As filed with the Securities and Exchange Commission on July 28, 1998
Registration No. 333-53441
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
AMENDMENT NO. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
NORTHEAST OPTIC NETWORK, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 4813 04-3056279
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
391 Totten Pond Road, Suite 401
Waltham, Massachusetts 02154
(781) 890-6868
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive offices)
---------------
Victor Colantonio
President
NorthEast Optic Network, Inc.
391 Totten Pond Road, Suite 401
Waltham, Massachusetts 02154
(781) 890-6868
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copy to:
<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>
---------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of earlier effective
registration statement for the same offering. [ ] ---------------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the
same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
----------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, or until the Registration Statement shall become
effective on such date as the Securities and Exchange Commission, acting
pursuant to Section 8(a), may determine.
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This Registration Statement contains alternate sections, paragraphs,
sentences or phrases which will be contained in two forms of Prospectus covered
by this Registration Statement, one to be used in connection with the offering
(the "Equity Offering") of shares of Common Stock of NorthEast Optic Network,
Inc. (the "Equity Prospectus") and the other to be used in connection with the
concurrent offering (the "Debt Offering") of % Senior Notes Due 2008 of
NorthEast Optic Network, Inc. (the "Debt Prospectus"). Those sections,
paragraphs, sentences or phrases that will appear only in the Equity Prospectus
are marked at the beginning of such section, paragraph, sentence or phrase by
the symbol [E] and those appearing only in the Debt Prospectus are designated
by the symbol [D]. Unless so indicated with a [D] or [E], the language therein
will appear in both forms of Prospectus. The closing of the Debt Offering is
conditioned upon the closing of the Equity Offering and the closing of the
Equity Offering is conditioned upon the closing of the Debt Offering.
<PAGE>
[E] SUBJECT TO COMPLETION, DATED JULY 28, 1998
5,500,000 Shares
[Logo]
NorthEast Optic Network, Inc.
Common Stock
($.01 par value)
------------
Of the 5,500,000 shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby (the "Equity Offering"), 4,000,000 are being sold by
NorthEast Optic Network, Inc. ("NorthEast Optic Network" or the "Company") and
1,500,000 are being sold by Central Maine Power Company, Northeast Utilities or
their affiliates (the "Selling Stockholders"), that, prior to the Equity
Offering, are collectively the owners of approximately 95% of the outstanding
Common Stock of the Company. The Company will not receive any proceeds from the
sale of the shares being sold by the Selling Stockholders. Following the
consummation of the Equity Offering, the officers, directors and other
affiliates of the Company, including the Selling Stockholders, will
beneficially own approximately 64.6% of the outstanding shares of Common Stock
of the Company (assuming no exercise of the Underwriters' (as defined)
over-allotment option).
Prior to the Equity Offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial price to
the public will be between $12.00 and $14.00 per share. See "Underwriting"
for information relating to the factors to be considered in determining the
initial price to the public.
Concurrently with the closing of the Equity Offering, the Company is offering
$165.0 million aggregate principal amount of its % Senior Notes Due 2008 (the
"Debt Offering" and, together with the Equity Offering, the "Offerings"). The
closing of each Offering is conditioned upon the closing of the other
Offering. A portion of the proceeds of the Offerings will be used to repay
indebtedness owed to one of the Selling Stockholders.
Application has been made to list the Common Stock on The Nasdaq Stock Market's
National Market ("NNM") under the symbol NOPT.
For a discussion of certain factors that should be considered by prospective
investors, see "Risk Factors" beginning on page 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting Proceeds to
Price to Discounts and Proceeds to Selling
Public Commissions Company(1) Stockholders
---------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
Per Share ........ $ $ $ $
Total(2) ......... $ $ $ $
</TABLE>
(1) Before deducting expenses payable by the Company estimated at $600,000.
(2) The Company has granted the Underwriters an option exercisable for 30 days
from the date of this Prospectus to purchase a maximum of 825,000
additional shares from the Company to cover over-allotments of shares. If
the option is exercised in full, the total Price to Public will be $ ,
Underwriting Discounts and Commissions will be $ , Proceeds to Company
will be $ and Proceeds to Selling Stockholders will be $ .
The shares of Common Stock are being offered by the several Underwriters
when, as and if delivered to and accepted by the Underwriters and subject to
their right to reject orders in whole or in part. It is expected that delivery
of the shares of Common Stock will be made on or about , 1998, against
payment in immediately available funds.
Credit Suisse First Boston Warburg Dillon Read LLC
Prospectus dated , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
[D] SUBJECT TO COMPLETION, DATED JULY 28, 1998
[Logo]
$165,000,000
NorthEast Optic Network, Inc.
% Senior Notes Due 2008
Interest payable and Due , 2008
------------
NorthEast Optic Network, Inc. ("NorthEast Optic Network" or the "Company") is
offering (the "Debt Offering") $165.0 million aggregate principal amount of
its % Senior Notes Due 2008 (the "Notes"). Upon the closing of the Debt
Offering, the Company will purchase U.S. Government Obligations (as defined)
in such amount as will be sufficient, upon receipt of scheduled interest and
principal payments on such securities, to provide for payment in full of the
first seven scheduled interest payments on the Notes. Such securities will be
pledged as security for the benefit of the holders of the Notes.
The Notes will not be redeemable at the option of the Company prior to ,
2003, except that until , 2001, the Company may redeem, at its option, up
to 35% of the aggregate principal amount of the Notes at the redemption price
set forth herein with the net proceeds of one or more Public Equity Offerings
(as defined) if at least $107.25 million principal amount of the Notes remains
outstanding after any such redemption. On or after , 2003, the Notes may
be redeemed at the option of the Company, in whole or in part, at the
redemption prices set forth herein. Upon a Change of Control (as defined), each
holder of Notes may require the Company to purchase all or a portion of such
holder's Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase.
There can be no assurance that sufficient funds would be available at the time
of any Change of Control to make any required purchases of Notes tendered.
The Notes will be senior unsecured obligations of the Company. The Notes will
rank senior in right of payment to all subordinated indebtedness of the Company
and will rank pari passu in right of payment with all existing and future
indebtedness of the Company that is not by its terms subordinated in right and
priority to the Notes. In addition, claims of holders of the Notes will be
structurally subordinated to claims of holders of existing and future
indebtedness of the Company's subsidiaries. As of March 31, 1998, after giving
effect to the Offerings (as defined) and the application of the net proceeds
therefrom, the Company would have had outstanding approximately $165.4 million
of senior indebtedness (consisting of the Notes and indebtedness ranking pari
passu with the Notes) and no subordinated indebtedness, and the Company's
subsidiaries would have had outstanding approximately $289,000 of indebtedness.
Except for the restrictions on the ability of the Company to incur additional
indebtedness contained in the covenants described under "Description of the
Notes--Certain Covenants--Limitation on Indebtedness", "--Limitation on Liens"
and "--Limitation on Sale/Leaseback Transactions", 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.
Concurrently with the Debt Offering, the Company and certain shareholders of
the Company are offering (the "Equity Offering" and, together with the Debt
Offering, the "Offerings") 5,500,000 shares of Common Stock (6,325,000 shares
if the over-allotment option granted to the underwriters is exercised in
full). The closing of each Offering is conditioned upon the closing of the
other Offering. A portion of the proceeds of the Offerings will be used to
repay indebtedness owed to one of the principal stockholders of the Company.
For a discussion of certain factors that should be considered in connection
with an investment in the Notes, see "Risk Factors" beginning on page 12.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public(1) Commissions Company(1)(2)
----------- --------------- --------------
<S> <C> <C> <C>
Per Note ........ % % %
Total ........... $ $ $
</TABLE>
(1) Plus accrued interest, if any, from , 1998.
(2) Before deducting expenses payable by the Company estimated at $600,000.
The Notes are offered by the several Underwriters (as defined) when, as
and if issued by the Company, delivered to and accepted by the Underwriters and
subject to their right to reject orders, in whole or in part. It is expected
that delivery of the Notes will be made on or about , 1998, against payment
in immediately available funds.
Credit Suisse First Boston Warburg Dillon Read LLC
Prospectus dated , 1998.
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any state in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such state.
<PAGE>
[INSIDE FRONT COVER]
[The inside front cover contains a picture of the fiber filaments that are
contained in fiber optic cables, and the following words: "NEON(R), Northeast
Optic Network. A facilities-based "carriers' carrier" providing technologically
advanced, high-bandwidth, fiber optic transmission capacity on local loop,
inter-city and interstate facilities.
The gatefold foldout following the inside front cover contains a map showing the
routes of the NorthEast Optic Network. The map shows routes which are (i)
currently operational; (ii) planned for 1998; and (iii) planned for 1999. In
addition, the map shows the location of existing NEON POPs, and planned NEON
POPs, existing carrier rings and local distribution and planned carrier rings
and local distribution, and shows the respective NU and CMP service territories.
The foldout also contains a copy of the Company's logo and the words: NorthEast
Optic Network. "NEON(R) and the NEON logo are service marks of the Company."
The back cover contains a picture of the Company's logo.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE SECURITIES
OFFERED HEREBY, INCLUDING OVER-ALLOTMENT, STABILIZING TRANSACTIONS, SYNDICATE
SHORT COVERING TRANSACTIONS AND PENALTY BIDS. FOR A DESCRIPTION OF THESE
ACTIVITIES, SEE "UNDERWRITING."
-----------
NEON[RegTM] and the NEON logo are service marks of the Company.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be read
in conjunction with the more detailed information, consolidated financial
statements and other financial data appearing elsewhere in this Prospectus.
Unless otherwise indicated, all information in this Prospectus gives effect to
(i) the completion of the Reorganization (as such term is defined below under
"Business--Reorganization"), (ii) a 2.5-for-1 stock split of the Company's
Common Stock (the "Stock Split"), and (iii) the conversion of all outstanding
shares of Series A and Series B Convertible Preferred Stock of the Company (the
"Preferred Stock") into an aggregate of 11,777,910 (post-split) shares of
Common Stock at the closing of the Offerings (the "Preferred Stock
Conversion"). [E] Unless otherwise indicated, all information in this
Prospectus assumes no exercise of the Underwriters' over-allotment option. As
used herein "NorthEast Optic Network" or the "Company" refers to NorthEast
Optic Network, Inc. and its subsidiaries, including predecessor companies,
except where the context otherwise requires. Certain terms used herein are
defined in the Glossary beginning on page G-1.
The Company
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic transmission capacity for communications carriers
on local loop, inter-city and interstate facilities. The Company is currently
expanding its fiber optic network, the NEON system, to encompass over 900 route
miles, or more than 60,000 fiber miles, in New York and New England (the
"Northeast"). The Company believes that the Northeast, which in 1996
represented a $28.7 billion telephony services market and which the Company
believes has one of the highest population densities and concentrations of
businesses, universities, phone lines, personal computers and television sets
in the country, is a region characterized by significant and growing demand for
broadband communications infrastructure. The Company is constructing the NEON
system utilizing primarily electric utility rights-of-way ("ROWs"), which allow
the Company to provide secure fiber optic capacity at competitive prices with
potential access to virtually any urban location where the local utility
provides electrical service. The Company is using advanced fiber optic
technology in the NEON system, including non-zero dispersion shifted fiber,
dense wave division multiplexing optronics and SONET ring self-healing
technology, to allow the Company's carrier customers to meet the demand for
reliable, high-bandwidth voice, data and video transmission capacity in the
Northeast. For example, a pair of fiber optic strands on the NEON system can
transmit up to approximately 10 gigabits of data per second, or the equivalent
of approximately 129,000 simultaneous voice conversations.
The Company has already completed construction of approximately 295 route
miles, or approximately 19,500 fiber miles, of the NEON system as of June 30,
1998, and currently operates fiber optic routes from Hartford, Connecticut to
Springfield, Massachusetts and from Nashua, New Hampshire to Portland, Maine.
The Company is currently engineering, constructing or acquiring additional
routes in New York, Connecticut, Massachusetts, Rhode Island and New Hampshire
to create a continuous fiber optic link between New York City and Portland,
Maine with access into and around Boston, Massachusetts and numerous other
major service areas in the Northeast. These additional routes are expected to
be substantially completed in 1998 and will add approximately 500 route miles,
or approximately 23,300 fiber miles, to the NEON system. The Company is also
planning to complete further expansion routes in 1999 into and around New York
City and other metropolitan areas along the NEON system. The completion of
routes currently planned will enable the NEON system to connect more than 540
cities and towns in six states and pass more than 200 points-of-presence
("POPs"), tandem switches and central offices, which the Company believes serve
over 18 million people and over 470,000 businesses.
Commencing in September 1994, the Company entered into a series of ROW
agreements (the "NU Agreements") with the three principal operating
subsidiaries of Northeast Utilities ("NU"), the largest electric utility
service provider in New England, serving over 1.7 million customers in
Connecticut, Massachusetts and New Hampshire, to build fiber optic facilities
utilizing NU's transmission and distribution infrastructure, including utility
towers, poles, underground ducts and urban conduit systems. In January 1997,
the Company entered into a similar ROW agreement (the "CMP Agreement") with
Central Maine Power Company ("CMP"), the largest electric utility service
provider in Maine, serving over 500,000 customers, to build fiber optic
facilities utilizing CMP's transmission and distribution infrastructure. NU and
CMP have also financed substantially all of the construction and operations of
the NEON system to date and currently beneficially own (prior to the sale of
shares in the Equity Offering) 41.4% and 53.5%, respectively, of the Company's
capital stock. In July 1998, the Company entered into
3
<PAGE>
agreements with NEES Communications, Inc., a subsidiary of New England Electric
System, and BecoCom, Inc., a subsidiary of Boston Edison Company, to extend the
NEON system from Hudson, New Hampshire to Boston, Massachusetts terminating at
the Company's POP and Company-targeted carrier centers.
The Company has pursued a strategy of establishing relationships with
electric utilities and building the NEON system utilizing primarily electric
utility ROWs. The Company believes that the use of such ROWs provides
significant advantages, including: (i) inter-city routes and potentially
ubiquitous intra-city coverage in the local electric utility's urban service
territory, including throughout downtown areas and directly to buildings, (ii)
use of existing electric transmission infrastructures, including towers, poles,
ducts and conduits, to achieve faster, less costly installation, (iii)
generally more secure and reliable routes than other traditional ROWs, (iv)
desirable geographically diverse fiber optic routes for communications carriers
and (v) establishment of an extensive ROW network through negotiation with
relatively few parties, rather than with numerous parties such as
municipalities, transit authorities and governmental agencies.
The Company intends to target communications carriers as customers, rather
than end-users of telecommunications services. The Company believes that this
strategy allows it to: (i) maximize the Company's opportunities to sell its
capacity regardless of the end-user's selection of a retail provider, (ii)
avoid the significant initial and ongoing investment required in selling,
marketing and providing services to end-users, (iii) attract carrier customers
that may be reluctant to contract with a direct competitor, (iv) generate
revenues quickly from carriers that are easily identifiable and require large
amounts of fiber optic capacity, and (v) lock in relatively secure long-term
revenue streams from customers that are generally more creditworthy than
end-users and are likely to make long-term capital commitments prior to
completion of construction. Carrier customers typically lease fiber optic
capacity under multi-year contracts with which they enhance or constitute their
own communications networks as a cost-effective alternative to constructing
their own infrastructure or purchasing measured services from other carriers
with whom they may compete. Carriers targeted by the Company include a broad
range of communications companies such as incumbent local exchange carriers
("ILECs"), competitive local exchange carriers ("CLECs"), long distance
companies/interexchange carriers ("IXCs"), paging, cellular and PCS companies,
cable television companies and Internet service providers ("ISPs"). Currently,
the Company has contracts with Brooks Fiber Properties, Inc. ("Brooks Fiber")
(now owned by WorldCom, Inc. ("WorldCom")), Teleport Communications Group Inc.
("Teleport") (expected to be acquired by AT&T Corp. ("AT&T")), MCI
Communications Corporation ("MCI") (expected to be acquired by WorldCom),
Sprint Corporation ("Sprint") and Global NAPs, Inc., a regional ISP.
The Company intends to offer its carrier customers leases of both dark
fiber (fiber optic transmission lines leased without optronics equipment
installed by the Company) and lit fiber (fixed amounts of capacity, such as
DS-3, OC-3, OC-12, OC-48 and higher, on fiber optic transmission lines that use
the Company's optronics equipment) at fixed-cost pricing and over multi-year
lease terms. The Company intends to lease approximately one-third of the
available fibers in the NEON system as dark fiber and one-third as lit fiber.
In addition, the Company plans to reserve approximately one-third of its
available fibers for future services that the Company may provide to capitalize
on future technological advances or changes that the Company expects to occur
in the communications industry.
History of the Company
The Company was incorporated in 1989 in Massachusetts under the name
"FiveCom, Inc." to develop fiber-optic networks in secondary and tertiary
markets in the Northeast. Prior to 1994, the Company was the managing general
partner of a venture which built a competitive access provider ("CAP") network
in Springfield, Massachusetts and also built several small private networks in
eastern Massachusetts. In February 1994, the Company sold its interest in the
Springfield network to Brooks Fiber. Following this sale, the Company expanded
its business strategy to include intra-LATA and long distance facilities using
electric utility ROWs and changed its focus to target carrier customers rather
than end-users. Commencing in September 1994, the Company entered into the NU
Agreements, pursuant to which the Company obtained ROWs in the service
territories of NU and its subsidiaries. In 1996, the Company raised
approximately $16.7 million from private placements of equity securities to
MaineCom Services ("MaineCom"), an affiliate of CMP, and Mode 1 Communications,
Inc. ("Mode 1"), an affiliate of NU. In January 1997, the Company entered into
the CMP Agreement, under which the Company obtained ROWs in CMP's service
territory, and raised an additional
4
<PAGE>
$2.6 million from CMP and other investors in a private equity financing. In
1998, the Company was reincorporated in Delaware under the name "NorthEast
Optic Network, Inc." See "Business--Reorganization."
Market Opportunity
The Company believes that there is a significant demand for high-bandwidth
communications services and a limited supply of technologically advanced dark
and lit fiber optic facilities in the Northeast. The Company believes the needs
of communications carriers for advanced, high-bandwidth voice, data and video
transmission capacity will increase over the next several years due to various
factors, including: (i) rapid growth of communications traffic; (ii) capacity
required by new entrants to the telecommunications market; (iii) the need for
redundant routing and geographic diversity of ROWs to provide reliability in
the event of equipment failure, fiber line break or other outage; (iv) the need
to upgrade older communications networks; (v) accommodation of multimedia
(voice, data and video) and other potential high-bandwidth applications; and
(vi) communications carriers' desire for low-cost local and regional transport.
Business Strategy
The Company's objective is to become the preferred facilities-based
provider of fiber optic network capacity in the Northeast. The following are
the key elements of the Company's strategy to achieve this objective:
[bullet] Leverage Electric Utility ROWs. The Company is pursuing a strategy
of building the NEON system utilizing primarily electric utility
ROWs, which the Company believes provide significant competitive
advantages, including potential connectivity to virtually any
building in the utilities' urban service areas covered by the NEON
system, faster and less costly installation on existing
infrastructure and geographic diversity from traditional ROWs.
[bullet] Target Carrier Customers. The Company intends to target
communications carriers as customers, rather than end-users of
telecommunications services, which the Company believes will allow
it to maximize its opportunities to sell its capacity regardless of
the end-user's selection of a retail provider, avoid the significant
initial and ongoing investment required to attract and retain
numerous retail customers and generate revenues quickly from carrier
customers, which require large amounts of fiber optic capacity and
are more likely to make long-term capital commitments prior to
completion of construction.
[bullet] Reduce Construction and Operating Costs. The Company is reducing its
construction and operating costs by using primarily pre-existing
electric utility transmission and distribution infrastructure,
including towers, poles, ducts and conduits, in the construction of
the NEON system, installing high fiber count cable and utilizing
high quality, advanced fiber optic technology in the NEON system.
[bullet] Establish a Reliable, Technologically Advanced Network. The Company
is constructing the NEON system utilizing bi-directional,
self-healing SONET ring architecture on primarily electric utility
ROWs, which allow for enhanced physical security and geographic
diversity. The Company plans to use what the Company believes to be
the highest quality fiber optic cable and optronics available which
enable the highest commercially available transmission capacity
(OC-192) and data integrity level (10-15 Bit Error Rate).
[bullet] Focus on High Demand Northeast Market. The Company believes that the
Northeast market has one of the highest population densities and
concentrations of businesses, universities, phone lines, personal
computers and television sets in the country and is a region
characterized by significant and growing demand for reliable
broadband communications infrastructure.
[bullet] Capitalize on Management Experience. The Company's management team
includes individuals with significant experience in the
telecommunications and utility industries which will be important in
the build-out and management of the NEON system. Victor Colantonio,
the Chairman of the Company and its founder and President, has 25
years of experience in the telecommunications industry. Richard
Crabtree, the Chairman of the Board and Chief Executive Officer of
the Company, has 27 years of public utility company experience,
including serving as Chief Financial Officer to CMP. Other senior
executives of the Company also have extensive experience in the
telecommunications industry.
5
<PAGE>
[bullet] Leverage Utility Relationships. The Company believes that its
electric utility relationships enhance the Company's credibility
with large carrier customers and create opportunities to establish
relationships with other electric utility companies. In addition,
through its utility relationships, the Company has outsourced
substantially all of its engineering, design, routine maintenance
and construction supervision requirements, thereby building on the
utilities' significant resources and experience in the engineering
and construction of large transmission and distribution networks.
----------------
The Company's principal executive offices are located at 391 Totten Pond
Road, Suite 401, Waltham, Massachusetts, and its telephone number is (781)
890-6868.
6
<PAGE>
[D] The Debt Offering
<TABLE>
<S> <C>
Issuer ......................... NorthEast Optic Network, Inc.
Securities Offered ............. $165,000,000 aggregate principal amount of % Senior Notes
Due 2008.
Maturity Date .................. , 2008.
Interest Payment Dates ......... and of each year, commencing , 1999.
Pledge Account ................. Upon the closing of the Debt Offering, the Company will apply
a portion of the net proceeds of the Debt Offering to purchase
U.S. Government Obligations (the "Pledged Securities") to be
deposited in the Pledge Account (as defined) in such amount as
will be sufficient, upon receipt of scheduled interest and
principal payments on such securities, to provide for payment
in full of the first seven scheduled interest payments on the
Notes. The Pledged Securities will be pledged by the Company
to the Trustee for the benefit of the holders of the Notes. The
Notes will be secured by a first priority security interest in the
Pledged Securities and in the Pledge Account and, accordingly,
the Pledged Securities and the Pledge Account will also secure
repayment of the principal amount of the Notes to the extent of
such security. See "Description of the Notes--Security."
Optional Redemption ............ The Notes will not be redeemable at the option of the Company
prior to , 2003. On or after , 2003, the Notes
may be redeemed at the option of the Company, in whole or in
part, at the redemption prices set forth herein, plus accrued and
unpaid interest, if any, to the date of redemption. See
"Description of the Notes--Optional Redemption."
Change of Control .............. Upon a Change of Control, each holder of Notes will be entitled
to require the Company to purchase all or a portion of such
holder's Notes at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the
date of purchase. There can be no assurance that the Company
would have sufficient funds at the time of any Change of Control
to purchase any of the Notes tendered. See "Risk
Factors--Purchase of Notes Upon Change of Control" and
"Description of the Notes--Change of Control."
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Ranking ............................ The Notes will be senior unsecured (except to the extent of the
Pledge Account and the Pledged Securities) obligations of the
Company. The Notes will rank pari passu in right of payment
with all existing and future indebtedness of the Company that
is not by its terms subordinated in right and priority to the Notes
and will be senior in right of payment to all future subordinated
indebtedness of the Company. In addition, claims of holders of
the Notes will be structurally subordinated to claims of holders
of existing and future indebtedness of the Company's
subsidiaries. As of March 31, 1998, after giving effect to the
Offerings and the application of the net proceeds therefrom, the
Company would have had outstanding approximately $165.4
million of senior indebtedness (consisting of the Notes and
$437,042 of other indebtedness) and no subordinated
indebtedness, and the Company's subsidiaries would have had
outstanding approximately $289,000 of indebtedness.
Restrictive Covenants .............. The indenture under which the Notes will be issued (the
"Indenture") will contain certain covenants that, among other
things, will limit (i) the incurrence of additional Indebtedness
(as defined) by the Company and its Restricted Subsidiaries (as
defined), (ii) the payment of dividends and other Restricted
Payments (as defined) by the Company and its Restricted
Subsidiaries, (iii) the creation of restrictions on distributions
from Restricted Subsidiaries, (iv) asset sales, (v) transactions
with affiliates, (vi) sales or issuances of Restricted Subsidiary
capital stock, (vii) the incurrence of liens and the entering into
of sale/leaseback transactions and (viii) mergers, consolidations
and transfers of assets. All these limitations and prohibitions,
however, are subject to a number of important qualifications and
exceptions. See "Description of the Notes--Change of
Control--Certain Covenants."
Concurrent Equity Offering ......... Concurrently with the Debt Offering, the Company and certain
shareholders of the Company are offering 5,500,000 shares
(6,325,000 shares if the over-allotment option granted to the
underwriters thereof is exercised in full) of its Common Stock
(the "Common Stock") by a separate prospectus. The closing of
each Offering is conditioned upon the closing of the other
Offering, which conditions may not be waived.
Use of Proceeds .................... The net proceeds to the Company from the Offerings will be
used to purchase the Pledged Securities, for capital expenditures
associated with the continued construction and expansion of the
NEON system to repay outstanding debt and for working
capital, including payment of certain bonuses, and other general
corporate purposes. See "Use of Proceeds."
</TABLE>
[D] Risk Factors
An investment in the Notes offered hereby involves a high degree of risk.
Prospective investors should consider carefully the risk factors and other
information set forth in this Prospectus before making an investment in the
Notes offered hereby. See "Risk Factors."
8
<PAGE>
[E] The Equity Offering
<TABLE>
<S> <C>
Common Stock offered:
By the Company ...................... 4,000,000 shares
By the Selling Stockholders ......... 1,500,000 shares
-------
Total .............................. 5,500,000 shares (1)
------- -------
Common Stock to be outstanding after
the Equity Offering ................. 16,062,735 shares (1)(2)
Concurrent Debt Offering ............. Concurrently with the Equity Offering, the Company is offering
$165.0 million aggregate principal amount of its % Senior
Notes Due 2008 (the "Notes") by a separate prospectus. The
closing of each Offering is conditioned on the closing of the
other Offering, which conditions may not be waived. See
"Description of Certain Indebtedness."
Use of Proceeds ...................... The net proceeds to the Company from the Offerings will be
used to purchase U.S. government obligations in order to
provide for payment in full of the first seven scheduled interest
payments on the Notes (as defined), for capital expenditures
associated with the continued construction and expansion of the
NEON system, to repay outstanding debt and for working
capital, including payment of certain bonuses, and other general
corporate purposes. See "Use of Proceeds." The Company will
not receive any proceeds from the sale by the Selling
Stockholders of Common Stock in the Equity Offering.
Dividend Policy ...................... The Company does not anticipate paying any cash dividends on
its Common Stock in the foreseeable future. The terms of the
Notes will restrict the Company's ability to pay cash dividends
on its Common Stock.
Proposed NNM symbol .................. NOPT
</TABLE>
- ---------------------
(1) Assumes no exercise of the Underwriters' over-allotment option.
(2) Based on shares outstanding as of March 31, 1998 after giving effect to the
Reorganization, the Stock Split and the Preferred Stock Conversion.
Excludes (i) 3,600 shares of Common Stock issuable upon the exercise of
stock options outstanding as of March 31, 1998 with an exercise price of
$0.10 per share, (ii) 2,436,105 shares of Common Stock reserved for future
issuance under the Company's 1998 Stock Incentive Plan, of which 1,705,242
will be subject to outstanding options upon consummation of the Equity
Offering, and (iii) 174,367 shares of Common Stock issuable upon the
exercise of warrants outstanding as of March 31, 1998 with a weighted
average exercise price of $1.92 per share.
[E] Risk Factors
An investment in the Common Stock offered hereby involves a high degree of
risk. Prospective investors should consider carefully the risk factors and
other information set forth in this Prospectus before making an investment in
the Common Stock offered hereby. See "Risk Factors."
9
<PAGE>
Summary Consolidated Financial Data
The summary consolidated financial data presented below for each of the
years in the three-year period ended December 31, 1997 and as of December 31,
1997 have been derived from the Consolidated Financial Statements of the
Company, which have been audited by Arthur Andersen LLP, independent public
accountants. The summary consolidated financial data for each of the
three-month periods ended March 31, 1997 and 1998 and as of March 31, 1998 have
been derived from the unaudited consolidated financial statements of the
Company, which have been prepared on the same basis as the Consolidated
Financial Statements of the Company and, in the opinion of management, reflect
all normal recurring adjustments necessary for a fair presentation of the
financial position and results of operations for such periods and as of such
dates. The results for the three months ended March 31, 1998 are not
necessarily indicative of the operating results to be expected for the entire
year. The balance sheet data presented below as of December 31, 1997 and March
31, 1998 is also presented on an as adjusted basis to give effect to the
Reorganization and on a pro forma as adjusted basis to give effect to the
Offerings and the application of the estimated net proceeds therefrom and to
the Reorganization.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------- -----------------------------
1995 1996 1997(1)(2) 1997 1998(1)(2)
------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues ................................. $ 42,598 $ 13,773 $ 394,704 $ -- $ 151,363
Operating expenses ....................... 487,159 1,185,595 2,693,037 345,620 774,521
---------- ------------ ------------ ---------- ----------
Loss from operations ..................... (444,561) (1,171,822) (2,298,333) (345,620) (623,158)
Interest income (expense), net ........... (42,401) 125,838 (2,893) 56,638 (61,494)
Minority interest(3) ..................... -- 353,222 1,080,200 137,620 314,498
Provision for (benefit from)
income taxes ........................... -- 16,000 (261,000) (33,000) (77,000)
---------- ------------ ------------ ---------- ----------
Net loss ................................. (486,962) (708,762) (960,026) (118,362) (293,154)
Basic and diluted loss per share ......... (1.71) (2.49) (3.37) (0.42) (1.03)
Basic and diluted weighted average
shares outstanding ..................... 284,578 284,735 284,828 284,828 284,828
</TABLE>
<TABLE>
<CAPTION>
As of As of
December 31, 1997 March 31, 1998
-------------------------------------------------- -------------------------------------------------
Pro Forma Pro Forma
Actual As Adjusted(4) As Adjusted(5) Actual As Adjusted(4) As Adjusted(5)
---------------- ---------------- ---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital .............. $ (3,463,011) $ (3,463,011) $137,466,912 $ (5,500,383) $ (5,500,383) $133,574,279
Total assets ................. 23,461,000 70,223,134 278,065,556 26,183,672 73,260,304 279,040,594
Note payable to related
party ...................... 2,100,000 2,100,000 -- 3,975,000 3,975,000 --
Long-term debt,
including current
maturities ................. 2,118,905 2,118,905 165,543,133 1,987,577 1,987,577 165,437,042
Total liabilities ............ 8,275,154 8,275,154 169,599,382 11,605,478 11,605,478 171,079,943
Minority interest(3) ......... 5,338,786 -- -- 5,024,288 -- --
CMP Warrant .................. 532,836 -- -- 532,836 -- --
Stockholders' equity ......... 9,314,224 61,947,980 108,466,174 9,021,070 61,654,826 107,960,651
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
------------------------------------------------- --------------------------------
1995 1996 1997(1)(2) 1997 1998(1)(2)
---------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Other Financial Data:
Cash provided by (used in)
operating activities ................ $ (413,196) $ 37,460 $ (553,427) $(1,027,065) $ 657,881
Cash used in investing activities ..... (4,619,702) (6,738,898) (8,798,251) (4,037,187) (3,540,475)
Cash provided by financing
activities .......................... 4,943,300 11,565,481 5,585,205 3,657,456 3,016,396
Net increase (decrease) in cash and
cash equivalents .................... (89,598) 4,864,043 (3,766,473) (1,406,796) 133,802
EBITDA(6) ............................. (420,386) (794,432) (665,271) (178,121) (6,647)
Capital expenditures .................. 4,596,901 6,711,082 5,609,459 3,978,512 3,297,062
Ratio of deficiency to fixed
charges(2)(7) ....................... (2.54)x (4.50)x (10.11)x (9.46)x (7.53)x
</TABLE>
- ---------------------
(See footnotes on the following page)
10
<PAGE>
(1) If the Reorganization had occurred as of January 1, 1997, the as adjusted
impact on the Company's Statement of Operations for the year ended
December 31, 1997 would reflect depreciation and amortization of
$2,111,600, a net loss of $3,598,964 and a loss per share of $12.64, after
giving effect to the Stock Split. The pro forma impact on the Company's
Statement of Operations for the quarter ended March 31, 1998 would reflect
depreciation and amortization of $694,318, a net loss of $999,957 and a
loss per share of $3.51, after giving effect to the Stock Split.
(2) On a pro forma as adjusted basis giving effect to the Reorganization and to
the Offerings (assuming a 121/2% per annum interest rate on the Notes) and
the application of the net proceeds therefrom, (A) net loss and basic and
diluted loss per share for 1997, (i) before the extraordinary charge,
would have been $21,397,636 and $1.33, respectively, reflecting additional
interest expense of $20,483,189 from the issuance of the Notes offset by
interest income of $3,250,000 from the reinvestment of a portion of the
net proceeds of the Offerings (assuming a 5% per annum interest rate on
the $65,000,000 of restricted cash to be held in escrow), and (ii) after
the extraordinary charge (which reflects the write-off of deferred
financing costs of $1,241,806 related to the extinguishment of debt),
would have been $22,639,442 and $1.41, respectively, and (B) net loss and
basic and diluted loss per share for the first quarter of 1998, (i) before
the extraordinary charge, would have been $5,390,641 and $0.34,
respectively, reflecting additional interest expense of $5,064,434 from
the issuance of the Notes offset by interest income of $812,500 from the
reinvestment of a portion of the net proceeds of the Offerings (assuming a
5% per annum interest rate on the $65,000,000 of restricted cash to be
held in escrow), and (ii) after the extraordinary charge (which reflects
the write-off of deferred financing costs of $1,454,175 related to the
extinguishment of debt), would have been $6,844,816 and $0.43,
respectively.
(3) Minority interest consists of the interests of members other than CMP in
FiveCom LLC, NECOM LLC and FiveCom of Maine LLC. See
"Business--Reorganization." Changes in minority interest reflect such
other members' capital adjusted by their portion of the net loss.
(4) Adjusted to give effect to the Reorganization. In connection with the
Reorganization, the Company recorded an intangible asset to reflect the
Company's acquisition of NU's minority interest in a subsidiary (NECOM
LLC), in accordance with AICPA Accounting Interpretation 39 to APB Opinion
No. 16, Business Combinations (AIN-39). If the intangible asset were
recorded at December 31, 1997, the amount recorded would be $46,762,134.
If the intangible asset were recorded at March 31, 1998, the amount
recorded would be $47,076,632.
(5) Pro forma as adjusted to give effect to (i) the Offerings and the
application of the estimated net proceeds therefrom, assuming an initial
public offering price of $13.00 per share, the midpoint of the estimated
price range, and after deducting the estimated underwriting discount and
offering expenses payable by the Company, and the write-off of unamortized
financing costs associated with debt extinguished and (ii) the
Reorganization. See Note 4 above.
(6) EBITDA is defined herein as net loss before interest income (expense), net,
loan commitment fees, provision for (benefit from) income taxes,
depreciation and amortization and is presented because it is commonly used
by certain investors and analysts to analyze and compare a company's
operating performance and to determine a company's ability to incur and
service debt. EBITDA should not be considered in isolation from, or as a
substitute for, net income, cash flow from operating activities or other
consolidated income or cash flow statement data prepared in accordance
with generally accepted accounting principles or as a measure of
profitability or liquidity.
(7) For purposes of calculating the ratio of earnings (deficiency) to fixed
charges: (i) earnings consist of loss before income tax benefit, plus
fixed charges, excluding capitalized interest, and (ii) fixed charges
consist of interest expense and capitalized interest, plus amortization of
deferred financing costs. For the years ended December 31, 1995, 1996 and
1997 and for the three months ended March 31, 1997 and 1998, the Company's
earnings were insufficient to cover fixed charges by approximately
$601,400, $1,474,524, $3,432,869, $416,419 and $995,487, respectively. For
the year ended December 31, 1997 and for the three months ended March 31,
1998, on a pro forma as adjusted basis the Company's earnings would have
been insufficient to cover fixed charges by approximately $21,796,279 and
$5,486,053, respectively. See Note 2 above.
11
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following factors should be carefully considered by prospective investors when
evaluating an investment in the securities offered hereby. This Prospectus
contains certain forward-looking statements that involve risks and
uncertainties. The cautionary statements contained in this Prospectus should be
read as being applicable to all related forward-looking statements wherever
they appear in this Prospectus. The Company's actual results could differ
materially from those discussed here. Important factors that could cause or
contribute to such differences include those discussed below, as well as those
discussed elsewhere in this Prospectus.
Limited History of Operations; Negative Cash Flow
Although the Company has conducted business since 1989, the Company's
current business has only a very limited history. As a facilities-based
provider of fiber optic transmission capacity, the Company is a development
stage company in the process of constructing the NEON system throughout the
Northeast. Although limited portions of the NEON system are currently
operational, those portions represent less than 23% of the route miles and 21%
of the fiber miles of the NEON system as currently planned, and until the NEON
system is substantially completed, the Company does not expect to begin to
realize any substantial revenues. See "--Risks Associated with Completing the
NEON System." Prospective investors, therefore, have no meaningful historical
operating or financial information about the Company's current business upon
which to base an evaluation of the Company's performance or their investment in
the securities offered hereby. The Company does not expect to achieve
substantial completion of the NEON system as currently planned until the end of
1999. The Company has incurred net losses from inception. Such losses were
approximately $487,000, $709,000, $960,000 and $293,000 for the years ended
December 31, 1995, 1996 and 1997 and the three months ended March 31, 1998,
respectively. The Company's future operating results will fluctuate annually
and quarterly due to several factors, some of which are outside the control of
the Company. These factors include the cost of construction of the NEON system
(including any unanticipated costs associated therewith), the availability of
ROWs, the cost and timely availability of equipment and construction
contractors, pricing strategies for its services, changes in the regulatory
environment, changes in telecommunications technology and changes in general
and local economic conditions. In addition, the extent of the demand for the
Company's services cannot be estimated with any degree of certainty. See
"--Risks Associated with Implementing the Company's Strategy."
In addition, the development of the Company's business, the completion of
the NEON system and the development of the Company's services and customer base
will require significant expenditures, most of which will need to be made
before the Company is able to offer services over substantially all of the NEON
system. These expenditures, together with associated operating expenses, will
adversely impact cash flow and profitability until an adequate customer base is
established. To date, the Company has expended substantial amounts on
construction of the NEON system. Such cash expenditures have been funded by
proceeds from the Company's financing activities. Accordingly, the Company has
generated negative cash flow. Moreover, the Company expects to continue
generating negative cash flow from operations through at least 2000. There can
be no assurance that the Company will not need to obtain additional capital to
complete the NEON system.
As a result of the foregoing factors, there can be no assurance that the
Company will generate significant revenues, achieve or sustain profitability or
generate positive cash flow from operating activities in the future. If the
Company cannot generate significant revenues, achieve and sustain profitability
or generate positive cash flow from operating activities in the future, it will
not be able to make principal and interest payments with respect to its
indebtedness (including the Notes) or meet its other debt service or working
capital requirements, and the securities offered hereby would have little or no
value.
