it is placed along a certain route in the CMP ROW
(the "CMP System"). CMP and the Company both agreed to use their best efforts
to complete installation of the CMP System by January 7, 1999. The Company has
the right to install additional cable upon CMP's ROW, subject to the approval
of CMP, which must not be unreasonably withheld. The Company is obligated to
pay the cost of installing the cable. Title to and ownership of the CMP System
is to be held by CMP, but the Company is allowed to treat the CMP System as its
own property for tax and accounting purposes.
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 on January
7, 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
pre-tax 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.
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<PAGE>
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 opto-electronic 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 fiber leases, 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 opto-electronic terminals by
the Company, to the carrier's specifications, that "light" the fiber and
transmit/receive capacity on the 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 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, potential for near-ubiquitous access in its
service territory and the cost advantages that will allow the Company to lease
its fiber optic infrastructure at competitive fixed 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 also believes that communications carriers will be attracted
to the Company's dark fiber product. The contracts that the Company has signed
to date arose as a result of management's long standing relationships
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<PAGE>
in the telecommunications industry. The Company intends to leverage these
relationships and increase customer scope and penetration through a small,
dedicated sales force.
Customers
The Company is targeting other telecommunications carriers as customers
and does not intend to offer its services directly to the 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. 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.
[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,
AT&T/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, NECN, 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.
41
<PAGE>
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."
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, Southern New England Telecommunications Corporation, WorldCom,
Teleport and MFS Communications Company Inc.) and of other carriers (such as
IXC Communications, Qwest Communications International Inc., Metromedia Fiber
Network Inc., Level 3 and RCN Inc.) who are planning to own or lease additional
networks which, if constructed, could employ advanced technology comparable to
that of the NEON system.
Qwest recently acquired 288 miles of fiber optic cable 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, Inc. has recently acquired 280 miles of dark fiber between
New York and Boston. Another company, RCN Corporation, 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 MCI and AT&T, 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 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, Inc., 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 provided that these competitors are willing to offer this capacity
to all of their customers.
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 required for
its business and holds certain ownership interests in the cable comprising the
NEON system. The Company's installed fiber optic cable is laid under 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.
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The Company's executive, administrative and sales offices are located at
its principal office in Waltham, Massachusetts. The Company leases this space
(approximately 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 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 1998, (i) CMP exercised its warrants to purchase 5,876 shares of
membership interests in FiveCom LLC; (ii) each of the minority members in
FiveCom LLC (including NU and CMP), 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; (iii) FiveCom LLC, FiveCom of Maine LLC and NECOM LLC were each merged
with and into 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."
Regulation
While the Company believes it is not directly subject to common carrier
regulation (except 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 has it engaged in the
provision of telecommunications services, generally the two actions that
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 service provider because of the nature of its activities in, and the
statutory provisions of, those two states.
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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<PAGE>
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 recently vacated many of the FCC's guidelines. 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 impact 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. 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. The
difference between the two forms is that in the leasing of lit fiber the
Company provides a multiplexer and an interface (typically a patch panel) into
which the signal controlled by the customer is fed. Lit fiber generally has
lower capacity than dark fiber and therefore is more economical for some
customers with lower traffic volumes to transmit. There is, however, no
assurance that the FCC may not take the position that because of the
involvement by the Company in making the 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.
The two subsidiaries of the Company which have applied for authority to
provide telecommunications services 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
"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, and if
the agency decides that such companies are telecommunications carriers, then
the Company would be subject to certain additional regulatory requirements.
These requirements 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 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
44
<PAGE>
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. 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 inter-state
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
intra-state services may be limited because of regulation, although 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
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<PAGE>
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 April 30, 1998, the Company employed 11 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 a 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
John H. Forsgren ............. 51 Director
David Marsh .................. 50 Director
F. Michael McClain ........... 48 Director
Gary D. Simon ................ 49 Director
</TABLE>
Richard A. Crabtree has served as Chairman of the Board of Directors of
the Company since 1996 and was elected Chief Executive Officer 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 Services, Inc., a
wholly-owned subsidiary of Central Maine Power Company.
Victor Colantonio, the Company's founder, 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 as its Chief Financial Officer and
Treasurer in August, 1996. 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 Disney (a division of the
Walt Disney Company), and from December 1994 to January 1996, he was a Managing
Director of Chase Manhattan Bank.
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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 Services, Inc.,
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.
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 will make recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company and will
administer the Company's incentive plans. 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
Commitees 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
$100,000 in compensation for services rendered to the Company in all capacities
during the year ended December 31, 1997 (the "Named Executive Officers"):
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
1997 Annual Compensation Awards
-------------------------------------------- -------------
Securities
Other Annual Underlying All Other
Name and Principal Position Salary($) 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 -- -- --
President and Director(2)
Michael A. Musen ............ 112,000 2,154 -- -- --
</TABLE>
Vice President, Operations
- ------------
(1) During 1997, while serving as Chairman and Chief Executive Officer of the
Company, Mr. Crabtree was President of MaineCom Services, Inc., a
wholly-owned subsidiary of CMP, which paid his salary and benefits.
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Therefore, the Company did not pay any compensation to Mr. Crabtree for his
services in 1997; however, the Company reimbursed CMP $ for Mr.
Crabtree's services in 1997. In May 1998, Mr. Crabtree became a full-time
employee of the Company with an annual base salary of $200,000 and the Board
of Directors of the Company granted to him an option to purchase up to
shares of the Company's Common Stock, which becomes exercisable in four
equal annual installments, beginning one year after the closing of the
Offerings. The exercise price per share is the price to the public of a
share of Common Stock in the Equity Offering. In addition, Mr. Crabtree is
eligible to receive an annual bonus of up to 35% of his salary. Upon the
closing of the Offerings, the Company will pay a cash bonus of $500,000 to
MaineCom Services, Inc. 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 and granted to him an option
to purchase up to 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 is the price to the public of a share of Common
Stock in the Equity Offering. In addition, Mr. Colantonio is also eligible
to receive an annual bonus of up to 35% of his salary. 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 shares of Common 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 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 $200,000. If Mr.
Colantonio's employment is terminated without cause after the occurrence of a
"Change of Control" (as defined 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.
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 of 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 a
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 shares of the Company's Common Stock, which
become exercisable in four equal annual installments beginning one year after
the closing of the Offerings. 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.
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 is expected to be 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
49
<PAGE>
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. 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 of the 1998
Plan. The Board has authorized the Compensation Committee to administer certain
aspects of the 1998 Plan, including the granting of options to executive
officers.
As of May 20, 1998, a total of shares were reserved for issuance
under the 1998 Plan, of which shares were subject to options having a
weighted average exercise price per share of $ .
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.
50
<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 , 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. 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 $________ and $________ 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 $________ in 1996 and $________ 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
Bank under a $1.6 million construction loan agreement were outstanding. The
Company expects to repay the Peoples' Heritage Bank loan with the proceeds of
the Offerings. The amount of right-of-way payments accrued through March 31,
1998 was approximately $115,000.
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 Services, Inc. The payment
to MaineCom Services, Inc. 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 April 30, 1998, the Company had outstanding
principal of approximately $ million 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.
51
<PAGE>
[E] PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's voting securities as of April 30, 1998, assuming
exercise of options exercisable within 60 days of April 30, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, 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>
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(4)
83 Edison Drive
Augusta, ME 04336 ................. 53.53%
Mode 1 Communications, Inc.(5)
c/o Northeast Utilities Services
Company
107 Selden Street
Berlin, CT 06037 .................. 41.37%
Executive Officers and Directors
Richard A. Crabtree(4)(6) .......... -- --
Victor Colantonio(7) ............... 1.08%
William F. Fennell(8) .............. -- --
James D. Mack, Jr.(9) .............. -- --
Michael A. Musen ................... -- *
John D. Forsgren(5) ................ -- --
David E. Marsh(4) .................. -- --
F. Michael McClain(4) .............. -- --
Gary D. Simon ...................... -- --
All executive officers and directors
as a group (9 persons) ............
</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 Mode 1 Communications, Inc. is 391 Totten Pond Road, 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 April 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 shares held by MaineCom Services, Inc., a wholly-owned
subsidiary of Central Maine Power Company ("CMP"). Mr. Crabtree, the Chief
Executive Officer and Chairman of the Board of Directors of the Company,
is the President of MaineCom Services. 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
52
<PAGE>
CMP. Each of Messrs. Crabtree, Marsh and McClain disclaims beneficial
ownership of the shares held by MaineCom Services and CMP except to the
extent of his pecuniary interest therein.
(5) Mr. Forsgren, a director of the Company, is an Executive Vice President and
the Chief Financial Officer of Northeast Utilities Service Company ("NU"),
the parent of Mode 1 Communications, Inc. ("Mode 1"). Mr. Simon, a
director of the Company, is the Senior Vice President-Strategy and
Development for 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 shares subject to options granted to Mr. Crabtree in
May 1998. See "Management --Executive Compensation."
(7) Does not include shares subject to options granted to Mr. Colantonio
in May 1998. See "Management --Executive Compensation."
(8) Does not include shares subject to options granted to Mr. Fennell in
May 1998.
(9) Does not include shares subject to options granted to Mr. Mack in May
1998.
53
<PAGE>
[D] PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's voting securities as of April 30, 1998, assuming
exercise of options exercisable within 60 days of April 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(4)
83 Edison Drive
Augusta, ME 04336 ...................... 53.53%
Mode 1 Communications, Inc.(5)
c/o Northeast Utilities Services Company
107 Selden Street
Berlin, CT 06037 ....................... 41.37%
Executive Officers and Directors
Richard A. Crabtree(4)(6) ...............
Victor Colantonio(7) .................... 1.08%
William F. Fennell(8) ...................
James D. Mack, Jr.(9) ...................
Michael A. Musen ........................ *
John D. Forsgren(5) .....................
David E. Marsh(4) .......................
F. Michael McClain(4) ...................
Gary D. Simon ...........................
All executive officers and directors as a
group (9 persons) ......................
</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 Mode 1 Communications, Inc. is 391 Totten Pond Road, 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 April 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, MaineCom
Services and Mode 1 of , and shares of Common Stock,
respectively, in the Equity Offering.
(4) Consists of shares held by MaineCom Services, a wholly-owned
subsidiary of Central Maine Power Company ("CMP"). Mr. Crabtree, the Chief
Executive Officer and Chairman of the Board of Directors of the Company,
is the President of MaineCom Services. 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, Business Development of CMP.
54
<PAGE>
Each of Messrs. Crabtree, Marsh and McClain disclaims beneficial ownership
of the shares held by MaineCom Services and CMP except to the extent of his
pecuniary interest therein.
(5) Mr. Forsgren, a director of the Company, is an Executive Vice President and
the Chief Financial Officer of Northeast Utilities Service Company ("NU"),
the parent of Mode 1 Communications, Inc. ("Mode 1"). Mr. Simon, a
director of the Company, is the Senior Vice President-Strategy and
Development for 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 shares subject to options granted to Mr. Crabtree in
May 1998. See "Management --Executive Compensation."
(7) Does not include shares subject to options granted to Mr. Colantonio
in May 1998. See "Management --Executive Compensation."
(8) Does not include shares subject to options granted to Mr. Fennell in
May 1998.
(9) Does not include shares subject to options granted to Mr. Mack in May
1998.
55
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of April 30, 1998 (after giving effect to the Reorganization and the
Preferred Stock Conversion), there were outstanding an aggregate of
shares of Common Stock held of record by 22 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
56
<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.
Shareholders Agreement
Central Maine Power Company and Northeast Utilities have entered into an
agreement dated May , 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.