Risks Associated with Completing the NEON System
The Company's ability to achieve its strategic objectives will depend in
large part upon the successful, timely and cost-effective completion of the
NEON system. Factors that could affect such completion include, among other
things, (i) obtaining adequate ROWs on acceptable terms in and between major
cities in the Northeast not covered by utility ROWs currently available to the
Company, (ii) obtaining required governmental permits and certifications where
necessary and (iii) delays or disruptions resulting from physical damage, power
loss, defective equipment
12
<PAGE>
or the failure of third-party suppliers or contractors to meet their
obligations in a timely and cost-effective manner. No assurance can be given
that the Company will be able to complete the NEON system or achieve completion
on time or within the anticipated budget.
In order to complete the NEON system, the Company must obtain additional
rights-of-way and other permits to install fiber optic cables from third
parties, including electric utilities, transit authorities and others. The
Company has not yet obtained the necessary ROWs to expand the NEON system to
encompass the planned New York local loop. The Company may be required to pay
cash or provide in-kind facilities for these ROWs or other ROWs to accommodate
extensions to the NEON system. In negotiating the terms for its ROWs, the
Company has sought, and expects to continue to seek, waivers or deferrals of
right-of-way fees while the NEON system is being constructed. For instance,
under its agreements with NU, the Company has, among other terms, agreed to pay
to NU mileage-based annual fees beginning in 2004 and a percentage of the gross
revenues of the Company generated over the ROWs granted by NU upon achieving
certain revenue levels. In addition, the Company has agreed to set aside for
NU's use a portion of the fibers along the ROWs granted by NU. Under its
agreements with CMP, the Company has agreed to pay CMP an annual fee beginning,
with regard to any particular route segment, in the first calendar year
following the installation date for such route segment, and the Company has
agreed to set aside certain fibers along the CMP ROWs for CMP's use. Although
the Company believes that its strategy of utilizing such ROWs, primarily from
electric utilities, will help to minimize the costs of acquiring ROWs for
telecommunications purposes, the Company is unable to predict with certainty
the cost of obtaining necessary ROWs, and there can be no assurance that it
will be able to obtain such ROWs on acceptable terms, if at all. If the Company
is unable to reach agreement on terms acceptable to the Company for the planned
completion of the NEON system, then such failure may prevent the completion of
the NEON system as currently planned by the Company, and such a result would
have a material adverse effect on the Company's business, financial condition
and results of operation. In addition, if CMP or NU or any other entity with
whom the Company has an agreement seeks bankruptcy or other protection from its
creditors, the Company's ability to exercise rights to obtain route extensions
or other rights under its agreement with such entity may be adversely affected.
See "Business--Right-of-Way Agreements."
The Company expects that it will require a substantial amount of capital
to complete the build-out of the NEON system as currently planned. The Company
currently estimates that its capital expenditure requirements for 1998 and 1999
will be approximately $54.0 million in each year. Additional funds will be
required to fund operating losses during these periods. The Company believes
that it will have sufficient capital to fund the build-out of the NEON system
as currently planned and its other working capital needs, contingent upon
completion of the Offerings. In the event that the proceeds of the Offerings
are less than anticipated or are otherwise insufficient to meet its capital
expenditure and other capital requirements, the Company would be required to
obtain funding from other sources to complete the construction of the NEON
system and to fund operating losses. Sources of funding may include vendor
financing, public offerings or private placements of equity and/or debt
securities, strategic customer alliances, and bank loans. However, there can be
no assurance that additional financing will be available to the Company or, if
available, that it can be obtained on a timely basis and on acceptable terms.
Failure to obtain such financing could result in the delay or curtailment of
the Company's development and expansion plans and expenditures or revisions to
the Company's business strategy. Any of these events would impair the Company's
ability to meet its debt service requirements and would have a material adverse
effect on its business, financial condition and results of operations. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Risks Associated with Implementing the Company's Strategy
The Company's ability to implement its business strategy is dependent upon
the Company's ability to secure a market for its leased dark and lit fiber
optic capacity and obtain service contracts with communications carriers.
The Company's ability to attract and retain customers is crucial to the
Company's success. Many of the Company's targeted customers are companies that
may also be the Company's potential competitors. If the Company's services are
not satisfactory or cost competitive, the Company's potential customers may
elect to develop other alternatives in the Company's markets. The Company has
incurred and will continue to incur significant operating expenses and has made
and will continue to make significant capital investments, in each case based
upon certain expectations as to the anticipated customer demand for the
Company's services in its markets.
13
<PAGE>
Accordingly, the failure of the Company to attract and retain sufficient
communications carriers for its services would materially and adversely affect
the Company's business, financial condition and results of operations.
The Company's business strategy assumes that its current and future
service revenues will come from a limited number of communications carriers.
Therefore, dissatisfaction with the Company's services by a relatively few
number of customers could have a material adverse effect on the Company's
business, financial condition and results of operations. Revenues through the
second quarter of 1997 consisted primarily of service fees from MCI. For the
year ended December 31, 1997, the Company's two largest customers, MCI and
Cellular One Group, accounted for 69% and 10% of total revenues, respectively,
and for the three months ended March 31, 1998, the Company's two largest
customers, MCI and Teleport, accounted for 76% and 10% of total revenues,
respectively. The Company is aware that certain IXCs are constructing or
considering constructing new networks, or buying companies with local networks,
which could reduce their need for the Company's services. See "--Competition."
Accordingly, there can be no assurance that any of the Company's customers or
potential customers will use or increase their use of the Company's services,
which would have a material adverse effect on the Company's business, financial
condition and results of operations.
Implementation of the Company's business strategy also will require
substantial growth in the Company's management staff, support systems and other
operations and may be affected by factors such as: (i) the availability of
financing and regulatory approvals; (ii) the existence of strategic alliances
or relationships; (iii) technological, regulatory or other developments in the
Company's business; (iv) changes in the competitive climate in which the
Company operates; and (v) the emergence of future opportunities.
Risks Associated with Contractual Rights-of-Way
The construction and operation of the NEON system by the Company is
dependent upon indefeasible rights of use ("IRUs") granted to the Company in
ROWs and in fiber optic filaments. IRUs, which are created by contract, have
been used extensively in the telecommunications industry. Although IRUs confer
upon the holder certain indicia of ownership, legal title and the right to
control the ROW or the fiber optic filaments, as the case may be, remain in the
hands of the grantor. Therefore, while IRUs might be construed as conferring a
significant equitable right in the ROW or the fiber optic filaments, as the
case may be, the legal status of IRUs remains uncertain, and there can be no
assurance that a trustee in bankruptcy would not void an IRU in the event of
the bankruptcy of the grantor of such IRU. In addition, the IRUs granted by CMP
and the NU companies are subject to pre-existing, system-wide mortgages used to
secure utility bonds issued by those companies. The Company has sought
acknowledgments from the NU companies' indenture trustees that the Company's
rights under the NU Agreements would be recognized in the event of the
foreclosure of the related mortgage. Such agreements have been obtained from
the indenture trustees for The Connecticut Light and Power Company and Western
Massachusetts Electric Company, and negotiations are ongoing with the indenture
trustee of Public Service Company of New Hampshire ("PSNH"). If such an
agreement is not obtained from PSNH's indenture trustee, a default by PSNH
under its mortgage that resulted in the foreclosure of the mortgage could
result in the Company losing its rights under the NU Agreements in the State of
New Hampshire. The Company has not sought such acknowledgments from CMP's
indenture trustees because, unlike in the NU Agreements, in the CMP Agreement
the Company is not entitled to such acknowledgments. A default by CMP under its
mortgage that resulted in the foreclosure of the mortgage could result in the
Company losing its rights under the CMP Agreement.
The Company's IRUs are derivative of the grantor's interest in the real
property on which the NEON system is located. To the extent that the grantor
has a limited easement in such property, the IRUs granted to the Company may be
alleged to be insufficient for the Company's uses. Certain landowners have
asserted claims against the Company on this basis, and, to date, in one such
case, rather than electing to contest the landowner's interpretation of the
scope of the easement, the Company has made a payment to such landowner to
acquire a ROW meeting the Company's requirements. The Company believes that the
easements granted by a substantial number of landowners to grantors of the
Company's IRUs are similar in scope to those with respect to which claims have
been asserted, and there can be no assurance that additional claims will not be
made in the future. Although litigation has not commenced in connection with
any of these claims, there can be no assurance that litigation will not
commence in the future. In the event that a substantial number of landowners
makes similar claims in the future and the Company is required to compensate
such landowners for the use of their property for the NEON system or seek
alternative routes for portions of the NEON system so affected, the Company's
business, financial condition and results of operations would be materially
adversely affected.
14
<PAGE>
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, certain of the Company's construction efforts are constrained by
the ability of NU and CMP to de-energize segments of their transmission and
distribution facilities in order to permit construction crews to work safely.
The Company has experienced construction delays in the past as a result of the
inability to timely de-energize certain segments and may experience such delays
in the future.
The NU Agreements may be terminated under certain circumstances, including
the Company's failure to complete NUNet (as defined below under "Business--NU
Agreements") by September 1999, to maintain all necessary government permits,
licenses, franchises and approvals or its failure to pay amounts when due. In
addition, the CMP Agreement may be terminated by CMP under certain
circumstances, including the Company's failure to pay fees provided therein.
The termination of either the NU Agreements or the CMP Agreement would result
in the Company's loss of its ROWs under such agreements and would have a
material adverse effect on the Company's business, financial condition and
results of operations.
Some of the agreements that the Company enters into to construct, operate
and install the NEON system may be nonexclusive, short-term or revocable at
will, and there can be no assurance that the Company will have continued access
to existing rights-of-way after their expiration or termination. If any of
these agreements were terminated as a result of among other things a default by
the Company of its obligations thereunder including failure to maintain any
necessary governmental approvals or could not be renewed on commercially
reasonable terms and the Company lost its rights in the fiber optic cable or
abandoned portions of its NEON system, such actions would impair the operation
of the NEON system. See "Business--Right-of-Way Agreements."
Competition
The telecommunications industry is highly competitive. The Company faces
substantial competition from ILECs, which currently dominate their local
telecommunications markets, and CLECs, most of which have greater financial and
other resources than the Company. In addition to ILECs and CLECs, potential
competitors capable of offering services similar to those offered by the
Company include IXCs, other facilities-based communications service providers,
cable television companies, electric utilities, microwave carriers, satellite
carriers, wireless telephone system operators and end-users with private
communications networks. There can be no assurance that such entities will not
compete with the Company or that such competition would not have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Business--Competition."
The Company is currently aware of communications carriers that own or
lease fiber optic networks in New England (such as AT&T, MCI, Sprint, Bell
Atlantic, SNET, WorldCom and Teleport) and of other carriers (such as IXC
Communications, Qwest Communications International, Metromedia Fiber Network,
Level 3 Communications and RCN) who are planning to own or lease additional
networks which, if constructed, may employ advanced technology comparable to
that of the NEON system.
NU and CMP each own or have an IRU in certain fibers in the cable that
includes the NEON system, which permit NU and CMP to compete directly with the
Company in the future if they are not using these fibers for their own
corporate requirements. See "Business--Right-of-Way Agreements." In addition
the Company's ROWs are nonexclusive in that other service providers (including
the utilities themselves) could install competing networks using the same ROWs.
In the future, the Company may be subject to more intense competition due
to the development of new technologies, an increased supply of domestic and
international transmission capacity, the consolidation in the industry among
local and long distance service providers and the effects of deregulation
resulting from the Telecommunications Act of 1996. The introduction of new
products or emergence of new technologies may reduce the cost or increase the
supply of certain services similar to those provided by the Company. The
Company cannot predict which of many possible future product and service
offerings will be crucial to maintain its competitive position or what
expenditures will be required to develop profitably and provide such products
and services.
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Regulatory Risks
Regulation of the telecommunications industry is changing rapidly.
Existing and future federal, state and local governmental regulations will
greatly influence the viability of the Company. Consequently, undesirable
regulatory changes could adversely affect the Company's business, financial
conditions and results of operations. For instance, while the Company does not
believe that its fiber offerings, as proposed, are subject to common carrier
regulation by the Federal Communications Commission ("FCC") or under the common
carrier provisions of the Communications Act of 1934, as amended (the
"Communications Act"), except with respect to its provision of
telecommunications services on a common carrier basis offered through its
subsidiaries in New York and Connecticut, the Company cannot predict the future
regulatory status of its business. The FCC has recognized a class of private,
non-common carriers whose practice it is to make individualized decisions on
what terms and with whom to deal. These carriers may be subject to FCC
jurisdiction but are not currently extensively regulated. Such private carriers
include entities providing "telecommunications" for a fee as defined in the
1996 Act, which may include certain of the Company's offerings. In the event
that the Company becomes subject to the FCC's jurisdiction, it will be required
to comply with a number of regulatory requirements, including, but not limited
to rate regulation, reporting requirements, special payments, including
universal service assessments and access charges, and required service
offerings. Compliance with these regulatory requirements may impose substantial
administrative burdens on the Company. In addition, ILECs, CLECs and IXCs are
subject to various federal telecommunications laws. Accordingly, changes in
federal telecommunications law may affect the Company's business by virtue of
the inter-relationships that exist among the Company and many of these
regulated telecommunications entities. It is difficult for the Company to
forecast at this time how these changes will affect the Company in light of the
complex interrelationships that exist in the industry and the different levels
of regulation.
The Company is subject to state regulation, which can vary substantially
from state to state. The Company's subsidiaries in New York and Connecticut
have petitioned to provide telecommunications services on a certificated common
carrier basis. Therefore, such subsidiaries may be subject to the obligations
that applicable law places on all similarly certificated common carriers as
described above and elsewhere in this Prospectus, including: the filing of
tariffs, state regulation of certain service offerings and pricing,
requirements for interconnection with and resale to other carriers, payment of
regulatory fees and assessments, and reporting requirements. See
"Business--Regulation." At present, the Company does not anticipate that the
costs of compliance with these regulatory requirements, or any of the
regulatory requirements of other states to which it might become subject, will
have a material adverse effect on its operations, and expects its direct
competitors to be subject to similar regulatory requirements to the extent they
operate within these states. In some jurisdictions, the Company's pricing
flexibility for intrastate services may be limited because of regulation,
although the Company's direct competitors are expected to be subject to similar
restrictions.
For a more detailed discussion of the regulatory environment in which the
Company conducts its business, see "Business--Regulation."
Dependence on Third-Party Contractors
The Company has contracted to NU and CMP substantially all of the
engineering, routine maintenance and construction supervision activities
associated with the construction of that portion of the NEON system located on
NU and CMP properties and the Company has contracted to various third party
contractors, as well as CMP, the construction of the NEON system. As a result,
the Company may have less control over the timeliness and quality of the work
performed by such parties than if such work were to be performed by the
Company's own employees. The failure of NU, CMP or such contractors to complete
these activities in a timely manner, within anticipated budgets and in
accordance with the Company's quality standards and performance criteria, could
have a material adverse effect upon the Company's business, financial condition
and results of operations. In addition, as a result of their activities on
behalf of the Company, NU, CMP and such contractors may from time to time have
access to certain proprietary information about the Company. The Company's
agreements with NU, CMP and such contractors include provisions protecting the
confidentiality of such proprietary information.
Rapid Technological Changes
The telecommunications industry is subject to rapid and significant
changes in technology. For instance, recent technological advances permit
substantial increases in transmission capacity of both new and existing fiber,
and the introduction of new products or emergence of new technologies may
reduce the cost or increase the supply
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of certain services similar to those provided by the Company. While the Company
believes that, for the foreseeable future, technological changes will neither
materially affect the continued use of fiber optic cable nor materially hinder
the Company's ability to acquire necessary technologies, the effect of
technological changes on the Company's operations cannot be predicted and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
Dependence on Suppliers
The Company is dependent upon third-party suppliers for a number of
components and parts used in the NEON system. In particular, the Company
purchases cable that includes fiber optic glass manufactured by Lucent
Technologies, Inc. ("Lucent"). The Company believes that there are alternative
suppliers or alternative components for all of the components contained in the
NEON system. However, any delay or extended interruption in the supply of any
of the key components, changes in the pricing arrangements with its suppliers
and manufacturers or delay in transitioning a replacement supplier's product
into the NEON system could disrupt the Company's operations and, if such
disruption continued for an extended period of time, have a material adverse
effect on the Company's business, financial condition and results of
operations.
Risk of Continued Decline in Prices
Although the Company believes that, in the last several years, increasing
demand for fiber optic transmission capacity has resulted in a shortage of
capacity and slowed a decline in prices, the Company anticipates that prices
for its services to carriers specifically, and interstate services in general,
will continue to decline over the next several years due primarily to (i) price
competition as various network providers continue to install networks that
compete with the NEON system, (ii) technological advances that permit
substantial increases in the transmission capacity of both new and existing
fiber and (iii) strategic alliances or similar transactions, such as long
distance capacity purchasing alliances among certain ILECs, that increase
customer purchasing power. Such price decreases, without offsetting decreases
in the Company's cost of services or increases in demand for the Company's
services, could have a material adverse effect on the Company's business,
financial condition and results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Limited Nature of Company's Services
The Company is a facilities-based provider of technologically advanced,
high-bandwidth, fiber optic communications infrastructure, and does not control
whether a customer uses such bandwidth for voice, data or video signals. The
Company is not currently engaged in the transmission of voice, data or video
services and does not provide switched voice and data services. Accordingly, at
the present time, the Company, unlike some telecommunications companies,
receives no revenues from providing such services, and instead derives and
expects to continue to derive substantially all of its revenues from the
leasing of fiber optic capacity to its customers, many of whom transmit voice,
data or video information or provide switched voice and data services. The
limited nature of the Company's current services could limit potential revenues
and result in the Company having lower revenues than competitors which provide
a wider array of services. See "Business--Customers" and "--Competition."
Dependence Upon Network Infrastructure; Risk of System Failure
The Company's success in marketing its services to its customers requires
that the Company provide competitive reliability, capacity and security via its
network. The Company's network and the infrastructures upon which it depends
are subject to physical damage, power loss, capacity limitations, software
defects, breaches of security and other disruptions beyond the control of the
Company that may cause interruptions in service or reduced capacity for
customers, any of which could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's
agreements with its customers typically provide for the payment of outage
related credits (a predetermined reduction or offset against the Company's
lease rate when a customer's leased facility is non-operational or otherwise
does not meet certain operating parameters) or damages in the event of a
disruption in service, which credits or damages could be substantial and could
have a material adverse effect on the Company's business, financial condition
and results of operations.
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Dependence on Key Personnel
The Company's future performance will depend to a significant extent upon
the efforts and abilities of its senior executives. The loss of service of one
or more of these persons could have an adverse effect on the Company's
business. There can be no assurance that the Company will be able to attract
and retain qualified executives to achieve its business objectives. See
"Management."
High Leverage; Ability to Service Indebtedness
Upon completion of the Offerings, the Company will be highly leveraged. As
of March 31, 1998, after giving effect to the Offerings and the application of
the estimated net proceeds therefrom, the Company would have had outstanding
approximately $165.4 million of indebtedness (consisting of the Notes and
$437,042 of other indebtedness) and the Company's ratio of total debt to total
capitalization would have been 60.29%. [D]Although the Indenture will contain
certain limitations on the ability of the Company and its subsidiaries to incur
additional Indebtedness, under certain circumstances such additional
Indebtedness could be substantial and such limitations generally do not
restrict the Company and its subsidiaries from incurring liabilities that do
not constitute Indebtedness.
The Company's high degree of leverage could have adverse consequences to
the holders of the Company's securities. Such consequences may include, among
other things: (i) commencing on , 2002, a substantial portion of the
Company's cash flow will be dedicated to the payment of the Company's interest
expense with respect to the Notes and such cash flow may be insufficient to
meet its payment obligations on the Notes in addition to paying other
obligations of the Company as they become due; (ii) the Company's ability to
obtain any necessary financing in the future for completion of the NEON system
or other purposes may be impaired; (iii) certain of the future borrowings by
the Company may be at variable rates of interest that could cause the Company
to be vulnerable to increases in interest rates; (iv) the Company may be more
leveraged than its competitors, which may place the Company at a competitive
disadvantage; and (v) the Company may be vulnerable to a downturn in its
business or the economy generally or to delays in or increases in the cost of
constructing the NEON system.
For the year ended December 31, 1997 and the three months ended March 31,
1998, after giving effect to the Debt Offering (as if it had occurred at the
beginning of the periods) and the application of the net proceeds therefrom,
the Company's earnings would have been insufficient to cover fixed charges by
approximately $21,796,279 and $5,486,053 respectively. Although the first seven
interest payments on the Notes will be paid from the [D] Pledge Account [E]
U.S. government obligations (and interest and principal payments thereon) to be
purchased by the Company upon consummation of the Offerings, thereafter, the
Notes will require annual cash interest payments of $ million, and the Notes
will mature on , 2008. The Company's ability to pay principal and interest
on the Notes and any additional indebtedness it may incur after the Offerings
will depend upon its ability to complete and operate the NEON system and its
future operating performance, which will be affected by prevailing economic
conditions and financial, business and other factors, many of which are beyond
its control. There can be no assurance that the NEON system will be completed
on time or on budget or that the Company will be able to generate sufficient
cash flow to pay its indebtedness and its other obligations as they become due.
If the Company is unable to service its indebtedness, the Company will be
forced to take actions such as reducing or delaying acquisitions or capital
expenditures, selling assets, restructuring or refinancing its indebtedness or
seeking additional equity capital. There is no assurance that any of these
remedies could be effected on satisfactory terms, if at all, including,
whether, and on what terms, the Company could refinance its indebtedness or
raise equity capital.
The Indenture imposes and will impose significant operating and financial
restrictions on the Company and its present and future subsidiaries. These
restrictions affect, and in certain cases significantly limit or prohibit,
among other things, the ability of the Company and its subsidiaries to incur
certain indebtedness, pay dividends and make certain other restricted payments,
create liens, issue and sell capital stock of subsidiaries, guarantee certain
indebtedness, sell assets, or consolidate, merge or transfer all or
substantially all of their assets. There can be no assurance that such
covenants will not adversely affect the Company's ability to finance its future
operations or capital needs or to engage in attractive business opportunities.
[D] Ranking of the Notes
The indebtedness evidenced by the Notes will be senior unsecured (except
to the extent of the Pledge Account and the Pledged Securities) obligations of
the Company. The Notes will rank senior in right of payment to all subordinated
indebtedness of the Company and will rank pari passu in right of payment with
all existing and future indebtedness
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of the Company that is not by its terms subordinated in right and priority to
the Notes. As of March 31, 1998, after giving effect to the Offerings and the
application of the net proceeds therefrom, the Company would have had
outstanding approximately $165.4 million of senior indebtedness (consisting of
the Notes and $437,042 of other indebtedness). The Notes will be effectively
subordinated to any future secured indebtedness of the Company to the extent of
the value of the assets securing such indebtedness. The Indenture will permit
the Company or its subsidiaries to incur additional secured indebtedness,
including purchase money indebtedness. See "Description of the Notes." In the
event of a bankruptcy, liquidation, dissolution, restructuring or similar
proceeding with respect to the Company, such assets will be available to
satisfy obligations of any such secured debt before any payment can be made on
the Notes. In addition, to the extent such assets would not satisfy in full any
such secured indebtedness, the holders of such indebtedness will have a claim
for any shortfall that is pari passu (or effectively senior if the indebtedness
were issued by the subsidiaries) with the Notes. Accordingly, other than the
Pledge Account and the Pledged Securities (if such are still in existence),
there may only be a limited amount of assets available to satisfy any claims of
the holders of the Notes upon an acceleration of the Notes.
The Notes will also be structurally subordinated to all existing and
future indebtedness of any subsidiary of the Company. Claims of creditors of
such subsidiaries, including trade creditors, secured creditors and creditors
holding indebtedness and guarantees issued by such subsidiaries, and claims of
preferred stockholders (if any) of such subsidiaries, generally will have
priority with respect to the assets and earnings of such subsidiaries over the
claims of creditors of the Company, including holders of the Notes. As of March
31, 1998, on a pro forma as adjusted basis after giving effect to the Offerings
and the application of the net proceeds therefrom and to the Reorganization,
the total liabilities of the Company's subsidiaries were approximately
$289,000, including trade payables.
Concentration of Stock Ownership; Potential Conflicts of Interest
After consummation of the Offerings, CMP and NU will beneficially own or
control, in the aggregate, approximately 61.9% of the outstanding Common Stock.
As a result of their stock ownership, these stockholders acting together will
be able to continue to elect the members of the Board of Directors and decide
all matters requiring stockholder approval. See [E]"Principal and Selling
Stockholders" [D]"Principal Stockholders."
The Company has entered into various agreements with CMP and NU, including
certain existing ROW agreements for the engineering, design and construction
supervision of the NEON system. Certain conflicts may arise between the
interests of CMP and NU and other securityholders of the Company. Pursuant to
such agreements, CMP and NU may have monetary claims from time to time against
the Company. See "Business--Right-of-Way Agreements" and "Certain
Transactions."
CMP and NU have entered into a Principal Stockholders Agreement dated May
28, 1998, whereby each such party agrees that, following the completion of the
Offerings, it will not permit or cause the Company to (i) merge or consolidate,
liquidate or dissolve, change its form of organization or sell, lease, exchange
or transfer all or substantially all of its assets; or (ii) seek bankruptcy
protection or certain other protection from creditors, unless both parties
agree. After the closing of the Offerings, this agreement will remain in effect
for so long as (a) NU owns at least 10% of the outstanding Common Stock of the
Company, fully diluted and (b) the aggregate Common Stock of the Company owned
by NU and CMP is at least 331/3% of the outstanding Common Stock of the
Company, fully diluted. The Company expects that each of CMP and NU will be
major creditors of the Company under their existing ROW agreements. See
"Business--Right-of-Way Agreements" and "Description of Capital
Stock--Shareholders Agreement."
The Company has agreed with Mode 1, an affiliate of NU, that for so long
as NU owns at least 10% of the Company's equity securities, the Company will
not take any action that would cause Mode 1 to fail to qualify as an "exempt
telecommunications carrier" under the Public Utility Holding Company Act of
1935, as amended, and as further amended by the Telecommunications Act of 1996.
[E] No Prior Public Market; Possible Volatility of Stock Price
Prior to the Equity Offering, there has been no public market for the
Common Stock. The initial public offering price of the Common Stock will be
determined by negotiations between the Company and the Representatives of the
Underwriters and may not be indicative of the market price for the Common Stock
in the future. See "Underwriting"
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for a discussion of the factors to be considered in determining the initial
public offering price. There can be no assurance that an active trading market
for the Common Stock will develop or be sustained after the Equity Offering. If
a trading market develops, the market price of the Common Stock may fluctuate
widely as a result of various factors, such as period-to-period fluctuations in
the Company's operating results, sales of Common Stock by principal
stockholders, developments in the industry, competitive factors, regulatory
developments, economic and other external factors, general market conditions
and market conditions affecting stocks of telecommunications companies in
particular. The stock market in general, and the stocks of telecommunications
companies in particular, have in the past experienced extreme volatility in
trading prices and volumes that has often been unrelated to operating
performance. Such market volatility may have a significant adverse affect on
the market price and marketability of the Common Stock. See "Underwriting."
[E] Absence of Dividends
The Company anticipates that all of its earnings in the foreseeable future
will be retained to finance the continued growth and expansion of its business
and has no current intention to pay cash dividends on its Common Stock. The
terms of the Notes will restrict the Company's ability to pay cash dividends on
its Common Stock. See "Dividend Policy."
[E] Shares Eligible for Future Sale
Upon consummation of the Equity Offering, 16,066,335 shares of Common
Stock will be outstanding (16,891,335 shares if the Underwriters'
over-allotment option is exercised in full), of which 5,500,000 shares will be
freely tradeable (6,325,000 shares if the Underwriters' over-allotment option
is exercised in full). Of the 10,566,335 remaining shares, 9,950,780 shares
will be held by CMP, NU or their affiliates who, together with the Company and
its officers and directors, have entered into agreements not to sell, contract
to sell, or otherwise dispose of, any shares of Common Stock without the
consent of Credit Suisse First Boston Corporation for a period of 180 days
after the date of this Prospectus (the "Lock-Up Agreements"). Upon expiration
of the Lock-Up Agreements, such shares will be eligible for sale in the public
markets in accordance with Rule 144 ("Rule 144") promulgated under the
Securities Act of 1933 (the "Securities Act"). Upon consummation of the Equity
Offering, the Company will have outstanding stock options to purchase a total
of 1,705,272 shares of Common Stock, of which options for 284,210 shares will
be exercisable immediately upon consummation of the Equity Offering. The shares
issued upon exercise of these options will be potentially eligible for public
sale 90 days after the date of this Prospectus pursuant to Rule 701 under the
Securities Act. All holders of such options, however, have signed Lock-Up
Agreements. Except as limited by the Lock-Up Agreements and by Rule 144 volume
limitations applicable to affiliates, shares issued upon the exercise of stock
options generally are available for sale in the open market. Future sales of
significant amounts of Common Stock in the public market after the Equity
Offering could adversely affect the prevailing market price of the Common
Stock. See "Shares Eligible for Future Sale."
[E] Immediate and Substantial Dilution
Investors purchasing Common Stock in the Equity Offering will experience
immediate and substantial dilution in the net tangible book value of their
shares. Assuming an initial public offering price of $13.00 per share
(representing the midpoint of the estimated price range), dilution to new
investors would be $9.70 per share. Additional dilution will occur upon
exercise of outstanding stock options. If the Company seeks additional capital
in the future, the issuance of shares or securities convertible into shares of
Common Stock to obtain such capital may lead to further dilution. See
"Dilution."
[E] Antitakeover Effect of Certain Charter Provisions
The Board of Directors has the authority to issue up to 2,000,000 shares
of Preferred Stock and to determine the price, rights, preferences, privileges
and restrictions, including voting rights, of those shares without any further
vote or action by the stockholders. The rights of the holders of Common Stock
may be subject to, and may be adversely affected by, the rights of the holders
of any Preferred Stock that may be issued in the future. The issuance of
Preferred Stock may have the effect of delaying, deferring or preventing a
change of control of the Company without further action by the stockholders and
may adversely affect the voting and other rights of the holders of Common
Stock, which could have an adverse impact on the market price of the Common
Stock. The Company has no present plans to issue shares of Preferred Stock.
Further, certain provisions of the Company's charter documents, including
provisions eliminating the ability of stockholders to take action by written
consent and limiting the ability of stockholders to raise matters at a meeting
of stockholders without giving advance notice, may have the effect of delaying
or preventing changes in control
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or management of the Company, which could have an adverse effect on the market
price of the Company's Common Stock. The Company is subject to the
anti-takeover provision of Section 203 of the Delaware General Corporation Law,
which will prohibit the Company from engaging in a "business combination" with
an "interested stockholder" for a period of three years after the date of the
transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner. The application of
Section 203 also could have the effect of delaying or preventing a change of
control of the Company. See "Description of Capital Stock."
[D] Purchase of Notes Upon Change of Control
Upon a Change of Control, the Company must offer to purchase all
outstanding Notes at 101% of the principal amount thereof, plus accrued and
unpaid interest, if any, to the date of purchase. The source of funds for any
such purchase would be the Company's available cash or cash generated from
other sources. However, there can be no assurance that sufficient funds would
be available at the time of any Change of Control to make any required
purchases of Notes tendered. See "Description of the Notes--Change of Control."
[D] Absence of Trading Market for the Notes
The Notes constitute a new issue of securities, have no established
trading market and may not be widely held. Although the Underwriters have
informed the Company that they currently intend to make a market in the Notes
as permitted by applicable laws and regulations, they are not obligated to do
so and may discontinue market making at any time without notice. The Company
does not intend to list the Notes on any national securities exchange, and
there can be no assurance as to the development of any market or the liquidity
of any market that may develop for the Notes. If such a market does develop,
the price of the Notes may fluctuate and liquidity may be limited. If such a
market does not develop, purchasers may be unable to resell the Notes for an
extended period of time, if at all.
[D] Risks of Investing in Non-Investment Grade Debt
The Notes have not been rated as investment-grade by any rating
institution and it is not expected that the Notes will be so rated. As a
result, holders of the Notes will have the risks associated with an investment
in non-investment grade debt. Historically, the market for non-investment grade
debt has been subject to disruptions that have caused substantial volatility in
the prices of such securities and greatly reduced liquidity for the holders of
such securities. If the Notes are traded, they may trade at a discount from
their initial offering price, depending upon prevailing interest rates, the
market for similar securities, the performance of the Company and certain other
factors. The liquidity of, and trading markets for, the Notes may also be
adversely affected by general declines in the market for non-investment grade
debt. Such declines may adversely affect the liquidity of, and trading markets
for, the Notes, independent of the financial performance of or prospects for
the Company. In addition, certain regulatory restrictions prohibit certain
types of financial institutions from investing in non-investment grade debt,
which may further suppress demand for such securities. There can be no
assurance that the market for the Notes will not be subject to similar
disruptions. Any such disruptions may have an adverse effect on holders of the
Notes.
[D] EQUITY OFFERING
Concurrently with the Debt Offering, the Company and certain selling
stockholders of the Company (the "Selling Stockholders") are offering 5,500,000
shares of Common Stock to the public in the Equity Offering. In addition, as
part of the Equity Offering the Company has granted the underwriters thereof an
option to purchase up to 825,000 additional shares of Common Stock to cover
over-allotments, if any. The closing of the Debt Offering is conditioned upon
the closing of the Equity Offering, and the closing of the Equity Offering is
conditioned upon the closing of the Debt Offering. Such conditions may not be
waived.
[E] DEBT OFFERING
Concurrently with the Equity Offering, the Company is offering $165.0
million aggregate principal amount of its % Senior Notes Due 2008 to the
public in the Debt Offering. Upon the closing of the Debt Offering, the Company
will purchase U.S. government obligations in such amount as will be sufficient,
upon receipt of scheduled interest and principal payments on such securities,
to provide for payment in full of the first seven scheduled interest payments
on the Notes. Such securities will be pledged as security for the benefit of
the holders of the Notes. The indenture under
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which the Notes will be issued will contain certain covenants that, among other
things, will limit (i) the incurrence of additional Indebtedness by the Company
and its Restricted Subsidiaries (as defined), (ii) the payment of dividends and
other restricted payments by the Company and its Restricted Subsidiaries, (iii)
the creation of restrictions on distributions from Restricted Subsidiaries,
(iv) asset sales, (v) transactions with affiliates, (vi) sales or issuances of
Restricted Subsidiary capital stock, (vii) the incurrence of liens and the
entering into of sale/leaseback transactions and (viii) mergers, consolidations
and transfers of assets. The closing of the Equity Offering is conditioned upon
the closing of the Debt Offering, and the closing of the Debt Offering is
conditioned upon the closing of the Equity Offering. Such conditions may not be
waived. See "Description of Certain Indebtedness."
USE OF PROCEEDS
[E] The net proceeds to the Company from the Equity Offering are estimated
to be approximately $47.76 million (approximately $57.73 million if the
Underwriters' over-allotment option is exercised in full), assuming an initial
public offering price of $13.00 per share, the midpoint of the estimated price
range, and after deducting the estimated underwriting discount and offering
expenses. The Company will not receive any of the proceeds from the sale of
shares of Common Stock sold by the Selling Stockholders in the Equity Offering.
The net proceeds to the Company from the Debt Offering are estimated to be
approximately $159.45 million, after deducting the estimated underwriting
discount and offering expenses.
[D] The net proceeds to the Company from the Debt Offering are estimated
to be approximately $159.45 million after deducting the estimated underwriting
discount and offering expenses and the net proceeds to the Company from the
Equity Offering are estimated to be approximately $47.76 million (approximately
$57.73 million if the underwriters' over-allotment option is exercised in
full), assuming an initial public offering price of $13.00 per share and after
deducting the estimated underwriting discount and offering expenses.
Of the net proceeds of the Offerings, estimated to be $207.2 million, the
Company intends to use approximately $65.0 million to purchase U.S. government
obligations in such amount as will be sufficient, upon receipt of scheduled
interest and principal payments on such securities, to provide for payment in
full of the first seven scheduled interest payments due on the Notes,
approximately $90.0 million for capital expenditures in 1998 and 1999
associated with the continued construction and expansion of the NEON system,
approximately $19.4 million (as of June 30, 1998) to repay certain indebtedness
and the balance for working capital and general corporate purposes. Such
indebtedness to be repaid includes approximately $17.9 million (as of June 30,
1998) of principal plus accrued interest under the Company's Construction Loan
Agreement with CMP (the "CMP Loan Agreement") and approximately $1.5 million
(as of June 30, 1998) of principal and prepayment premium plus accrued interest
under the Company's Construction Loan Agreement with Peoples Heritage Savings
Bank (the "Peoples Loan Agreement"). Indebtedness under the CMP Loan Agreement
and the Peoples Loan Agreement bears interest at an annual rate of LIBOR plus
3% and an annual rate of 9.25%, respectively, and matures in 2002 and 2007,
respectively. Among the general corporate purposes for which the Company
intends to use the proceeds of the Offerings are the payment of a bonus of
$500,000 to Mr. Colantonio in recognition of his efforts on behalf of the
Company and payment of a bonus of $500,000 to MaineCom in recognition of the
services provided by Mr. Crabtree, as an employee of MaineCom, to the Company.
See "Management--Executive Compensation." The payment of these amounts is
contingent upon the closing of the Offerings. Pending the foregoing uses, the
net proceeds of the Offerings will be invested in short-term, investment-grade
securities.
[E] DIVIDEND POLICY
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its Common Stock in the foreseeable future. The
payment of dividends is within the discretion of the Company's Board of
Directors and will be dependent upon, among other factors, the Company's
results of operations, financial condition and capital requirements,
restrictions imposed by the Company's financing arrangements and legal
requirements.
The terms of the Notes will restrict the Company's ability to pay cash
dividends on its Common Stock. See "Description of Certain Indebtedness."
22
<PAGE>
[E] DILUTION
At March 31, 1998, after giving effect to the Reorganization and Stock
Split, the Company had a net tangible book value of approximately $10,870,000
or $0.90 per share of Common Stock. Net tangible book value per share
represents the amount of total tangible assets less total liabilities divided
by the number of shares of Common Stock outstanding, after giving effect to the
Preferred Stock Conversion and the Stock Split. After giving effect to the sale
of shares of Common Stock offered by the Company hereby at an assumed initial
public offering price of $13.00 per share (the mid-point of the estimated price
range) and after deducting the estimated underwriting discount and offering
expenses payable by the Company, the pro forma net tangible book value of the
Company as of March 31, 1998 would have been approximately $53,080,000 or $3.30
per share. This represents an immediate increase in net tangible book value of
$2.40 per share to the existing stockholders and an immediate dilution of $9.70
per share to new investors. The following table illustrates this per share
dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price ............................. $ 13.00
Net tangible book value as of March 31, 1998 ..................... $ 0.90
Increase attributable to net proceeds to the
Company of the Equity Offering ................................. 2.40
Pro forma net tangible book value after the Equity Offering ....... 3.30
--------
Dilution to new investors ......................................... $ 9.70
========
</TABLE>
The following table summarizes on a pro forma basis, as of March 31, 1998,
the differences between existing stockholders and new investors in the Equity
Offering (at an assumed initial public offering price of $13.00 per share) with
respect to the number of shares of Common Stock purchased from the Company, the
total consideration paid and the average price per share paid:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------------ --------------------------
Average Price
Number Percent Amount Percent per Share
------------ --------- -------------- --------- --------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)(2) ......... 12,062,735 75.1% $19,378,632 27.1% $ 1.61
New investors(2) .................... 4,000,000 24.9 52,000,000 72.9 13.00
---------- ---- ----------- ---- -------
Total ............................. 16,062,735 100% $71,378,632 100%
========== ==== =========== ====
</TABLE>
- ---------------------
(1) Excludes options outstanding as of March 31, 1998 to purchase 3,600 shares
of Common Stock with an exercise price of $0.10 per share and warrants
outstanding as of March 31, 1998 to purchase 174,367 shares of Common
Stock with a weighted average exercise price of $1.92 per share. See
"Capitalization," "Management--1998 Stock Incentive Plan" and the Notes to
Consolidated Financial Statements of the Company included elsewhere in
this Prospectus. To the extent these options and warrants are exercised,
there will be further dilution to the new investors.