57
<PAGE>
[E] DESCRIPTION OF CERTAIN INDEBTEDNESS
Concurrently with the Equity Offering, the Company is offering its %
Senior Discount Notes due 2008 pursuant to the Debt Offering for gross proceeds
of $ million. 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. A copy of the proposed form of Indenture has been filed
with the Registration Statement of which this Prospectus forms a part.
The Notes will be unsecured senior obligations of the Company, and will
mature on , 2008. No cash interest will accrue on the Notes prior to
, 2003. Commencing on , 2003, cash interest will accrue on the Notes
at the rate of % per annum, and will be paid semiannually on the and
of each year, commencing , 2004.
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 original 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 accreted
value thereof, together with accrued and unpaid interest 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 or consolidations.
58
<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 , 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 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 of 1939, as
amended. 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 unsecured senior obligations of the Company, limited to
$ million aggregate principal amount at maturity, and will mature on ,
2008. No cash interest will accrue on the Notes prior to , 2003, although
for U.S. Federal income tax purposes a significant amount of OID will be
recognized by a Holder as such discount accrues. See "Certain United States
Federal Income Tax Consequences" for a discussion regarding the taxation of
such OID. Cash interest will accrue on the Notes at the rate per annum shown on
the cover page hereof from , 2003, 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 , 2004. 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 Accreted Value), plus
accrued and unpaid interest 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 original principal amount
of the Notes with the proceeds of one or more Public Equity Offerings, at a
redemption price (expressed as a percentage of Accreted Value) of % plus
accrued and unpaid interest 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 $
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 each such redemption and (ii) any such redemption shall occur within 60
days of the applicable Public Equity Offering.
59
<PAGE>
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 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
obligations of the Company, will rank pari passu in right of payment with all
existing and future senior indebtedness of the Company and will be senior in
right of payments to all future subordinated indebtedness of the Company. As of
March 31, 1998, after giving effect to the issuance of the Notes and the
application of the proceeds therefrom, the Company's senior indebtedness
outstanding would have been approximately $ million, including the Notes.
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. At March 31, 1998 on a
pro forma basis after giving effect to the Offering and the application of the
net proceeds therefrom, the total liabilities of the Company's subsidiaries
were approximately $ million, 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."
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
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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 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.
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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
Accreted Value 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 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 Accreted Value 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
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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 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 $25 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";
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(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 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 for use in a
Related Business;
(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
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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);
(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
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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
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
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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 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 Accreted Value 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
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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.
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
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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.
Defaults
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (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 is not paid within any applicable grace
period after final maturity or is 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") or (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"). 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 Accreted Value of and accrued but unpaid interest on all the Notes
to be due and payable (collectively, the "Default Amount"). Upon such a
declaration, the Default Amount 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 Default Amount 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.
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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
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 or Accreted Value 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 or (vii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions.
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.
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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 described under "--Merger and Consolidation"), the operation
of the cross acceleration provision, the bankruptcy provisions with respect to
Significant Subsidiaries and the judgment 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
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.
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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
"Accreted Value" means, as of any date (the "Specified Date"), the amount
provided below for each $1,000 principal amount of Notes:
(i) if the Specified Date occurs on one of the following dates (each, a
"Semi-Annual Accrual Date"), the Accreted Value will equal the amount set
forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
Semi-Annual Accreted
Accrual Date Value
- --------------------- -------------
<S> <C>
Issue Date ...............................
, 1999 ..............................
, 1999 ..............................
, 2000 ..............................
, 2000 ..............................
, 2001 ..............................
, 2001 ..............................
, 2002 ..............................
, 2002 ..............................
, 2003 ..............................
, 2003 .............................. 1,000.00
</TABLE>
(ii) if the Specified Date occurs between two Semi-Annual Accrual Dates,
the Accreted Value will equal to the sum of (a) the Accreted Value for the
Semi-Annual Accrual Date immediately preceding such Specified Date and (b)
an amount equal to the product of (1) the Accreted Value for the
immediately following Semi-Annual Accrual Date less the Accreted Value for
the immediately preceding Semi-Annual Accrual Date multiplied by (2) a
fraction, the numerator of which is the number of days elapsed from the
immediately preceding Semi-Annual Accrual Date to the Specified Date, using
a 360-day year of 12 30-day months, and the denominator of which is 180
(or, if the Semi-Annual Accrual Date immediately preceding the Specified
Date is the Issue Date, the denominator is the number of days from and
including the Issue Date to and excluding the Specified Date; or
(iii) if the Specified Date occurs after the last Semi-Annual Accrual
Date, the Accreted Value will equal $1,000.
"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 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
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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, (x) a disposition by a Restricted
Subsidiary to the Company or by the Company or a Restricted Subsidiary to a
Wholly Owned Subsidiary, (y) 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 and (z) 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, (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
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(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 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;
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(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.
"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.
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"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"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.
"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;
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(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.
"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 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.
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"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 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
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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.
"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.
"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.
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"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 (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 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,
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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.
"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
April 30, 1998), the Company will have outstanding an aggregate of
shares of Common Stock, assuming no exercise of the Underwriters' over-allotment
option and no exercise of outstanding options. Of these shares, the
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
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, shares will be eligible
for sale upon expiration of the lock-up agreements on , 180 days after
the date of this Prospectus and 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 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 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
FOR NON-UNITED STATES HOLDERS
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.
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.
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) the 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 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 as may be
specified by an applicable income tax treaty. For purposes of determining
whether tax is to be withheld
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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 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
The receipt of cash in respect of the stated interest on the Notes will
not be taxable to the United States Holders but, rather, such stated interest
will be included in income as original issue discount ("OID") on a daily
economic accrual basis as described below.