(2) Sales by the Selling Stockholders in the Equity Offering will reduce the
number of shares held by existing stockholders to 10,562,735, or
approximately 65.7% of the total number of shares of Common Stock
outstanding after the Equity Offering (or approximately 62.5% if the
Underwriters over-allotment option is exercised in full), and will
increase the number of shares held by new investors to 5,500,000, or
approximately 34.2% of the total number of shares of Common Stock
outstanding after the Equity Offering (or 6,325,000 shares and
approximately 37.5% if the Underwriters over-allotment option is exercised
in full).
23
<PAGE>
CAPITALIZATION
The following table sets forth the cash and cash equivalents and
capitalization of the Company as of March 31, 1998 (i) on an actual basis, (ii)
on an as adjusted basis after giving effect to the Reorganization and (iii) on
a pro forma as adjusted basis reflecting in addition to the Reorganization, (A)
the conversion of the Company's Preferred Stock into an aggregate of 11,777,910
(post-split) shares of Common Stock upon the closing of the Offerings and (B)
the Offerings and the application of the estimated net proceeds therefrom
(assuming, in the case of the Equity Offering, an initial public offering price
of $13.00 per share).
<TABLE>
<CAPTION>
As of March 31, 1998
---------------------------------------------------
Pro Forma
Actual As Adjusted As Adjusted
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash and cash equivalents .................................... $ 1,232,254 $ 1,232,254 $138,756,381
Restricted cash .............................................. 839,662 839,662 65,000,000
------------ ------------ ------------
Total cash, cash equivalents and restricted cash ......... $ 2,071,916 $ 2,071,916 $203,756,381
============ ============ ============
Short-term borrowings ........................................ $ 1,949,936 $ 1,949,936 $ 399,401
Note payable to related party ................................ 3,975,000 3,975,000 --
Long-term debt (less current portion) ........................ 37,641 37,641 37,641
% Senior Notes Due 2008 .................................... -- -- 165,000,000
------------ ------------ ------------
Total debt ............................................... 5,962,577 5,962,577 165,437,042
------------ ------------ ------------
Minority interest (1) ........................................ 5,024,288 -- --
------------ ------------ ------------
CMP Warrant (1)(4) ........................................... 532,836 -- --
Stockholders' equity:
Preferred stock (no shares authorized, issued or
outstanding, actual; 2,000,000 shares authorized
and no shares issued or outstanding, as adjusted
and pro forma as adjusted) ................................ -- -- --
Series A convertible preferred stock (200,000 and
277,960 shares authorized and 78,324 and
277,960 shares issued and outstanding, actual and
as adjusted, respectively) (2) ............................ 783 2,779 --
Series B convertible preferred stock (4,500,000 and
4,498,371 shares authorized and 962,734 and
4,433,204 issued and outstanding, actual and as
adjusted, respectively) (1) ............................... 9,627 44,332 --
Common stock (4,000,000, 30,000,000 and
30,000,000 shares authorized and 284,828,
284,828 and 16,062,735 shares issued and
outstanding, actual, as adjusted and pro forma
as adjusted, respectively) (3) ............................ 2,848 2,848 160,627
Warrants .................................................... 8,595 8,595 8,595
Additional paid-in capital (4)(5) ........................... 11,817,216 64,414,271 112,063,603
Accumulated deficit (6) ..................................... (2,817,999) (2,817,999) (4,272,174)
------------ ------------ ------------
Total stockholders' equity ............................... 9,021,070 61,654,826 107,960,651
------------ ------------ ------------
Total capitalization ................................... $ 20,540,771 $ 67,617,403 $273,397,693
============ ============ ============
</TABLE>
- ---------------------
(See footnotes on the following page)
24
<PAGE>
(1) In connection with the Reorganization, the minority interests in the
Company's subsidiaries were exchanged for Series B convertible preferred
stock, resulting in the elimination of any minority interest and an
increase of 3,470,470 shares of Series B convertible preferred stock, of
which 144,172 shares arose from CMP's exercise of a warrant.
(2) In connection with the Reorganization, the conversion rate on the Series A
convertible preferred stock was reduced to a 1 : 1 ratio and 199,636
additional shares of Series A convertible preferred stock were issued to
adjust for such reduction.
(3) Excludes (i) 3,600 shares of Common Stock issuable upon the exercise of
stock options outstanding as of March 31, 1998 with an exercise price of
$0.10 per share, (ii) an additional 2,436,105 shares of Common Stock
reserved for future issuance under the Company's 1998 Stock Incentive
Plan, and (iii) 174,367 shares of Common Stock issuable upon the exercise
of warrants outstanding as of March 31, 1998 with a weighted average
exercise price of $1.92 per share.
(4) The exercise of the CMP warrant resulted in an increase in additional
paid-in capital of $531,394, which represents the difference between the
actual book value of the warrant and the new par value of Series B
convertible preferred stock arising upon exercise of the warrant.
(5) In connection with the Reorganization, the Company recorded an intangible
asset of $47,076,632 to reflect the Company's acquisition of NU's minority
interest in a subsidiary (NECOM LLC), in accordance with AICPA Accounting
Interpretation 39 to APB Opinion No. 16, Business Combinations (AIN-39).
(6) Pro forma as adjusted reflects the write-off of deferred financing costs of
$1,454,175 related to the extinguishment of debt with a portion of the
proceeds of the Offerings.
25
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The selected consolidated financial and operating data presented below for
each of the years in the three-year period ended December 31, 1997 and as of
December 31, 1996 and 1997 have been derived from the Consolidated Financial
Statements of the Company, which have been audited by Arthur Andersen LLP,
independent public accountants. The selected consolidated financial data for
each of the years in the two-year period ended December 31, 1994 and for each
of the three-month periods ended March 31, 1997 and 1998 and as of December 31,
1993, 1994 and 1995, and March 31, 1998 have been derived from the unaudited
consolidated financial statements of the Company, which have been prepared on
the same basis as the Consolidated Financial Statements of the Company and, in
the opinion of management, reflect all normal recurring adjustments necessary
for a fair presentation of the financial position and results of operations for
such periods and as of such dates. The results for the three-months ended March
31, 1998 are not necessarily indicative of the operating results to be expected
for the entire year. The information set forth below should be read in
conjunction with the discussion under "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus. The balance
sheet data presented below as of December 31, 1997 and March 31, 1998 is also
presented on an as adjusted basis to give effect to the Reorganization and on a
pro forma as adjusted basis to give effect to the Offerings and the application
of the estimated net proceeds therefrom and the Reorganization.
<TABLE>
<CAPTION>
Three Months Ended
Year Ended December 31, March 31,
----------------------------------------------------------------------- ---------------------------
1993 1994 1995 1996 1997(1)(2) 1997 1998(1)(2)
----------- ------------- ------------- --------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenues .................. $287,894 $ 326,581 $ 42,598 $ 13,773 $ 394,704 $ -- $ 151,363
Operating expenses ........ 291,551 589,250 487,159 1,185,595 2,693,037 345,620 774,521
-------- ----------- ----------- ------------- ------------- ----------- -----------
Loss from operations ...... (3,657) (262,669) (444,561) (1,171,822) (2,298,333) (345,620) (623,158)
Interest income (expense),
net ....................... -- 59,959 (42,401) 125,838 (2,893) 56,638 (61,494)
Minority interest(3) ...... -- -- -- 353,222 1,080,200 137,620 314,498
Provision for (benefit
from) income taxes ........ -- -- -- 16,000 (261,000) (33,000) (77,000)
-------- ----------- ----------- ------------- ------------- ----------- -----------
Net loss .................. (3,657) (202,710) (486,962) (708,762) (960,026) (118,362) (293,154)
Basic and diluted
loss per share ............ (6.90) (2.48) (1.71) (2.49) (3.37) (0.42) (1.03)
Basic and diluted
weighted average
shares outstanding ........ 530 81,745 284,578 284,735 284,828 284,828 284,828
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
--------------------------------------------------------------------------
1997
----------------
1993 1994 1995 1996 Actual
------------ ------------- ---------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital .............. $ (9,165) $ (29,141) $ (4,526,664) $3,209,234 $ (3,463,011)
Total assets ................. 63,612 165,081 4,774,827 16,369,663 23,461,000
Note payable to related party 5,000 -- -- -- 2,100,000
Long-term debt, including
current maturities ........... -- 348,198 932,713 927,021 2,118,905
Total liabilities ............ 23,213 478,332 5,574,589 2,332,963 8,275,154
Minority interest(3) ......... -- -- -- 6,312,554 5,338,786
CMP Warrant .................. -- -- -- -- 532,836
Stockholders' equity (deficit) 40,399 (313,251) (799,762) 7,724,146 9,314,224
<CAPTION>
As of December 31, As of March 31, 1998
-------------------------------- ---------------------------------
1997
--------------------------------
Pro Forma Pro Forma
As As As As
Adjusted(4) Adjusted(5) Actual Adjusted(4) Adjusted(5)
---------------- --------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Working capital .............. $ (3,463,011) $137,466,912 $ (5,500,383) $ (5,500,383) $133,574,279
Total assets ................. 70,223,134 278,065,556 26,183,672 73,260,304 279,040,594
Note payable to related party 2,100,000 -- 3,975,000 3,975,000 --
Long-term debt, including
current maturities ........... 2,118,905 165,543,133 1,987,577 1,987,577 165,437,042
Total liabilities ............ 8,275,154 169,599,382 11,605,478 11,605,478 171,079,943
Minority interest(3) ......... -- -- 5,024,288 -- --
CMP Warrant .................. -- -- 532,836 -- --
Stockholders' equity (deficit) 61,947,980 108,466,174 9,021,070 61,654,826 107,960,651
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------------------
1993 1994 1995 1996 1997(1)(2)
------- -------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
Other Financial Data:
Cash provided by (used in) operating
activities .................................. N/A $(194,091) $ (413,196) $ 37,460 $ (553,427)
Cash provided by (used in) investing
activities .................................. N/A 19,591 (4,619,702) (6,738,898) (8,798,251)
Cash provided by financing activities ........ N/A 258,374 4,943,300 11,565,481 5,585,205
Net increase (decrease) in cash and cash
equivalents ................................. N/A 83,874 (89,598) 4,864,043 (3,766,473)
EBITDA(6) .................................... N/A (250,032) (420,386) (794,432) (665,271)
Capital expenditures ......................... 1,579 26,179 4,596,901 6,711,082 5,609,459
Ratio of deficiency to fixed charges(2)(7) ... -- (6.43)x (2.54)x (4.50)x (10.11)x
<CAPTION>
Three Months Ended
March 31,
--------------------------------
1997 1998(1)(2)
---------------- ---------------
<S> <C> <C>
Other Financial Data:
Cash provided by (used in) operating
activities .................................. $(1,027,065) $ 657,881
Cash provided by (used in) investing
activities .................................. (4,037,187) (3,540,475)
Cash provided by financing activities ........ 3,657,456 3,016,396
Net increase (decrease) in cash and cash
equivalents ................................. (1,406,796) 133,802
EBITDA(6) .................................... (178,121) (6,647)
Capital expenditures ......................... 3,978,512 3,297,062
Ratio of deficiency to fixed charges(2)(7) ... (9.46)x (7.53)x
</TABLE>
- ---------------------
(See footnotes on following page)
26
<PAGE>
(1) If the Reorganization had occurred as of January 1, 1997, the as adjusted
impact on the Company's Statement of Operations for the year ended
December 31, 1997 would reflect depreciation and amortization of
$2,111,600, a net loss of $3,598,964 and a loss per share of $12.64, after
giving effect to the Stock Split. The pro forma impact on the Company's
Statement of Operations for the quarter ended March 31, 1998 would reflect
depreciation and amortization of $694,318, a net loss of $999,957 and a
loss per share of $3.51, after giving effect to the Stock Split.
(2) On a pro forma as adjusted basis giving effect to the Reorganization and to
the Offerings (assuming a 121/2% per annum interest rate on the Notes) and
the application of the net proceeds therefrom, (A) net loss and basic and
diluted loss per share for 1997, (i) before the extraordinary charge,
would have been $21,397,636 and $1.33, respectively, reflecting additional
interest expense of $20,483,189 from the issuance of the Notes offset by
interest income of $3,250,000 from the reinvestment of a portion of the
net proceeds of the Offerings (assuming a 5% per annum interest rate on
the $65,000,000 of restricted cash to be held in escrow), and (ii) after
the extraordinary charge (which reflects the write-off of deferred
financing costs of $1,241,806 related to the extinguishment of debt),
would have been $22,639,442 and $1.41, respectively, and (B) net loss and
basic and diluted loss per share for the first quarter of 1998, (i) before
the extraordinary charge, would have been $5,390,641 and $0.34,
respectively, reflecting additional interest expense of $5,064,434 from
the issuance of the Notes offset by interest income of $812,500 from the
reinvestment of a portion of the net proceeds of the Offerings (assuming a
5% per annum interest rate on the $65,000,000 of restricted cash to be
held in escrow), and (ii) after the extraordinary charge (which reflects
the write-off of deferred financing costs of $1,454,175 related to the
extinguishment of debt), would have been $6,844,816 and $0.43,
respectively.
(3) Minority interest consists of the interests of members other than CMP in
FiveCom LLC, NECOM LLC and FiveCom of Maine LLC. See
"Business--Reorganization." Changes in minority interest reflect such
other members' capital adjusted by their portion of the net loss.
(4) Adjusted to give effect to the Reorganization. In connection with the
Reorganization, the Company recorded an intangible asset to reflect the
Company's acquisition of NU's minority interest in a subsidiary (NECOM
LLC, in accordance with AICPA Accounting Interpretation 39 to APB Opinion
No. 16, Business Combinations (AIN-39). If the intangible asset were
recorded at December 31, 1997, the amount recorded would be $46,762,134.
If the intangible asset were recorded at March 31, 1998, the amount
recorded would be $47,076,632.
(5) Pro forma as adjusted to give effect to (i) the Offerings and the
application of the estimated net proceeds therefrom, assuming an initial
public offering price of $13.00 per share, the midpoint of the estimated
price range, and after deducting the estimated underwriting discount and
offering expenses payable by the Company and the write-off of unamortized
financing costs associated with debt extinguished and (ii) the
Reorganization. See Note 4 above.
(6) EBITDA is defined herein as net loss before interest income (expense), net,
loan commitment fees, provision for (benefit from) income taxes,
depreciation and amortization and is presented because it is commonly used
by certain investors and analysts to analyze and compare a company's
operating performance and to determine a company's ability to incur and
service debt. EBITDA should not be considered in isolation from, or as a
substitute for, net income, cash flow from operating activities or other
consolidated income or cash flow statement data prepared in accordance
with generally accepted accounting principles or as a measure of
profitability or liquidity.
(7) For purposes of calculating the ratio of earnings (deficiency) to fixed
charges: (i) earnings consist of loss before income tax benefit, plus
fixed charges, excluding capitalized interest, and (ii) fixed charges
consist of interest expenses and capitalized interest, plus amortization
of deferred financing costs. For the years ended December 31, 1993, 1994,
1995, 1996 and 1997 and for the three months ended March 31, 1997 and
1998, the Company's earnings were insufficient to cover fixed charges by
approximately $3,657, $202,710, $601,400, $1,474,524, $3,432,869, $416,419
and $995,487, respectively. For the year ended December 31, 1997 and for
the three months ended March 31, 1998, on a pro forma as adjusted basis,
the Company's earnings would have been insufficient to cover fixed charges
by approximately $21,796,279 and $5,486,053, respectively. See Note 2
above.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere in this Prospectus. The discussion contains certain trend analysis
and other statements of a forward-looking nature relating to future events or
the future financial performance of the Company. Prospective investors are
cautioned that such statements are only projections and that actual results or
events may differ materially. In evaluating such statements, prospective
investors should consider the risk factors identified in this Prospectus,
particularly the matters set forth under the caption "Risk Factors," which
could cause actual results to differ materially from those indicated by such
forward-looking statements.
Overview
The Company is a facilities-based provider of technologically advanced,
high bandwidth, fiber optic transmission capacity for communications carriers
on local loop, inter-city and interstate facilities. The Company is currently
expanding its fiber optic network, the NEON system, to encompass over 900 route
miles, or more than 60,000 fiber miles, in New York and New England (the
"Northeast").
The Company has already completed construction of approximately 295 route
miles, or approximately 19,500 fiber miles, of the NEON system as of June 30,
1998, and currently operates fiber optic routes from Hartford, Connecticut to
Springfield, Massachusetts and from Nashua, New Hampshire to Portland, Maine.
The Company is currently engineering, constructing or acquiring additional
routes in New York, Connecticut, Massachusetts, Rhode Island and New Hampshire
to create a continuous fiber optic link between New York City and Portland,
Maine with access into and around Boston, Massachusetts and numerous other
major service areas in the Northeast. These additional routes are expected to
be substantially completed in 1998 and will add approximately 500 route miles,
or approximately 23,300 fiber miles, to the NEON system. The Company is also
planning to complete further expansion routes in 1999 into and around New York
City and other metropolitan areas along the NEON system. The completion of
routes currently planned will enable the NEON system to connect more than 540
cities and towns in six states and pass more than 200 points-of-presence
("POPs"), tandem switches and central offices, which the Company believes serve
over 18 million people and over 470,000 businesses.
The Company generates revenue primarily through the leasing of capacity on
its network and also through the provision of services consisting principally
of design and installation work. The Company generally receives fixed monthly
payments from its customers for the leasing of capacity on its network and
recognizes revenues ratably over the term of the applicable customer agreement.
Other service revenues are recognized as services are performed.
Prior to the Reorganization, the Company held interests in its
majority-owned or controlled subsidiaries, FiveCom LLC, FiveCom of Maine LLC
and NECOM LLC. See "Business--Reorganization." The interests of the minority
owners of these subsidiaries are reflected on the Company's balance sheet as
minority interest in consolidated subsidiaries. As a result of the
Reorganization, such minority owners became stockholders of the Company, and
the value of the stock of the Company received by them over the tangible book
value of their minority interests was reflected as goodwill.
Prior to the Offerings, the Company was included in CMP's consolidated
federal income tax return pursuant to the terms of a tax-sharing arrangement
entered into in 1996. The benefit from income taxes represents refundable
income taxes from CMP as a result of this tax sharing arrangement. The Company
has no net operating loss carryforwards as a result of this tax sharing
arrangement.
Results Of Operations
The Company did not generate significant revenues until the last half of
1997. Revenues through the second quarter of 1997 consisted primarily of
service fees from MCI. The Company began recognizing revenues under recurring
lease arrangements in the third quarter of 1997.
28
<PAGE>
Three Months Ended March 31, 1998 Compared to the Three Months Ended March 31,
1997
Revenues for the first quarter of 1998 were $151,363, compared to no
revenue in the first quarter of 1997. Revenues in 1998 were generated by
recurring lease services to customers, which commenced during the second half
of 1997.
Total cost of sales for the first quarter of 1998 were $247,386, an
increase of 128% over the $108,358 recorded in the first quarter of 1997. The
increase was associated with right-of-way fees and property taxes incurred in
connection with the expansion of the NEON system.
Selling, general and administrative expenses increased to $225,122 in the
first quarter of 1998 from $204,275 in the first quarter of 1997, a 10%
increase. This increase resulted primarily from higher legal fees.
Depreciation and amortization expense was $302,013 in the first quarter of
1998 as compared to $32,987 in the first quarter of 1997. The increase resulted
from higher depreciation expense, resulting from portions of the NEON system
being placed into service at the end of the second quarter of 1997.
Interest income decreased in the first quarter of 1998 to $30,322 compared
to $56,638 in the first quarter of 1997. The decline was due primarily to a
decrease in cash balances as cash was used to fund construction of the NEON
system.
Interest expense (including the amortization of financing costs) increased
in the first quarter of 1998 to $91,816 from no interest expense in the first
quarter of 1997. The increase resulted from a reduction in the amount of
interest capitalized as the NEON system was placed into service.
Minority interest increased in the first quarter of 1998 to $314,498 from
$137,620 in the first quarter of 1997. The increase resulted in a rise in the
proportionate share of the net losses of subsidiaries.
Benefit from income taxes increased in the first quarter of 1998 to
$77,000 from $33,000 in the first quarter of 1997. The benefit related to
refundable income taxes in 1997 resulting from the Company's tax sharing
arrangement with CMP.
A net loss of $293,154 was recorded in the first quarter of 1998 versus a
net loss of $118,362 in the first quarter of 1997. The increase in net loss is
primarily attributable to the factors discussed above.
Year Ended December 31, 1997 Compared to the Year Ended December 31, 1996
During the years ended December 31, 1997 and 1996, the Company was
continuing in its development stage and did not generate significant revenues
until the last half of 1997, when customers began using the NEON system.
Revenues for 1997 were $394,704 as compared to 1996 revenues of $13,773.
The revenue increase was generated primarily from services to customers during
the last half of 1997 as the NEON system was placed in service and contracts
with carriers commenced.
Cost of sales for 1997 were $1,137,943 as compared to $260,619 in 1996.
The increase resulted primarily from accrued right-of-way fees due to NU under
arrangements for right-of-way extensions and property taxes incurred in
connection with the expansion of the NEON system.
Selling, general and administrative expenses increased to $1,002,232 in
1997 from $900,808 in 1996, an 11% increase. This increase resulted primarily
from increased professional fees and salaries and benefits caused by increased
business activities and growth within the Company.
Depreciation and amortization expense was $552,862 in 1997 as compared to
$24,168 in 1996. The increase resulted from the recognition of depreciation
expense resulting from portions of the NEON system being placed into service at
the end of the second quarter of 1997.
Interest income of $138,918 was recorded in 1997 as compared to $201,473
in 1996. The decline was due primarily to a decrease in cash balances as cash
was used to fund construction of the NEON system.
Interest expense (including the amortization of financing costs) increased
in 1997 to $141,811 from $75,635 in 1996. The increase reflects additional debt
incurred in 1997 to finance construction of the NEON system and to fund
operations of the Company.
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<PAGE>
Minority interest increased in 1997 to $1,080,200 from $353,222 in 1996.
The increase resulted from an increase in the proportionate share of net losses
of subsidiaries.
Provision (benefit) for income taxes decreased in 1997 to $(261,000) from
$16,000 in 1996. The decrease relates to the fact that the Company had
refundable income taxes in 1997 as a result of its tax sharing arrangement with
CMP.
A net loss of $960,026 was recorded in 1997 compared to a net loss of
$708,762 in 1996. The increase in net loss is primarily attributable to the
factors discussed above.
Year Ended December 31, 1996 Compared to the Year Ended December 31, 1995
Revenues decreased to $13,773 for the year ended December 31, 1996 from
$42,598 for the year ended December 31, 1995. The decrease resulted from a
reduction in services provided to the Company's sole customer.
Cost of sales for 1996 were $260,619, an increase of 150% versus $104,223
in 1995. The increase was associated with an increase in right-of-way fees.
Selling, general and administrative expenses increased to $900,808 in 1996
from $358,761 in 1995, a 151% increase. The increase resulted primarily from
higher professional fees, increased start-up activities within the Company and
increased staffing to accommodate the Company's anticipated growth.
Depreciation and amortization amounted to $24,168 for the year ended
December 31, 1996 compared to $24,175 for the year ended December 31, 1995.
Interest income of $201,473 was recorded in 1996 as compared to no
interest income in 1995. The interest income increased in 1996 due primarily to
an increase in cash balances as a result of the timing of cash requirements to
fund construction of the NEON system compared to borrowings.
Interest expense (including the amortization of financing costs) increased
to $75,635 during 1996 from $42,401 during 1995. This increase was a result of
additional debt incurred in 1996 to finance construction of the NEON system and
to fund the operations of the Company.
Minority interest increased in 1996 to $353,222 from no minority interest
in 1995. Minority interest reflects the portion of the net loss related to the
minority interest investment in the Company's subsidiaries in 1996.
A net loss of $708,762 was recorded in 1996 compared to a net loss of
$486,962 in 1995, representing an increase of $221,800. The increase in net
loss is attributable to the factors discussed above.
Liquidity and Capital Resources
The Company has funded the construction of the NEON system and operations
primarily from equity investments from CMP and NU, and borrowings under a $30
million construction loan agreement with CMP, a $1.6 million construction loan
from Peoples Heritage Savings Bank and $1.5 million of lease financing from
Applied Telecommunications Technologies, Inc.
Net cash generated from (used in) operating activities was $657,881 for
the three months ended March 31, 1998, $(553,427) for the year ended December
31, 1997, $37,460 for the year ended December 31, 1996 and $(413,196) for the
year ended December 31, 1995. Net cash generated for the three months ended
March 31, 1998 was due primarily to a payment advanced by Sprint Communications
Company L.P. ("Sprint Communications") for telecommunications network services
and increased vendor payables. The payment by Sprint Communications is an
advance of the first three monthly payments for the portion of the NEON system
leased by Sprint Communications and expected to be placed in service by the
Company and accepted by Sprint Communications in late 1998. Net cash used in
operating activities during 1997 resulted primarily from an increase in
restricted cash. Net cash generated by operating activities during 1996 was
primarily from an increase in vendor payables offset by net operating losses.
Net cash used in operating activities in 1995 resulted primarily from increases
in prepayments and net operating losses.
Cash flow from financing activities was $3,016,396 in the three months
ended March 31, 1998, $5,585,205 in the year ended December 31, 1997,
$11,565,481 in the year ended December 31, 1996 and $4,943,300 in the year
ended December 31, 1995. In the three months ended March 31, 1998, cash flow
from financing activities was generated by borrowings of $1,875,000 under
long-term construction loan agreements. In 1997, cash flow from
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<PAGE>
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 Peoples
Heritage Savings Bank. Upon the repayment of the loan from Peoples Heritage
Savings Bank, the Company will also be required to pay approximately $120,000
to CMP, representing accrued right-of-way fees that were deferred while such
loan was outstanding.
Cash flow used in investing activities totaled $3,540,475, $8,798,251,
$6,738,898 and $4,619,702 in the three month period ended March 31, 1998, and
the one year periods ended December 31, 1997, December 31, 1996 and December
31, 1995, respectively. Cash requirements in all the periods consisted
primarily of the cost of construction to build the NEON system.
The Company anticipates that it will continue to experience negative cash
flow as it expands the NEON system, constructs additional networks and markets
its services to an expanding customer base. The Company anticipates that its
total capital expenditures to build out the NEON system as currently planned
will be approximately $128.0 million. Of this amount, the Company had already
expended approximately $23.0 million as of March 31, 1998. The Company
anticipates remaining total capital expenditures of approximately $51.0 million
in the remainder of 1998 and approximately $54.0 million in 1999 relating to
the build-out of the NEON system. The Company expects to incur additional
capital expenditures to enhance the capacity and penetration of the NEON system
after 1999. Cash provided by operations will not be sufficient to fund the
expansion and development of the NEON system as currently planned and as a
result the Company intends to use cash on hand and the net proceeds of the
Offerings to fund this expansion and development. Management believes that the
net proceeds of the Offerings will be sufficient to fund the substantial
completion of the NEON system as currently planned and its other working
capital needs. The expectations of required future capital expenditures are
based on the Company's current estimates. There can be no assurance that actual
expenditures will not significantly exceed current estimates or that the
Company will not accelerate its capital expenditures program.
The Indenture for the Notes contains certain covenants that, among other
things, limit the ability of the Company and its subsidiaries to incur
indebtedness, pay dividends, prepay subordinated indebtedness, repurchase
capital stock, engage in transactions with stockholders and affiliates, create
liens, sell assets and engage in mergers and consolidations.
Year 2000
The Company has completed an assessment of its exposure to the "Year 2000"
computer problem. Based on this assessment, the Company believes that no
critical software systems of the Company will be impacted by this situation.
Systems currently used by the Company are already "Year 2000" compliant.
Although the Company believes that it is taking appropriate precautions against
disruption of its systems due to the "Year 2000" problem, there can be no
assurance that the Company's suppliers and customers will not be adversely
affected by the "Year 2000" problem. Nonetheless, the Company believes that the
"Year 2000" issue will not have a material impact on the Company's business
operations or financial condition.
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 over 900 route
miles, or more than 60,000 fiber miles, in the Northeast. The Company believes
that the Northeast, which in 1996 represented a $28.7 billion telephony
services market and which the Company believes has one of the highest
population densities and concentrations of businesses, universities, phone
lines, personal computers and television sets in the country, is a region
characterized by significant and growing demand for broadband communications
infrastructure. The Company is constructing the NEON system utilizing primarily
electric utility ROWs, which allow the Company to provide secure fiber optic
capacity at competitive prices with potential access to virtually any urban
location where the local utility provides electrical service. The Company is
using advanced fiber optic technology in the NEON system, including non-zero
dispersion shifted fiber, dense wave division multiplexing optronics and SONET
ring self-healing technology, to allow the Company's carrier customers to meet
the demand for reliable, high-bandwidth voice, data and video transmission
capacity in the Northeast. For example, a pair of fiber optic strands on the
NEON system can transmit up to approximately 10 gigabits of data per second, or
the equivalent of approximately 129,000 simultaneous voice conversations.
The Company has already completed construction of approximately 295 route
miles, or approximately 19,500 fiber miles, of the NEON system as of June 30,
1998, and currently operates fiber optic routes from Hartford, Connecticut to
Springfield, Massachusetts and from Nashua, New Hampshire to Portland, Maine.
The Company is currently engineering, constructing or acquiring additional
routes in New York, Connecticut, Massachusetts, Rhode Island and New Hampshire
to create a continuous fiber optic link between New York City and Portland,
Maine with access into and around Boston, Massachusetts and numerous other
major service areas in the Northeast. These additional routes are expected to
be substantially completed in 1998 and will add approximately 500 route miles,
or approximately 23,300 fiber miles, to the NEON system. The Company is also
planning to complete further expansion routes in 1999 into and around New York
City and other metropolitan areas along the NEON system. The completion of
routes currently planned will enable the NEON system to connect more than 540
cities and towns in six states and pass more than 200 POPs, tandem switches and
central offices, which the Company believes serve over 18 million people and
over 470,000 businesses.
Commencing in September 1994, the Company entered into a series of ROW
agreements with the three principal operating subsidiaries of NU, the largest
electric utility service provider in New England, serving over 1.7 million
customers in Connecticut, Massachusetts and New Hampshire, to build fiber optic
facilities utilizing NU's transmission and distribution infrastructure,
including utility towers, poles, underground ducts and urban conduit systems.
In January 1997, the Company entered into a similar ROW agreement with CMP, the
largest electric utility service provider in Maine, serving over 500,000
customers, to build fiber optic facilities utilizing CMP's transmission and
distribution infrastructure. NU and CMP have also financed substantially all of
the construction and operations of the NEON system to date and currently
beneficially own (prior to the sale of shares in the Equity Offering) 41.4% and
53.5%, respectively, of the Company's capital stock. In July 1998, the Company
entered into agreements with NEES Communications, Inc., a subsidiary of New
England Electric System, and BecoCom, Inc., a subsidiary of Boston Edison, to
extend the NEON system from Hudson, New Hampshire to Boston, Massachusetts
terminating at the Company's POP and Company-targeted carrier centers.
The Company has pursued a strategy of establishing relationships with
electric utilities and building the NEON system utilizing primarily electric
utility ROWs. The Company believes that the use of such ROWs provides
significant advantages, including: (i) inter-city routes and, where permitted
by applicable rights, potentially ubiquitous intra-city coverage in the local
electric utility's urban service territory, including throughout downtown areas
and directly to buildings, (ii) use of existing electric transmission
infrastructures, including towers, poles, ducts and conduits, to achieve
faster, less costly installation, (iii) generally more secure and reliable
routes than other ROWs, (iv) desirable geographically diverse fiber optic
routes for communications carriers and (v) establishment of an extensive ROW
network through negotiation with relatively few parties, rather than with
numerous parties such as municipalities, transit authorities and governmental
agencies.
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The Company intends to target communications carriers as customers, rather
than end-users of telecommunications services. The Company believes that this
strategy allows it to: (i) maximize the Company's opportunities to sell its
capacity regardless of the end-user's selection of a retail provider, (ii)
avoid the significant initial and ongoing investment required in selling,
marketing and providing services to end-users, (iii) attract carrier customers
that may be reluctant to contract with a direct competitor, (iv) generate
revenues quickly from carriers that are easily identifiable and require large
amounts of fiber optic capacity, and (v) lock in relatively secure long-term
revenue streams from customers that are generally more creditworthy than
end-users and are likely to make long-term capital commitments prior to
completion of construction. Carrier customers typically lease fiber optic
capacity under multi-year contracts with which they enhance or constitute their
own communications networks as a cost-effective alternative to constructing
their own infrastructure or purchasing measured services from other carriers
with whom they may compete. Carriers targeted by the Company include a broad
range of communications companies such as ILECs, CLECs, IXCs, paging, cellular
and PCS companies, cable television companies and ISPs. Currently, the Company
has contracts with Brooks Fiber (now owned by WorldCom), Teleport (expected to
be acquired by AT&T), MCI (expected to be acquired by WorldCom), Sprint and
Global NAPs, Inc., a regional ISP.
The Company intends to offer its carrier customers leases of both dark
fiber (fiber optic transmission lines leased without optronics equipment
installed by the Company) and lit fiber (fixed amounts of capacity, such as
DS-3, OC-3, OC-12, OC-48 and higher, on fiber optic transmission lines that use
the Company's optronics equipment) at fixed-cost pricing and over multi-year
lease terms. The Company intends to lease approximately one-third of the
available fibers in the NEON system as dark fiber and one-third as lit fiber.
In addition, the Company plans to reserve approximately one-third of its
available fibers for future services that the Company may provide to capitalize
on future technological advances or changes that the Company expects to occur
in the communications industry.
History of the Company
The Company was incorporated in 1989 in Massachusetts under the name
"FiveCom, Inc." to develop fiber-optic networks in secondary and tertiary
markets in the Northeast. Prior to 1994, the Company was the managing general
partner of a venture which built a CAP network in Springfield, Massachusetts
and also built several small private networks in eastern Massachusetts. In
February 1994, the Company sold its interest in the Springfield network to
Brooks Fiber. Following this sale, the Company expanded its business strategy
to include intra-LATA and long distance facilities using electric utility ROWs
and changed its focus to target carrier customers rather than end users.
Commencing in September 1994, the Company entered into the NU Agreements,
pursuant to which the Company obtained ROWs in the service territories of NU
and its subsidiaries. In 1996, the Company raised approximately $16.7 million
from private placements of equity securities to MaineCom and Mode 1. In January
1997, the Company entered into the CMP Agreement, under which the Company
obtained ROWs in CMP's service territory, and raised an additional $2.6 million
from CMP and other investors in a private equity financing. In 1998 the Company
was reincorporated in Delaware under the name "NorthEast Optic Network, Inc."
See "--Reorganization."
Market Opportunity
The Company believes that there is a significant demand for high-bandwidth
communications services and a limited supply of technologically advanced dark
and lit fiber optic facilities in the Northeast to meet such demand. The
Company believes the needs of communications carriers for advanced,
high-bandwidth voice, data and video transmission capacity will increase over
the next several years due to various factors, including:
Rapid Growth of Communications Traffic. The Company believes that total
telephony service revenue in the United States grew by approximately 9%
annually from 1992 to 1996, to $222.3 billion. Data traffic service grew by 28%
from 1996 to 1997 to $16 billion and is projected to grow by 38% to $22.1
billion in 1998. Much of this growth in data traffic is attributable to
increased Internet traffic and its corresponding demands for increased data
communications bandwidth. For example, the number of Americans using the
Internet is estimated to have grown from fewer than 5 million in 1993 to as
many as 62 million by the end of 1997. The Company believes that the
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<PAGE>
growth of communications traffic in the Northeast will be enhanced by the
favorable demographic characteristics of the region, including the high
population density, income and education levels and number of phone lines per
household. With its advanced fiber optic transmission capacity, the Company
believes that it will be well-positioned to capitalize on this growth.
Capacity Required by New Entrants. Competition and deregulation are
attracting new entrants to the telecommunications market. The
Telecommunications Act of 1996 (the "1996 Act") allows the Regional Bell
Operating Companies ("RBOCs") to enter the long distance business upon meeting
certain competitive conditions and also eliminates certain barriers to entry in
the local exchange market. The 1996 Act also enables other entities, including
entities affiliated with power utilities and ventures between ILECs and cable
television companies, to provide a wider range of telecommunications products
and services. The Company believes that the deregulation of various
telecommunications markets will lead to an increase in the number of
telecommunications providers needing fiber optic transmission capacity as more
parties choose to compete. The Company believes that many carrier customers
will choose to lease fiber optic capacity from facilities providers such as the
Company to enhance or constitute their own communications networks as a
lower-cost alternative to constructing their own infrastructure or purchasing
measured services from other carriers. The Company believes that the NEON
system will provide a cost-effective alternative in a number of communications
industry segments for new market entrants, including ILECs, CLECs, IXCs,
wireless companies, cable companies and ISPs.
Need for Redundant Routing and Geographic Diversity of ROWs. Carriers
require redundant paths throughout their networks to provide reliability in the
event of an equipment failure, break in one of their fiber lines or other
outage. In order to ensure the required redundancy, carriers typically build,
swap or lease capacity along fiber routes that do not share a common point of
potential failure. In the Northeast, however, there are relatively few pre-
assembled ROWs available to support new telecommunications infrastructure and
many of the carriers' routes currently run within the same ROWs. As a result,
many carriers are unable to establish secure redundant routing. In the event
such a common ROW were to be damaged or cut, the consequences would be severe
for the carriers and their customers. This lack of geographic diversity of
fiber optic routes in the Northeast has created a substantial need for network
capacity on new and alternative ROWs, such as those offered by the Company.
Need for Upgrades to Older Communications Networks. Many of the fiber
optic networks currently operated by existing carriers in the Northeast were
constructed prior to 1990, using asynchronous, non-SONET ring architecture and
using earlier generation fiber that cannot optimally deploy dense wave division
multiplexing ("DWDM") optronics for high capacity transmission. The Company
believes that these carriers will need to improve or replace parts of their
networks to complete the SONET ring architecture and also add more high
capacity fiber optic transmission lines to remain competitive in the future. In
addition, the Company believes that, in 1996, approximately 88% of the ILECs
networks were comprised of copper cable. The ILECs will likely need to replace
or upgrade their networks to remain competitive and satisfy their customers'
increasing demand for reliable, high-bandwidth capacity in the coming years.
The Company believes that carriers with older, more limited networks will seek
cost-effective and expedient solutions when faced with the decision to lease,
buy or build fiber optic capacity which could result in increased demand for
the Company's fiber optic capacity.
Accommodation of Multimedia and Other New Applications. The Company
believes that additional transmission capacity and faster response times will
be required to accommodate the needs of multimedia (voice, data and video) and
other potential high-bandwidth applications, including the deployment of
corporate intranets and wide area networks, and the use of the
telecommunications infrastructure for providing cable television and other
entertainment services. In addition, the Company's SONET technology and
high-bandwidth fiber optic capacity support advanced communications
applications, such as Frame Relay, ATM and IP platforms. The Company believes
that these capacity-intensive requirements will create significant demand for
its high quality, high-bandwidth fiber optic capacity.
Carriers' Desire for Low-Cost Local and Regional Transport. The Company
believes that it has an opportunity to fill the needs of the predominant
interstate carriers that are building or have completed their backbone networks
to key LATAs in the Northeast. Generally, an IXC constructs a network with
trunk lines terminating into tandem switches in LATAs. To get from the tandem
switch to the end-user, or vice versa, IXCs typically pay to a LEC access and
egress charges, which often comprise a significant component of the IXCs'
transmission costs. For this reason, IXCs are seeking less costly, alternative
local access within LATAs. One alternative for the IXCs is to carry their
traffic deeper into the region's telecommunications base and to hand off their
traffic at a LEC host switch, which is located much closer to the end-user than
the tandem switch, or to terminate their traffic directly at the
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<PAGE>
customer's premises. Similarly, the Company believes that LECs with inter-LATA
traffic, including the RBOCs when they are permitted to provide long-distance
traffic, desire to minimize the transportation costs imposed by the IXCs and
are seeking lower cost, alternative regional transport. The NEON system, which
will connect into and around numerous cities and towns in the Northeast, will
be able to provide such local and regional transport.
Business Strategy
The Company's objective is to become the preferred facilities-based
provider of fiber optic network capacity in the Northeast. The following are
the key elements of the Company's strategy to achieve this objective:
Leverage Electric Utility ROWs. The Company is pursuing a strategy of
building the NEON system utilizing primarily electric utility ROWs, which the
Company believes provide significant competitive advantages compared to
alternative ROWs in the Northeast such as railbeds and highways. Using electric
utility ROWs, the Company can provide fiber optic connectivity for its carrier
customers to and from virtually any location in the utilities' urban service
territory covered by the NEON system, including throughout downtown areas and
directly to buildings. The Company also intends to utilize existing,
pre-assembled electric utility transmission infrastructure, including towers,
poles, ducts and conduits for faster, less costly installation. In addition,
since electric utility ROWs are generally more secure than other ROWs and
provide valuable geographic route diversity for carriers, the Company can offer
its customers highly reliable primary and redundant network capacity. In
addition to the Company's existing ROW agreements with electric utilities, the
Company is currently pursuing additional agreements with other utilities in
adjoining territories to expand the Company's network footprint and gain access
to further ROWs through negotiation with relatively few parties.
Target Carrier Customers. The Company intends to target communications
carriers as customers, rather than end-users of telecommunications services.
This enables the Company to maximize its opportunities to sell its capacity
regardless of the end-user's selection of a retail provider and to attract
carrier customers that may be reluctant to purchase services from a direct
competitor that serves the same retail market. Carrier customers are also
easily identifiable, which allows the Company to focus its sales and marketing
and customer services efforts and avoid the significant initial and ongoing
investment required to attract and retain numerous retail customers. In
addition, the Company believes that it can generate revenues more quickly from
carrier customers, which are generally more creditworthy than end-users,
require large amounts of fiber optic capacity and are more likely to make
long-term capital commitments prior to completion of construction. To date, the
Company has entered into contracts with five carriers, including Brooks Fiber
(now owned by WorldCom), Teleport (expected to be acquired by AT&T), MCI
(expected to be acquired by WorldCom), Sprint and Global NAPs, Inc., a regional
ISP.
Reduce Construction and Operating Costs. The Company is reducing the
construction and operating costs of the NEON system in order to offer its
customers competitive prices while maximizing its operating margins and return
on investment. The Company is using primarily pre-existing electric utility
transmission and distribution infrastructure, including towers, poles, ducts
and conduits, in the construction of the NEON system, which reduces the need to
obtain local permits, conduct surveys, install conduits and ducts and erect
towers and poles prior to installation. In addition, the Company's electric
utility ROWs typically provide easy and safe access to the fiber cable for low
cost maintenance and repair. The Company is also installing high fiber count
cable in the NEON system--64 to 96 fiber optic strands per cable in the routes
currently under construction and is planning to install cable with up to 144 to
432 fiber optic strands on future installations, depending on the anticipated
demand for a particular route and the Company's ROW agreements. This high fiber
count reduces the Company's fiber cost per mile and provides reserve capacity,
which will reduce the cost of providing additional services in the future. The
Company's newly-constructed network also provides significant operating and
maintenance cost advantages because of the high quality, advanced fiber optic
technology utilized by the NEON system.
Establish a Reliable, Technologically Advanced Network. The Company
believes that the characteristics of its network will allow it to meet its
customers' demands for reliability and high capacity. The Company is
constructing the NEON system utilizing bi-directional, self-healing SONET ring
architecture primarily on electric utility ROWs, which allow for enhanced
physical security and more geographic flexibility than other ROWs. The Company
uses both non-zero dispersion shifted Truewave[RegTM] fiber and conventional
single-mode fiber manufactured by Lucent Technologies Inc., which the Company
believes to be the highest quality fiber optic cable available. The Company is
also planning to use Nortel's DWDM optronics and forward error correction
technology at high optical carrier ("OC") levels that enable the highest
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<PAGE>
commercially available transmission capacity (OC-192) and data integrity level
(10-15 Bit Error Rate). The NEON system can also accommodate advanced
communications applications such as Frame Relay, ATM and Internet Protocol.
Focus on High Demand Northeast Market. The Northeast is one of the most
densely-populated regions of the United States. The Company believes that the
Northeast market, which in 1996 represented a $28.7 billion telephony services
market and which the Company believes has one of the highest population
densities and concentrations of businesses, universities, phone lines, personal
computers and television sets in the country, is a region characterized by
significant and growing demand for broadband communications infrastructure. The
Company believes that the Northeast market is dependent in part upon antiquated
telecommunications infrastructure currently lacking sufficient fiber optic
capacity, route diversity and redundancy. The Company's strategy is to focus on
serving the present and future needs of this market by constructing and
operating a technologically advanced network offering (i) more capacity, (ii)
enhanced capabilities, such as SONET ring architecture and route diversity, and
(iii) near-ubiquitous urban coverage.
Capitalize on Management Experience. The Company's management team
includes individuals with significant experience in the telecommunications and
utility industries which will be important in the build-out and management of
the NEON System. Victor Colantonio, the Company's founder and President, has 25
years of experience in the telecommunications industry. The Company's Chairman
of the Board of Directors and Chief Executive Officer, Richard Crabtree, has 27
years of public utility company experience, including serving as Chief
Financial Officer of CMP. William Fennell, the Company's Chief Financial
Officer and Treasurer, held several positions at GTE Corporation over 16 years
before becoming Chief Financial Officer of Philips Electronics Group of North
America. James Mack, the Company's head of sales, has worked in the
telecommunications industry since 1966 having held various sales positions at
Bell Atlantic and NYNEX. The Company's head of operations, Michael Musen, has
spent 18 years in telecommunications having previously worked at International
Communications Services Corp., a provider of network services.
Leverage Utility Relationships. The Company intends to continue to
leverage its relationships with electric utilities, including NU and CMP, its
principal stockholders. The Company directly benefits from these relationships
for the following reasons: (i) the Company believes relationships with electric
utilities enhance the Company's credibility with large carrier customers and
facilitates new customer contracts with such carriers, (ii) the Company
outsources substantially all of its engineering and design, routine maintenance
and construction supervision requirements to these utilities, thereby
increasing the Company's mission critical preparedness and the reliability of
the Company's network and enhancing the Company's ability to respond to
emergency repair needs, (iii) these utilities have significant resources and
experience in the engineering and construction supervision of large
transmission and distribution networks, and (iv) the Company's experience with
these utilities creates opportunities to establish relationships with other
electric utility companies. The Company is currently in the process of pursuing
additional agreements with other electric utilities.
The NEON System
The NEON system is a technologically-advanced, high-bandwidth, fiber optic
network that the Company is constructing primarily using electric utility ROWs
in the Northeast and that the Company intends to expand into a communications
system serving numerous cities and towns in six states. The Company has
completed construction of approximately 295 route miles, or approximately
19,500 fiber miles, of the NEON system as of June 30, 1998, and currently
operates fiber optic routes from Portland, Maine to Nashua, New Hampshire and
Springfield, Massachusetts to Hartford, Connecticut. The Company is currently
engineering, constructing or acquiring additional routes in New York,
Connecticut, Massachusetts, Rhode Island and New Hampshire, to create a
continuous fiber optic link between New York City and Portland, Maine with
access into and around Boston, Massachusetts and numerous other major service
areas in the Northeast. These additional routes are expected to be completed in
1998 and will add approximately 500 route miles, or approximately 23,300 fiber
miles, to the NEON system. The Company is planning to complete further
expansion routes in 1999 into and around New York City and other metropolitan
areas along the NEON system. Upon completion of routes currently planned, the
NEON system will exceed 900 route miles or over 60,000 fiber miles, and will
enable the Company to connect more than 540 cities and towns in six states and
pass more than 200 POPs, tandem switches and central offices, which the Company
believes serve over 18 million people and over 470,000 businesses.
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The following table lists the states through which the NEON system is
expected to pass, the estimated route miles and fiber miles of the NEON system
in each state, the estimated number of POPs, tandem switches and central
offices passed by the NEON system, the estimated population of the service
areas expected to be passed by the NEON system, the major service areas the
Company expects to connect to the NEON system and the expected dates of
completion:
<TABLE>
<CAPTION>
Estimated
Number of
POPs, Tandem Estimated
Estimated Estimated Switches and Population of
Route Fiber Central Offices Service Areas Major Expected
State Miles Miles Passed Passed Service Areas Completion
- ----------------------- ----------- ----------- ----------------- --------------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Connecticut ........... 271 17,502 62 2,990,000 Hartford Completed
Stamford 1998
New London 1998
New Haven 1998
Bridgeport 1998
Maine ................. 55 3,630 15 425,000 Portland Completed
Massachusetts ......... 235 14,842 55 4,750,000 Springfield Completed
Boston 1998/1999
Amherst 1998
Framingham 1998
Lawrence 1999
New Hampshire ......... 205 12,100 34 920,000 Nashua Completed
Manchester Completed
Dover Completed
Portsmouth 1998
Keene 1998
New York .............. 94 15,000 25 8,190,000 Westchester 1998/1999
New York City 1998/1999
Rhode Island .......... 70 840 14 996,000 Providence 1998
--- ------ -- ---------
Total ................ 930 63,914 205 18,271,000
=== ====== === ==========
</TABLE>
The Company acquires its ROWs principally from electric utilities in the
territory covered by the NEON system. The Company believes that such ROWs are
superior to alternative ROWs available in the Northeast, because electric
utility ROWs may provide near-ubiquitous urban coverage at lower cost and
because deviations from other ROWs often entail significant expenditures and a
lengthy and expensive community-by-community approval process. Furthermore,
installing cable in electric utility ROWs is often safer, easier and faster,
because the cable is placed in existing underground conduits and ducts or
installed on existing towers and poles. With other ROWs cable must often be
buried in trenches, a process often hampered by accommodating commuter rush
hours, complying with stringent environmental laws, crossing water, trenching
and blasting bedrock. In addition, using primarily electric utility ROWs, the
NEON system has the potential to provide communications connections to nearly
every building, business park and industrial complex in its urban service
territory.
The Company uses three cost-effective methods for installing its fiber
optic cable and taking advantage of the pre-assembled and pre-existing electric
utility infrastructure in the Company's ROWs, including utility transmission
structures (towers) and distribution infrastructure (poles, civil works and
conduit). The first is to replace existing ordinary ground wire (which is used
to provide lightning protection atop utility structures) with optical phased
ground wire ("OPGW"), which is custom-made for the Company and contains up to
96 fiber strands currently and will contain up to 144 fiber strands in future
sheath designs. The second method is to install new all dielectric (non--
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conductive) self-support fiber optic cable ("ADSS") under the electrical
conductors on electric transmission structures. ADSS is capable of carrying up
to 288 fiber strands currently and is expected to carry up to 432 fiber strands
in future designs. Finally, in underground utility conduits, the Company uses
conventional optical cable made for underground conditions.
Advanced Technology
The Company uses state-of-the-art technology in the NEON system. The NEON
system consists of fiber optic communication paths, which allow for high speed,
high quality transmission of voice, data and video communications. Fiber optic
systems use laser-generated light waves to transmit voice, data and video in
digital formats through ultra-thin strands of glass. Fiber optic systems are
generally characterized by large circuit capacity, are resistant to external
signal interference and directly interface to digital switching equipment or
digital microwave systems. The Company is currently installing fiber optic
cable containing between 64 and 96 fiber optic strands and in the future may
install up to 144 or 216 fiber optic strands per cable depending on anticipated
demand for the particular route and the number of fiber optic strands allowed
by the Company's ROW agreements. Each of these fiber optic strands is capable
of transmitting significantly greater bandwidth than traditional analog copper
cables. Using current fiber optic transmission optronics, a single pair of
fiber optic strands used by the Company's network can transmit up to 10
gigabits of data per second or the equivalent of approximately 129,000
simultaneous voice conversations. The Company believes that continuing
developments in compression technology and multiplexing equipment will increase
the capacity of each fiber optic strand, thereby providing more bandwidth
carrying capacity at attractive incremental costs.
The technologies employed by the Company in the construction and operation
of the NEON system include Lucent's non-zero dispersion shifted fiber and
Nortel's DWDM optronics possessing forward error correction technology at high
OC levels that enable the highest commercially available capacity transmission
(OC-192) and data integrity level (10-15 Bit Error Rate). The Company believes
that the advanced technical operating characteristics of the NEON system will
enable it to provide highly reliable services to its customers at low costs by
permitting higher capacity transmission over longer distances between
regeneration and amplifier facilities than can be provided by less advanced
fiber systems.
The Company offers end-to-end fiber optic capacity utilizing
bi-directional SONET ring architecture, which has the ability to route customer
traffic in two directions around a ring design thereby minimizing service
interruptions due to fiber cuts. Currently, the NEON system is continuously
monitored to maintain quality control on a 24-hour basis and to alert the
Company of any degradation of signal or loss of fiber capacity, and to pinpoint
the location of such difficulty and enable the Company to repair or replace
impaired fiber quickly.
Right-of-Way Agreements
The following is a summary of the Company's agreements that provide for
most of the ROWs currently used in the NEON system.
NU Agreements
In 1994 and 1995, the Company entered into a series of agreements (as
subsequently amended and restated in February 1998, the "NU Agreements") with
the three principal operating subsidiaries of NU concerning the provision of
ROWs along electric utility towers and inside urban electric utility ducts.
Pursuant to the NU Agreements, the Company acquired indefeasible rights of use
("IRUs") in fiber optic filaments placed along NU's ROWs prior to February 1998
and acquired ownership of fiber optic filaments placed along NU's ROWs
subsequent to February 1998 (collectively, the "NU System"). NU and the Company
both agreed to use their best efforts to complete installation of the NU System
by September 1999. The Company agreed to pay the cost of installing the cable
and to utilize NU's engineering staff in carrying out the installation. Under
the NU Agreements, the Company agreed to pay to NU mileage-based annual fees
and a percentage of the gross revenues that the Company generates on the
portion of the NEON system located on NU ROWs.
A portion of the NU System, comprised of 12 fibers within the cable, has
been set aside for NU's use ("NUNet"). NU may lease these fibers to third
parties, provided that prior to September 2001, NU is not permitted to assign
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any fibers or resell capacity on NUNet to certain specified carriers except for
certain limited purposes. After September 2001, NU will be free to use NUNet to
compete with the Company.
Under the NU Agreements, if any proposed segment of the NEON system's
route requires material modifications or unusual expense to make it available
for the Company's fiber, or if NU withdraws any segment from the route in order
to give priority to electrical services, the Company has the right to designate
additional or alternative route segments, subject to NU's approval, which shall
not be withheld unless such additional or alternative segments would materially
adversely affect NU's ability to provide reliable electric service, cause or
create safety problems or would not be feasible for structural reasons. If NU
desires to create new route segments in order to extend the NU System, the
Company has a right of first refusal on the provision of any such segments. If
NU obtains such segments from third parties, NU has agreed to use its best
efforts to obtain for the Company the unimpeded use of not less than 12 usable
single mode fibers in such segment on terms no less favorable than those
provided to NU.
The NU Agreements have an initial term of 30 years and expire in September
2024. Thereafter they automatically renew for five-year terms, unless one of
the parties has given a one-year advance notice of termination. In the event
that NU gives such a notice and terminates the NU Agreements, it must either,
at its option, pay to the Company an amount equal to the fair market value of
the NU System less NUNet or allow the Company to retain its IRUs and receive
from the Company an annual payment equal to 10% of the Company's gross revenue
from the NU System, which payment would be in addition to the other annual
payments under the NU Agreements.
In addition to the foregoing, the NU Agreements may be terminated by NU if
the Company defaults in the performance of certain of its obligations under the
NU Agreements, including the failure to establish NUNet by September 1999, the
failure to obtain and maintain all necessary government permits, licenses,
franchises and approvals, and the failure to pay amounts due by it under the NU
Agreements, subject in most cases to cure periods of between 30 and 90 days.
CMP Agreement
In January 1997, the Company entered into an agreement with CMP (the "CMP
Agreement") in which CMP granted the Company a right of use in fiber optic
filaments within a cable along a certain route in CMP's service territory (the
"CMP System"). CMP and the Company both agreed to use their best efforts to
complete installation of the CMP System by January 1999. The Company has the
right to install additional cable in CMP's service territory, subject to the
approval of CMP, which must not be unreasonably withheld. The Company is
obligated to pay the cost of installing the cable.
In exchange for the rights of use, the Company agreed to pay to CMP an
annual fee beginning, with regard to any particular route segment, in the first
calendar year following the installation date for such route segment (the
"Installation Date").
The Company's rights of use do not apply to 6 fibers that have been set
aside for CMP's use ("CMPNet"). CMP may use these fibers for its own business
purposes, but may not lease them to third parties prior to the seventh
anniversary of any given Installation Date. After such seven-year period, to
the extent that CMP has excess capacity on CMPNet, CMP is required to negotiate
in good faith with the Company to provide such excess capacity to the Company
before making it available to third parties. If the Company does not enter into
an agreement with CMP with respect to such excess capacity, CMP will be able to
use such capacity to compete with the Company.
The CMP Agreement has an initial term of 30 years and expires in January
2027. Thereafter it is renewable at the option of the Company for an additional
ten-year term. In the event that the Company elects to renew the CMP Agreement,
it must pay to CMP an annual payment equal to 10% of the Company's gross annual
revenue from the CMP System, which payment would be in addition to the other
annual payments under the CMP Agreement.
In addition to the foregoing, the CMP Agreement may be terminated by CMP
if the Company defaults in certain of its obligations under the CMP Agreement
and such default is not cured within a designated cure period.
Boston Agreements
In July 1998, the Company entered into a Fiber Optic Lease Agreement with
NEES Communications, Inc., a subsidiary of New England Electric System (the
"NEES Com Agreement"), and a Fiber Optic Use Agreement with BecoCom, Inc., a
subsidiary of Boston Edison Company (the "BecoCom Agreement"). Pursuant to the
terms
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of these agreements, the Company acquired the right to use certain fibers (the
"Company Fibers"), to be constructed and maintained by NEES Communications and
BecoCom, respectively, on a route running from Hudson, New Hampshire to Boston,
Massachusetts terminating at the Company's POP and Company-targeted carrier
centers. Under the terms of these agreements, the Company is required to pay a
monthly fee, and has agreed to share a portion of the revenue generated from
the use of the Company Fibers (in excess of a base revenue amount specified in
each agreement). The Company Fibers are expected to be available by December
31, 1998. Both the NEES Com Agreement and the BecoCom Agreement have an initial
term of 20 years, with the potential to negotiate for up to two additional,
consecutive five-year extensions. Although the BecoCom Agreement permits the
Company to grant capacity to third parties, the Company may not use the Company
Fibers under the BecoCom Agreement to handle local point to point services
within the service area generally prescribed as the Boston Edison service
territory. Nothing, however, precludes the Company from acquiring other sources
for local point to point services.
Other Agreements
In July 1998, the Company entered into an IRU agreement (the "Qwest
Agreement") with Qwest Communications Corporation ("Qwest") in which Qwest
agreed to grant the Company an IRU in certain fibers along a route to be
constructed between Boston and New York City (the "Boston-New York Segment").
In consideration of such grant, the Company agreed to pay to Qwest an IRU fee
in a series of installments. The Boston-New York Segment is expected to become
available to the Company by December 31, 1998. Although the Qwest Agreement
permits the Company to grant capacity in lit fiber to third parties, the
Company may not grant IRUs in dark fiber to third parties for five years
following the availability date of the Boston-New York Segment. The term of the
Qwest Agreement is for approximately 20 years; provided, however, that the
Qwest Agreement may be terminated at any time upon the occurrence of certain
uncured defaults by the Company or the loss of certain underlying rights held
by Qwest or other parties upon whom Qwest depends for its rights in the fiber.
The Company also has a number of agreements with Bell Atlantic to use
certain ROWs along pole lines and within ducts in various areas throughout the
Northeast to supplement its primary means of procuring ROWs.
Payments under Right-of-Way Agreements
The aggregate amount accrued by the Company under its agreements that
provide for its ROWs used in the NEON system was $350,400, $435,100 and
$158,000 for the years ended December 31, 1996 and 1997 and the three-month
period ended March 31, 1998, respectively.
Services
The Company generally leases high capacity transmission services for use
by various communications carriers. The Company's customers include
facilities-based carriers that require transmission capacity where they have
geographic gaps in their facilities, need additional capacity or require
alternative or redundant routing, and non-facilities-based carriers requiring
transmission capacity to carry their customers' telecommunications traffic.
The Company currently leases dark fiber and lit fiber, as described below,
and has also reserved fibers for future uses.
Dark Fiber
The leasing of dark fiber allows a carrier to interconnect any two or more
specific points on the NEON system. This product requires the Company to
install a fiber optic patch panel ("FOPP"), which is the minimal customer
premise equipment installed by the Company. Dark fiber leases allow a carrier
to install its own optronic equipment and to use as much or as little capacity
as it desires and to customize its capacity with feature rich technology and
its network protocols that differentiate that carrier's product offerings from
others. As a result, the carrier can deploy the dark fiber for whatever purpose
it chooses while the Company remains transparent to the carrier's end-user.
Whenever possible, the carrier customer is restricted from using the dark
fibers for purposes other than supporting its own customers. To date, the
Company has placed restrictions on the transfer or assignment of the leased
fiber from one carrier to another. In addition, the lease prohibits carriers
from accessing its leased fibers at any point other than those designated in
the lease; therefore carriers cannot add additional traffic or draw off traffic
along the path.
Lit Fiber
Pursuant to its leases with its customers, the Company provides a specific
amount of capacity between any two or more points on the NEON system as
specified by the carrier. Lit services involve the installation of optronic
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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, potentially, DS-1 levels.
Reserved Fiber
Part of the Company's strategy is to reserve approximately one-third of
the fibers comprising the NEON system in order to have the capacity necessary
to take advantage of changes in telecommunications technology and services and
to meet future anticipated market demand. The Company believes that continuing
improvements in telecommunications technology will alter the way in which such
services are provided as well as the level of demand for such services. These
changes include developments in compression and multiplexing technology, as
well as changes in communications protocols. These changes will likely effect a
change in the nature of services provided by the Company's customers and,
thereby, a change in the nature of the services provided by the Company. In
addition, such changes may open new opportunities for the Company, including
opportunities to serve new classes of customers. Because the exact nature and
effect of such changes are, at present, difficult to measure, the Company
believes it prudent to retain capacity that is not committed to any particular
use or technology but can be brought out of reserve when the impact of such
technological changes becomes clear. In the meantime, the Company may enter
into short-term agreements with respect to such reserved capacity for the
provision of its current services if such opportunities arise.
Sales and Marketing
The Company's sales and marketing strategy includes positioning itself as
the carriers' carrier of choice, emphasizing its capacity, reliability, rapid
deployment, customer service, access in urban areas of its service territory
and the cost advantages that will allow the Company to lease its fiber optic
infrastructure at competitive prices. The Company intends to price its services
below what the Company believes it would cost carriers to construct their own
facilities or to obtain capacity from other sources.
The Company believes that communications carriers will be attracted to the
Company's dark fiber and lit fiber products. The contracts that the Company has
signed to date arose as a result of management's long standing relationships in
the telecommunications industry. The Company intends to leverage these
relationships and increase customer scope and penetration through a dedicated
sales force.
Customers
The Company is targeting other telecommunications carriers as customers
and does not intend to offer its services directly to end-users. The NEON
system enables carriers to link geographically separated central offices and
POPs with primary or redundant connections in their networks. The Company's
facilities also enable carriers to connect their networks directly into the
premises of the carriers' end-users.
The Company currently has contracts with Brooks Fiber (now owned by
WorldCom), Teleport (expected to be acquired by AT&T), MCI (expected to be
acquired by WorldCom), Sprint and Global NAPs, Inc., a regional ISP. The terms
of certain of these customer contracts are twenty years with varying lease
rates to be paid monthly. The monthly lease rates cover dark fiber and/or lit
fiber leased from the Company. In addition, the contracts typically provide for
"outage related credits," a predetermined reduction or offset against the
customer's lease rate when a customer's leased facility is non-operational or
does not meet the customer's operating parameters. In addition, the Company is
currently in the process of negotiating agreements with certain other major
communications carriers. There can be no assurance that such agreements will be
consummated or will be on terms as favorable to the Company as its existing
agreements.
The Company's potential carrier customer base includes the following
classes of carriers:
[bullet] Incumbent Local Exchange Carriers & Independent Telcos, such as Bell
Atlantic, SNET, Standish Telephone Co. (ME), Wilton Telephone
Company, Inc. (NH) and Saco River Telephone Co. (ME). ILECs
typically require some interstate paths for internal communications,
signal control and operator services. ILECs also require intrastate
capacity to connect central offices to one another and to connect
central offices to POPs and customer premises.
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[bullet] Facilities Based IXCs, such as AT&T, Sprint, MCI/WorldCom/LDDS,
WilTel, Frontier, Qwest, IXC Communications, Inc., Cable & Wireless
PLC, Level 3 Communications, Inc. and others. IXCs typically require
(i) regional short-haul connectivity from their national backbone
facilities to originate and terminate traffic deeper into the
customer base, (ii) redundant routing to ensure reliability in their
networks, and (iii) additional capacity for their customers as
minutes-of-use and IP bandwidth requirements increase.
[bullet] Competitive Local Exchange Carriers, such as WorldCom/Brooks Fiber,
Teleport, WorldCom/MFS Communications Company, Inc., RCN
Corporation, MCImetro, Intermedia Communications Inc., NextLink
Communications, Inc., ICG Communications, Inc. and others. CLECs
typically require interconnection between their local networks and
extensions further into the community.
[bullet] Internet Service Providers, such as MCI, GTE Corporation/BBN, Bell
Atlantic, WorldCom/Gridnet, WorldCom/UUNet Technologies
Incorporated, Sprint, RCN Corporation, HarvardNet, MediaOne and
others. ISPs typically require distribution channels to IXC and LEC
switches and interconnection to ISP switches.
[bullet] Cable Television Companies and Video Carriers, such as MediaOne
Group, Inc. (U S West, Inc.), Time Warner Inc., Cablevision Systems
Corporation, Cox Communications, Inc., Vyvx, Public Broadcasting
Service affiliates, broadcasters and others. Cable companies
typically require fiber optic capacity to upgrade their systems to
higher speed bandwidths, which allow them to increase the number of
channels available, add interactive programming and Internet and
data transfer capabilities and to consolidate head-end facilities.
Broadcasters typically require inexpensive video paths to extend
their reach to distant locations.
[bullet] Wireless Communication Companies, such as SNET Links, Bell Atlantic
Mobile, CellularOne, Sprint PCS, OmniPoint, AT&T Wireless, STV
Group, Inc., WinStar Communications, Inc., NextWave Telecom Inc.,
NorthCoast, Opcse-Galloway, Personal Communications, ACC-PCS (TCG),
Devon Mobile, Vtel Corporation and others. Wireless companies
typically require land-based back-hauling of traffic from towers to
their switches and also capacity between their switches with IXCs,
POPs, and ILECs central offices.
[bullet] Microwave Carriers, such as Eastern Microwave Inc./Intermedia
Communications Inc. Microwave carriers typically require fiber optic
capacity to replace microwave service as their primary source of
communications capacity.
Supply Relationships
The Company has entered into agreements and arrangements for the supply of
equipment and services relating to the construction of the NEON system. In
choosing its suppliers, the Company uses such criteria as the quality and
performance of the product for the intended purpose, pricing, and the ability
of the supplier to meet the Company's delivery schedule and technical support
requirements. The Company purchases optronic network multiplexers and network
services from Northern Telecom Ltd. ("Nortel"), and cable from Fitel/Lucent
Technologies, Inc. ("Fitel") and FOCAS, Inc. ("FOCAS"). The cable purchased
from Fitel and FOCAS includes Lucent's patented "TrueWave" fiber, which the
Company believes contains certain favorable performance characteristics that
reduce the Company's investment in signal enhancing network equipment. The
Company believes that there are alternative suppliers or alternative components
for all of the components contained in the NEON system. However, any delay or
extended interruption in the supply of any of the key components, changes in
the pricing arrangements with its suppliers and manufacturers or delay in
transitioning a replacement supplier's product into the NEON system could
disrupt the Company's operations and, if such disruption continued for an
extended period of time, have a material adverse effect on the Company's
business, financial condition and results of operations. See "Risk
Factors--Dependence on Suppliers."
Competition
The telecommunications industry is highly competitive, and the Company
faces substantial competition. Many of the Company's existing and potential
competitors have financial, management and other resources that are
substantially greater than those of the Company, as well as other competitive
advantages, including established reputations in the communications market. See
"Risk Factors--Competition."
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The Company is currently aware of communications carriers that own or
lease fiber optic networks in New England (such as AT&T, MCI, Sprint, Bell
Atlantic, SNET, WorldCom and Teleport) and of other carriers (such as IXC
Communications, Qwest Communications International, Metromedia Fiber Network,
Level 3 Communications and RCN) who are planning to own or lease additional
networks which, if constructed, could employ advanced technology comparable to
that of the NEON system.
Qwest Communications International recently announced that it had acquired
approximately 288 miles of fiber optic network between New York and Boston,
connecting such cities as Providence and Greenhill in Rhode Island and New
London, New Haven, Bridgeport and Stamford in Connecticut. Similarly, IXC
Communications recently announced that it had acquired approximately 280 miles
of fiber optic network between New York and Boston. Another company, RCN, is
engaged in the construction of fiber optic networks in Boston and several
surrounding communities and in New York City. The Company's customers and
potential customers, such as AT&T, MCI and Sprint, also have facilities
available to them in the region which could be used to compete with the
Company. Development of fiber optic networks is also continuing on a national
scale; for example, Frontier Corp. is currently in the midst of constructing a
cross-continental long distance fiber optic network from Los Angeles to New
York and Qwest Communications International is constructing a fiber-based
national backbone network which will connect 115 metropolitan areas and span
approximately 16,000 miles. In addition, other companies, including Level 3
Communications, are planning nationwide and regional networks of their own.
These networks enable their owners either to operate dedicated facilities for
themselves or to install excess fiber to lease to other communications carriers
and large corporate, government or other customers seeking high-bandwidth
capacity. Alternatively, some network owners, typically CLECs, may choose to
use their infrastructure to provide switched voice and data services, competing
directly with ILECs and IXCs. Currently, the Company does not provide such
services or plan to provide such services. See "Risk Factors--Limited Nature of
Company's Services."
In the cities connected by the NEON system, the Company also faces
significant competition from the ILECs, which currently dominate their
respective local markets. In addition, the Company faces competition from CLECs
and wireless competitors in the cities in which the Company plans to build its
networks.
Most communications carriers already own fiber optic cables as part of
their communications networks, and each of these carriers could, and some do,
compete directly with the Company in the market for leasing fiber capacity.
Some local cable television companies have extensive coaxial cable
networks in place that have been or could be further upgraded to fiber optic
cable. To the extent that local cable television companies decide to equip
their networks with fiber optic cable, they are potential direct competitors of
the Company.
The Company also faces potential competition from both NU and CMP, both of
which have rights to use fibers in certain portions of the NEON system, which
use may include competition with the Company. See "--Right-of-Way Agreements."
Properties
The NEON system and its component assets are the principal properties
currently owned by the Company or with respect to which the Company has an IRU.
The Company owns substantially all of the communications equipment currently
utilized in its business and holds certain ownership interests in the cable
comprising the NEON system. The Company's installed fiber optic cable is laid
along the various rights-of-way held by the Company. See "--Right-of-Way
Agreements." Other fixed assets are located at various leased locations in
geographic areas served by the Company.
The Company's executive, administrative and sales offices are located at
its principal office in Waltham, Massachusetts. The Company leases this space
(approximately 4,375 square feet) under an agreement that expires in June 2000.
Reorganization
The Company was incorporated in Massachusetts in July 1989 under the name
"FiveCom, Inc." In May 1996, FiveCom LLC, an operating subsidiary
majority-owned by the Company, was organized in Massachusetts. Also in May
1996, FiveCom LLC and Mode 1 Communications, Inc. ("Mode 1"), a subsidiary of
NU, organized NECOM LLC
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in Massachusetts, with FiveCom LLC owning approximately 60%, and Mode 1 owning
approximately 40% of the membership interests in NECOM LLC. In December 1996,
FiveCom LLC and MaineCom Services ("MaineCom"), a wholly-owned subsidiary of
CMP, organized FiveCom of Maine LLC in Massachusetts, with MaineCom owning
66.67%, and FiveCom LLC owning 33.33%, of the membership interests in FiveCom
of Maine LLC.
In order to simplify the corporate structure and in contemplation of the
Offerings, the Company's major stockholders decided to reorganize the Company.
In April 1998, prior to the Reorganization, CMP exercised its warrants to
purchase 5,876 shares of membership interests in FiveCom LLC for an aggregate
exercise price of $58.76 and in July 1998, (i) each of the minority members in
FiveCom LLC (and each of Mode 1 and MaineCom) exchanged their membership
interests in FiveCom LLC, NECOM LLC and FiveCom of Maine LLC, respectively, for
shares of the Series B Convertible Preferred Stock of the Company; (ii) FiveCom
LLC and NECOM LLC were each merged with and into a wholly-owned subsidiary of
the Company; (iii) FiveCom of Maine LLC was merged into FiveCom of Maine, Inc.,
a wholly-owned subsidiary of the Company; and (iv) the Company was
reincorporated in Delaware under the name "NorthEast Optic Network, Inc." and
the Company's Certificate of Incorporation was amended and restated. The
actions described in the preceding sentence are referred to in this Prospectus
as the "Reorganization." The shares of membership interest in FiveCom LLC
received by CMP upon exercise of its warrant were exchanged for 144,172 shares
of the Series B Convertible Preferred Stock of the Company, which shares had an
estimated value at the time of the Reorganization of approximately $4.3
million. Mr. Colantonio, the Company's President, and Mr. Musen, a Vice
President of the Company, exchanged their membership interests in FiveCom LLC
for 17,788 shares and 14,549 shares, respectively, of the Company's Series B
Convertible Preferred Stock, which shares had an estimated aggregate value at
the time of the Reorganization of approximately $542,000 and $443,000,
respectively. The Company believes that the value of the membership interests
exchanged in the Reorganization was equivalent to the value of the shares
issued in respect of each such membership interest. See "Certain Transactions."
Regulation
While the Company believes it is not directly subject to common carrier
regulation (except to the extent is certified as a common carrier through its
subsidiaries in Connecticut and New York), it is part of an industry that is
highly regulated by federal, state and local governments whose regulatory
actions are often subject to judicial modification. The Company has not been
subject to such regulation because it has not offered its facilities to the
general public nor indifferently for a fee, which would subject an entity to
such regulation. In light of the changes that are occurring in the regulation
of telecommunications, the Company cannot forecast whether or not it will be
subject to additional regulation in the future. In Connecticut and New York the
Company has petitioned to be recognized as a regulated telecommunications
service provider because of the nature of its activities in, and the statutory
provisions of, those two states; these subsidiaries, as authorized
telecommunications service providers, would also be subject to certain federal
law and regulation.
Federal
Federal regulation has the greatest impact on the telecommunications
industry and has undergone major changes in the last two years as the result of
the adoption by Congress of the Telecommunications Act of 1996 ("the 1996 Act")
on February 8, 1996. The 1996 Act is the most comprehensive reform of the
nation's telecommunications laws since the Communications Act was enacted. The
1996 Act imposes a number of access and interconnection requirements on
telecommunications carriers and on all local exchange providers, including
CLECs, with additional requirements imposed on ILECs. The 1996 Act provides a
detailed list of items which are subject to these interconnection requirements,
as well as a detailed set of duties for all affected carriers. All
telecommunications carriers must interconnect with the facilities of other
carriers and not install features that will interfere with the interoperability
of networks. All LECs, including CLECs, have a duty to (i) not unreasonably
limit the resale of their services, (ii) provide number portability if
technically feasible, (iii) provide dialing parity to competing providers, and
nondiscriminatory access to telephone numbers, directory assistance, operator
services and directory listings, (iv) provide access to poles, ducts, conduits
and rights-of-way and (v) establish reciprocal compensation arrangements for
the transport and termination of telecommunications. In addition to those
general duties of all LECs, ILECs have additional duties to (i) interconnect at
any technically feasible point and provide service equal in quality to that
provided to their customers or the ILEC itself, (ii) provide unbundled access
to network elements at any technically feasible point at just, reasonable and
nondiscriminatory rates, terms and conditions, (iii) offer retail services at
wholesale prices for the use of telecommunication carriers, (iv) provide
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reasonable public notice of changes in the network or the information necessary
to use the network or which affect interoperability and (v) provide for
physical collocation. "Physical collocation" is an offering by an ILEC that
enables another telecommunications carrier to enter the ILEC's premises to
install, maintain and repair its own equipment that is necessary for
interconnection or access to the ILEC's network elements. An ILEC must allocate
reasonable amounts of space to telecommunications carriers on a first-come
first-served basis. If space limitations or practical or technical reasons
prohibit physical collocation, an ILEC must offer "virtual collocation," by
which the other telecommunications carrier may specify ILEC equipment to be
dedicated to its use and electronically monitor and control communications
terminating in such equipment.
The FCC adopted pricing and other guidelines to implement the
interconnection provisions of the 1996 Act, but the 8th Circuit Court of
Appeals vacated many of the FCC's guidelines. The Supreme Court has granted a
writ of certiorari to review the 8th Circuit's decision and is expected to
decide the case during its 1998-1999 term. The responsibility for setting
pricing and other guidelines with respect to interconnection has thus been left
up to the individual state public service commissions. It is expected that
varying pricing and guidelines will emerge from state to state and some of
these guidelines may eventually have an indirect adverse effect on the
Company's business.