Original Issue Discount
General. Because the Notes are being issued with more than a de minimis
amount of discount from their stated redemption price at maturity and no
interest will be paid on the Notes prior to , 2003, the Notes will be
considered to have been issued with OID for federal income tax purposes. The
OID on a Note will be the excess of its "stated redemption price at maturity"
(as defined below) over its "issue price." The stated redemption price at
maturity of a Note will be equal to the stated principal amount of the Note,
plus the amount of all stated interest due and payable on such Note. The issue
price of the Notes will be the first price to the public (excluding bond houses
and brokers) at which a substantial amount of the Notes were sold.
A United States Holder will be required to include OID in gross income on
a daily economic accrual basis over the term of a Note, regardless of such
United States Holder's method of tax accounting and in advance of the receipt
of the cash attributable to such interest income. In general, a United States
Holder must include in income the sum of the daily portions of OID with respect
to a Note for each day during the taxable year on which the United States
Holder holds the Note, including the purchase date and excluding the
disposition date. The daily portion of OID is determined by allocating to each
day of any accrual period (which may be of any length and may vary
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over the term of a Note, at the option of the holder, provided that each
accrual period is not longer than one year and each scheduled payment of
principal or interest on the Note occurs on the first or last day of an accrual
period) within a taxable year a pro rata portion of an amount equal to the
adjusted issue price of a Note at the beginning of the accrual period
multiplied by the yield to maturity of such Note. For purposes of computing
OID, the Company will use six-month accrual periods that end on the days in the
calendar year corresponding to the maturity date of the Notes and the date six
months prior to such maturity date, with the exception of an initial short
accrual period. The adjusted issue price of a Note at the beginning of any
accrual period is the issue price of the Note increased by the accrued OID for
all prior accrual periods (less any cash payments received on such Notes). The
yield to maturity of a Note is the discount rate that, when used in computing
the present value of all principal and interest payments to be made under a
Note, produces an amount equal to the issue price of the Note.
Under these rules, United States Holders will have to include in gross
income increasingly greater amounts of OID in each successive accrual period.
Each payment made under a Note will be treated first as a payment of OID which
was previously includible in gross income (to the extent of OID that has
accrued as of the date of payment and has not been allocated to prior payments)
and second as a payment of principal (which generally is not includible in
income).
Optional Redemption. The Company's option to redeem the Notes, in whole or
in part, at any time on or after , 2003, at certain redemption prices
based on a percentage of Accreted Value, plus accrued interest will be treated
as a call option. See "Description of the Notes -- Optional Redemption."
Because any exercise by the Company of this option would not decrease the yield
on the Notes, the Company will not be presumed to exercise the option for
purposes of the OID rules.
In addition to the optional redemption described above, the Company will
have the right to redeem up to 35% in aggregate face amount of the outstanding
Notes out of the net cash proceeds of one or more Public Equity Offerings on or
prior to , 2000. See "Description of the Notes -- Optional
Redemption." Furthermore, a United States Holder will have the right to tender
Notes to the Company for redemption should the Company experience a Change of
Control. See "Description of the Notes -- Offer to Purchase upon Change of
Control." Such additional redemption rights should not affect, and will not be
treated by the Company as affecting, the determination of the yield or maturity
of the Notes.
The tax treatment of a redemption of the Notes generally should be
governed by the rules for dispositions thereof as described below.
If a United States Holder tenders Notes for redemption as a result of a
Change of Control, the United States Holder may be required to include as
ordinary income any amount the Holder is entitled to receive in excess of the
Accreted Value of a Note on the date of the redemption. Holders should consult
their own tax advisors regarding the treatment of payments received upon any
optional redemptions.
Disposition of the Notes
Generally, upon the sale or exchange or redemption for 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 that such holder has not included
in gross income previously) 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 increased by any accrued OID
includible in such holder's gross income and decreased by the amount of any
payments received by such holder in respect of such Note regardless of whether
such payments are denominated as principal or interest. 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 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. If the United States Holder has held the Note more than 12 months but
not more than 18 months, any gain recognized on a sale of the Notes will be
taxed for federal income tax purposes at a maximum rate of 28 percent (15
percent if such older is in a 15 percent bracket).
87
<PAGE>
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 U.S.
Holder (i) fails to furnish his social security or taxpayer identification
number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is notified by the
Internal Revenue Service 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 Internal
Revenue Service. 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 and OID, as applicable.
THE COMPANY AND U.S. CORPORATE HOLDERS
The Notes will constitute "applicable high yield discount obligations"
("AHYDOs") if the yield to maturity of the Notes will be equal to or greater
than the sum of the relevant applicable federal rate ("AFR") in effect for debt
instruments issued in 1998 ( % compounded semi-annually), plus 5
percentage points. If the Notes constitute AHYDOs, the Company will not be
entitled to deduct any interest on the Notes until it pays such interest in
cash or other property (other than stock or debt instruments of the Company or
related party). In addition, if the yield to maturity of the Notes exceeds the
sum of the relevant AFR plus six percentage points (the "Excess Yield"), the
"disqualified portion" of the OID accruing on the Notes will not be deductible
by the Company and to the extent of the Company's current and accumulated
earnings and profits will be treated as a dividend distribution solely for
purposes of the dividends received deduction of Sections 243, 246 and 246A of
the Code with respect to holders that are U.S. corporations. In general, the
"disqualified portion" of OID for any accrual period will be equal to that
portion of the OID attributable to the yield on the Note in excess of the AFR
plus six percentage points.
Subject to otherwise applicable limitations, holders that are U.S.
corporations will be entitled to a dividends received deduction (generally at a
70% rate) with respect to the disqualified portion of the accrued OID if the
Company has sufficient current or accumulated "earnings and profits." The
excess will continue to be taxed as ordinary OID income in accordance with the
rules described above in "-- United States Holders -- Original Issue Discount."
NON-UNITED STATES HOLDERS
As used herein, the term "Non-United States Holder" means any beneficial
owner of a Note or Common Stock 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 and OID on Notes. Generally any interest or OID 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 and payments (including redemption
proceeds) attributable to OID on the Notes.
88
<PAGE>
Sale, Exchange or Redemption of the Notes
Expect 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 on the Notes by the Company
to a Non-U.S. 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 its non-U.S. status under penalty of perjury or otherwise
establishes an exemption, provided that the broker does not 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-U.S. 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.
89
<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 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.........
....................
----------
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 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 and the Selling Stockholders have granted to the Underwriters
an option expiring on the 30th day after the date of this Prospectus, to
purchase up to additional shares from the Company and an aggregate of
additional shares from the Selling Stockholders 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 of 1933 (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 shares of the Common Stock for employees, directors and
certain other persons associated with the Company who have expressed an
interest in purchasing such shares of Common Stock in the offering. The number
of shares available for sale to the general public in the offering will be
reduced to the extent these individuals purchase such reserved shares. Any
reserved shares not so purchased will be offered by the Underwriters to the
general public on the same terms as the other shares offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including 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.
90
<PAGE>
Among the factors 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 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 do not intend to confirm sales of the Common Stock
offered hereby to any accounts over which they exercise discretionary
authority.
91
<PAGE>
[D] UNDERWRITING
Under the terms and subject to the conditions contained in the
Underwriting Agreement dated [bullet] , 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......... $
...................................
---------
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 shares 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 non-defaulting Underwriters 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 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.
92
<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.
93
<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.
94
<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 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.
95
<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>
After the reorganization transaction discussed in Note 14 to NorthEast Optic
Network, Inc.'s consolidated financial statements is effected, we expect to be
in position to render the following audit report.
ARTHUR ANDERSEN LLP
May 22, 1998
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.
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 (Note 4) ................................... 44,850 3,591,225 3,708,325
------------ ------------ ------------
$ 16,369,663 $ 23,461,000 $ 26,183,672
============ ============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations (Note 5) ............. $ 380,142 $ 509,506 $ 399,401
Accounts payable ................................................. 315,977 294,758 290,636
Accounts payable construction in progress ........................ 482,308 1,199,293 2,786,515
Accrued expenses (Note 13) ....................................... 382,657 1,357,028 1,349,983
Deferred revenue ................................................. 225,000 1,144,170 1,129,575
------------ ------------ ------------
Total current liabilities ..................................... 1,786,084 4,504,755 5,956,110
------------ ------------ ------------
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 (Note 5) ........... 546,879 1,609,399 1,588,176
------------ ------------ ------------
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, $.05 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 ................................... 1,059 3,916 3,916
Series B convertible preferred stock, $.05 par value--
Authorized--2,025,120 shares; 962,734 shares issued and
outstanding .................................................... 48,137 48,137 48,137
Common stock, $.05 par value--
Authorized--4,000,000 shares; 113,931 shares issued and
outstanding .................................................... 5,696 5,696 5,696
Warrants ......................................................... 8,595 541,431 541,431
Additional paid-in capital ....................................... 9,225,478 11,772,725 11,772,725
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 13,733 46,986 -- 5,106
---------- ------------ ------------ ---------- ----------
Total revenues ............................. 42,598 13,773 394,704 -- 151,363
---------- ------------ ------------ ---------- ----------
Expenses:
Cost of sales ............................... 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 ............. $ (4.28) $ (6.22) $ (8.43) $ (1.04) $ (2.57)
========== ============ ============ ========== ==========
Basic and Diluted Weighted Average
Shares Outstanding .......................... 113,831 113,894 113,931 113,931 113,931
========== ============ ============ ========== ==========
</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 $.05 Par Number of $.05 Par Number of $.05 Par
Shares Value Shares Value Shares Value
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ......... 21,180 $1,059 -- $ -- 113,831 $5,691
Issuance of common stock
warrant .......................... -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- --
------ ------ -- ------- ------- ------
Balance, December 31, 1995 ......... 21,180 1,059 -- -- 113,831 5,691
Issuance of Series B
convertible preferred stock,
net of issuance cost of
$775,950 ......................... -- -- 405,024 20,251 -- --
Exercise of common stock
options .......................... -- -- -- -- 100 5
Issuance of common stock
warrant .......................... -- -- -- -- -- --
Issuance of Series B
convertible preferred stock -- -- 557,710 27,886 -- --
Net loss .......................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Balance, December 31, 1996 ......... 21,180 1,059 962,734 48,137 113,931 5,696
Issuance of ownership
interest ......................... -- -- -- -- -- --
Issuance of common stock
warrants ......................... -- -- -- -- -- --
Issuance of Series A
convertible preferred stock 57,144 2,857 -- -- -- --
Net loss .......................... -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Balance, December 31, 1997 ......... 78,324 3,916 962,734 48,137 113,931 5,696
Net loss (unaudited) .............. -- -- -- -- -- --
------ ------ ------- ------- ------- ------
Balance, March 31, 1998
(unaudited) ....................... 78,324 $3,916 962,734 $48,137 113,931 $5,696
====== ====== ======= ======= ======= ======
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Warrants Capital Deficit Equity (Deficit)
---------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ......... $ -- $ 49,094 $ (369,095) $ (313,251)
Issuance of common stock
warrant .......................... -- 451 -- 451
Net loss .......................... -- -- (486,962) (486,962)
-------- ----------- ----------- ----------
Balance, December 31, 1995 ......... -- 49,545 (856,057) (799,762)
Issuance of Series B
convertible preferred stock,
net of issuance cost of
$775,950 ......................... -- 9,203,799 -- 9,224,050
Exercise of common stock
options .......................... -- 20 -- 25
Issuance of common stock
warrant .......................... 8,595 -- -- 8,595
Issuance of Series B
convertible preferred stock -- (27,886) -- --
Net loss .......................... -- -- (708,762) (708,762)
-------- ----------- ----------- ----------
Balance, December 31, 1996 ......... 8,595 9,225,478 (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 -- 797,159 -- 800,016
Net loss .......................... -- -- (960,026) (960,026)
-------- ----------- ----------- ----------
Balance, December 31, 1997 ......... 541,431 11,772,725 (2,524,845) 9,847,060
Net loss (unaudited) .............. -- -- (293,154) (293,154)
-------- ----------- ----------- ----------
Balance, March 31, 1998
(unaudited) ....................... $541,431 $11,772,725 $(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. 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.