Aside from the impact of the 1996 Act, the Company believes federal
regulation does not affect the Company directly because the Company is not
currently regulated as a common carrier under federal law. Federal
telecommunications law imposes special legal requirements on "common carriers"
who engage in "interstate or foreign communication by wire or radio for hire."
The Company believes that the leasing of fiber facilities does not constitute
engaging in the transmission of "communications by wire or radio" and therefore
is not subject to these legal requirements. However, this conclusion could be
affected by the FCC's review of its earlier decision, on remand from the U.S.
Court of Appeals for the District of Columbia Circuit, that local exchange
carriers offered dark fiber on a common carrier basis. In any event, the
Company does not intend to offer its fiber facilities as a common carrier.
Common carriers are those who offer telecommunications services directly to the
public for a fee. The Company does not intend to offer its fiber capacity in
this manner, but instead intends to enter into individual agreements on a
selective basis with prospective lessees of its fiber facilities. The Company
therefore does not believe that its fiber offerings are subject to the common
carrier provisions of the Communications Act. These conclusions reflect the
Company's view that there is no material difference from a regulatory
perspective between the leasing of dark and lit fiber, both of which are
offered by the Company. There is no assurance that the FCC may not take the
position that in making fiber transmission capable, in the case of lit fiber,
the leasing of such fiber is subject to regulation under the Communication Act
or that even the offering of dark fiber itself is subject to regulation.
As indicated above, the two subsidiaries of the Company which have applied
for authority to provide telecommunications services on a common carrier basis
in New York and Connecticut will be subject to regulation under the
Communications Act.
In addition to regulation of common carriers, federal telecommunications
law also imposes special legal requirements on "telecommunications carriers."
The law essentially defines "telecommunications carriers" as those offering
certain telecommunication services "directly to the public" or such classes of
users as to be effectively available directly to the public, regardless of the
facilities used. The Company therefore believes that a company has to be a
common carrier in order to be considered a telecommunications carrier. For the
reasons stated above, the Company believes that it is not a common carrier and
therefore that it is also not a telecommunications carrier with respect to its
fiber capacity leases. Nevertheless, the law is not entirely clear as to, and
the FCC has not definitively addressed whether, the term "telecommunications
carriers" is meant to encompass only common carriers, and therefore whether a
provider of fiber facilities on an individualized basis, like the Company, is a
"common carrier" or "telecommunications carrier." The FCC has been petitioned
by certain railroad, power and telecommunications associations, none of which
are affiliated with the Company, to clarify the status of fiber providers in
this respect. The FCC's pending remand, described above, could also
definitively address the application of these requirements to the Company. If
the agency decides that such companies are telecommunications carriers or
common carriers, then the Company would be subject to certain regulatory
requirements, which could have a material adverse effect on the Company.
If the Company were deemed to be a common carrier it would be required,
with respect to its telecommunications services, to (1) provide such services
indiscriminately upon any reasonable request; (2) charge rates and adopt
practices, classifications and regulations that are just and reasonable; (3)
avoid unreasonable discrimination in charges, practices, regulations,
facilities and services; (4) ensure that its services are accessible
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to and usable by persons with disabilities; (5) pay into federal funds for
Telecommunications Relay Services and the North American Numbering
Administration; (6) assure that its networks comply with the requirements of
the Communications Assistance for Law Enforcement Act; (7) be subject to
government oversight and limitations on its transactions with affiliates; (8)
limit its use of Customer Proprietory Network Information (CPNI) to
provisioning of the services in connection with which the CPNI was obtained;
(9) be subject to the complaint process at the FCC; and comply with various
reporting, regulatory fee payment and other requirements. The Company might
also be required to file tariffs setting forth the rates for its services.
These regulatory requirements could impose substantial burdens on the Company.
If the Company's offering of fiber facilities were deemed to constitute a
"telecommunications service," or the provision of "telecommunications" for a
fee (unless deemed de minimis) then its revenues from fiber leases to end users
(but not to most other telecommunication carriers) would become subject to
assessment for the FCC's Universal Service Fund, a fund that was established by
the FCC pursuant to the 1996 Act to assist in ensuring the universal
availability of basic telecommunications services at affordable prices. The
Company may be subject to this assessment even if it is found to not be a
common carrier and only provides service on a private contractual basis or
through the leasing of excess capacity to end-users. This assessment could
create a liability equal to a percentage of the gross revenues from these
leases although the FCC has not announced what the annual assessment will be
(the Company anticipates, based on quarterly contribution factors as of May
1998 that the annual rate of assessment will be approximately 4.5% of gross
interstate end-user revenues for the year 1998, and may be higher in subsequent
years). The Company also may be liable for assessments by state commissions for
state universal service programs. The Company does not anticipate that its
aggregate liability for these universal service programs would be material. In
addition, since the revenues of the Company's competitors will be subject to
comparable assessments; this should not reduce the Company's competitiveness.
Federal telecommunications law may also affect the Company's business by
virtue of the inter-relationships that exist among the Company and ILECs and
IXCs. For example, the FCC recently issued an order requiring, among other
things, that common line access fees charged to IXCs, which previously amounted
to more than what was necessary to recover the costs of providing access, shift
from being usage driven to a fixed flat cost-based structure. While it is not
possible to predict the precise effect the access charge changes will have on
the Company's business or financial condition, the reforms will reduce access
charges paid by IXCs, likely eliminating one of the principal disincentives for
use of ILEC facilities by IXCs, which could have a material adverse effect on
the use of the Company's fiber optic telecommunications networks by IXCs.
The FCC has responsibility under the 1996 Act's interconnection provisions
to determine what elements of an ILEC's network must be provided to competitors
on an unbundled basis. The FCC has decided not to declare fiber an unbundled
network element under these provisions. This decision is currently subject to
petitions for reconsideration before the FCC. An FCC decision to alter this
decision on reconsideration could decrease the demand for fiber provided by the
Company. In addition, the FCC has announced that state commissions may decide
to add network elements to the FCC's list of elements that are required to be
unbundled by all carriers throughout the country.
State
The 1996 Act prohibits state and local governments from enforcing any law,
rule or legal requirement that prohibits or has the effect of prohibiting any
person from providing any interstate or intrastate telecommunications service.
In addition, under current FCC policies, any dedicated transmission service or
facility that is used more than 10% of the time for the purpose of interstate
or foreign communication is subject to FCC jurisdiction to the exclusion of any
state regulation. Notwithstanding these prohibitions and limitations, states
regulate telecommunications services, including through certification of
providers of intrastate services, regulation of intrastate rates and service
offerings, and other regulations and retain jurisdiction under the 1996 Act to
adopt regulations necessary to preserve universal service, protect public
safety and welfare, ensure the continued quality of communications services and
safeguard the rights of consumers. Accordingly, the degree of state involvement
in local telecommunications services may be substantial.
The state regulatory environment varies substantially from state to state.
At present, the Company does not anticipate that the regulatory requirements to
which it will be subject in Connecticut, Maine, Massachusetts, New Hampshire,
New York and Rhode Island will have any material adverse effect on its
operations. In some jurisdictions, the Company's pricing flexibility for
intrastate services may be limited because of regulation, although
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<PAGE>
the Company's direct competitors will be subject to similar restrictions.
However, there can be no assurance that future regulatory, judicial, or
legislative action will not have a material adverse effect on the Company.
In arbitrating interconnection agreements under the 1996 Act between ILECs
and their potential competitors, some state commissions have considered whether
fiber should be an unbundled network element. The New York Public Service
Commission determined that it would not require NYNEX Corporation to provide
fiber as an unbundled network element. State commissions in Florida, Maryland,
North Carolina, and Virginia have either refused to require the ILECs to offer
fiber to competitors, or have stated that the issue would be addressed at a
later time. On the other hand, state commissions in Illinois, Massachusetts,
Arizona, Georgia, Minnesota, Ohio, Oregon and Tennessee have found fiber to be
a network element and required the ILECs to offer it on an unbundled basis to
CLECs. There can be no assurance that these requirements, and the associated
pricing methodologies, where applicable will not reduce the demand for fiber
provided by the Company.
The Company has determined that there are advantages to having certain of
its subsidiaries subject to state regulation in Connecticut and New York. As a
regulated carrier in those two jurisdictions, these subsidiaries will have
access to poles and rights of way for its fiber lines that would not be
available to it as an unregulated lessor of fiber. Two subsidiaries of the
Company have, therefore, recently filed petitions in those two states
requesting authority to provide telecommunications services. The Company
anticipates that based on past practices these petitions will be granted within
the next three or four months. As a result, these subsidiaries will incur
certain costs to comply with regulatory requirements such as the filing of
tariffs, submission of periodic financial and operational reports to
regulators, and payment of regulatory fees and assessments in Connecticut and
New York.
Local
In addition to federal and state laws, local governments exercise legal
authority that may impact the Company's business. For example, local
governments, such as the City of Boston and the City of New York, typically
retain the ability to license public rights-of-way, subject to the limitation
that local governments may not prohibit persons from providing
telecommunications services. Local authorities affect the timing and costs
associated with the Company's use of public rights-of-way. These regulations
may have an adverse effect on the Company's business.
Employees
As of June 30, 1998, the Company employed 13 people. The Company's
employees are not represented by any labor union. The Company considers its
relationship with employees to be satisfactory.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of the Company and their ages as of
May 20, 1998 are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Richard A. Crabtree ........... 51 Chairman of the Board of Directors and Chief
Executive Officer
Victor Colantonio ............. 50 Chairman of the Company, President and Director
William F. Fennell ............ 53 Chief Financial Officer and Treasurer
James D. Mack, Jr. ............ 53 Vice President, Sales
Michael A. Musen .............. 49 Vice President, Operations and Secretary
John H. Forsgren .............. 51 Director
David Marsh ................... 50 Director
F. Michael McClain ............ 48 Director
Gary D. Simon ................. 49 Director
Katherine D. Courage .......... 40 Director-designee
</TABLE>
Richard A. Crabtree has been a member of the Board of Directors since 1996
and was elected Chief Executive Officer and Chairman of the Board of Directors
in May 1997. From 1971 to May 1997, Mr. Crabtree held various positions at
Central Maine Power Company, including Senior Vice President and Chief
Financial Officer, Senior Vice President, Customer Service and Vice President,
Retail Operations. Mr. Crabtree also serves as President of MaineCom, a
wholly-owned subsidiary of Central Maine Power Company.
Victor Colantonio, the Company's founder and the Chairman and President of
the Company, has been a director of the Company since 1989. Prior to founding
the Company, from 1987 to 1991 Mr. Colantonio was president of International
Communications Services Corp., a provider of network services to New England
Telephone Company, AT&T and others. He served as President of Ireland-based
Murray International from 1986 to 1987, where he sold network services to SNET,
LiTel, MCI, Sprint and others. From 1983 to 1986, Mr. Colantonio served as
Director of Marketing for Tele-Engineering Corp., an advanced WAN/LAN developer
and video switch and ad-insertion manufacturer, and in such capacity he secured
contracts with, among others, USAF Logistic Command, U.S. Navy Underwater
Signal Command and NASA.
William F. Fennell joined the Company in August 1996 and became its Chief
Financial Officer and Treasurer in May 1997. From October 1986 to January 1996,
Mr. Fennell was Chief Financial Officer of Philips Electronics Group of North
America, a manufacturer and distributor of electronic and electrical products.
From 1970 to 1986, Mr. Fennell served in various positions at GTE Corporation,
including Director of Operations for the Communications Products Group.
James D. Mack, Jr. joined the Company in March 1998 as its Vice President,
Sales. From March 1997 until joining the Company, Mr. Mack was General Manager
of US Telecenters, an independent telecommunications dealer, representing Bell
Atlantic, Nothern Telecom, GTE Corporation and Southwestern Bell. From 1966
until March 1997, Mr. Mack held various sales and marketing positions at Bell
Atlantic/NYNEX Corporation (formerly NYNEX), including Branch Manager for NYNEX
Systems Marketing.
Michael A. Musen has served as an officer of the Company since its
inception, and became Vice President, Operations in 1996. Prior to joining the
Company, Mr. Musen was Vice President of International Communications Services
Corp.
John H. Forsgren has served as a Director of the Company since May 1998.
Mr. Forsgren has served as Executive Vice President and Chief Financial Officer
of Northeast Utilities and certain of its affiliates since February 1996. From
September 1996 to the present, he has served as a director of Connecticut
Yankee Atomic Power Company. From January 1990 to July 1994, he served as
Senior Vice President-Chief Financial Officer of Euro
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Disney (a division of the Walt Disney Company), and from December 1994 to
January 1996, he was a Managing Director of Chase Manhattan Bank.
David E. Marsh has served as Director of the Company since May 1998. Since
1973, he has held various positions at Central Maine Power Company, including
Treasurer, Senior Vice President of Finance, and his current position, Chief
Financial Officer. Mr. Marsh also serves as director of Maine Yankee Atomic
Power Company and as Chairman of the Boards of CMPI, MaineCom Union Water Power
Company and Telesmart.
F. Michael McClain has served as a Director of the Company since May 1998.
Mr. McClain has served as Vice President, Corporate Development of Central
Maine Power Company since February 1998. From 1979 to December 1996 he was
Group Vice President-Petroleum for Dead River Company, a petroleum and real
estate company.
Gary D. Simon has served as a Director of the Company since May 1998. Mr.
Simon has served as Senior Vice President-Strategy and Development for the
Northeast Utilities System since April 1998. From 1989 to April 1998, he was
Senior Director, Electric Power of Cambridge Energy Research Associates. From
1984 to 1989, Mr. Simon was Director of California Affairs and then Vice
President of Marketing for El Paso Natural Gas Company. From 1981 to 1984, he
served as President of Sigma Group, an economics consulting and project
development company which he founded in 1981.
There are no family relationships among any of the directors and executive
officers of the Company.
Katherine D. Courage has consented to become a director of the Company
upon the closing of the Offerings. Ms. Courage is a managing director in the
Global Telecommunications and Media Group in the Investment Banking Department
of Credit Suisse First Boston ("CSFB"), one of the underwriters of the Equity
Offering and Debt Offering. Prior to joining CSFB in September 1996, Ms.
Courage worked at Salomon Brothers, Inc for ten years where she was a managing
director with responsibility for the Global Telecommunications Group. Ms.
Courage also worked at Merrill Lynch & Co. in the corporate finance department.
Committees of the Board of Directors
Upon the completion of the Offerings, the Board of Directors will
establish a Compensation Committee and an Audit Committee. The Compensation
Committee, which is expected to include a representative of each of NU and CMP,
and, in the future, a director not employed by the Company or affiliated with
NU or CMP, will make recommendations concerning salaries and incentive
compensation for employees of and consultants to the Company and will
administer certain aspects of the Company's incentive plans. See "--1998 Stock
Incentive Plan." The Audit Committee will review the results and scope of the
audit and other services provided by the Company's independent public
accountants.
Compensation of Directors
The Company has no present plans to pay cash compensation to directors.
The Company intends to reimburse directors for certain out-of-pocket expenses
incurred in connection with attendance at meetings of the Board of Directors or
Committees thereof. In addition, the Company may issue options to the directors
under the 1998 Stock Incentive Plan, which options would vest and become
exercisable over time.
Executive Compensation
The following table sets forth compensation paid to the Chief Executive
Officer and each of the two other most highly compensated individuals who
served as executive officers on December 31, 1997 and who received over
$100,000 in compensation for services rendered to the Company in all capacities
during the year ended December 31, 1997 (the "Named Executive Officers"):
49
<PAGE>
Summary Compensation Table
<TABLE>
<CAPTION>
Long-Term
Compensation
1997 Annual Compensation Awards
-------------------------------------------- --------------------------------
Securities
Other Annual Underlying All Other
Name and Principal Position Salary($) Bonus($) Compensation($) Options (#) Compensation($)
- ----------------------------- ----------- ---------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
Richard A. Crabtree ......... -- -- -- -- --
Chairman of the Board and
Chief Executive Officer (1)
Victor Colantonio ........... 150,000 2,885 -- -- --
Chairman of the Company,
President and Director(2)
Michael A. Musen ............ 112,000 2,154 -- -- --
</TABLE>
Vice President, Operations
- ------------
(1) During 1997, while serving as Chairman of the Board of Directors and Chief
Executive Officer of the Company, Mr. Crabtree was President of MaineCom,
a wholly-owned subsidiary of CMP, which paid his salary and benefits.
Therefore, the Company did not pay any compensation to Mr. Crabtree for
his services in 1997; however, the Company reimbursed MaineCom $67,808 for
Mr. Crabtree's services in 1997. Effective July 1, 1998, Mr. Crabtree
became a full-time employee of the Company with an annual base salary of
$200,000. In June 1998 the Board of Directors of the Company granted to
him an option to purchase up to 649,628 shares of the Company's Common
Stock, which becomes exercisable in three equal annual installments,
beginning one year after the closing of the Offerings. The exercise price
per share for such option is the price to the public of a share of Common
Stock in the Equity Offering. In addition, Mr. Crabtree has an opportunity
to earn an annual bonus, targeted at 35% of his salary. Upon the closing
of the Offerings, the Company will pay a cash bonus of $500,000 to
MaineCom in recognition of Mr. Crabtree's efforts on behalf of the Company
while he was employed by MaineCom.
(2) In May 1998, the Board of Directors of the Company increased Mr.
Colantonio's annual base salary to $200,000 effective upon the
consummation of the Offerings and granted to him an option to purchase up
to 649,628 shares of the Company's Common Stock, which becomes exercisable
in four equal annual installments, with the first such installment
becoming exercisable upon the closing of the Offerings. The exercise price
per share for such option is the price to the public of a share of Common
Stock in the Equity Offering. In addition, Mr. Colantonio has an
opportunity to earn an annual bonus, targeted at 35% of his salary. In
recognition of Mr. Colantonio's services to the Company in obtaining
financing and establishing and maintaining the Company's utility and
customer relationships, the Board of Directors determined that, upon the
closing of the Offerings, Mr. Colantonio will be entitled to a cash bonus
of $500,000. Pursuant to the terms of Mr. Colantonio's employment
agreement with the Company, MaineCom transferred 42,310 shares of Series A
Preferred Stock of the Company to Mr. Colantonio as of April 17, 1998. Mr.
Colantonio may forfeit such shares if he voluntarily terminates employment
with the Company prior to October 14, 2000. See "--Employment Agreements."
Employment Agreements
The Company has entered into an Employment Agreement, dated July 1, 1998,
with Richard Crabtree. This agreement has an initial term expiring on December
31, 1998, and is extendable by mutual agreement of the parties for an
additional three years. The Agreement provides for an annual base salary of not
less than $200,000 per year, as well as an option to purchase 649,628 shares of
Common Stock at an exercise price equal to the price to the public of a share
of Common Stock in the Equity Offering, vesting in three equal annual
installments beginning on the first anniversary of the closing of the
Offerings. Pursuant to the Agreement, Mr. Crabtree is also entitled to
participate in the Company's executive incentive plan and has an opportunity to
earn an annual bonus, targeted at 35% of his base salary.
The Company has entered into an Employment Agreement with Victor
Colantonio, dated October 15, 1997, as amended. This Agreement has an initial
term of three years and automatically extends for one-year terms thereafter
unless either party gives written notice of its desire to terminate the
agreement no later than the immediately preceding April 1. The Agreement
provides for an annual base salary of not less than $150,000. If Mr.
Colantonio's employment is terminated without cause after the occurrence of a
"Change of Control" (as defined
50
<PAGE>
in the Agreement) of the Company, Mr. Colantonio will be entitled to receive a
lump sum payment in an amount equal to 2.99 times his then-current base salary.
Upon consummation of the Offerings, Mr. Colantonio's annual base salary will be
increased to $200,000.
The Company has entered into an Employment Agreement, dated July 1, 1998,
with William Fennell. This Agreement has an initial term expiring on the later
of the third anniversary of the execution date or the third anniversary of the
closing of the Offerings. The Agreement provides for an annual base salary of
not less than $125,000 per year, as well as an option to purchase 162,407
shares of Common Stock at an exercise price equal to the price to the public of
a share of Common Stock in the Equity Offering, vesting in four equal
installments beginning on the date of the closing of the Offerings and on each
of the next three anniversaries of such date. Pursuant to the Agreement, Mr.
Fennell is also entitled to participate in the Company's executive incentive
plan and has an opportunity to earn an annual bonus, targeted at 25% of his
base salary.
The Company has also entered into employment agreements with James Mack,
the Company's Vice President, Sales, and Michael Musen, the Company's Vice
President, Operations, dated May 4, 1998 and September 29, 1994, respectively.
The Company's agreement with Mr. Mack has a term of three years and provides
that Mr. Mack will receive a base salary of at least $150,000 per year and
bonus, awards, cash incentives and stock option incentives having an aggregate
value of at least an additional $150,000 per year provided certain performance
targets are met. Pursuant to the terms of this agreement, Mr. Mack was granted
an option to purchase up to 162,407 shares of the Company's Common Stock, which
become exercisable as to 50% of such shares beginning on April 30, 1999 and as
to an additional 25% on each anniversary of such date. The exercise price per
share is the price to the public of a share of Common Stock in the Equity
Offering. The Company's agreement with Mr. Musen has a term of three years and
renews automatically on an annual basis unless terminated by either party on at
least 180 days' notice. The Agreement provides for an annual base salary of
$112,000. In addition, in June 1998 the Board of Directors granted to Mr. Musen
an option to purchase 40,601 shares of the Company's Common Stock, exercisable
in full upon the closing of the Offerings, with an exercise price per share
equal to the price to the public of a share of Common Stock in the Equity
Offering.
Option Grants
The Company did not grant any options to the Named Executive Officers in
1997.
Option Exercises and Options Outstanding
None of the Named Executive Officers held any options as of December 31,
1997.
1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the "1998 Plan") was adopted by
the Board of Directors on May 18, 1998 and approved by the Company's
stockholders on May 26, 1998. The 1998 Plan provides for the grant of incentive
stock options intended to qualify under Section 422 of the Internal Revenue
Code of 1986, as amended (the "Code"), nonstatutory stock options, restricted
stock awards and other stock-based awards, including the grant of shares based
upon certain conditions, the grant of securities convertible into Common Stock
and the grant of stock appreciation rights (collectively "Awards"). Options may
be granted at an exercise price which may be less than, equal to or greater
than the fair market value of the Common Stock on the date of grant. Under
present law, however, incentive stock options and options intended to qualify
as performance-based compensation under Section 162(m) of the Code may not be
granted at an exercise price less than the fair market value of the Common
Stock on the date of grant (or less than 110% of the fair market value in the
case of incentive stock options granted to optionees holding more than 10% of
the voting power of the Company). Options granted under the 1998 Plan typically
will vest over time, subject to acceleration upon a Change in Control of the
Company (as defined therein). Restricted stock awards entitle recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares from the recipient in the event that the
conditions specified in the applicable Award are not satisfied prior to the end
of the applicable restriction period established for such Award. Under the 1998
Plan, the Board has the right to grant other Awards based upon the Common Stock
having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
Officers, employees, directors, consultants and advisors of the Company and its
subsidiaries are eligible to be granted Awards under the 1998 Plan.
The 1998 Plan is administered by the Board of Directors. The Board has the
authority to adopt, amend and repeal the administrative rules, guidelines and
practices relating to the 1998 Plan and to interpret the provisions
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<PAGE>
of the 1998 Plan. The Board has authorized the Compensation Committee to
administer the granting of options to executive officers under the 1998 Plan.
Upon consummation of the Equity Offering, a total of 2,436,105 shares will
be reserved for issuance under the 1998 Plan, of which 1,705,272 shares will be
subject to options granted to employees of the Company with an exercise price
per share equal to the price to the public of a share of Common Stock in the
Equity Offering. See "--Executive Compensation--Employment Agreements."
Compensation Committee Interlocks and Insider Participation
During 1997, the Company had no compensation committee, and no officers,
other than Messrs. Crabtree and Colantonio, who were also members of the Board
of Directors, participated in deliberations of the Board of Directors
concerning executive officer compensation. No interlocking relationship exists
between any member of the Company's anticipated Compensation Committee and any
member of any other company's board of directors or compensation committee.
52
<PAGE>
CERTAIN TRANSACTIONS
The Company has entered into certain agreements with NU and CMP,
affiliates of which are major stockholders of the Company, relating to fiber
optic facilities and services upon which the NEON system depends. See
"Business--Right-of-Way Agreements." The Company believes that these agreements
are on terms at least as favorable to the Company as could have been obtained
from unaffiliated third parties. NU has waived right-of-way fees otherwise
payable by the Company through 2004 in return for the Company's agreement to
build the NEON system to certain NU facilities and to allow NU to use 12 fibers
on designated route segments in the NU service territory.
In July 1998, the Company entered into a Restructuring and Contribution
Agreement with, inter alia, CMP, MaineCom (an affiliate of CMP) and Mode 1 (an
affiliate of NU) relating to the restructuring of the Company. Pursuant to this
Agreement, each of MaineCom and Mode 1 exchanged membership interests in
subsidiaries of the Company for shares of the Series B Convertible Preferred
Stock of the Company. In addition, pursuant to the Restructuring and
Contribution Agreement, Mr. Colantonio, the Company's President, and Mr. Musen,
the Company's Vice President, Operations, exchanged their membership interests
in FiveCom LLC, a subsidiary of the Company, for shares of the Series B
Convertible Preferred Stock of the Company. See "Business --Reorganization."
During the years ended December 31, 1996 and 1997, the Company reimbursed
CMP and/or MaineCom for personnel and construction costs related to activities
of the Company. The amount paid to CMP totaled $310,591 and $725,000 for the
years ended December 31, 1996 and 1997, respectively. Approximately $0 and
$29,779 was included in accounts payable at December 31, 1996 and 1997,
respectively.
CMP and the Company are parties to a Tax Sharing Agreement pursuant to
which CMP has included the Company in its consolidated federal income tax
return since 1996. At December 31, 1996 and 1997, the amounts due under the Tax
Sharing Agreement to the Company from CMP amounted to approximately $0 and
$368,734, respectively, for current and deferred income tax benefits related to
CMP's utilization of the Company's loss carryforwards. As a result of this
arrangement, the Company has no loss carryforwards.
The Company paid NU $3,719,404 in 1996 and $945,667 in 1997 for materials,
labor and other contractor charges related to the construction of the NEON
system. Approximately $357,100 and $494,500 was included in accounts payable at
December 31, 1996 and 1997, respectively.
CMP agreed to allow right-of-way payments otherwise payable by the Company
to accrue so long as amounts borrowed by the Company from Peoples Heritage
Savings Bank under a $1.6 million construction loan agreement were outstanding.
The Company expects to repay the Peoples Heritage Savings Bank loan with the
proceeds of the Offerings. The amount of right-of-way payments accrued through
March 31, 1998 was approximately $120,000.
For a description of certain employment agreements and other arrangements
between the Company and its executive officers, see "Management--Executive
Compensation."
Upon the closing of the Offerings, the Company has agreed to pay a bonus
of $500,000 to each of Mr. Colantonio and MaineCom. The payment to MaineCom is
in recognition of the services provided by Mr. Crabtree, as an employee of
MaineCom, to the Company.
In October 1997, the Company entered into a Construction Loan Agreement
with CMP, as amended in February 1998 and June 1998 (as amended, the "CMP Loan
Agreement"). Pursuant to the terms of the CMP Loan Agreement, the Company may
borrow up to $30 million to pay approved expenses related to the construction
of the NEON system. Amounts borrowed by the Company bear interest at an annual
interest rate equal to LIBOR plus 3%, and are secured by a first priority
security interest in all of the Company's assets, including the Company's
rights in the NEON system, except that part of the NEON system which is located
in CMP's service territory, as to which CMP's security interest is subordinated
to that of another lender. As of June 30, 1998, the Company had outstanding
principal of approximately $17,875,000 under the CMP Loan Agreement. Amounts
due under the CMP Loan Agreement are being paid in full with the proceeds of
the Offerings. See "Use of Proceeds."
Concurrently with the CMP Loan Agreement, CMP was issued warrants to
purchase 5,876 shares of membership interest in FiveCom LLC with an exercise
price of $.01 per share.
MaineCom has certain rights with respect to the registration of its shares
of the capital stock of the Company. See "Description of Capital
Stock--Registration Rights."
53
<PAGE>
[E] PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's voting securities as of June 30, 1998, assuming
exercise of options exercisable within 60 days of June 30, 1998, and as
adjusted to reflect the sale of the shares of Common Stock offered hereby, by
(i) each Selling Stockholder, (ii) each person who, to the knowledge of the
Company, beneficially owns more than 5% of any class of the Company's voting
securities; (iii) each director of the Company; (iv) each Named Executive
Officer of the Company; and (v) all directors and officers of the Company as a
group.
<TABLE>
<CAPTION>
Shares of Common Shares of Common
Stock Beneficially Stock Beneficially Owned
Owned Prior to the Number of After the Equity
Equity Offering(2) Shares of Offering(2)(3)
------------------------------ Common Stock ---------------------------
Name(1) Number Percent Being Offered Number Percent
- ------------------------------------- ------------------ --------- --------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
5% Stockholders
Central Maine Power Company
83 Edison Drive
Augusta, ME 04336 .................. 6,458,765(4) 53.5% 846,069 5,612,696 34.9%
Northeast Utilities
107 Selden Street
Berlin, CT 06037 ................... 4,992,015(5) 41.4% 653,931 4,338,084 27.0%
Executive Officers and Directors
Richard A. Crabtree(6)(7) ........... -- -- -- -- --
Victor Colantonio(8) ................ 293,122 2.4% -- 293,122 1.8%
William F. Fennell(9) ............... 40,601 * -- 40,601 *
James D. Mack, Jr. .................. -- --
Michael A. Musen(10) ................ 113,141 * -- 113,141 *
John H. Forsgren(11) ................ -- -- -- -- --
David E. Marsh(7) ................... -- -- -- -- --
F. Michael McClain(7) ............... -- -- -- -- --
Gary D. Simon(11) ................... -- -- -- -- --
All executive officers and directors
as a group (9 persons)(12) ......... 446,864 3.6% -- 446,864 2.7%
</TABLE>
- ------------
* Represents less than one percent of the outstanding Common Stock
(1) The address of each person in the table other than Central Maine Power
Company and Northeast Utilities is 391 Totten Pond Road, Suite 401,
Waltham, Massachusetts.
(2) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days after June 30, 1998. The inclusion herein of such shares,
however, does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of such shares. Unless otherwise
indicated, each person or entity named in the table has sole voting power
and investment power (or shares such power with his or her spouse) with
respect to all shares of capital stock listed as owned by such person or
entity.
(3) Assumes no exercise of the Underwriters' over-allotment option.
(4) Consists of 360,430 shares held by CMP and 6,098,335 shares held by
MaineCom, a wholly-owned subsidiary of CMP. Mr. Crabtree, the Chief
Executive Officer and Chairman of the Board of Directors of the Company,
is the President of MaineCom. Mr. Marsh, a director of the Company, is the
Chief Financial Officer of CMP. Mr. McClain, a director of the Company, is
the Vice President, Corporate Development of CMP. Each of Messrs.
Crabtree, Marsh and McClain disclaims beneficial ownership of the shares
held by MaineCom and CMP except to the extent of his pecuniary interest
therein.
54
<PAGE>
(5) All shares beneficially owned by NU are held by Mode 1, a wholly-owned
subsidiary of NU. Mr. Forsgren, a director of the Company, is an Executive
Vice President and the Chief Financial Officer of NU. Mr. Simon, a
director of the Company, is the Senior Vice President-Strategy and
Development for Northeast Utilities Service Company, a service company
affiliate of NU. Each of Messrs. Forsgren and Simon disclaims beneficial
ownership of the shares held by Mode 1 except to the extent of his
pecuniary interest therein.
(6) Does not include 649,628 shares subject to options granted to Mr. Crabtree
in May 1998. See "Management --Executive Compensation."
(7) Does not include shares held by CMP and MaineCom.
(8) Includes 162,407 shares subject to options granted to Mr. Colantonio in
May 1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(9) Includes 40,601 shares subject to options granted to Mr. Fennell in May
1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(10) Includes 40,601 shares subject to options granted to Mr. Musen in June
1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(11) Does not include shares held by Mode 1.
(12) Does not include Katherine D. Courage, who will become a director of the
Company following the completion of the Offerings. Ms. Courage is a
managing director of Credit Suisse First Boston, one of the underwriters
in this Offering. As of June 30, 1998, Ms. Courage did not beneficially
own any shares of Common Stock of the Company.
55
<PAGE>
[D] PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of the Company's voting securities as of June 30, 1998, assuming
exercise of options exercisable within 60 days of June 30, 1998, and as
adjusted to reflect the sale of shares of Common Stock offered in the Equity
Offering, by (i) each person who, to the knowledge of the Company, beneficially
owns more than 5% of any class of the Company's voting securities; (ii) each
director of the Company; (iii) each Named Executive Officer of the Company, and
(iv) all directors and officers of the Company as a group.
<TABLE>
<CAPTION>
Percentage of Shares
Number of of Common Stock
Shares of Beneficially Owned
Common Stock ------------------------------------
Beneficially Prior to the After the
Name(1) Owned(1) Offerings Offerings(2)(3)
- ----------------------------------------- ------------------ -------------- ----------------
<S> <C> <C> <C>
5% Stockholders
Central Maine Power Company
83 Edison Drive
Augusta, ME 04336 ...................... 6,458,765(4) 53.5% 34.9%
Northeast Utilities
107 Selden Street
Berlin, CT 06037 ....................... 4,992,015(5) 41.4% 27.0%
Executive Officers and Directors
Richard A. Crabtree(6)(7) ............... -- -- --
Victor Colantonio(8) .................... 293,122 2.4% 1.8
William F. Fennell(9) ................... 40,601 * *
James D. Mack, Jr.(10) .................. -- -- --
Michael A. Musen(10) .................... 113,141 * *
John H. Forsgren(11) .................... -- -- --
David E. Marsh(7) ....................... -- -- --
F. Michael McClain(7) ................... -- -- --
Gary D. Simon(11) ....................... -- -- --
All executive officers and directors as a
group (9 persons)(12) .................. 446,864 3.6% 2.7%
</TABLE>
- ------------
* Represents less than one percent of the outstanding Common Stock
(1) The address of each person in the table other than Central Maine Power
Company and Northeast Utilities is 391 Totten Pond Road, Suite 401,
Waltham, Massachusetts 02154.
(2) The number of shares beneficially owned by each stockholder is determined
under rules promulgated by the Securities and Exchange Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days after June 30, 1998. The inclusion herein of such shares,
however, does not constitute an admission that the named stockholder is a
direct or indirect beneficial owner of such shares. Unless otherwise
indicated, each person or entity named in the table has sole voting power
and investment power (or shares such power with his or her spouse) with
respect to all shares of capital stock listed as owned by such person or
entity.
(3) Assumes no exercise of the Underwriters' over-allotment option in the
Equity Offering. Reflects the sale by each of the Company, CMP (including
shares held by MaineCom Services) and Mode 1 of 4,000,000, 846,069 and
653,931 shares of Common Stock, respectively, in the Equity Offering.
(4) Consists of 360,430 shares held by CMP and 6,098,335 shares held by
MaineCom Services, a wholly-owned subsidiary of CMP. Mr. Crabtree, the
Chief Executive Officer and Chairman of the Board of Directors of the
Company, is the President of MaineCom. Mr. Marsh, a director of the
Company, is the Chief Financial Officer of CMP. Mr. McClain, a director of
the Company, is the Vice President, Corporate Development of CMP.
56
<PAGE>
Each of Messrs. Crabtree, Marsh and McClain disclaims beneficial ownership
of the shares held by MaineCom and CMP except to the extent of his
pecuniary interest therein.
(5) All shares beneficially owned by NU are held by Mode 1, a wholly-owned
subsidiary of NU. Mr. Forsgren, a director of the Company, is an Executive
Vice President and the Chief Financial Officer of NU. Mr. Simon, a
director of the Company, is the Senior Vice President-Strategy and
Development for Northeast Utilities Service Company, a service company
affiliate of NU. Each of Messrs. Forsgren and Simon disclaims beneficial
ownership of the shares held by Mode 1 except to the extent of his
pecuniary interest therein.
(6) Does not include 649,628 shares subject to options granted to Mr. Crabtree
in May 1998. See "Management --Executive Compensation."
(7) Does not include shares held by CMP and MaineCom.
(8) Includes 162,407 shares subject to options granted to Mr. Colantonio in
May 1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(9) Includes 40,601 shares subject to options granted to Mr. Fennell in May
1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(10) Includes 40,601 shares subject to options granted to Mr. Musen in June
1998 exercisable within 60 days after June 30, 1998. See
"Management--Executive Compensation."
(11) Does not include shares held by Mode 1.
(12) Does not include Katherine D. Courage, who will become a director of the
Company following the completion of the Offerings. Ms. Courage is a
managing director of Credit Suisse First Boston, one of the underwriters
in this Offering. As of June 30, 1998, Ms. Courage did not beneficially
own any shares of Common Stock of the Company.
57
<PAGE>
DESCRIPTION OF CAPITAL STOCK
As of March 31, 1998 (after giving effect to the Reorganization and the
Preferred Stock Conversion), there were outstanding an aggregate of 12,062,735
shares of Common Stock held of record by 21 stockholders.
Common Stock
The Company's Restated Certificate of Incorporation authorizes the
issuance of up to 30,000,000 shares of Common Stock, $.01 par value per share.
Holders of Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of Common Stock are entitled to receive ratably
such dividends, if any, as may be declared by the Board of Directors out of
funds legally available therefor, subject to any preferential dividend rights
of outstanding Preferred Stock. Upon the liquidation, dissolution or winding up
of the Company, the holders of Common Stock are entitled to receive ratably the
net assets of the Company available after the payment of all debts and other
liabilities and subject to the prior rights of any outstanding Preferred Stock.
Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Equity Offering will be, when issued and paid
for, fully paid and nonassessable. The rights, preferences and privileges of
holders of Common Stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of Preferred Stock which the
Company may designate and issue in the future.
Preferred Stock
The Restated Certificate of Incorporation authorizes the issuance of up to
2,000,000 shares of Preferred Stock, $.01 par value per share. Under the terms
of the Restated Certificate of Incorporation, the Board of Directors is
authorized, subject to any limitations prescribed by law, without stockholder
approval, to issue such shares of Preferred Stock in one or more series. Each
such series of Preferred Stock shall have such rights, preferences, privileges
and restrictions, including voting rights, dividend rights, conversion rights,
redemption privileges and liquidation preferences, as shall be determined by
the Board of Directors.
The purpose of authorizing the Board of Directors to issue Preferred Stock
and determine its rights and preferences is to eliminate delays associated with
a stockholder vote on specific issuances. The issuance of Preferred Stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could have the effect of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring,
a majority of the outstanding voting stock of the Company. The Company has no
present plans to issue any shares of Preferred Stock.