(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.
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)
(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>
(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 at each
reporting period based on the undiscounted projected cash flows of the related
asset. Should there be an
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)
impairment, the cash flow estimates that will be used will contain management's
best estimates, using appropriate and customary assumption and projections at
the time. To date the Company does not believe that an impairment exists.
(k) Concentrations of Credit Risk
Financial instruments that subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company's cash equivalents are invested in
financial instruments with high credit ratings. Concentration of credit risk
with respect to accounts receivable is limited to customers to whom the Company
makes significant sales. One customer accounted for approximately 90%, 90%, and
88% of accounts receivable at December 31, 1996 and 1997 and March 31, 1998,
respectively (see Note 12). To control credit risk, the Company performs
regular credit evaluations of its customers' financial condition and maintains
allowances, when required, for potential credit losses.
(l) Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to the short-term
nature of these instruments. The carrying amounts of debt issued pursuant to
agreements with banks approximate fair value as the interest rates on these
instruments fluctuate with market interest rates.
(m) Earnings per Share
The Company has adopted SFAS No. 128, Earnings per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The Company has applied the provisions of SFAS
No. 128, retroactively to all periods presented. In accordance with SEC Staff
Accounting Bulletin (SAB) No. 98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the period prior
to the Company's planned initial public offering. The dilutive effect of
potential common shares in 1998, consisting of outstanding stock options and
convertible preferred stock, is determined using the treasury method and the
if-converted method, respectively, in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for 1995, 1996 and 1997 exclude the
potential common shares from warrants, stock options and convertible preferred
stock outstanding because to do so would have been antidilutive for the years
presented. The potential common shares excluded in 1995, 1996 and 1997 related
to outstanding warrants and stock options were 0, 0 and 4,493 shares,
respectively. The potential common shares excluded in 1995, 1996 and 1997
related to convertible preferred stock were 21,180, 391,332 and 1,096,953
shares, respectively. In addition, the warrants to purchase membership interest
in a subsidiary (see Note 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 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
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)
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 that 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.
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.
In 1994, the Company entered into an agreement with NU whereby NU waived
right-of-way fees for 10 years in return for the Company's guarantee to build
the fiber optic network to certain NU facilities and allow NU the use of 12
fibers on designated route segments in the NU service territory.
The Company has employment contracts with three 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 April 2001 with an
annual compensation commitment of $412,000 in the aggregate. In addition, the
Company will record a one-time expense 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 expense for a payment of $500,000 to MaineCom Services,
Inc.
(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,
F-11
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(3) COMMUNICATIONS NETWORK CONSTRUCTION (Continued)
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 .............. $ -- $2,471,743
Financing costs ......................... 68,404 1,291,616
Trademarks .............................. 2,098 2,098
------- ----------
70,502 3,765,457
Less--Accumulated amortization .......... 25,652 174,232
------- ----------
$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 ........................................... 380,142 509,506
-------- -----------
$546,879 $ 1,609,399
======== ===========
</TABLE>
(a) Note Payable to Related Party
On October 7, 1997 the Company entered into a $30,000,000 construction
loan agreement with CMP. The Company paid CMP a commitment fee of $150,000. The
note bears interest at the LIBOR rate (5.72% at December 31, 1997) plus three
hundred basis points. Interest is payable quarterly in arrears commencing
January 1, 1998 through the conversion date (first day of the first month after
the completion of certain portions of the network (see Note 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.
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)
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 $8,100,000. 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
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 December 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 ............................... $ 509,506
1999 ............................... 248,398
2000 ............................... 123,041
2001 ............................... 135,459
2002 ............................... 148,723
Thereafter ......................... 953,778
----------
2,118,905
Less--Current portion ............... 509,506
----------
Total long-term obligations ......... $1,609,399
==========
</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 $.05
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 13, 1998 the Board of Directors voted to increase the authorized
shares to 277,960 and 4,500,000 for Series A and B convertible preferred stock,
respectively.
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 holders and holders of Series B preferred shall vote as a
separate class upon matters adversely affecting the Series B preferred holders.
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 ($7.37 and
$24.7 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 May 13, 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 1,600 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 ........................................ 1,600 .25
Exercised ...................................... (100) .25
----- -----
Outstanding, December 31, 1996 .................. 1,500 .25
Canceled ....................................... (1,500) .25
------ -----
Outstanding, December 31, 1997 .................. -- $ .25
====== =====
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 is expected to be 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
F-15
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(7) STOCK-BASED COMPENSATION (Continued)
grant of shares based on certain conditions, the grant of securities
convertible into common stock and the grant of stock appreciation rights.
Officers, employees, directors, consultant and advisers of the Company and its
subsidiaries are eligible to be granted Awards under the 1998 Plan.
As of May 20, 1998, a total of 864,050 shares were reserved for issuance
under the 1998 Plan, of which the Company's Board of Directors approved the
issuance of 9% of the issued and outstanding stock of the Company as of the
planned initial public offering having an exercise price 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 4,579 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 advisers for
the purchase of 2,656 shares of membership interest in FiveCom LLC at an
exercise price of $125.80 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 14).
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) EMPLOYEE BENEFIT PLAN
The Company has a qualified 401(k) retirement savings plan (the 401(k)
Plan) covering all employees. Under this plan, participants may elect to defer
a portion of their compensation, subject to certain limitations. In addition,
the Company, at the discretion of the Board of Directors, may make profit
sharing contributions into the plan. During 1995, 1996 and 1997, no
contributions were made to the 401(k) Plan by the Company.