Delaware Law and Certain Charter and Bylaw Provisions
The Company is subject to the provisions of Section 203 of the General
Corporation Law of Delaware. Section 203 prohibits a publicly-held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless the business
combination is approved in a prescribed manner. A "business combination"
includes mergers, asset sales and other transactions resulting in a financial
benefit to the interested stockholder. Subject to certain exceptions, an
"interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
Under the Restated Certificate of Incorporation, any vacancy on the Board
of Directors, however occurring, including a vacancy resulting from an
enlargement of the Board, may only be filled by vote of a majority of the
directors then in office. The Restated Certificate of Incorporation also
provides that any action required or permitted to be taken by the stockholders
of the Company at an annual meeting or special meeting of stockholders may only
be taken if it is properly brought before such meeting and may not be taken by
written action in lieu of a meeting. The Restated Certificate of Incorporation
further provides that special meetings of the stockholders may only be called
by a Chairman of the Board of Directors or by the Board of Directors. Under the
Company's Bylaws, in order for any matter to be considered "properly brought"
before a meeting, a stockholder must comply with certain requirements regarding
advance notice to the Company. The foregoing provisions could have the effect
of delaying until the next stockholders' meeting stockholder actions which are
favored by the holders of a majority of the
58
<PAGE>
outstanding voting securities of the Company. These provisions may also
discourage another person or entity from making a tender offer for the
Company's Common Stock, because such person or entity, even if it acquired a
majority of the outstanding voting securities of the Company, would be able to
take action as a stockholder (such as electing new directors or approving a
merger) only at a duly called stockholders' meeting, and not by written
consent.
The Restated Certificate of Incorporation contains certain provisions
permitted under the General Corporation Law of Delaware relating to the
liability of directors. The provisions eliminate a director's liability for
monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, the Restated Certificate of Incorporation
contains provisions to indemnify the Company's directors and officers to the
fullest extent permitted by the General Corporation Law of Delaware. The
Company believes that these provisions will assist the Company in attracting
and retaining qualified individuals to serve as directors.
Transfer Agent and Registrar
The transfer agent and registrar for the Company's Common Stock is
BankBoston, N.A.
Registration Rights
In November 1995, the Company and MaineCom entered into a Stock
Subscription Agreement, pursuant to which MaineCom purchased shares of the
Company's Series B Convertible Preferred Stock. Pursuant to the terms of the
Agreement, MaineCom has the right to have the shares of Common Stock issuable
upon conversion of its shares of Series B Convertible Preferred Stock
("Registrable Securities") included in any registration statement filed by the
Company relating to any public offering of the Company's Common Stock, except
to the extent the number of such shares may be limited by the managing
underwriter of any such offering. In addition, MaineCom may request that the
Company register all or part of the Registrable Securities at any time at least
180 days after the effective date of a registered underwritten offering of the
Company's Common Stock, provided that the anticipated aggregate net offering
price for such securities is at least $10,000,000.
In May 1996, the Company issued a warrant to Oppenheimer & Co., Inc. (now
CIBC Oppenheimer Corp.) ("Oppenheimer"), relating to the right to purchase
65,167 shares of the Company's Series B Convertible Preferred Stock (the
"Oppenheimer Warrant"). Pursuant to the terms of the Oppenheimer Warrant, upon
Oppenheimer's request, the Company is required to include any securities
issuable with respect to the Oppenheimer Warrant ("Oppenheimer Registrable
Securities") in any registration statement filed by the Company (other than a
Registration Statement on Form S-8) relating to any public offering of the
Company's Common Stock. In addition, if requested by the holders of 50% of the
Oppenheimer Registrable Securities, the Company is required to register such
securities on a Registration Statement on Form S-3 when the Company becomes
eligible to use such form. However, in lieu of either of the above-referenced
registrations, the Company may purchase the Oppenheimer Registrable Securities
for an amount in cash equal to 95% of the difference between (a) the last sale
price of such securities on the day the request for registration is made and
(b) the exercise price in effect for the Oppenheimer Warrant on such day.
Principal Stockholders Agreement
CMP and NU have entered into an agreement dated May 20, 1998, whereby each
such party agrees that, following the completion of the Offerings, it will not
permit or cause the Company to (i) merge or consolidate, liquidate or dissolve,
change its form of organization or sell, lease, exchange or transfer all or
substantially all of its assets or (ii) seek bankruptcy protection or certain
other protection from creditors, without the consent of both parties. In
addition, each of NU and CMP has rights of first offer in connection with the
proposed sale of Common Stock of the Company held by the other party and the
option to purchase the shares of Common Stock of the Company held by the other
party if such other party seeks bankruptcy protection or similar relief. After
the closing of the Offerings, this agreement will remain in effect for so long
as (a) NU owns at least 10% of the outstanding Common Stock of the Company,
fully diluted and (b) the aggregate Common Stock of the Company owned by NU and
CMP is at least 331/3% of the outstanding Common Stock of the Company, fully
diluted.
59
<PAGE>
[E] DESCRIPTION OF CERTAIN INDEBTEDNESS
Concurrently with the Equity Offering, the Company is offering $165.0
million aggregate principal amount of its % Senior Notes Due 2008 pursuant
to the Debt Offering. The following is a summary of certain terms of the Notes
and is qualified in its entirety by reference to the Indenture (the
"Indenture") relating to the Notes.
The Notes will be senior unsecured (except to the extent of the Pledge
Account and the Pledged Securities (each as defined in the Indenture))
obligations of the Company, and will mature on , 2008. The Notes will pay
interest semiannually each and , commencing on , 1999. Upon the
closing of the Debt Offering, the Company will purchase U.S. government
obligations in such amount as will be sufficient, upon receipt of scheduled
interest and principal payments on such securities, to provide for payment in
full of the first seven scheduled interest payments on the Notes. Such
securities will be pledged as security for the benefit of the holders of the
Notes.
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.
Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder of Notes will have the right to require the Company to purchase all
or a portion of such holder's Notes at a price equal to 101% of the principal
amount thereof, together with accrued and unpaid interest, if any, to the date
of purchase.
The Indenture will contain certain covenants, including covenants that
limit (i) indebtedness, (ii) restricted payments, (iii) restrictions on
distributions from certain subsidiaries, (iv) transactions with affiliates, (v)
sales of assets and subsidiary stock (including sale and leaseback
transactions), (iv) sale or issuance of capital stock of certain subsidiaries,
(vii) liens and (viii) mergers, consolidations or transfers of assets.
60
<PAGE>
[D] DESCRIPTION OF THE NOTES
General
The Notes are to be issued under an Indenture, to be dated as of ,
1998 (the "Indenture"), between the Company and U.S. Bank Trust National
Association, as Trustee (the "Trustee"). A copy of the form of the Indenture is
filed as an exhibit to the Registration Statement of which this Prospectus is a
part. The Indenture will be subject to the Trust Indenture Act of 1939, as
amended (the "Trust Indenture Act"). The following summary of the material
provisions of the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, all the provisions of the
Indenture, including the definitions of certain terms therein and those terms
made a part thereof by the Trust Indenture Act. For purposes of this summary,
the term "Company" refers only to NorthEast Optic Network, Inc., and not to any
of its subsidiaries.
The Notes will be issued only in fully registered form, without coupons,
in denominations of $1,000 and any integral multiple of $1,000. No service
charge shall be made for any registration of transfer or exchange of Notes, but
the Company may require payment of a sum sufficient to cover any transfer tax
or other similar governmental charge payable in connection therewith.
Terms of the Notes
The Notes will be senior unsecured (except to the extent of the Pledge
Account and the Pledged Securities) obligations of the Company, limited to
$165.0 million aggregate principal amount, and will mature on , 2008. The
Notes will bear interest at the rate per annum shown on the cover page hereof
from , 1998, or from the most recent date to which interest has been paid
or provided for, payable semiannually to Holders of record at the close of
business on the or immediately preceding the interest payment date on
and of each year, commencing , 1999. The Company will pay interest on
overdue principal at 1% per annum in excess of such rate, and it will pay
interest on overdue installments of interest at such higher rate to the extent
lawful. Interest will be computed on the basis of a 360-day year of twelve
30-day months.
Optional Redemption
The Notes will not be redeemable at the option of the Company prior to
, 2003. Thereafter, the Notes will be redeemable, at the Company's option,
in whole or in part, at any time or from time to time, upon not less than 30
nor more than 60 days' prior notice mailed by first-class mail to each Holder's
registered address, at the following redemption prices (expressed in
percentages of principal amount), plus accrued and unpaid interest, if any, to
the redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on of the years set forth
below:
<TABLE>
<CAPTION>
Redemption
Period Price
------ -----------
<S> <C>
2003 ........................ %
2004 ........................
2005 ........................
2006 and thereafter ......... 100
</TABLE>
In 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 (except
to the extent of the Pledge Account and the Pledged Securities) obligations of
the Company. The Notes will be senior in right of payment to all subordinated
indebtedness of the Company and will rank pari passu in right of payment with
all existing and future
61
<PAGE>
indebtedness of the Company that is not by its terms subordinated in right and
priority to the Notes. As of March 31, 1998, after giving effect to the
issuance of the Notes and the application of the net proceeds therefrom, the
Company's senior indebtedness outstanding would have been approximately $165.4
million (consisting of the Notes and $437,042 of other indebtedness).
A portion of the operations of the Company are conducted through its
subsidiaries. Claims of creditors of such subsidiaries, including trade
creditors, secured creditors and creditors holding indebtedness and guarantees
issued by such subsidiaries, and claims of preferred stockholders (if any) of
such subsidiaries generally will have priority with respect to the assets and
earnings of such subsidiaries over the claims of creditors of the Company,
including holders of the Notes. The Notes, therefore, will be effectively
subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of subsidiaries of the Company. As of March 31, 1998, on
a pro forma as adjusted basis after giving effect to the Offering and the
application of the net proceeds therefrom and to the Reorganization, the total
liabilities of the Company's subsidiaries were approximately $289,000,
including trade payables. Although the Indenture limits the incurrence of
Indebtedness and preferred stock of certain of the Company's subsidiaries, such
limitation is subject to a number of significant qualifications. Moreover, the
Indenture does not impose any limitation on the incurrence by such subsidiaries
of liabilities that are not considered Indebtedness or Preferred Stock under
the Indenture. See "--Certain Covenants--Limitation on Indebtedness."
Security
The Indenture will provide that upon the closing of the Debt Offering, the
Company shall apply a portion of the net proceeds of the Debt Offering to
purchase, and pledge to the Trustee for the benefit of the holders of the
Notes, the Pledged Securities in such amount as will be sufficient upon receipt
of scheduled interest and principal payments on such securities to provide for
payment in full of the first seven scheduled interest payments due on the
Notes. The Company expects to use approximately $65.0 million of the net
proceeds of the Debt Offering to acquire the Pledged Securities; however, the
precise amount of securities to be acquired will depend upon the interest rates
on U.S. Government Obligations prevailing at the time of the closing of the
Debt Offering and the interest rate on the Notes. The Pledged Securities will
be pledged by the Company to the Trustee for the benefit of the Holders of the
Notes pursuant to a Pledge Agreement and will be held by the Trustee in the
Pledge Account. Pursuant to the Pledge Agreement, immediately prior to an
interest payment date on the Notes, the Company may either deposit with the
Trustee, from funds otherwise available to the Company, cash sufficient to pay
the interest scheduled to be paid on such date or the Company may direct the
Trustee to release from the Pledge Account proceeds sufficient to pay interest
then due. In the event that the Company exercises the former option, the
Company may thereafter direct the Trustee to release to the Company proceeds or
Pledged Securities from the Pledge Account in like amount. The failure by the
Company to pay interest on the Notes in a timely manner through ,
2002 will constitute an immediate Event of Default under the Indenture, with no
grace period or cure period.
Interest earned on the Pledged Securities will be added to the Pledge
Account. In the event that the funds or Pledged Securities held in the Pledge
Account exceed the amount sufficient, in the opinion of a nationally recognized
firm of independent public accountants selected by the Company, to provide for
payment in full of the first seven scheduled interest payments due on the Notes
(or, in the event an interest payment or payments have been made, an amount
sufficient to provide for payment in full of any interest payments remaining,
up to and including the seventh scheduled interest payment) the Trustee will
release to the Company at the Company's request any such excess amount. The
Notes will be secured by a first priority security interest in the Pledged
Securities and in the Pledge Account and the Pledged Securities and the Pledge
Account will also secure repayment of the principal amount of the Notes to the
extent of such security.
Under the Pledge Agreement, assuming that the Company makes the first
seven scheduled interest payments on the Notes in a timely manner, all of the
Pledged Securities will have been released from the Pledge Account and
thereafter the Notes will be unsecured.
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<PAGE>
Book-Entry, Delivery and Form
The Notes sold will be issued in the form of a Global Note. The Global
Note will be deposited with, or on behalf of, the Depository and registered in
the name of the Depository or its nominee. Except as set forth below, the
Global Note may be transferred, in whole and not in part, only to the
Depository or another nominee of the Depository. Investors may hold their
beneficial interests in the Global Note directly through the Depository if they
have an account with the Depository or indirectly through organizations which
have accounts with the Depository.
Upon the transfer of a Note in definitive form, such Note will, unless the
Global Note has previously been exchanged for Notes in definitive form, be
exchanged for an interest in the Global Note representing the principal amount
of Notes being transferred.
The Depository has advised the Company as follows: The Depository is a
limited-purpose trust company and organized under the laws of the State of New
York, a member of the Federal Reserve System, a "clearing corporation" within
the meaning of the New York Uniform Commercial Code, and "a clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. The
Depository was created to hold securities of institutions that have accounts
with the Depository ("participants") and to facilitate the clearance and
settlement of securities transactions among its participants in such securities
through electronic book-entry changes in accounts of the participants, thereby
eliminating the need for physical movement of securities certificates. The
Depository's participants include securities brokers and dealers (which may
include the Initial Purchasers), banks, trust companies, clearing corporations
and certain other organizations. Access to the Depository's book-entry system
is also available to others such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a participant,
whether directly or indirectly.
Upon the issuance of the Global Note, the Depository will credit, on its
book-entry registration and transfer system, the principal amount of the Notes
represented by such Global Note to the accounts of participants. Ownership of
beneficial interests in the Global Note will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interests in the Global Note will be shown on, and the transfer of those
ownership interests will be effected only through, records maintained by the
Depository (with respect to participants' interest) and such participants (with
respect to the owners of beneficial interests in the Global Note other than
participants). The laws of some jurisdictions may require that certain
purchasers of securities take physical delivery of such securities in
definitive form. Such limits and laws may impair the ability to transfer or
pledge beneficial interests in the Global Note.
So long as the Depository, or its nominee, is the registered holder and
owner of the Global Note, the Depository or such nominee, as the case may be,
will be considered the sole legal owner and holder of the related Notes for all
purposes of such Notes and the Indenture. Except as set forth below, owners of
beneficial interests in the Global Note will not be entitled to have the Notes
represented by the Global Note registered in their names, will not receive or
be entitled to receive physical delivery of certificated Notes in definitive
form and will not be considered to be the owners or holders of any Notes under
the Global Note. The Company understands that under existing industry practice,
in the event an owner of a beneficial interest in the Global Note desires to
take any action that the Depository, as the holder of the Global Note, is
entitled to take, the Depository would authorize the participants to take such
action, and that the participants would authorize beneficial owners owning
through such participants to take such action or would otherwise act upon the
instructions of beneficial owners owning through them.
Payment of principal of and interest on Notes represented by the Global
Note registered in the name of and held by the Depository or its nominee will
be made to the Depository or its nominee, as the case may be, as the registered
owner and holder of the Global Note.
The Company expects that the Depository or its nominee, upon receipt of
any payment of principal of or interest on the Global Note, will credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of the Global Note as
shown on the records of the Depository or its nominee. The Company also expects
that payments by participants to owners of beneficial interests in the Global
Note held through such participants will be governed by standing instructions
and customary practices and will 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
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or for any other aspect of the relationship between the Depository and its
participants or the relationship between such participants and the owners of
beneficial interests in the Global Note owning through such participants.
Unless and until it is exchanged in whole or in part for certificated
Notes in definitive form, the Global Note may not be transferred except as a
whole by the Depository to a nominee of such Depository or by a nominee of such
Depository to such Depository or another nominee of such Depository.
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Note among participants of the
Depository, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depository or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations.
Certificated Notes
The Notes represented by the Global Note are exchangeable for certificated
Notes in definitive form of like tenor as such Notes in denominations of U.S.
$1,000 and integral multiples thereof if (i) the Depository notifies the
Company that it is unwilling or unable to continue as Depository for the Global
Note or if at any time the Depository ceases to be a clearing agency registered
under the Exchange Act and a successor Depository is not appointed by the
Company within 90 days, (ii) the Company in its discretion at any time
determines not to have all of the Notes represented by the Global Note or (iii)
an Event of Default has occurred and is continuing. Any Note that is
exchangeable pursuant to the preceding sentence is exchangeable for
certificated Notes issuable in authorized denominations and registered in such
names as the Depository shall direct. Subject to the foregoing, the Global Note
is not exchangeable, except for a Global Note of the same aggregate
denomination to be registered in the name of the Depository or its nominee.
Same-Day Payment
The Indenture will require that payments in respect of Notes (including
principal, premium and interest) be made by wire transfer of immediately
available funds to the accounts specified by the holders thereof or, if no such
account is specified, by mailing a check to each such holder's registered
address.
Change of Control
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company
repurchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof on the date of purchase, plus accrued and unpaid
interest, if any, to the date of purchase (subject to the right of holders of
record on the relevant record date to receive interest due on the relevant
interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act), other than one or more Permitted Holders, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 3d-5 under the Exchange
Act, except that for purposes of this clause (i) such person shall be
deemed to have "beneficial ownership" of all shares that any such person
has the right to acquire, whether such right is exercisable immediately or
only after the passage of time), directly or indirectly, of more than 35%
of the total voting power of the Voting Stock of the Company; provided,
however, that the Permitted Holders beneficially own (as defined in Rules
13d-3 and 13d-5 under the Exchange Act), directly or indirectly, in the
aggregate a lesser percentage of the total voting power of the Voting Stock
of the Company than such other person and do not have the right or ability
by voting power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause (i),
such other person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by another Person (a "parent corporation") if
such other person is the beneficial owner (as described in this clause
(i)), directly or indirectly, of more than 35% of the voting power of the
Voting Stock of such parent corporation and the Permitted Holders
beneficially own (as described in this clause (i)), directly or indirectly,
in the aggregate a lesser percentage of the voting power 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);
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(ii) individuals who on the Issue Date constituted the Board of Directors
(together with any new directors whose election by such Board of Directors
or whose nomination for election by the shareholders of the Company was
approved by a vote of 662/3% of the directors of the Company then still in
office who were either directors on the Issue Date or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors then in office;
(iii) the adoption of a plan relating to the liquidation or dissolution
of the Company; or
(iv) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled by the Permitted Holders),
and, in the case of any such merger or consolidation, the securities of the
Company that are outstanding immediately prior to such transaction and
which represent 100% of the aggregate voting power of the Voting Stock of
the Company are changed into or exchanged for cash, securities or property,
unless pursuant to such transaction such securities are changed into or
exchanged for, in addition to any other consideration, securities of the
surviving corporation that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of the
surviving corporation.
Within 30 days following any Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee (the "Change of Control
Offer") stating: (1) that a Change of Control has occurred and that such Holder
has the right to require the Company to purchase such Holder's Notes at a
purchase price in cash equal to 101% of the principal amount thereof on the
date of purchase, plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of holders of record on the relevant record date
to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by
the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.
If a Holder's Notes are redeemed by the Company pursuant to its option to
redeem Notes as described under "--Optional Redemption" prior to the date on
which the Company would be obligated to pay for such Notes tendered pursuant to
a Change of Control Offer, such Holder will be entitled to receive only the
redemption price. The Company will not be required to make a Change of Control
Offer following a Change of Control if a third party makes the Change of
Control Offer in the manner, at the times and otherwise in compliance with the
requirements set forth in the Indenture applicable to a Change of Control Offer
made by the Company and purchases all Notes validly tendered and not withdrawn
under such Change of Control Offer.
The Company shall comply, to the extent applicable, with the requirements
of Section 14(e) of the Exchange Act and any other securities laws or
regulations in connection with the repurchase of Notes pursuant to this
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that
the Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancings or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "--Certain Covenants--Limitation on Indebtedness",
"--Limitation on Liens" and "--Limitation on Sale/Leaseback Transactions." Such
restrictions can only be waived with the consent of the holders of a majority
in principal amount of the Notes then outstanding. Except for the limitations
contained in 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.
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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 a positive number that is less than 5.5 to 1.0 if such
Indebtedness is Incurred on or prior to December 31, 2000 or 5.0 to 1.0 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and the
Restricted Subsidiaries may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to Credit Agreements; provided, however,
that, after giving effect to any such Incurrence, the aggregate
principal amount of such Indebtedness then outstanding does not exceed
$50.0 million less the sum of all principal payments with respect to
such Indebtedness pursuant to paragraph (a)(ii)(A) of the covenant
described under "--Limitation on Sales of Assets and Subsidiary Stock";
(2) Indebtedness owed to and held by the Company or a Restricted
Subsidiary; provided, however, that (i) any subsequent issuance or
transfer of any Capital Stock of a Restricted Subsidiary which results
in any such Indebtedness being owned or held by a Person that is no
longer a Restricted Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or a Restricted Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the obligor thereon and (ii) if the Company is the
obligor on such Indebtedness, such Indebtedness is expressly
subordinated to the prior payment in full in cash of all obligations
with respect to the Notes;
(3) the Notes;
(4) Indebtedness outstanding on the Issue Date (other than Indebtedness
described in clause (1), (2) or (3) of this covenant);
(5) Refinancing Indebtedness in respect of Indebtedness Incurred pursuant
to paragraph (a) or pursuant to clause (3) or (4) above, this clause (5)
or clauses (7), (8) or (10) below; provided, however, that to the extent
such Refinancing Indebtedness directly or indirectly Refinances
Indebtedness of a Restricted Subsidiary described in clause (10), such
Refinancing Indebtedness shall be Incurred only by such Restricted
Subsidiary;
(6) Hedging Obligations directly related to Indebtedness permitted to be
Incurred by the Company or any Restricted Subsidiary pursuant to
paragraphs (a) or (b) hereof;
(7) Indebtedness (including Indebtedness of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such
Subsidiary was acquired by the Company or another Restricted Subsidiary)
Incurred to finance the cost (including the cost of design, development,
acquisition, construction, installation, improvement, transportation and
integration) of acquiring property, plant and equipment or inventory to
be used in connection with a Telecommunications Business (including
acquisitions by way of capital lease and acquisitions of the Capital
Stock of a Person that becomes a Restricted Subsidiary 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; provided that such Telecommunications
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Business is not located principally in Maine, New Hampshire,
Massachusetts, Connecticut or along a route between and including New
York City and White Plains, New York;
(8) Indebtedness of the Company Incurred after the Issue Date in an amount
which, when taken together with the amount of any other Indebtedness
Incurred after the Issue Date pursuant to this clause (8) does not
exceed two times the Net Cash Proceeds received by the Company after the
Issue Date as a capital contribution from, or from the issuance and sale
of its Capital Stock (other than Disqualified Stock) to, a Person that
is not a Subsidiary of the Company, to the extent such Net Cash Proceeds
have not been used pursuant to paragraph (a)(3)(B) or paragraph (b)(i)
of the covenant described under "--Limitation on Restricted Payments" to
make a Restricted Payment; provided, however, that such Indebtedness
does not mature prior to the Stated Maturity of the Notes and has an
Average Life longer than the Average Life of the Notes;
(9) Guarantees by any Restricted Subsidiary of the Notes, Indebtedness
Incurred pursuant to paragraph (a) above and any Indebtedness that
Refinances the Notes or any Indebtedness Incurred pursuant to paragraph
(a) above;
(10) Indebtedness of a Restricted Subsidiary Incurred and outstanding on or
prior to the date on which such Subsidiary was acquired by the Company
(other than Indebtedness Incurred in connection with, or to provide all
or any portion of the funds or credit support utilized to consummate,
the transaction or series of related transactions pursuant to which
such Subsidiary became a Subsidiary or was acquired by the Company);
provided, however, that on the date of such acquisition and after
giving effect thereto, the Company would have been able to Incur at
least $1.00 of additional Indebtedness pursuant to paragraph (a)
hereof; and
(11) Indebtedness Incurred in an aggregate amount which, when taken
together with the aggregate amount of all other Indebtedness of the
Company and its Restricted Subsidiaries outstanding on the date of such
Incurrence (other than Indebtedness permitted by clause (1) through
(10) above or paragraph (a)) does not exceed $5 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof
are used, directly or indirectly, to Refinance any Subordinated Obligations
unless such Indebtedness shall be subordinated to the Notes to at least the
same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses
and (ii) an item of Indebtedness may be divided and classified in more than one
of the types of Indebtedness described above. For the purposes of determining
the amount of Indebtedness outstanding at any time, Guarantees with respect to
Indebtedness otherwise included in the determination of such amount shall not
be included.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any Restricted Subsidiary, directly or indirectly, to make a
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); (2) the Company is not able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under "--Limitation on Indebtedness"; or (3) the aggregate amount of
such Restricted Payment and all other Restricted Payments since the Issue Date
would exceed the sum of (without duplication):
(A) the remainder of (x) cumulative EBITDA during the period (taken as a
single accounting period) beginning on the first day of the fiscal
quarter of the Company beginning after the Issue Date and ending on the
last day of the most recent fiscal quarter for which financial
statements have been made publicly available but in no event ending more
than 135 days prior to the date of such determination minus (y) the
product of 1.5 times cumulative Consolidated Interest Expense during
such period;
(B) the aggregate Net Cash Proceeds received by the Company from the
issuance or sale of its Capital Stock (other than Disqualified Stock)
subsequent to the Issue Date (other than an (x) issuance or sale to a
Subsidiary of the Company, (y) an issuance or sale to an employee stock
ownership plan or to a trust
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established by the Company or any of its Subsidiaries for the benefit of
their employees and (z) an issuance or sale that served as the basis for
the Incurrance of Indebtedness pursuant to paragraph (b)(8) of the
covenant described under Limitation on Indebtedness);
(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, 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 or Capital Stock, the
issuance or sale of which served as the basis for the Incurrence of
Indebtedness pursuant to Section 4.03(b)(8)); provided, however, that (A)
such Restricted Payment shall be excluded in the calculation of the amount
of Restricted Payments and (B) the Net Cash Proceeds from such sale used
to make such Restricted Payment shall be excluded from the calculation of
amounts under clause (3)(B) of paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent sale
of, Indebtedness of the Company which is permitted to be Incurred pursuant
to the covenant described under "--Limitation on Indebtedness"; provided,
however, that such purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value shall be excluded in the calculation of
the amount of Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration thereof
if at such date of declaration such dividend would have complied with this
covenant; provided, however, that at the time of payment of such dividend,
no other Default shall have occurred and be continuing (or result
therefrom); provided further, however, that such dividend shall be included
in the calculation of the amount of Restricted Payments; or
(iv) the repurchase or other acquisition of shares of, or options to
purchase shares of, common stock of the Company or any of its Subsidiaries
from employees, former employees, directors or former directors of the
Company or any of its Subsidiaries (or permitted transferees of such
employees, former employees, directors or former directors), pursuant to
the terms of the agreements (including employment agreements) or plans (or
amendments thereto) approved by the Board of Directors under which such
individuals purchase or sell or are granted the option to purchase or sell,
shares of such common stock; provided, however, that the aggregate amount
of such repurchases and other acquisitions shall not exceed $500,000 in any
calendar year; provided further, however, that such repurchases and other
acquisitions shall be excluded in the calculation of the amount of
Restricted Payments.
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary to (a) pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) make any loans or advances to the Company or (c) transfer any
of its property or assets to
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the Company (the payments, distributions, loans, advances and transfers
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 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
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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 principal amount (without premium) plus accrued
but unpaid interest in accordance with the procedures (including prorating in
the event of oversubscription) set forth in the Indenture. The Company shall
not be required to make such an offer to purchase Notes pursuant to this
covenant if the Net Available Cash available therefor is less than $5 million
(which lesser amount shall be carried forward for purposes of determining
whether such an offer is required with respect to the Net Available Cash from
any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $1.0 million, (i) are set forth in
writing and (ii) have been approved by a majority of the members of the Board
of Directors having no personal stake in such Affiliate Transaction and (3) if
such Affiliate Transaction involves as amount in excess of $5.0 million, have
been determined by nationally recognized investment banking firm to be fair,
from a financial standpoint, to the Company and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to the covenant described
under "--Limitation on Restricted Payments", (ii) any issuance of securities,
or other payments, awards or grants in cash, securities or otherwise pursuant
to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of the Company pursuant to
plans approved by the Board of Directors, (iv) loans or advances to employees
in the ordinary course of business in accordance with
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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 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
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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, as to any interest payment date
falling on or prior to , 2002, and any such default in the payment of
interest on the Notes continued for 30 days as to any interest payment date
thereafter, (ii) a default in the payment of principal of any Note when due at
its Stated Maturity, upon optional redemption, upon required repurchase, upon
declaration or otherwise, (iii) the failure by the Company to comply with its
obligations under "--Certain Covenants--Merger and Consolidation" above, (iv)
the failure by the Company to comply for 30 days after notice with any of its
obligations in the covenants described above under "--Change of Control" (other
than a failure to purchase Notes) or under "--Certain Covenants" under
"--Limitation on Indebtedness", "--Limitation on Restricted Payments",
"--Limitation on Restrictions on Distributions from Restricted Subsidiaries",
"--Limitation on Sales of Assets and Subsidiary Stock" (other than a failure to
purchase Notes), "--Limitation on Affiliate Transactions", "--Limitation on the
Sale or Issuance of Capital Stock of Restricted Subsidiaries", "--Limitation on
Liens", "--Limitation on Sale/Leaseback Transactions", "--Future Guarantors" or
"--SEC Reports", (v) the failure by the Company to comply for 60 days after
notice with its other agreements contained in the Indenture, (vi) Indebtedness
of the Company or any Significant Subsidiary not being paid within any
applicable grace period after final maturity or being accelerated by the
holders thereof because of a default and the total amount of such Indebtedness
unpaid or accelerated exceeds $5 million (the "cross acceleration provision"),
(vii) certain events of bankruptcy, insolvency or reorganization of the Company
or a Significant Subsidiary (the "bankruptcy provisions"), (viii) any judgment
or decree for the payment of money in excess of $5 million is entered against
the Company or a Significant Subsidiary, remains outstanding for a period of 60
days following such judgment and is not discharged, waived or stayed within 10
days after notice (the "judgment default provision") or (ix) the security
interest under the Pledge Agreement shall cease to be in full force and effect
for any reason other than in accordance with its terms or such security
interest shall be declared invalid or unenforceable or the Company shall
assert, in any pleading in any court of competent jurisdiction, that such
security interest is invalid or unenforceable (the "security default
provision"). However, a default under clauses (iv), (v) and (viii) will not
constitute an Event of Default until the Trustee or the holders of 25% in
principal amount of the outstanding Notes notify the Company of the default and
the Company does not cure such default within the time specified after receipt
of such notice.
If an Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount of the outstanding Notes may
declare the principal of and accrued but unpaid interest on all the Notes to be
due and payable. Upon such a declaration, such principal and interest shall be
due and payable immediately. If an Event of Default relating to certain events
of bankruptcy, insolvency or reorganization of the Company occurs and is
continuing, the principal of and interest on all the Notes will ipso facto
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders of the Notes. Under certain
circumstances, the holders of a majority in principal amount of outstanding
Notes may rescind any such acceleration with respect to the Notes and its
consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a
Note may pursue any remedy with respect to the Indenture or the Notes unless
(i) such holder has previously given the Trustee notice that an Event of
Default is continuing, (ii) holders of at least 25% in principal amount of the
outstanding Notes have requested the Trustee to pursue the remedy, (iii) such
holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt thereof and the offer of security or indemnity
and (v) the holders of a majority in principal amount of the outstanding Notes
have not given the Trustee a direction inconsistent with such request within
such 60-day period. Subject to certain restrictions, the holders of a majority
in principal amount of the outstanding Notes are given the right to direct the
time, method and place of conducting any proceeding for any remedy available to
the Trustee or of exercising any trust or power conferred on the Trustee. The
Trustee, however, may refuse to follow any direction that conflicts
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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 of or extend the Stated Maturity of any
Note, (iv) reduce the amount payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "--Optional
Redemption", (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions or
(viii) make any change in the Pledge Agreement that would adversely affect the
rights of any Noteholder.
Without the consent of any holder of the Notes, the Company and Trustee
may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Notes, to secure the Notes, to add to the covenants of the Company for
the benefit of the holders of the Notes or to surrender any right or power
conferred upon the Company, to make any change that does not adversely affect
the rights of any holder of the Notes or to comply with any requirement of the
SEC in connection with the qualification of the Indenture under the Trust
Indenture Act.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the
Notes, or any defect therein, will not impair or affect the validity of the
amendment.
Transfer
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax,
assessment or other governmental charge payable in connection with certain
transfers and exchanges.
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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, the judgment default provision and the security
default provision described under "--Defaults" above and the limitations
contained in clause (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 and the Trustee shall release the
Pledged Securities from the Pledge Account. 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), (viii) or (ix) under "--Defaults" above or
because of the failure of the Company to comply with clause (iii) or (iv) under
"--Certain Covenants--Merger and Consolidation" above.
In order to exercise either defeasance option, the Company must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amounts and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
Concerning the Trustee
U.S. Bank Trust National Association is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any
such claim as security or otherwise. The Trustee will be permitted to engage in
other transactions; provided, however, if it acquires any conflicting interest
it must either eliminate such conflict within 90 days, apply to the SEC for
permission to continue or resign.
The Holders of a majority in principal amount of the outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that if an Event of Default occurs
(and is not cured), the Trustee will be required, in the exercise of its power,
to use the degree of care of a prudent man in the conduct of his own affairs.
Subject to such provisions, the Trustee will be under no obligation to exercise
any of its rights or powers under the Indenture at the request of any Holder of
Notes, unless such Holder shall have offered to the Trustee security and
indemnity satisfactory to it against any loss, liability or expense and then
only to the extent required by the terms of the Indenture.
Governing Law
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
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Certain Definitions
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock
of a Person that becomes a Restricted Subsidiary as a result of the acquisition
of such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of the provisions described under "--Certain Covenants--Limitation on
Restricted Payments", "--Certain Covenants--Limitation on Affiliate
Transactions" and "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 5% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary
(other than, in the case of (i), (ii) and (iii) above, (A) a disposition by a
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (B) for purposes of the covenant
described under "--Certain Covenants--Limitation on Sales of Assets and
Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under
"--Certain Covenants--Limitation on Restricted Payments" or a Permitted
Investment, (C) for purposes of the covenant described under "Certain
Covenants--Limitation on Sale of Assets and Subsidiary Stock" only, exchanges
of Telecommunications Assets for other Telecommunications Assets where the Fair
Market Value of the Telecommunications Assets received is at least equal to the
Fair Market Value of the Telecommunications Assets disposed of or, if less, the
difference is received in cash and such cash shall be deemed to be Net
Available Cash from an Asset Disposition for purposes of the covenant described
under "--Certain Covenants--Limitations on Sale of Assets and Subsidiary
Stock", (D) Permitted Telecommunications Capital Asset Dispositions and (E)
disposition of assets with a fair market value of less than $250,000);
provided, however, that transfers of fiber capacity in exchange for
indefeasible rights of use and long-term leases of fiber capacity shall be
treated as made in the ordinary course of business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as
at the time of determination, the present value (discounted at the interest
rate borne by the Notes, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied
by the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
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"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
(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), 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
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(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;
(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.
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"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.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Fair Market Value" means, with respect to any asset or property
(including Capital Stock), the price that could be negotiated in an
arm's-length free market transaction, for cash, between a willing seller and a
willing buyer, neither of whom is under pressure or compulsion to complete the
transaction. Fair Market Value shall be determined by the Board of Directors
acting in good faith and shall be evidenced by a resolution of the Board of
Directors delivered to the Trustee; provided, however, that if the Fair Market
Value as determined by the Board of Directors for any transaction or series of
related transactions exceeds $5.0 million, such determination of Fair Market
Value shall be determined by a U.S. investment banking firm nationally
recognized in the United States or by a nationally recognized expert in the
U.S. telecommunications industry with experience in valuing such assets and
property.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect as of the Issue Date, including those set forth in (i)
the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial
statements) in periodic reports required to be filed pursuant to Section 13 of
the Exchange Act, including opinions and pronouncements in staff accounting
bulletins and similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any Person
directly or indirectly guaranteeing any Indebtedness of any Person and any
obligation, direct or indirect, contingent or otherwise, of such Person (i) to
purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness or other obligation of such Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial
statement conditions or otherwise) or
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(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;
(vii) all obligations of the type referred to in clauses (i) through (vi)
of other Persons secured by any Lien on any property or asset of such
Person (whether or not such obligation is assumed by such Person), the
amount of such obligation being deemed to be the lesser of the value of
such property or assets or the amount of the obligation so secured; and
(viii) to the extent not otherwise included in this definition, Hedging
Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the
outstanding balance at such date of all unconditional obligations as described
above and the maximum liability, upon the occurrence of the contingency giving
rise to the obligation, of any contingent obligations at such date; provided,
however, that the amount outstanding at any time of any Indebtedness issued
with original issue discount is the amount of the liability in respect thereof
determined in accordance with GAAP.
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"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.
"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
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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 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
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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.
"Permitted Telecommunications Capital Asset Disposition" means the
transfer, conveyance, sale, lease or other disposition of dark fiber, conduit
or components of the conduit system, (i) the proceeds of which are treated as
revenues by the Company in accordance with GAAP and (ii) that, in the case of
the sale of dark fiber, would not result in the Company retaining less than 24
fibers per route mile on any segment of the Company's network.
"Person" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization, government or any agency or political subdivision thereof or any
other entity.
"Pledge Account" means an account established with the Trustee pursuant to
the terms of the Pledge Agreement for the deposit of the Pledged Securities
purchased by the Company with a portion of the net proceeds of the Debt
Offering.
"Pledge Agreement" means the Collateral Pledge and Security Agreement
dated the Issue Date, between the Company and the Trustee, governing the
disbursement of funds from the Pledge Account.
"Pledged Securities" means the securities purchased by the Company with a
portion of the net proceeds from the Debt Offering, which shall consist of U.S.
Government Obligations, to be deposited in the Pledge Account.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred
as to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"Principal" of a Note means the principal of the Note plus the premium, if
any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Public Equity Offering" means an underwritten primary public offering of
common stock of the Company pursuant to an effective registration statement
under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, defease or retire, or to issue other
Indebtedness in exchange or replacement for, such indebtedness. "Refinanced"
and "Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or
if Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the
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Indebtedness being Refinanced; provided further, however, that Refinancing
Indebtedness shall not include (x) Indebtedness of a Subsidiary that Refinances
Indebtedness of the Company (except to the extent such Refinanced Indebtedness
was guaranteed by such Subsidiary) or (y) Indebtedness of the Company or a
Restricted Subsidiary that Refinances Indebtedness of an Unrestricted
Subsidiary.
"Related Business" means any business related, ancillary or complementary
to the businesses of the Company and the Restricted Subsidiaries on the Issue
Date.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect
of its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (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.
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"Subsidiary" means, with respect to any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Telecommunications Assets" means all assets, rights (contractual or
otherwise) and properties, whether tangible or intangible, used or intended for
use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i) transmitting or
providing services relating to the transmission of, voice, video or data
through owned or leased transmission facilities, (ii) constructing, creating,
developing or marketing communications related network equipment, software and
other devices for use in a Telecommunications Business or (iii) evaluating,
participating or pursuing any other activity or opportunity that is primarily
related to those identified in clause (i) or (ii) above.
"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.
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"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the
Company or one or more Wholly Owned Subsidiaries.
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[E] SHARES ELIGIBLE FOR FUTURE SALE
Prior to the Equity Offering, there has been no market for the Common
Stock of the Company. Future sales of substantial amounts of Common Stock in
the public market could adversely affect prevailing market prices from time to
time. Furthermore, since only a limited number of shares will be available for
sale shortly after the Equity Offering because of certain contractual and legal
restrictions on resale (as described below), sales of substantial amounts of
Common Stock of the Company in the public market after the restrictions lapse
could adversely affect the prevailing market price and the ability of the
Company to raise equity capital in the future.
Upon completion of the Equity Offering (based on shares outstanding at
March 31, 1998), the Company will have outstanding an aggregate of 16,062,735
shares of Common Stock, assuming no exercise of the Underwriters'
over-allotment option and no exercise of outstanding options. Of these shares,
the 5,500,000 shares sold in the Equity Offering will be freely tradeable
without restrictions or further registration under the Securities Act, unless
such shares are purchased by an existing "affiliate" of the Company as that
term is defined in Rule 144 under the Securities Act (an "Affiliate"). The
remaining 10,562,735 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the
Securities Act ("Restricted Shares"). Restricted Shares may be sold in the
public market only if registered or if they qualify for an exemption from
registration under Rules 144, 144(k) or 701 promulgated under the Securities
Act, which rules are summarized below. As a result of the contractual
restrictions described below and the provisions of Rule 144, 144(k) and 701,
10,159,995 shares will be eligible for sale upon expiration of the lock-up
agreements 180 days after the date of this Prospectus and 402,740 shares will
be eligible for sale upon expiration of their respective one-year holding
periods.
All officers, directors and principal stockholders of the Company have
agreed not to offer, pledge, sell, contract to sell, sell any option or
contract to purchase, purchase any option or contract to sell, grant any
option, right or warrant to purchase, or otherwise transfer, lend or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or enter into
any swap or other arrangement that transfers to another, in whole or in part,
any of the economic consequences of ownership of the Common Stock for a period
of 180 days after the date of this Prospectus, without the prior written
consent of Credit Suisse First Boston Corporation, subject to certain limited
exceptions. Credit Suisse First Boston Corporation currently has no plans to
release any portion of the securities subject to lock-up agreements. When
determining whether or not to release shares from the lock-up agreements,
Credit Suisse First Boston Corporation will consider, among other factors, the
stockholder's reasons for requesting the release, the number of shares for
which the release is being requested and market conditions at the time.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, a person (or persons whose shares are aggregated)
who has beneficially owned Restricted Shares for at least one year (including
the holding period of any prior owner except an Affiliate) would be entitled to
sell within any three-month period a number of shares that does not exceed the
greater of (i) one percent of the number of shares of Common Stock then
outstanding (which will equal approximately 160,627 shares immediately after
the Equity Offering); or (ii) the average weekly trading volume of the Common
Stock on the Nasdaq National Market during the four calendar weeks preceding
the filing of a notice on Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions, notice requirements
and the availability of current public information about the Company. Under
Rule 144(k), a person who is not deemed to have been an Affiliate of the
Company at any time during the 90 days preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an Affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144. Accordingly,
unless otherwise restricted, "144(k) shares" may therefore be sold immediately
upon the completion of the Equity Offering.
Subject to certain limitations on the aggregate offering price of a
transaction and other conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its
employees, directors, officers, consultants or advisors prior to the date the
issuer becomes subject to the reporting requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act") pursuant to written compensatory
benefit plans or written contracts relating to the compensation of such
persons. In addition, the SEC has indicated that Rule 701 will apply to typical
stock options granted by an issuer before it becomes subject to the reporting
requirements of the Exchange Act, along with the shares acquired upon exercise
of such options (including exercises after the date of the Equity Offering).
Securities issued in reliance on Rule 701 are restricted securities and,
subject to the
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contractual restrictions described above, beginning 90 days after the date of
this Prospectus, may be sold (i) by persons other than Affiliates, subject only
to the manner of sale provisions of Rule 144 and (ii) by Affiliates, under Rule
144 without compliance with its one-year minimum holding period requirements.
The Company has agreed not to offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise transfer, lend or
dispose of, directly or indirectly, any shares of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock, or
enter into any swap or similar agreement that transfers, in whole or in part,
the economic risk of ownership of the Common Stock, for a period of 180 days
after the date of this Prospectus, without the prior written consent of Credit
Suisse First Boston Corporation, subject to certain limited exceptions.
Following the Equity Offering, the Company intends to file registration
statements under the Securities Act covering approximately 2,436,105 shares of
Common Stock issued and outstanding, subject to outstanding options or reserved
for issuance under the Company's 1998 Plan. See "Management--1998 Stock
Incentive Plan." Accordingly, shares registered under such registration
statement will, subject to Rule 144 volume limitations applicable to
Affiliates, be available for sale in the open market, except to the extent that
such shares are subject to vesting restrictions with the Company or the
contractual restrictions described above.
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[E] UNITED STATES FEDERAL TAX CONSEQUENCES
The following is a summary of material United States federal income tax
considerations relating to the ownership and disposition of Common Stock
applicable to Non-United States Holders, but does not purport to be a complete
analysis of all the potential tax considerations relating thereto. This summary
is based on the provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), the applicable Treasury Regulations promulgated or proposed
thereunder ("Treasury Regulations"), judicial authority and current
administrative rulings and practice, all of which are subject to change,
possibly on a retroactive basis. This summary does not address tax
considerations that may be relevant to a particular investor in light of such
investor's personal investment circumstances, nor does it address any tax
consequences arising out of the laws of any state, local or foreign taxing
jurisdiction.
Non-United States Holders
A "Non-United States Holder" is any beneficial owner of Common Stock that,
for United States federal income tax purposes, is a non-resident alien
individual, a foreign corporation, a foreign partnership or an estate or trust
not subject to United States federal income tax on a net income basis in
respect of income or gain with respect to Common Stock. An individual may be
deemed to be a resident alien (as opposed to a non-resident alien) by virtue of
being present in the United States on at least 31 days during the calendar year
and for an aggregate of 183 days during the calendar year and the two preceding
calendar years (counting, for such purposes, all the days present in the
current year, one-third of the days present in the immediately preceding year
and one-sixth of the days present in the second preceding year). In addition to
the "substantial presence test" described in the immediately preceding
sentence, an individual may be treated as a resident alien if he or she (i)
meets a lawful permanent residence test (a so-called "green card" test) or (ii)
elects to be treated as a U.S. resident and meets the "substantial presence
test" in the immediately following year.
Each prospective Non-United States Holder is advised to consult its own
tax advisor with respect to the tax consequences of owning and disposing of
Common Stock.
Sale or Exchange of Common Stock
A Non-United States Holder of Common Stock will generally not be subject
to United States federal income tax or withholding tax on any gain realized on
the sale or exchange of the Common Stock unless (1) the gain is effectively
connected with a United States trade or business of the Non-United States
Holder, (2) in the case of a Non-United States Holder who is an individual and
holds Common Stock as a capital asset, such Holder is present in the United
States for a period or periods aggregating 183 days or more during the taxable
year of the disposition and certain other conditions are met, (3) such Holder
is subject to tax pursuant to the provisions of the Code applicable to certain
United States expatriates, or (4) subject to the exceptions discussed below,
the Company is or has been a "United States real property holding corporation"
for federal income tax purposes at any time within the shorter of the five-year
period preceding such disposition or such Holder's holding period and certain
other conditions are met.
United States Real Property Holding Corporations
Under present law, a company is a United States real property holding
corporation if (a) the fair market value of its United States real property
interests is equal to or more than (b) 50% of the sum of the fair market value
of its United States real property interests, its interests in real property
located outside the United States, and its other assets which are used or held
in a trade or business. Because of its investment in the communication network,
the Company may be a United States real property holding corporation. If the
Company is a "United States real property holding corporation," gain recognized
on a disposition of the Common Stock by a Non-United States Holder would be
subject to United States federal income tax unless (i) the Common Stock is
"regularly traded on an established securities market" within the meaning of
the Code and (ii) the Non-United States Holder disposing of Common Stock did
not own, actually or constructively, at any time during the five-year period
preceding the disposition, more than 5% of the Common Stock. It is anticipated
that the Common Stock will be regularly traded on an established securities
market.
Dividends
Subject to the discussion below, any dividend paid to a Non-United States
Holder generally will be subject to United States withholding tax either at a
rate of 30% of the gross amount of the dividend or such lower rate
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as may be specified by an applicable income tax treaty. For purposes of
determining whether tax is to be withheld at a 30% rate or at a reduced rate as
specified by an income tax treaty, the Company ordinarily will presume that
dividends paid to an address in a foreign country are paid to a resident of
such country absent knowledge that such presumption is not warranted. Under
recently issued Treasury Regulations, however, Non-United States Holders of
Common Stock who wish to claim the benefit of an applicable treaty rate would
be required to satisfy certain certification requirements. The new Treasury
Regulations are effective for payments made after December 31, 1999. Dividends
paid to a holder with an address within the United States generally will not be
subject to withholding tax, unless the Company has actual knowledge that the
holder is a Non-United States Holder.
Dividends received by a Non-United States Holder that are effectively
connected with a United States trade or business conducted by such Non-United
States Holder are exempt from withholding tax. However, such effectively
connected dividends are subject to regular United States income tax in the same
manner as if the Non-United States Holder were a United States resident. A
Non-United States Holder may claim exemption from withholding under the
effectively connected income exception by filing Form 4224 (Statement Claiming
Exemption from Withholding of Tax on Income Effectively Connected With the
Conduct of a Trade or Business in the United States) each year with the Company
or its paying agent prior to the payment of the dividends for such year.
Effectively connected dividends received by a corporate Non-United States
Holder may be subject to an additional "branch profits tax" at a rate of 30%
(or such lower rate as may be specified by an applicable tax treaty) of such
corporate Non-United States Holder's effectively connected earnings and
profits, subject to certain adjustments.
A Non-United States Holder eligible for a reduced rate of United States
withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for refund with the
United States Internal Revenue Service (the "IRS").
Backup Withholding and Information Reporting
Generally, the Company must report to the IRS the amount of dividends
paid, the name and address of the recipient, and the amount, if any, of tax
withheld. A similar report is sent to the holder. Pursuant to tax treaties or
other agreements, the IRS may make its reports available to tax authorities in
the recipient's country of residence.
Unless the Company has actual knowledge that a holder is a non-United
States person, dividends paid to a holder at an address within the United
States may be subject to backup withholding at a rate of 31% if the holder is
not an exempt recipient as defined in Treasury Regulation Section
1.6049-4(c)(1)(ii) (which includes corporations) and fails to provide a correct
taxpayer identification number and other information to the Company. If paid to
an address outside the United States, dividends on Common Stock held by a
Non-United States Holder will generally not be subject to the information
reporting and backup withholding requirements. However, under recently issued
Treasury Regulations, dividend payments will be subject to information
reporting and backup withholding unless applicable certification requirements
are satisfied. The new Treasury Regulations apply to dividend payments made
after December 31, 1999.
If the proceeds of the disposition of Common Stock by a Non-United States
Holder are paid over, by or through a United States office of a broker, the
payment is subject to information reporting and to backup withholding at a rate
of 31% unless the disposing holder certifies as to its name, address and status
as a Non-United States Holder under penalties of perjury or otherwise
establishes an exemption. Generally, United States information reporting and
backup withholding will not apply to a payment of disposition proceeds if the
payment is made outside the United States through a non-United States office of
a non-United States broker. However, United States information reporting
requirements (but not backup withholding) will apply to a payment of
disposition proceeds outside the United States if (a) the payment is made
through an office outside the United States of a broker that is either (i) a
United States person for United States federal income tax purposes, (ii) a
"controlled foreign corporation" for United States federal income tax purposes,
or (iii) a foreign person which derives 50% or more of its gross income for
certain periods from the conduct of a United States trade or business, and (b)
the broker fails to maintain documentary evidence in its files that the holder
is a Non-United States Holder and that certain conditions are met or that the
holder otherwise is entitled to an exemption.
Backup withholding is not an additional tax. Rather, the tax liability of
persons subject to 31% backup withholding will be reduced by the amount of tax
withheld. If withholding results in an overpayment of taxes, a refund may be
obtained, provided that the required information is furnished to the IRS.
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[D] UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of material United States federal income tax
considerations relating to the purchase, ownership and disposition of the
Notes, but does not purport to be a complete analysis of all the potential tax
considerations relating thereto. This summary is based on the provisions of the
Internal Revenue Code of 1986, as amended (the "Code"), the applicable Treasury
Regulations promulgated or proposed thereunder ("Treasury Regulations"),
judicial authority and current administrative rulings and practice, all of
which are subject to change, possibly on a retroactive basis. This summary
deals only with holders that will hold the Notes as "capital assets" (within
the meaning of Section 1221) and does not address tax considerations that may
be relevant to a particular investor in light of such investor's personal
investment circumstances, nor does the discussion address special rules
applicable to certain types of investors subject to special treatment under the
Code (including, without limitation, financial institutions, broker-dealers,
regulated investment companies, life insurance companies, tax-exempt
organizations, foreign corporations, non-resident aliens, dealers in securities
or currencies, persons that will hold Notes as a position in a hedging
transaction, "straddle" or "conversion transaction" for tax purposes, or
persons that have a "functional currency" other than the U.S. dollar.) This
summary discusses the tax considerations applicable to the initial purchasers
of the Notes who purchase the Notes at their "original issue price" as defined
in Section 1273 of the Code and does not discuss the tax considerations
applicable to subsequent purchasers of the Notes. The Company has not sought
any ruling from the Internal Revenue Service ("IRS") with respect to the
statements made and the conclusions reached in the following summary, and there
can been no assurance that the IRS will agree with such statements and their
conclusions. No consideration of any aspects of state, local or foreign
taxation is included herein. INVESTORS CONSIDERING THE PURCHASE OF NOTES SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE APPLICATION OF THE UNITED
STATES FEDERAL INCOME TAX LAWS TO THEIR PARTICULAR SITUATIONS AS WELL AS ANY
TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE, LOCAL OR FOREIGN TAXING
JURISDICTION OR UNDER ANY APPLICABLE TAX TREATY.
United States Holders
As used herein, the term "United States Holder" means the beneficial owner
of a Note that for United States federal income tax purposes is (i) a citizen
or resident of the United States, (ii) a corporation, partnership or other
entity created or organized in or under the laws of the United States or any
political subdivision thereof, (iii) an estate the income of which is subject
to United States federal income taxation regardless of its source, or (iv) a
trust if (a) a court within the United States is able to exercise primary
supervision over the administration of the trust and (b) one or more U.S.
persons have the authority to control all substantial decisions of the trust.
Stated Interest
A United States Holder will recognize ordinary income when it receives or
accrues interest on the Notes in accordance with such United States Holder's
method of tax accounting. A United States Holder may be entitled to treat
interest income on the Notes as "investment income" for purposes of computing
certain limitations concerning the deductibility of investment interest
expense.
Disposition of the Notes
Generally, upon the sale or exchange or redemption of a Note, a United
States Holder will realize taxable gain or loss equal to the difference between
the amount of cash or other property received by the United States Holder in
exchange for such Note (except to the extent such amount realized is
attributable to accrued but unpaid interest which will be taxable as ordinary
interest income) and such holder's adjusted tax basis in such Note. A United
States Holder's adjusted tax basis in a Note will initially equal the cost of
the Note to such holder and will be decreased by the amount of any principal
payments received by such holder in respect of such Note. Any gain or loss upon
a sale or other disposition of a Note will generally be capital gain or loss.
At the time of sale or exchange or redemption, any such gain will be taxed to a
United States Holder who is a natural person at a maximum rate of 20 percent
(10 percent, if such holder is in a 15 percent bracket) if the Note is held for
more than 18 months and at a maximum rate of 28 percent (15 percent if such
holder is in a 15 percent bracket) if the Note is held for more than 12 months
but not more than 18 months. Under proposed legislation, the 20% maximum rate
would apply to Notes held for more than 12 months by a United States Holder who
is a natural person, but there can be no assurance that such legislation will
be enacted.
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Information Reporting and Backup Withholding
A United States Holder may be subject, under certain circumstances, to
backup withholding at a 31 percent rate with respect to payments received with
respect to the Notes. This withholding generally applies only if the United
States Holder (i) fails to furnish his social security or taxpayer
identification number ("TIN"), (ii) furnishes an incorrect TIN, (iii) is
notified by the IRS that he has failed to report properly payments of interest
and dividends and the service has notified the Company that he is subject to
withholding or (iv) fails under certain circumstances to provide a certified
statement, signed under penalty of perjury, that the TIN provided is his
correct number and that he is not subject to backup withholding. Any amount
withheld from a payment to a United States Holder under the backup withholding
rules is allowable as a credit against such holder's federal income tax
liability, provided that the required information is furnished to the IRS.
Certain holders (including, among others, corporations and foreign individuals
who comply with certain certification requirements described below under
"Non-United States Holders") are not subject to backup withholding. United
States Holders should consult their tax advisors as to their qualification for
exemption from backup withholding and the procedure for obtaining such an
exemption.
The Company will furnish to the IRS and to record holders of the Notes (to
whom it is required to furnish such information) information relating to the
amount of interest.
Non-United States Holders
As used herein, the term "Non-United States Holder" means any beneficial
owner of a Note that is not a United States Holder.
The following discussion is a summary of certain U.S. federal income tax
consequences to a Non-United States Holder of a Note.
Stated Interest
Generally, any interest paid to a Non-United States Holder of a Note will
not be subject to U.S. federal income or withholding tax, provided that (i) the
holder is not (A) a direct or indirect owner of 10% or more of the total voting
power of all voting stock of the Company or (B) a controlled foreign
corporation related to the Company through stock ownership, (ii) such interest
payments are not effectively connected with the conduct by the Non-United
States Holder of a trade or business within the United States and (iii) the
Company (or its paying agent) receives certain information from the holder
certifying under penalties of perjury that such holder is a Non-United States
Holder.
If these conditions are not satisfied a Non-United States Holder generally
would be subject to U.S. withholding tax at a flat rate of 30% (or lower
applicable treaty rate) on interest payments on the Notes.
Sale, Exchange or Redemption of the Notes
Except as provided below and subject to the discussion concerning backup
withholding, a Non-United States Holder of a Note will generally not be subject
to United States federal income tax or withholding tax on any gain realized on
the sale, exchange or redemption of the Note unless (1) the gain is effectively
connected with a United States trade or business of the Non-United States
Holder, (2) in the case of a Non-United States Holder who is an individual,
such Holder is present in the United States for a period or periods aggregating
183 days or more during the taxable year of the disposition and certain other
conditions are met or (3) the Holder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates.
Information Reporting and Backup Withholding
The Treasury regulations provide that backup withholding and information
reporting will not apply to payments of principal, premium, if any, and
interest on the Notes by the Company to a Non-United States Holder, if the
holder certifies as to its non-U.S. status under penalties of perjury or
otherwise establishes an exemption (provided that neither the Company nor their
paying agents has actual knowledge that the holder is a United States person or
that the conditions of any other exemption are not, in fact, satisfied).
The payment of the proceeds from the disposition of the Notes to or
through the United States office of any broker, U.S. or foreign, will be
subject to information reporting and possibly backup withholding unless the
owner certifies as to its non-U.S. status under penalty of perjury or otherwise
establishes an exemption, provided that the broker does not
91
<PAGE>
have actual knowledge that the holder is a U.S. person or that the conditions
of any other exemption are not, in fact, satisfied. The payment of the proceeds
from the disposition of a Note to or through a non-U.S. office of a non-U.S.
broker that is not a U.S. related person will not be subject to information
reporting or backup withholding. For this purpose, a "U.S. related person" is
(i) a "controlled foreign corporation" for U.S. federal income tax purposes or
(ii) a foreign person 50% or more of whose gross income from all sources for
the three-year period ending with the close of its taxable year preceding the
payment (or for such part of the period that the broker has been in existence)
is derived from activities that are effectively connected with the conduct of a
United States trade or business.
In the case of the payment of proceeds from the disposition of Notes to or
through a non-U.S. office of a broker that is either a U.S. person or a U.S.
related person, the regulations require information reporting on the payment
unless the broker has documentary evidence in its files that the owner is a
Non-United States Holder and the broker has no knowledge to the contrary.
Backup withholding will not apply to payments made through foreign offices of a
broker that is not a U.S. person or a U.S. related person (absent actual
knowledge that the payee is a U.S. person).
The United States Department of the Treasury recently promulgated final
regulations regarding the information reporting and backup reporting rules
discussed above. In general, the final regulations do not significantly alter
the substantive information reporting and backup withholding requirements but
rather unify current certification procedures and forms and clarify reliance
standards. In addition, the final regulations permit the shifting of primary
responsibility for withholding to certain financial intermediaries acting on
behalf of beneficial owners. The final regulations are generally effective for
payments made after December 31, 1999, subject to certain transition rules.
Prospective purchasers of the Notes should consult their own tax advisors
concerning the effect of such regulations on their particular situations.
92
<PAGE>
[E] UNDERWRITING
Under the terms and subject to the conditions contained in the
Underwriting Agreement dated , 1998 (the "Underwriting Agreement"), the
underwriters named below (the "Underwriters"), for whom Credit Suisse First
Boston Corporation and Warburg Dillon Read LLC are acting as representatives
(the "Representatives"), have severally but not jointly agreed to purchase from
the Company and the Selling Stockholders the following respective numbers of
shares of Common Stock:
<TABLE>
<CAPTION>
Number of
Underwriter Shares
- ----------- ------------
<S> <C>
Credit Suisse First Boston Corporation .........
Warburg Dillon Read LLC ........................
Total ........................................ 5,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the shares of the Common
Stock offered hereby (other than those shares covered by the over-allotment
option described below) if any are purchased. The Underwriting Agreement
provides that, in the event of a default by an Underwriter, in certain
circumstances the purchase commitments of non-defaulting Underwriters may be
increased or the Underwriting Agreement may be terminated.
The Company has granted to the Underwriters an option, expiring on the
30th day after the date of this Prospectus to purchase up to 825,000 additional
shares at the initial public offering price, less the underwriting discounts
and commissions, all as set forth on the cover page of this Prospectus. Such
option may be exercised only to cover over-allotments in the sale of the shares
of Common Stock. To the extent such option is exercised, each Underwriter will
become obligated, subject to certain conditions, to purchase approximately the
same percentage of such additional shares of Common Stock as it was obligated
to purchase pursuant to the Underwriting Agreement.
The Company and the Selling Stockholders have been advised by the
Representatives that the Underwriters propose to offer the shares of Common
Stock to the public initially at the price set forth on the cover page of this
Prospectus, and through the Representatives, to certain dealers (who may
include the Underwriters) at such price less a concession of $ per share
and the Underwriters and such dealers may allow a discount of $ per share
on sales to certain other dealers. After the initial public offering, the
public offering price and concession and discount to dealers may be changed by
the Representatives.
Each of the Company and its officers, directors and principal stockholders
have agreed, subject to certain exceptions, that it will not offer, sell,
contract to sell, announce its intention to sell, pledge or otherwise dispose
of, directly or indirectly, or file with the Securities and Exchange Commission
a registration statement under the Securities Act relating to, any shares of
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock, without the prior written consent of Credit Suisse First Boston
Corporation for a period of 180 days after the date of this Prospectus. See
"Shares Eligible for Future Sale."
The Underwriters have reserved for sale at the initial public offering
price up to 275,000 shares of the Common Stock for employees, directors and
other persons with whom the Company has business relationships, including
potential marketing or supply partners and other persons who have been
supportive of the Company's efforts, who have expressed an interest in
purchasing such shares of Common Stock in the offering. The number of shares
93
<PAGE>
available for sale to the general public in the offering will be reduced to the
extent these individuals purchase such reserved shares. Any reserved shares not
so purchased will be offered by the Underwriters to the general public on the
same terms as the other shares offered hereby.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain liabilities, including civil liabilities under the
Securities Act, or to contribute to payments which the Underwriters may be
required to make in respect thereof.
Application has been made to list the shares of Common Stock on the Nasdaq
National Market.
Prior to the Equity Offering, there has been no public market for the
Common Stock of the Company. The initial public offering price will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in determining the initial public offering
price will be prevailing market conditions for initial public offerings,
certain financial information of the Company, the history of, and the prospects
for, the Company and the industry in which it competes, and assessment of the
Company's management, its past and present operations, the prospects for, and
timing of, future revenues of the Company, the present state of the Company's
development, and the above factors in relation to market values and various
valuation measures of other companies engaged in activities similar to the
Company. There can be no assurance that an active trading market will develop
for the Common Stock or that the Common Stock will trade in the public market
subsequent to the Equity Offering at or above the initial public offering
price.
The Representatives, on behalf of the Underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions and
penalty bids. Over-allotment involves syndicate sales in excess of the offering
size, which creates a syndicate short position. Stabilizing transactions permit
bids to purchase the underlying security so long as the stabilizing bids do not
involve purchases of the securities in the open market after the distribution
has been completed in order to cover syndicate short positions. Penalty bids
permit the Representatives to reclaim a selling concession from a syndicate
member when the securities originally sold by such syndicate member are
purchased in a syndicate covering transaction to cover syndicate short
positions. Such stabilizing transactions, syndicate covering transactions and
penalty bids may cause the price of the securities to be higher than it would
otherwise be in the absence of such transactions. These transactions may be
effected on The Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the number of shares of
the Common Stock offered hereby.
94
<PAGE>
[D] UNDERWRITING
Under the terms and subject to the conditions contained in the
Underwriting Agreement dated , 1998 (the "Underwriting
Agreement"), the underwriters named below (the "Underwriters") have severally
but not jointly agreed to purchase from the Company the following respective
principal amounts of the Notes:
<TABLE>
<CAPTION>
Principal
Underwriter Amount
- --------------------------------------------------- ----------
<S> <C>
Credit Suisse First Boston Corporation ......... $
Warburg Dillon Read LLC ........................
Total ........................................ $
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will be obligated to purchase all of the securities offered hereby
if any are purchased. The Underwriting Agreement provides that, in the event of
a default by an Underwriter, in certain circumstances the purchase commitments
of the non-defaulting Underwriter may be increased or the Underwriting
Agreement may be terminated.
The Company has been advised by the Underwriters that the Underwriters
propose to offer the Notes to the public initially at the price set forth on
the cover page of this Prospectus, and to certain dealers (who may include the
Underwriters) at such price less a concession of % of the principal amount,
and the Underwriters and such dealers may allow a discount of % of the
principal amount on sales to certain other dealers. After the initial public
offering, the public offering price and concession and discount to dealers may
be changed by the Underwriters.
The Underwriters have informed the Company that they do not expect
discretionary sales by the Underwriters to exceed 5% of the principal amount
being offered hereby.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including civil liabilities under the Securities Act, or to
contribute to payments which the Underwriters may be required to make in
respect thereof.
The Underwriters may engage in over-allotment, stabilizing transactions,
syndicate covering transactions and penalty bids. Over-allotment involves
syndicate sales in excess of the offering size, which creates a syndicate short
position. Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a specified maximum.
Syndicate covering transactions involve purchases of the Notes in the open
market after the distribution has been completed in order to cover syndicate
short positions. Penalty bids permit the Underwriters to reclaim a selling
concession from a syndicate member when the Notes originally sold by such
syndicate member are purchased in a syndicate covering transaction to cover
syndicate short positions. Such stabilizing transactions, syndicate covering
transactions and penalty bids may cause the price of the Notes to be higher
than it would otherwise be in the absence of such transactions.
95
<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.
96
<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.
97
<PAGE>
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Hale and Dorr LLP, Boston, Massachusetts. H&D Investments II, a
partnership comprised of partners of Hale and Dorr LLP, owns 6,338 shares of
Common Stock of the Company. The Underwriters have been represented by Cravath,
Swaine & Moore, New York, New York.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1997 and 1996 and for each of the three years in the period ended December 31,
1997 included in this Prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 under the Securities Act
with respect to the securities being offered by this Prospectus. This
Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain portions of which have
been omitted as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the securities offered
hereby, reference is made to the Registration Statement and the exhibits
thereto, copies of which may be obtained upon payment of the fees prescribed by
the Commission or examined without charge at (i) the Public Reference Section
of the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and (ii) the Commission's regional offices located at
500 W. Madison Street, Suite 1400, Chicago, Illinois 60661 and 75 Park Plaza,
14th Floor, New York, New York 10007. Statements contained in this Prospectus
as to the contents of any contract or other document are not necessarily
complete, and in each instance where such contract or other document is an
exhibit to the Registration Statement, reference is made to the copy of such
contract or other document filed as an exhibit to the Registration Statement,
each statement being qualified in all respects by such reference. The
Commission maintains a World Wide Web site (http://www.sec.gov) that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission.
98
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Report of Independent Public Accountants ............................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1997 and
March 31, 1998 (unaudited) ............................................................ F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997 and for the three month periods
ended March 31, 1997 and 1998 (unaudited) ............................................. F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1995, 1996 and 1997 and for the three month period
ended March 31, 1998 (unaudited) ...................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997 and for the three month periods ended
March 31, 1997 and 1998 (unaudited) ................................................... F-6
Notes to Consolidated Financial Statements ............................................. F-8
Consolidated Pro Forma Financial Statements (unaudited) ................................ F-23
Consolidated Pro Forma Balance Sheet as of March 31, 1997 (unaudited) .................. F-24
Consolidated Pro Forma Statements of Operations for the year ended December 31, 1997
and for the three month period ended March 31, 1998 (unaudited) ....................... F-25
Notes to Consolidated Pro Forma Financial Statements (unaudited) ....................... F-26
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NorthEast Optic Network, Inc.:
We have audited the accompanying consolidated balance sheets of NorthEast Optic
Network, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1997, and the related consolidated statements of operations, stockholders'
equity (deficit) and cash flows for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of NorthEast Optic
Network, Inc. and subsidiaries as of December 31, 1996 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
Boston, Massachusetts ARTHUR ANDERSEN LLP
July 8, 1998
F-2
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1997 March 31, 1998
--------------- --------------- ---------------
(Unaudited)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ............................................. $ 4,864,925 $ 1,098,452 $ 1,232,254
Accounts receivable ................................................... 125,540 1,034,391 168,740
Refundable taxes from related party (Note 2) .......................... -- 368,734 495,375
Prepaid expenses and other current assets ............................. 4,853 13,572 109,893
------------ ------------ ------------
Total current assets ............................................... 4,995,318 2,515,149 2,006,262
------------ ------------ ------------
Property and Equipment, at cost:
Communications network ................................................ -- 15,583,770 16,355,922
Machinery and equipment ............................................... 51,390 54,927 72,118
Motor vehicles ........................................................ 29,426 29,426 29,426
Furniture and fixtures ................................................ 8,057 11,918 17,319
Communications network construction in progress (Note 3) .............. 11,274,200 1,292,492 3,794,811
------------ ------------ ------------
11,363,073 16,972,533 20,269,596
Less--Accumulated depreciation ........................................ 33,578 437,830 640,173
------------ ------------ ------------
11,329,495 16,534,703 19,629,423
------------ ------------ ------------
Restricted Cash (Note 5) ............................................... -- 819,923 839,662
Intangible Assets, net (Notes 2 and 4)
Deferred right-of-way fees--related party ............................. -- 2,348,156 2,286,362
Other ................................................................. 44,850 1,243,069 1,421,963
------------ ------------ ------------
$ 16,369,663 $ 23,461,000 $ 26,183,672
============ ============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations (Notes 2 and 5) ........... $ 380,142 $ 1,982,911 $ 1,949,936
Accounts payable ...................................................... 315,977 294,758 290,636
Accounts payable construction in progress ............................. 482,308 1,199,293 2,786,515
Accrued expenses (Note 13) ............................................ 32,243 571,493 409,135
Accrued right-of-way fees--related party (Note 2) ..................... 350,414 785,535 940,848
Deferred revenue ...................................................... 225,000 1,144,170 1,129,575
------------ ------------ ------------
Total current liabilities .......................................... 1,786,084 5,978,160 7,506,645
------------ ------------ ------------
Deferred Tax Liability ................................................. -- 61,000 86,192
------------ ------------ ------------
Note Payable to Related Party (Note 5) ................................. -- 2,100,000 3,975,000
------------ ------------ ------------
Long-Term Obligations, less current maturities (Notes 2 and 5) ......... 546,879 135,994 37,641
------------ ------------ ------------
Minority Interest in Consolidated Subsidiaries ......................... 6,312,554 5,338,786 5,024,288
Commitments and Contingencies (Notes 5, 10 and 11)
CMP Warrant ............................................................ -- 532,836 532,836
Stockholders' Equity:
Series A convertible preferred stock, $.01 par value--
Authorized--200,000 shares; 21,180, 78,324 and 78,324 shares
issued and outstanding at December 31, 1996 and 1997 and
March 31, 1998, respectively ........................................ 212 783 783
Series B convertible preferred stock, $.01 par value--
Authorized--2,025,120 shares; 962,734 shares issued and
outstanding ......................................................... 9,627 9,627 9,627
Common stock, $.01 par value--
Authorized--4,000,000 shares; 284,828 shares issued and
outstanding ......................................................... 2,848 2,848 2,848
Warrants .............................................................. 8,595 8,595 8,595
Additional paid-in capital ............................................ 9,267,683 11,817,216 11,817,216
Accumulated deficit ................................................... (1,564,819) (2,524,845) (2,817,999)
------------ ------------ ------------
Total stockholders' equity ......................................... 7,724,146 9,314,224 9,021,070
------------ ------------ ------------
$ 16,369,663 $ 23,461,000 $ 26,183,672
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-3
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
Years Ended December 31, March 31,
1995 1996 1997 1997 1998
------------- --------------- --------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues:
Network service ............................. $ -- $ -- $ 347,718 $ -- $ 146,257
Other service ............................... 42,598 13,773 46,986 -- 5,106
---------- ------------ ------------ ---------- ----------
Total revenues ............................. 42,598 13,773 394,704 -- 151,363
---------- ------------ ------------ ---------- ----------
Expenses:
Cost of sales (Note 2) ...................... 104,223 260,619 1,137,943 108,358 247,386
Selling, general and administrative ......... 358,761 900,808 1,002,232 204,275 225,122
Depreciation and amortization ............... 24,175 24,168 552,862 32,987 302,013
---------- ------------ ------------ ---------- ----------
Total expenses ............................. 487,159 1,185,595 2,693,037 345,620 774,521
---------- ------------ ------------ ---------- ----------
Loss from operations ....................... (444,561) (1,171,822) (2,298,333) (345,620) (623,158)
---------- ------------ ------------ ---------- ----------
Interest Income (Expense):
Interest income ............................. -- 201,473 138,918 56,638 30,322
Interest expense ............................ (42,401) (75,635) (141,811) -- (91,816)
---------- ------------ ------------ ---------- ----------
Total interest income (expense) ............ (42,401) 125,838 (2,893) 56,638 (61,494)
---------- ------------ ------------ ---------- ----------
Loss before minority interest in
subsidiaries' earnings and
provision for (benefit from)
income taxes .............................. (486,962) (1,045,984) (2,301,226) (288,982) (684,652)
Minority Interest ............................ -- 353,222 1,080,200 137,620 314,498
Provision for (Benefit From)
Income Taxes ................................ -- 16,000 (261,000) (33,000) (77,000)
---------- ------------ ------------ ---------- ----------
Net Loss ..................................... $ (486,962) $ (708,762) $ (960,026) $ (118,362) $ (293,154)
========== ============ ============ ========== ==========
Basic and Diluted Loss per Share ............. $ (1.71) $ (2.49) $ (3.37) $ (0.42) $ (1.03)
========== ============ ============ ========== ==========
Basic and Diluted Weighted Average
Shares Outstanding .......................... 284,578 284,735 284,828 284,828 284,828
========== ============ ============ ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-4
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
F-5
Series A Series B
Convertible Preferred Convertible Preferred
Stock Stock Common Stock
---------------------- ---------------------- ----------------------
Number of $.01 Par Number of $.01 Par Number of $.01 Par
Shares Value Shares Value Shares Value
----------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1994 ......... 21,180 $212 -- $ -- 284,578 $2,846
Issuance of common stock
warrant .......................... -- -- -- -- -- --
Net loss .......................... -- -- -- -- -- --
------ ---- -- ------ ------- ------
Balance, December 31, 1995 ......... 21,180 212 -- -- 284,578 2,846
Issuance of Series B
convertible preferred stock,
net of issuance cost of
$775,950 ......................... -- -- 405,024 4,050 -- --
Exercise of common stock
options .......................... -- -- -- -- 250 2
Issuance of common stock
warrant .......................... -- -- -- -- -- --
Issuance of Series B
convertible preferred stock -- -- 557,710 5,577 -- --
Net loss .......................... -- -- -- -- -- --
------ ---- ------- ------ ------- ------
Balance, December 31, 1996 ......... 21,180 212 962,734 9,627 284,828 2,848
Issuance of ownership
interest ......................... -- -- -- -- -- --
Issuance of Series A
convertible preferred stock 57,144 571 -- -- -- --
Net loss .......................... -- -- -- -- -- --
------ ---- ------- ------ ------- ------
Balance, December 31, 1997 ......... 78,324 783 962,734 9,627 284,828 2,848
Net loss (unaudited) .............. -- -- -- -- -- --
------ ---- ------- ------ ------- ------
Balance, March 31, 1998
(unaudited) ....................... 78,324 $783 962,734 $9,627 284,828 $2,848
====== ==== ======= ====== ======= ======
<CAPTION>
Additional Total
Paid-in Accumulated Stockholders'
Warrants Capital Deficit Equity (Deficit)
---------- -------------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 ......... $ -- $ 52,786 $ (369,095) $ (313,251)
Issuance of common stock
warrant .......................... -- 451 -- 451
Net loss .......................... -- -- (486,962) (486,962)
------ ----------- ------------ ----------
Balance, December 31, 1995 ......... -- 53,237 (856,057) (799,762)
Issuance of Series B
convertible preferred stock,
net of issuance cost of
$775,950 ......................... -- 9,220,000 -- 9,224,050
Exercise of common stock
options .......................... -- 23 -- 25
Issuance of common stock
warrant .......................... 8,595 -- -- 8,595
Issuance of Series B
convertible preferred stock -- (5,577) -- --
Net loss .......................... -- -- (708,762) (708,762)
------ ----------- ------------ ----------
Balance, December 31, 1996 ......... 8,595 9,267,683 (1,564,819) 7,724,146
Issuance of ownership
interest ......................... -- 1,750,088 -- 1,750,088
Issuance of Series A
convertible preferred stock -- 799,445 -- 800,016
Net loss .......................... -- -- (960,026) (960,026)
------ ----------- ------------ ----------
Balance, December 31, 1997 ......... 8,595 11,817,216 (2,524,845) 9,314,224
Net loss (unaudited) .............. -- -- (293,154) (293,154)
------ ----------- ------------ ----------
Balance, March 31, 1998
(unaudited) ....................... $8,595 $11,817,216 $ (2,817,999) $9,021,070
====== =========== ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-5
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
1995 1996 1997 1997 1998
---------------- ---------------- ---------------- ---------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss .......................... $ (486,962) $ (708,762) $ (960,026) $ (118,362) $ (293,154)
Adjustments to reconcile net
loss to net cash provided by
(used in) operating
activities--
Accretion of long-term
obligations .................... -- -- 26,642 -- 26,642
Warrants issued in connection
with long-term obligations 451 -- -- -- --
Depreciation and amortization 24,175 24,168 552,862 32,987 302,013
Changes in assets and
liabilities--
Accounts receivable ............. (4,912) (120,628) (908,851) 2,783 865,651
Refundable taxes from
related party ................ -- -- (368,734) -- (126,641)
Prepaid expenses and other
current assets ............... (98,905) 104,565 (8,719) 1,124 (96,321)
Restricted cash ................ -- -- (819,923) (800,000) (19,739)
Accounts payable ............... (32,560) 315,977 (21,219) (213,565) (4,122)
Accrued expenses ............... 185,517 197,140 974,371 67,968 (7,045)
Deferred revenue ............... -- 225,000 919,170 -- (14,595)
Deferred tax liability ......... -- -- 61,000 -- 25,192
------------ ------------ ------------ ------------ ------------
Net cash provided by
(used in) operating
activities .................. (413,196) 37,460 (553,427) (1,027,065) 657,881
------------ ------------ ------------ ------------ ------------
Cash Flows from Investing
Activities:
Purchases of property and
equipment ....................... (16,303) (17,480) (7,397) -- (22,591)
Purchases of communications
network ......................... (4,580,598) (6,693,602) (5,602,062) (3,981,620) (3,274,471)
Increase in intangible assets ..... (22,801) (27,816) (3,188,792) (55,567) (243,413)
------------ ------------ ------------ ------------ ------------
Net cash used in investing
activities ..................... $ (4,619,702) $ (6,738,898) $ (8,798,251) $ (4,037,187) $ (3,540,475)
------------ ------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-6
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
<TABLE>
<CAPTION>
Years Ended December 31, Three Months Ended March 31,
1995 1996 1997 1997 1998
------------- ---------------- --------------- --------------- -------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Cash Flows from Financing Activities:
Increase (Decrease) in
construction accounts payable $3,843,430 $ (3,361,122) $ 716,985 $ 229,294 $1,587,222
Proceeds from issuance of
long-term obligations ............. 1,147,766 -- 1,600,000 1,000,000 --
Proceeds from note payable to
related party ..................... -- -- 2,100,000 -- 1,875,000
Payments on long-term
obligations ....................... (47,896) (618,621) (408,116) (90,772) (131,328)
Proceeds from issuance of
ownership interest ................ -- -- 1,750,088 1,750,088 --
Proceeds from exercise of stock
options ........................... -- 25 -- -- --
Minority interest in subsidiary ..... --- 6,312,554 (973,768) (31,189) (314,498)
Proceeds from sale of preferred
stock, net ........................ -- 9,232,645 800,016 800,035 --
---------- ------------ ------------ ------------ ----------
Net cash provided by
financing activities ............. 4,943,300 11,565,481 5,585,205 3,657,456 3,016,396
---------- ------------ ------------ ------------ ----------
Net Increase (Decrease) in Cash
and Cash Equivalents ................ (89,598) 4,864,043 (3,766,473) (1,406,796) 133,802
Cash and Cash Equivalents,
beginning of period ................. 90,480 882 4,864,925 4,864,925 1,098,452
---------- ------------ ------------ ------------ ----------
Cash and Cash Equivalents,
end of period ....................... $ 882 $ 4,864,925 $ 1,098,452 $ 3,458,129 $1,232,254
========== ============ ============ ============ ==========
Supplemental Disclosure of Cash
Flow information:
Cash paid during the year for--
Interest ........................... $ 27,896 $ 331,505 $ 165,446 $ 35,672 $ 161,555
========== ============ ============ ============ ==========
Taxes .............................. $ -- $ -- $ 45,261 $ 27,550 $ 28,440
========== ============ ============ ============ ==========
Supplemental Disclosure of
Noncash Investing and
Financing Activities:
Issuance of warrants in
connection with sale of
preferred stock and note
payable to related party .......... $ -- $ 8,595 $ 532,836 $ -- $ --
========== ============ ============ ============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-7
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NorthEast Optic Network, Inc. (the Company) (formerly FiveCom, Inc.) and
its subsidiaries are engaged in the ownership, management, operation and
construction of fiber optic telecommunication networks in the Northeast,
consisting of New England and New York.