(12) SIGNIFICANT CUSTOMERS
Sales to significant customers as a percentage of the Company's total
revenues were as follows:
<TABLE>
<CAPTION>
Three-Months
Ended
December 31, March 31,
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
<S> <C> <C> <C> <C> <C>
Customer A ......... 100% 98% 10% --% --%
Customer B ......... -- -- 69 -- 76
Customer C ......... -- -- -- -- 10
</TABLE>
(13) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997, and March 31, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
----------- ------------- -------------
<S> <C> <C> <C>
Accrued lease fees ....................... $350,414 $ 785,535 $ 940,848
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
-------- ---------- ----------
$382,657 $1,357,028 $1,349,983
======== ========== ==========
</TABLE>
(14) SUBSEQUENT EVENT
In June 1998, (i) each of the minority members in FiveCom LLC (including
NU), Mode 1 and CMP exchanged their membership interests in NECOM LLC and
FiveCom of Maine LLC, respectively, for shares of Series B convertible
preferred stock of the Company; (ii) FiveCom LLC, FiveCom of Maine LLC and
NECOM LLC were each merged with and into a wholly-owned subsidiary of the
Company, (iii) CMP exercised its warrants to purchase 5,876 shares of
membership interests in FiveCom LLC and (iv) the Company was reincorporated in
Delaware under the name NorthEast Optic Network, Inc.
In connection with the Reorganization, the Company will record 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). 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.
The Restated Certificate of Incorporation authorizes the issuance of up to
5,000,000 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.
F-18
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(14) SUBSEQUENT EVENT (Continued)
On May 13, 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 to
stock split. All share and per share amounts have been retroactively
restated to reflect the stock split.
(15) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly results of
operations for each of the four quarters ended December 31, 1997 and the
quarter ended March 31, 1998. In management's opinion, this unaudited
information has been prepared on the same basis as the annual financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented, when read in conjunction with the financial statements and
notes thereto included elsewhere in this document. The operating results for
any quarter are not necessarily indicative of results for any subsequent
quarter.
<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 ............. $ (1.04) $ (3.10) $ (1.71) $ (2.58) $ (2.57)
</TABLE>
F-19
<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'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
Collocation ................. The physical locating of a telecommunication carrier's switch in the ILECs
premises that facilitates the interconnection of their respective switching
equipment.
Common Carrier .............. A government defined group of private companies offering
telecommunications services or facilities to the general public on a non-
discriminatory basis.
Conduit ..................... A pipe, usually made of metal, ceramic or plastic, that protects buried cables.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
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.
DS-3 miles ........................ A measure of the total capacity and length of a transmission path, calculated
as the capacity of the transmission path in DS-3s multiplied by the length of
the path in miles.
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.
</TABLE>
G-2
<PAGE>
<TABLE>
<S> <C>
Frame Relay ..................... A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access
speeds ranging from 56 kilobits per second to 1.5 megabits per second. This
service is well-suited for connecting local area networks, but is not presently
well suited for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern
fiber optic networks.
Gbps ............................ Gigabits per second, which is a measurement of speed for digital signal
transmission expressed in billions of bits per second.
ILEC ............................ Incumbent Local Exchange Carrier, an historic provider of local telephone
services.
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 and
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.
MCI ............................. MCI Communications Corporation.
Metered Service ................. Service provided by phone companies where charges are levied according to
use, rather than according to a flat, fixed rate.
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
Northeastern United States.
Non-Zero Dispersion Fiber
(NZDF) .......................... 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
Multiplex (DWDM) applications.
</TABLE>
G-3
<PAGE>
<TABLE>
<S> <C>
Northeast ........................ Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island
and Vermont.
NU ............................... Northeast Utilities.
OC-3, OC-12, OC-48, and
OC-192 ........................... OC is a measure of SONET transmission optical carrier level, which is equal
to a corresponding number of DS-3s (e.g., OC-3 is equal to 3 DS-3s and
OC-48 is equal to 48 DS-3s).
POP (Point of Presence) .......... The place where an IXC terminates an end user's long distance lines just
before those lines are connected to the end user's local phone company's lines
or the end-user's own direct hookup.
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.
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.
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.
Sprint ........................... Sprint Corporation
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.
Switch 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.
</TABLE>
G-4
<PAGE>
<TABLE>
<S> <C>
Tandem Switch .......... An electronic communications switch located between the LEC switch and the
IXC switch that passes along routing, signaling and billing information.
Terabits ............... A trillion bits of transmission capacity.
Tier 1 ................. The top 15 cities in the United States based on population.
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 ................................. 13
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 ................................... 47
Certain Transactions ......................... 51
Principal and Selling Stockholders ........... 52
Description of Capital Stock ................. 56
Description of Certain Indebtedness .......... 58
Shares Eligible for Future Sale .............. 82
Certain United States Federal Tax
Consequences for Non-U.S. Holders ......... 84
Underwriting ................................. 90
Notice to Canadian Residents ................. 94
Legal Matters ................................ 95
Experts ...................................... 95
Additional Information ....................... 95
Index to 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.
- --------------------------------------------------------------------------------
NORTHEAST OPTIC NETWORK, INC.
Shares
Common Stock
P R O S P E C T U S
Credit Suisse First Boston
- --------------------------------------------------------------------------------
<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 ................................ 13
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 .................................. 47
Certain Transactions ........................ 51
Principal Stockholders ...................... 54
Description of the Notes .................... 59
Certain United States Federal Income Tax
Consequences ............................. 86
Underwriting ................................ 92
Notice to Canadian Residents ................ 93
Legal Matters ............................... 95
Experts ..................................... 95
Additional Information ...................... 95
Index to 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.
- --------------------------------------------------------------------------------
NORTHEAST OPTIC NETWORK, INC.
$
(Gross Proceeds)
% Senior Discount Notes
Due 2008
P R O S P E C T U S
Credit Suisse First Boston
- --------------------------------------------------------------------------------
<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 ............................. $2,950
NASD filing fee .................................. $1,500
Nasdaq National Market Listing Fee ............... $ *
Blue Sky fees and expenses ....................... $ *
Printing, mailing and engraving expenses ......... $ *
Legal fees and expenses .......................... $ *
Accounting fees and expenses ..................... $ *
Transfer agent and registrar fees ................ $ *
Miscellaneous expenses ........................... $ *
------
Total ........................................... $ *
======
</TABLE>
- ---------------------
* To be filed by amendment.
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.
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 -for- 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").
II-1
<PAGE>
2. On May 23, 1996, the Company issued 40 Sharing Ratios representing a
40% interest in the Company to Mode 1 for an aggregate capital contribution of
$5,333,000. These Sharing Ratios were subsequently cancelled in exchange for
shares of Series B Convertible Preferred Stock.
3. On May 23, 1996, the Company issued 1,000 shares of Membership Interest
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 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
cancelled in exchange for warrants to purchase shares of Series B Convertible
Preferred Stock.
5. On May 23, 1996, the Company issued 5,153 shares of Membership Interest
to Northeast Utilities for an aggregate capital contribution of $653,333. These
shares were subsequently cancelled in exchange for shares of 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 to Mode 1 for an aggregate capital contribution of $666,667. These
shares were subsequently cancelled in exchange for shares of 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 to two employees, as compensation, pursuant to the provisions of their
employment agreements. These shares were subsequently cancelled in exchange for
shares of 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 Sharing Ratios
representing a 66.67% interest in the Company to MaineCom for an aggregate
capital contribution of $1,750,088. These Membership Interests were
subsequently cancelled in exchange for shares of 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, 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.
16. On April 17, 1998, the Company issued 5,876 shares of Membership
Interest 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 cancelled in exchange for shares of
Series B Convertible Preferred Stock.
II-2
<PAGE>
17. On April 17, 1998, the Company issued 645 shares of Membership
Interest 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 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 May , 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.
20. On May , 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 and 106.67 Sharing
Ratios.
21. On May , 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 is subject to the approval by the stockholders of
the Company at their meeting on May 26, 1998. As of June 30, 1998, no options
to purchase shares of Common Stock had been exercised and no options to
purchase shares of Common Stock were outstanding under such plan. Please see
1998 Stock Incentive Plan, attached as an Exhibit hereto.
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.
*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 Discount Notes Due 2008
*5.1 Opinion of Hale and Dorr LLP
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
*10.1 1998 Stock Incentive Plan.
*+10.2 Stock Purchase Agreement dated July 28, 1994 among the Registrant, ATTI and Victor Colantonio,
Charles Decas, Michael Musen, Charles Aucoin, Joseph Bruno, William and Joy Fotsch
("Stockholders of FiveCom").
*+10.3 Stock Subscription Agreement dated November 22, 1995, as amended on April 30, 1996, between
the Registrant and MaineCom Services.
*+10.4 Restructuring and Contribution Agreement dated May , 1998.
*10.5 Common Stock Warrant dated May , 1998 issued to Oppenheimer & Co., Inc.
*10.6 Common Stock Purchase Warrant dated August 19, 1994 issued to Applied Telecommunications
Technologies IV ("A.T.T. IV") N.V. ("ATT IV").
*10.7 Common Stock Purchase Warrant dated February 15, 1995 issued to ATT IV.
*10.8 Common Stock Purchase Warrant dated April 3, 1995 issued 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, as amended on May 20, 1998, between the
Registrant and Victor Colantonio.
*10.31 Employment Agreement dated September 29, 1994 between the Registrant and Michael A. Musen.
*10.32 Employment Agreement dated , 1998 between the Registrant and James D. Mack, Jr.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
*+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.
*21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP (see page II- ).
*23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
24.1 Power of Attorney (see page II-4).
27.1 Financial Data Schedule
</TABLE>
- ---------------------
* To be filed by amendment.
+ Confidential treatment to be requested.
(b) Financial Statement Schedules
12.1 Schedule of Earnings to Fixed Charges
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.
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-5
<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 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
22nd day of May, 1998.
NORTHEAST OPTIC NETWORK, INC.
By /s/ Richard A. Crabtree
-------------------------
Richard A. Crabtree
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Richard A. Crabtree, Victor
Colantonio and Alexander A. Bernhard, and each of them, their true and lawful
attorneys and agents, with full power of substitution, each with power to act
alone, to sign and execute on behalf of the undersigned any amendment or
amendments to this Registration Statement on Form S-1, and any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b), and to perform any acts necessary to enable NorthEast Optic Network,
Inc. to comply with the provisions of the Securities Act of 1933, as amended,
and all requirements of the Securities and Exchange Commission, and each of the
undersigned does hereby ratify and confirm all that said attorneys and agents,
or their or his or her substitutes, shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ---------------------------------------------- -------------
<S> <C> <C>
/s/ Richard A. Crabtree Chairman of the Board
- ------------------------------ and Chief Executive Officer
Richard A. Crabtree (principal executive officer) May 22, 1998
/s/ Victor Colantonio
- ------------------------------ President and Director
Victor Colantonio May 22, 1998
/s/ William F. Fennell Chief Financial Officer
- ------------------------------ and Treasurer
William F. Fennell (principal financial and accounting officer) May 22, 1998
/s/ John D. Forsgren
- ------------------------------
John D. Forsgren Director May 21, 1998
/s/ David Marsh
- ------------------------------
David Marsh Director May 22, 1998
- ------------------------------
F. Michael McClain Director May , 1998
/s/ Gary D. Simon
- ------------------------------
Gary D. Simon Director May 21, 1998
</TABLE>
II-6
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 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 22, 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> 4,504,755 5,956,110
<BONDS> 0 0
0 0
52,053 52,053
<COMMON> 5,696 5,696
<OTHER-SE> 9,789,311 9,496,157
<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> (8.43) (2.57)
<EPS-DILUTED> (8.43) (2.57)
</TABLE>