The Company was incorporated in Massachusetts in July 1989. In May 1996,
FiveCom LLC, an operating subsidiary majority-owned by the Company, was
organized in Massachusetts. Also in May 1996, FiveCom LLC and Mode 1
Communications, Inc. (Mode 1), an affiliate of Northeast Utilities Services
Company (NU), organized NECOM LLC in Massachusetts, with FiveCom LLC owning
60%, and Mode 1 owning 40% of the membership interest in NECOM LLC. In December
1996, FiveCom LLC and Central Maine Power Company (CMP), organized FiveCom of
Maine LLC in Massachusetts, with CMP owning 66.67% and FiveCom LLC owning
33.33% of the membership interests in FiveCom of Maine LLC. In addition, CMP
purchased a 90.9% interest in the Company, giving it a controlling interest in
the Company. FiveCom LLC, NECOM LLC and FiveCom of Maine LLC commenced
operations upon their respective dates of organization. Prior to the
Reorganization completed on July 8, 1998 (see Note 14(a)--Reorganization) the
Company had a controlling interest in all entities except FiveCom of Maine LLC
(FiveCom of Maine LLC and the Company were commonly controlled by CMP). After
the Reorganization, FiveCom of Maine LLC became a wholly owned subsidiary of
the Company. As a result, the accompanying financial statements have been
restated to give retroactive effect to the merger of FiveCom of Maine LLC with
and into a subsidiary of the Company as a reorganization of entities under
common control in a manner similar to a pooling of interest.
To date, the Company has recorded limited revenues, principally from
contract and other services, and has incurred cumulative operating losses. The
Company is dependent on the funds received from CMP (Note 5) to fund
construction of the communications networks and working capital. The Company is
also dependent upon a single or limited source of suppliers for a number of
components and parts. Shortages resulting from a change in arrangements with
these suppliers and manufacturers could cause significant delays in the
expansion of the NEON systems and could have a material adverse effect on the
Company.
The market for fiber optic telecommunications networks in which the
Company operates can be characterized as rapidly changing due to technological
advancements, the introduction of new products and services and the increasing
demands placed on equipment in worldwide telecommunications networks.
The accompanying consolidated financial statements reflect the application
of certain accounting policies as described below and elsewhere in these notes
to consolidated financial statements.
(a) Principles of Consolidation
The consolidated financial statements include the accounts of NorthEast
Optic Network, Inc. and its majority owned or controlled subsidiaries, FiveCom
LLC, FiveCom of Maine LLC and NECOM LLC. All significant intercompany
transactions and balances have been eliminated in consolidation.
(b) Minority Interest in Consolidated Subsidiaries
Minority interest in the Company at December 31, 1996 and 1997 consists of
other members' interests in the LLCs identified above. Changes in minority
interest reflect other members' capital adjusted by their portion of the net
loss.
(c) Interim Financial Statements (Unaudited)
The accompanying consolidated financial statements as of March 31, 1998
and for the three-month periods ended March 31, 1997 and 1998 are unaudited,
but in the opinion of management, include all adjustments consisting of normal
recurring adjustments necessary for a fair presentation of results for the
interim periods. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been omitted with respect to the quarters, although
the Company
F-8
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
believes that the disclosures included are adequate to make the information
presented not misleading. Results for the three months ended March 31, 1998 are
not necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
(d) Management Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.
(e) Revenue Recognition
Revenues on telecommunications network services are recognized ratably
over the term of the applicable agreements with customers. Other service
revenue, which consists of design and installation work, is recognized as
services are performed.
(f) Income Taxes
The Company has been majority-owned by CMP and under a tax-sharing
arrangement has been included in the consolidated federal tax return of CMP
since 1996 (see Note 2).
(g) Cash and Cash Equivalents
The Company accounts for investments under Statement of Financial
Accounting Standards (SFAS) No. 115, Accounting for Certain Investments in Debt
and Equity Securities. Under SFAS No. 115, investments for which the Company
has the positive intent and ability to hold to maturity, consisting of cash
equivalents, are reported at amortized cost, which approximates fair market
value. Cash equivalents are highly liquid investments with original maturities
of three months or less. To date, the Company has not recorded any realized
gains or losses. Cash and cash equivalents consist of the following:
<TABLE>
<CAPTION>
December 31,
March 31,
1996 1997 1998
------------- ------------- -------------
<S> <C> <C> <C>
Cash and cash equivalents--
Cash ..................................... $ 270,316 $ 194,735 $ 232,984
Money markets ............................ -- 903,717 999,270
U.S. Treasury money markets .............. 4,594,609 -- --
---------- ---------- ----------
Total cash and cash equivalents ......... $4,864,925 $1,098,452 $1,232,254
========== ========== ==========
</TABLE>
(h) Deferred Revenue
Deferred revenue represents prepayments received from customers for future
use of the Company's fiber optic network, as well as prepayment for
installation services that have not yet been provided. During 1997 and the
first quarter of 1998, the Company derived revenue from leasing dark fiber
optic cable. Lease payments are structured as either prepayments or monthly
recurring charges. Prepayments are accounted for as deferred revenue and
recognized over the term of the respective customer fiber optic lease
agreement. At December 31, 1996 and 1997, the Company had prepaid lease
payments totaling $225,000 and $1,144,170, respectively.
F-9
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
(i) Depreciation
The Company provides for depreciation using the straight-line method to
allocate the cost of property and equipment over their estimated useful lives
as follows:
<TABLE>
<S> <C>
Communications network .......... 20 years
Machinery and equipment ......... 5-7 years
Motor vehicles .................. 3-5 years
Furniture and fixtures .......... 7 years
</TABLE>
(j) Long-Lived Assets
The Company follows SFAS No. 121, Accounting for Long-Lived Assets and for
Long-Lived Assets To Be Disposed Of. SFAS No. 121, which requires that
long-lived assets be reviewed for impairment by comparing the fair value of the
assets with their carrying amount. Any write-downs are to be treated as
permanent reductions in the carrying amount of the assets. Accordingly, the
Company evaluates the possible impairment of long-lived assets when facts and
circumstances indicate that the carrying amount of an asset may not be
recoverable based on the undiscounted projected cash flows of the related
asset. Should there be an impairment, the cash flow estimates that will be used
will contain management's best estimates, using appropriate and customary
assumption and projections at the time. To date the Company does not believe
that an impairment exists.
(k) Concentrations of Credit Risk
Financial instruments that subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents
and accounts receivable. The Company's cash equivalents are invested in
financial instruments with high credit ratings. Concentration of credit risk
with respect to accounts receivable is limited to customers to whom the Company
makes significant sales. One customer accounted for approximately 90%, 90%, and
88% of accounts receivable at December 31, 1996 and 1997 and March 31, 1998,
respectively (see Note 12). To control credit risk, the Company performs
regular credit evaluations of its customers' financial condition and maintains
allowances, when required, for potential credit losses.
(l) Fair Value of Financial Instruments
The carrying amounts of the Company's cash and cash equivalents, accounts
receivable and accounts payable approximate fair value due to the short-term
nature of these instruments. The carrying amounts of debt issued pursuant to
agreements with banks approximate fair value as the interest rates on these
instruments fluctuate with market interest rates.
(m) Earnings per Share
The Company has adopted SFAS No. 128, Earnings per Share, effective
December 15, 1997. SFAS No. 128 establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. The Company has applied the provisions of SFAS
No. 128, retroactively to all periods presented. In accordance with SEC Staff
Accounting Bulletin (SAB) No. 98, the Company has determined that there were no
nominal issuances of common stock or potential common stock in the period prior
to the Company's planned initial public offering. The dilutive effect of
potential common shares in 1998, consisting of outstanding stock options and
convertible preferred stock, is determined using the treasury method and the
if-converted method, respectively, in accordance with SFAS No. 128. Diluted
weighted average shares outstanding for 1995, 1996 and 1997 exclude the
potential common shares from warrants, stock options and convertible preferred
stock outstanding because to do so would have been antidilutive for the years
presented. The potential common shares excluded in 1995, 1996 and 1997 related
to outstanding warrants and stock options were 0, 0 and 4,493 shares,
respectively. The potential common shares excluded in 1995, 1996 and 1997
related to convertible preferred stock were 21,180, 391,332 and 1,096,953
shares, respectively. In addition, the warrants to purchase membership interest
in a subsidiary (see Note 8(d)) have been excluded from diluted weighted
average shares.
F-10
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES (Continued)
(n) New Accounting Standards
AICPA Statement of Position (SOP) 98-5, Reporting on the Costs of Start-Up
Activities was issued in April 1998. SOP 98-5 requires that all
non-governmental entities expense the costs of start-up activities, including
organizational costs, as those costs are incurred. The Company has recorded
such costs as expense, in the period incurred.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income. SFAS No. 130 requires disclosure of all components of comprehensive
income on an annual and interim basis. Comprehensive income is defined as the
change in equity of a business enterprise during a period from transactions and
other events and circumstances from nonowner sources. SFAS No. 130 is effective
for fiscal years beginning after December 15, 1997. This new standard is not
anticipated to have a significant impact on the Company's financial statements
based on the current structure and operations.
In July 1997, the FASB issued SFAS No. 131, Disclosures About Segments of
an Enterprise and Related Information. SFAS No. 131 requires certain financial
and supplementary information to be disclosed on an annual and interim basis
for each reportable segment of an enterprise. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. Unless impracticable, companies
would be required to restate prior period information upon adoption. The
Company implemented this standard in the first quarter of 1998. The Company
intends to analyze segment reporting based on dark fiber and lit fiber
facilities. To date, the Company has recorded revenues and costs related to
dark fiber facilities only.
(o) Litigation
Certain claims arising in the ordinary course of business are pending
against the Company. In the opinion of management, these claims are without
merit and there is no potential liability.
(2) RELATED PARTY TRANSACTIONS
Applied Telecommunication Technologies, Inc. (ATTI) has provided the
Company with $1,594,433 of lease financing to date as reflected in Note 5. The
principal balance of the obligations is $912,837 and $533,740 as of December
31, 1996 and 1997, respectively. ATTI owns 12,409 shares of the Company's
outstanding common stock at December 31, 1997. One of ATTI's investment funds
owns 21,180 shares of the Company's Series A convertible preferred stock.
During the years ended December 31, 1996 and 1997, the Company reimbursed
CMP and/or its subsidiary MaineCom Services primarily for personnel costs
related to the activities of the Company. The amount paid to CMP totaled
approximately $310,591 and $725,000 for the years ended December 31, 1996 and
1997, respectively. Approximately $0 and $29,779 was included in accounts
payable at December 31, 1996 and 1997, respectively. The Company believes that
these costs approximated the actual costs incurred by CMP and/or MaineCom
Services related to such personnel, and does not believe that such costs would
have been materially different had CMP and/or MaineCom Services not been
affiliates of the Company.
CMP agreed to allow right-of-way payments otherwise payable by the Company
to accrue so long as amounts borrowed by the Company from a Bank under a $1.6
million construction loan agreement were outstanding. The amount of
right-of-way payments accrued through March 31, 1998 was approximately
$120,000.
In addition, CMP includes the Company in its consolidated federal income
tax return. At December 31, 1996 and 1997, the amounts due under the
tax-sharing arrangement to the Company from CMP are included in refundable
taxes from related party and amounted to approximately $0 and $368,734,
respectively, for current and deferred income tax benefits related to CMP's
utilization of the Company's loss carryforwards (see Note 9).
F-11
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(2) RELATED PARTY TRANSACTIONS (Continued)
The Company is also affiliated with NU (see Note 1). The Company paid NU
approximately $3,719,404 in 1996 and $945,667 in 1997 for materials, labor and
other contractor charges. Approximately $357,100 and $494,500 was included in
accounts payable at December 31, 1996 and 1997, respectively.
In 1994, the Company entered into an agreement with NU whereby NU waived
right-of-way fees for 10 years in return for the Company's guarantee to build
the fiber optic network to certain NU facilities and allow NU the use of 12
fibers on designated route segments in the NU service territory.
The Company's agreement with NU provides for payments on a per mile basis
for certain right-of-way extensions. Such payments are recognized ratably over
the 30-year term of the contract. Approximately $350,400 and $785,500 was
included in accrued right-of-way fees--related party at December 31, 1996 and
1997, respectively.
The Company has employment contracts with four of its officers, two of
whom are also common and preferred stockholders of the Company. The contracts
are for three-year terms expiring at varying dates through July 2001 with an
annual compensation commitment of $537,000 in the aggregate. In addition, the
Company will record a one-time bonus for a payment to one individual totaling
$500,000 upon the successful completion of an initial public offering in the
period incurred.
Upon the successful completion of an initial public offering the Company
will record a one-time bonus for a payment of $500,000 to MaineCom Services.
(3) COMMUNICATIONS NETWORK CONSTRUCTION
The Company is constructing a communications network in the Northeast.
Costs directly related to the construction of the network are being capitalized
and will be depreciated over the 20-year estimated useful life of the fiber
optic transmission plant as individual segments of the system are placed in
service. During 1996 and 1997, approximately 0 and 160 miles, respectively,
were placed in service. Approximately $114,000, $181,000 and $142,000 of
interest has been capitalized to communications network construction in
progress in each of the three years in the period ended December 31, 1997.
(4) INTANGIBLE ASSETS
Intangible assets subject to amortization have been capitalized and are
amortized on a straight-line basis as follows:
<TABLE>
<S> <C>
Deferred right-of-way fees ......... 10 years (term of the agreement)
Financing costs .................... 3-5 years (term of the debt)
Trademarks ......................... 10 years
</TABLE>
Intangible assets consist of the following at December 31, 1996 and 1997:
<TABLE>
<CAPTION>
1996 1997
--------- -------------
<S> <C> <C>
Deferred right-of-way fees--related party .......... $ -- $2,471,743
Financing costs .................................... 68,404 1,318,258
Trademarks ......................................... 2,098 2,098
------- ----------
70,502 3,792,099
Less--Accumulated amortization ..................... 25,652 200,874
------- ----------
$44,850 $3,591,225
======= ==========
</TABLE>
F-12
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(5) LONG-TERM OBLIGATIONS AND NOTE PAYABLE TO RELATED PARTY
<TABLE>
<CAPTION>
1996 1997
---------- -------------
<S> <C> <C>
Note payable to related party ................................... $ -- $ 2,100,000
======== ===========
Construction loan payable ....................................... $ -- $ 1,575,772
ATTI notes payable (related party) .............................. 912,837 533,740
Capital lease payable to a bank in monthly principal and interest
installments of $482 with interest at 8.25% through August
1999, collateralized by a motor vehicle ........................ 14,184 9,393
-------- -----------
927,021 2,118,905
Less--Current portion ........................................... 380,142 1,982,911
-------- -----------
$546,879 $ 135,994
======== ===========
</TABLE>
(a) Note Payable to Related Party
On October 7, 1997 the Company entered into a $30,000,000 construction
loan agreement with CMP. The Company paid CMP a commitment fee of $150,000. The
note bears interest at the LIBOR rate (5.72% at December 31, 1997) plus three
hundred basis points. Interest is payable quarterly in arrears commencing
January 1, 1998 through the conversion date (first day of the first month after
the completion of certain portions of the network (see Note 10)). Beginning on
the first day of the first month after the conversion date, the loan is payable
in equal monthly payments of principal plus interest accrued thereon. On
October 1, 2002, all amounts are due and payable in full. If required by the
Maine Public Utilities Commission (PUC), CMP has the option of demanding
payment in full on April 1, 1999 of any amounts of the loan outstanding on
April 1, 1999 that are necessary to cause CMP to be in compliance with the
PUC's requirements concerning CMP's capitalization. The loan is secured by a
perfected mortgage lien on the security interest in substantially all assets of
the Company.
As of December 31, 1997, $2,100,000 has been advanced under the loan
agreement. Additional advances will be made upon the completion of certain
conditions contained in the loan document, as defined. Subsequent to year-end
the Company was advanced an additional $15,775,000. In conjunction with the
note, the Company issued a warrant to purchase membership interest in FiveCom
LLC (see Note 8(d)). The fair market value of the warrant, $532,836, included
in deferred financing costs in the accompanying balance sheet, is being
amortized as interest expense over the term of the note. Upon successful
completion of an initial public offering and retirement of the note, the
Company will record a charge in the statement of operations for the remaining
balance of the deferred financing costs in the period extinguished.
(b) Construction Loan Payable
In March 1997, the Company entered into a $1,600,000 construction loan
agreement with a bank. The Company is required to maintain $800,000 in a
reserve account, which is included in the accompanying consolidated balance
sheets as of December 31, 1997 and March 31, 1998 as restricted cash. All
interest earned on the deposit becomes part of the reserve account. The reserve
account agreement remains in effect until the note is paid in full; however,
the bank may release the reserve account in the absence of any material default
under the loan agreement and a debt service coverage ratio greater than 1.5 to
1.0, as defined. As of December 31, 1997, the bank has not released any funds
in the reserve account. Under the agreement, the Company is required to
maintain certain covenants, as defined, including tangible net worth. As of
December 31, 1997 and March 31, 1998, the Company was not in compliance with
this covenant. The Company received a waiver from the bank related to
compliance with this covenant through March 31, 1998. The Company has
classified this debt as current in the accompanying financial statements, due
to noncompliance with this covenant subsequent to March 31, 1998.
F-13
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(5) LONG-TERM OBLIGATIONS AND NOTE PAYABLE TO RELATED PARTY (Continued)
(c) ATTI Notes Payable
Through August 1994 and October 1995, the Company entered into five notes
payable with ATTI. The notes bear interest at 13% and are payable in monthly
principal and interest installments ranging from $1,194 to $13,270 through
August 1999. In addition, the Company issued common stock warrants in
conjunction with the notes (see Notes 2 and 8(d)).
(d) Future Maturities
Future maturities of long-term obligations as of December 31, 1997 are as
follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 ............................... $1,982,911
1999 ............................... 135,994
----------
2,118,905
Less--Current portion ............... 1,982,911
----------
Total long-term obligations ......... $ 135,994
==========
</TABLE>
(6) CMP WARRANT
During October 1997 and in connection with the CMP construction loan
agreement (see Note 5), the Company issued a warrant to purchase 5,876 shares
of membership interest in FiveCom LLC to the lender at an exercise price of
$.01 per share. The warrant expires on October 7, 2002. At the time of
issuance, the warrant was recorded as a discount on the agreement and as a
component of stockholders' equity in the accompanying consolidated balance
sheet at $532,836, the fair market value of the warrant, as calculated using
the Black-Scholes option pricing model. The discount is being amortized as
interest expense over the term of the debt. The warrant contains put and call
options and a right of first refusal. At the earlier of three years from the
date of the agreement or upon any reorganization, as defined, or an initial
public offering, the lender shall have the right to require the Company to
repurchase the warrant at fair market value, as defined. In addition, the
Company has the option to purchase the warrant prior to the warrant exercise at
the fair market value, as defined.
Subsequent to year end, CMP exercised the warrant (see Note 14).
(7) STOCKHOLDERS' EQUITY
(a) Reverse Stock Split
On April 30, 1996, the Company declared a five-for-one reverse split of
each class of its capital stock. All share and per share amounts for all
periods presented have been adjusted to reflect this split.
(b) Preferred Stock
The Company's Board of Directors authorized up to 3,000,000 shares of $.01
par value preferred stock, of which 200,000 shares are designated as Series A
convertible preferred stock (Series A preferred) and 2,025,120 are designated
as Series B convertible preferred stock (Series B preferred).
Pursuant to a stock subscription agreement dated November 22, 1995, CMP
invested $10,000,000 for 75% of the fully diluted equity of the Company. As of
December 31, 1996 and 1997, CMP owned 962,734 (subject to antidilution
adjustment) shares of Series B preferred.
On May 5, 1998 the Board of Directors voted to increase the authorized
shares of Series B convertible preferred stock to 4,500,000.
F-14
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(7) STOCKHOLDERS' EQUITY (Continued)
Dividends
The holders of Series A and B preferred are entitled to receive dividends,
as defined, if and when declared by the Company's Board of Directors. To date
no dividends have been declared.
Voting
Each holder of outstanding shares of Series A and B preferred is entitled
to a number of votes equal to the number of whole shares of common stock into
which such share of Series A and B preferred held is then convertible. All
outstanding holders of Series A and Series B preferred shall vote together with
the holders of common stock as a single class, except holders of Series A
preferred shall vote as a separate class upon matters adversely affecting the
Series A preferred stock and holders of Series B preferred shall vote as a
separate class upon matters adversely affecting the Series B preferred stock.
Liquidation
After payment in full to any class or series of stock ranking senior to
Series A and B preferred and before payment to any class or series of stock
ranking junior to Series A and B preferred, Series A and B preferred
stockholders are entitled to receive, in the event of any voluntary or
involuntary liquidation or dissolution of the Company, (i) $23.6 and $24.7 per
share, respectively (subject to certain adjustments, as defined) plus any
dividends declared or accrued but unpaid or (ii) such amount per share as would
have been payable had each such share been converted into common stock.
Conversion
Each share of Series A and B preferred is convertible, at the option of
the holder, at any time after the date of issuance and without any additional
payment into such number of shares of Common Stock as is determined by dividing
$23.6 and $24.7, respectively, by the Conversion Price, as defined ($2.948 and
$9.88 as of December 31, 1997, respectively). Series A and Series B preferred
will automatically convert into common stock upon the closing of an
underwritten public offering, as defined.
(c) Common Stock
In November 1995, the Company's Board of Directors authorized the issuance
of up to 4,000,000 shares of common stock. At December 31, 1997, there were
1,500 shares reserved for issuance under the Company's stock option plan and
1,213,541 shares reserved for issuance upon conversion of Series A and B
preferred stock. On June 23, 1998 the Board of Directors voted to increase the
authorized shares to 30,000,000.
(8) STOCK-BASED COMPENSATION
(a) 1994 Stock Option Plan
On December 2, 1994, the Company's Board of Directors adopted the 1994
Stock Option Plan (the 1994 Plan). Under the terms of the 1994 Plan, incentive
and nonstatutory options may be granted to employees, officers, directors,
consultants and advisers to purchase an aggregate of 4,000 shares of common
stock. The exercise price of the incentive options will be 100% of the fair
market value of the common stock or 110% of the fair market value in the case
of options granted to a greater than 10% stockholder. Options generally vest
quarterly over a two-year period and are exercisable within five years of the
original date of grant.
Stock option activity for the three years in the period ended December 31,
1997 and for the three-month period ended March 31, 1998 (unaudited) is as
follows:
F-15
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(8) STOCK-BASED COMPENSATION (Continued)
<TABLE>
<CAPTION>
Weighted
Average
Number of Exercise
Shares Price
----------- ---------
<S> <C> <C>
Outstanding, December 31, 1995 .................. -- $ --
Granted ........................................ 4,000 .10
Exercised ...................................... (250) .10
----- -----
Outstanding, December 31, 1996 .................. 3,750 .10
Canceled ....................................... (3,750) .10
------ -----
Outstanding, December 31, 1997 .................. -- $ .10
====== =====
Outstanding, March 31, 1998 (unaudited) ......... -- $ --
====== =====
</TABLE>
(b) 1998 Stock Incentive Plan
The Company's 1998 Stock Incentive Plan (the 1998 Plan) was adopted by the
Board of Directors on May 18, 1998 and approved by the Company's stockholders
on May 26, 1998. The 1998 Plan provides for the grant of incentive stock
options, nonstatutory stock options, restricted stock awards and other
stock-based awards, including the grant of shares based on certain conditions,
the grant of securities convertible into common stock and the grant of stock
appreciation rights (collectively the Awards). Options may be granted at an
exercise price that may be less than, equal to or greater than the fair market
value of the common stock on the date of grant. Incentive stock options and
options intended to qualify as performance-based compensation may not be
granted at an exercise price less than the fair market value of the common
stock on the date of grant (or less than 110% of the fair market value in the
case of incentive stock options granted to optionees holding more than 10% of
the voting power of the Company). Options granted under the 1998 Plan typically
will vest over time, subject to acceleration upon change in control. Restricted
stock awards entitle recipients to acquire shares of common stock, subject to
the right of the Company to repurchase all or part of such shares from the
recipient in the event that the conditions specified in the applicable Award
are not satisfied prior to the end of the applicable restriction period
established for such Award. Under the 1998 Plan, the Board of Directors has the
right to grant other Awards based on the common stock having such terms and
conditions as the Board of Directors may determine, including the grant of
shares based on certain conditions, the grant of securities convertible into
common stock and the grant of stock appreciation rights. Officers, employees,
directors, consultant and advisors of the Company and its subsidiaries are
eligible to be granted Awards under the 1998 Plan.
Upon consummation of the Equity Offering, a total of 2,436,105 shares will
be reserved for issuance under the 1998 Plan, of which 1,705,272 shares will be
subject to options granted to employees of the Company with an exercise price
per share equal to the initial public offering price.
(c) Fair Value of Stock Options
In October 1995, the FASB issued SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statements of income or disclosed in the notes to
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees, and elect the
disclosure-only alternative under SFAS No. 123.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option pricing model with the following assumptions
used for grants during the applicable period: dividend yield of 0% for all
periods; volatility of 0% for all periods; risk-free interest rate of 7.67% for
options granted during 1995 and a weighted average expected option term of two
years for all periods. The weighted average fair value per share of options
granted during 1995 was $0. No options were granted during 1996 and 1997.
F-16
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(8) STOCK-BASED COMPENSATION (Continued)
(d) Warrants
From August 1994 to October 1995, the Company issued warrants to ATTI (see
Note 2) for the purchase of 11,450 shares of the Company's common stock at an
exercise price of $.06 per share. The warrants expire five years from the date
of grant. At the time of issuance, the Company recorded a charge of $178,
representing the fair market value of the warrants, as determined by the Board
of Directors.
During July 1996, the Company issued a warrant to one of its advisors for
the purchase of 2,656 shares of membership interest in FiveCom LLC at an
exercise price of $125.84 per share. The warrant expires on April 30, 2001. At
the time of issuance, the Company recorded a charge of $8,595, representing the
fair market value of the warrant, as calculated using the Black-Scholes option
pricing model.
(9) INCOME TAXES
As discussed in Note 2, the Company is included in CMP's consolidated
federal income tax return. The Company accounts for income taxes under SFAS No.
109, Accounting for Income Taxes, the objective of which is to recognize the
amount of current and deferred income taxes payable or refundable at the date
of the financial statements as a result of all events that have been recognized
in the accompanying consolidated financial statements, as measured by enacted
tax laws.
The income tax provision (benefit) for the years ended December 31, 1995,
1996 and 1997 consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
------------- ------------ --------------
<S> <C> <C> <C>
Current--
Federal ......................... $ -- $ 14,000 $ (291,000)
State ........................... -- 2,000 (31,000)
---------- --------- ----------
-- 16,000 (322,000)
Deferred--
Federal ......................... (150,000) (58,000) 47,000
State ........................... (16,000) (6,000) 14,000
---------- --------- ----------
(166,000) (64,000) 61,000
Less valuation allowance ......... 166,000 64,000 --
---------- --------- ----------
Total .......................... $ -- $ 16,000 $ (261,000)
========== ========= ==========
</TABLE>
The provision for income taxes for the year ended December 31, 1996
consists of alternative minimum and net worth taxes. The benefit from income
taxes for the year ended December 31, 1997 represents refundable income taxes
from CMP as a result of its tax-sharing agreement with CMP.
The Company has recorded a deferred tax liability of $61,000 at December
31, 1997 related to the temporary differences associated with accelerated
depreciation.
(10) NETWORK CONSTRUCTION AND NU AND CMP CONTRACTS
In 1994 the Company contracted for the rights to use NU property over an
initial 30-year term for the purpose of owning and operating the fiber optic
network facilities. At the end of the initial 30-year term, NU will have the
option to purchase the network on NU rights-of-way from the Company at the
appraised value, or to extend the agreement for an additional 30-year term with
an added payment incentive of 10% of revenues generated from the network built
on NU rights-of-way. Contractually, the Company is required to build 310 fiber
route miles in NU's service territory by September 27, 1999.
Pursuant to the Company's agreement with NU, the right-of-way fees for
specified route segments have been waived for 10 years in return for the
Company's guarantee to build the fiber optic network to certain NU facilities
F-17
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(10) NETWORK CONSTRUCTION AND NU AND CMP CONTRACTS (Continued)
and allow NU the use of 12 fibers on designated route segments in the NU
service territory. Costs of $2,348,156 associated with the construction of the
12 fibers are included in Prepaid right-of-way fees-related party in the
accompanying balance sheet and are being recognized as a cost-of-service
ratably by over 10 years.
The Company's agreement with NU also provides for payments on a per mile
basis for certain right-of-way extensions. Such payments are being recognized
ratably over the 30-year term of the contract.
In 1996, the Company contracted for the rights to use CMP's property over
an initial 30-year term for the purpose of owning and operating fiber optic
network facilities. At the end of the initial 30-year term, CMP will have the
option to purchase the network on CMP rights-of-way from the Company at the
appraised value, or to extend the agreement for an additional 10-year term with
an added payment incentive of 10% of revenues generated from the network built
on CMP rights-of-way.
The Company's agreement with CMP provides for payments on a per mile
basis. Such payments are payable annually by January 31st of each year and are
recognized ratably over the 30-year term of the contract. CMP has agreed to
allow right-of-way payments otherwise payable by the Company to accrue so long
as amounts borrowed by the Company from a Bank under a $1.6 million
construction loan agreement were outstanding. The amount of right-of-way
payments accrued at December 31, 1997 and March 31, 1998 was approximately $0
and $120,000, respectively.
(11) COMMITMENTS
The Company leases certain motor vehicles, equipment and office facilities
under noncancelable operating leases which expire at various dates through
December 1999. Future minimum lease payments required under these leases at
December 31, 1997 are approximately as follows:
<TABLE>
<S> <C>
Year ending December 31,
1998 .................. $14,000
1999 .................. 4,000
-------
$18,000
=======
</TABLE>
(12) SIGNIFICANT CUSTOMERS
Sales to significant customers as a percentage of the Company's total
revenues were as follows:
<TABLE>
<CAPTION>
Three-Months
Ended
December 31, March 31,
1995 1996 1997 1997 1998
------ ------ ------ ------ -----
Customer A ......... 100% 98% 10% --% --%
<S> <C> <C> <C> <C> <C>
Customer B ......... -- -- 69 -- 76
Customer C ......... -- -- -- -- 10
</TABLE>
F-18
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(13) ACCRUED EXPENSES
Accrued expenses at December 31, 1996 and 1997, and March 31, 1998 consist
of the following:
<TABLE>
<CAPTION>
December 31, March 31,
1996 1997 1998
--------- ----------- ----------
<S> <C> <C> <C>
Accrued property taxes ................... -- $315,036 $293,034
Accrued interest ......................... -- 92,180 --
Accrued professional fees ................ 12,016 50,000 15,387
Accrued payable to related party ......... -- 61,793 61,793
Accrued payroll and benefits ............. 20,227 22,992 --
Accrued other ............................ -- 29,492 38,921
------ -------- --------
$32,243 $571,493 $409,135
======= ======== ========
</TABLE>
(14) SUBSEQUENT EVENTS
(a) Reorganization
Prior to the Reorganization, approximately 90.9% of the Company was owned
by MaineCom Services. In addition, the Company had one direct subsidiary,
FiveCom LLC, of which the Company owned approximately 82.6% of the outstanding
membership interests, with 9.9% of the outstanding membership interests being
owned by Mode 1, 5% of the outstanding membership interests being owned by CMP
and the remaining membership interests being owned by certain individuals.
FiveCom LLC in turn owned 60% of the outstanding membership interests in NECOM
LLC (with Mode 1 owning the other 40%) and 33.3% of the outstanding membership
interests of FiveCom of Maine LLC (with MaineCom Services owning the other
66.7%).
In order to simplify the corporate structure and in contemplation of the
Offerings, the Company's major stockholders decided to reorganize the Company.
In April 1998, prior to the Reorganization, CMP exercised its warrants to
purchase 5,876 shares of membership interests in FiveCom LLC for an aggregate
exercise price of $58.76 and on July 8, 1998, (i) each of the minority members
in FiveCom LLC (and each of Mode 1 and MaineCom Services) exchanged their
membership interests in FiveCom LLC, NECOM LLC and FiveCom of Maine LLC,
respectively, for 3,470,470 shares of the Series B Convertible Preferred Stock
of the Company; (ii) FiveCom LLC and NECOM LLC were each merged with and into
the Company; (iii) FiveCom of Maine LLC was merged into FiveCom of Maine, Inc.,
a wholly-owned subsidiary of the Company; and (iv) the Company was
reincorporated in Delaware under the name "NorthEast Optic Network, Inc." and
the Company's Certificate of Incorporation was amended and restated.
As a result of the Reorganization, (i) MaineCom Services ownership of the
Company was reduced to 52.82%, with Mode 1 gaining an ownership interest of
40.84% in the Company, and (ii) FiveCom LLC and NECOM LLC were merged with and
into the Company, and FiveCom of Maine LLC became a wholly-owned subsidiary of
the Company which was converted from a Massachusetts limited liability company
into a Delaware corporation.
On July 8, 1998, the Company entered into a Restructuring and Contribution
Agreement with CMP, MaineCom Services (a wholly-owned subsidiary of CMP) and
Mode 1 (an affiliate of NU) relating to the restructuring of the Company.
Pursuant to this Agreement, each of MaineCom Services and Mode 1 exchanged
membership interests in subsidiaries of the Company for shares of the Series B
Convertible Preferred Stock of the Company. In addition, pursuant to the
Restructuring and Contribution Agreement, the Company's President and the
Company's Vice President, Operations, exchanged their membership interests in
FiveCom LLC, a subsidiary of the Company, for shares of the Series B Convertible
Preferred Stock of the Company.
Prior to the reorganization, Fivecom, Inc., NU, and other minority
interests owned 82.7%, 9.9% and 7.4%, respectively, of FiveCom LLC membership
interests. CMP through its ownership in FiveCom, Inc. owned a 75.1% interest in
FiveCom LLC. In connection with the Reorganization, the Company will record an
intangible asset of approximately $47,000,000 to reflect the Company's exchange
of membership interest (acquisition) related to NU's
F-19
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(14) SUBSEQUENT EVENTS (Continued)
minority interest in a subsidiary (NECOM LLC), in accordance with AICPA
Accounting Interpretation 39 to APB Opinion No. 16, Business Combinations
(AIN-39). The intangible will be amortized over 30 years, reflecting assignment
of value to goodwill and to the rights-of-ways, which have 30-year terms.
Pro forma results of operations for the Company for the year ended
December 31, 1997 assuming that the Reorganization had occurred on January 1,
1997 would have been revenues of $394,704; operating loss of ($3,857,071); a
net loss of ($3,598,964); and a basic and diluted loss per share of $12.64.
(b) Stockholders' Equity
The Restated Certificate of Incorporation authorizes the issuance of up to
2,000,000 shares of preferred stock, $.01 par value per share. Under the terms
of the Certificate of Incorporation, the Board of Directors is authorized,
subject to any limitations prescribed by law, without stockholder approval, to
issue such shares of preferred stock in one or more series. Each series of
preferred stock shall have rights, preferences, privileges and restrictions,
including voting rights, dividend rights, conversion rights, redemption
privileges and liquidation preferences, as shall be determined by the Board of
Directors.
In connection with the Reorganization, the par value of the Series A
convertible preferred stock, Series B convertible preferred stock and common
stock was reduced from $0.05 to $0.01 per share, resulting in a reduction in
par value of $3,133, $38,509 and $4,557 in Series A convertible preferred
stock, Series B convertible preferred stock and common stock, respectively, and
a corresponding increase in additional paid-in capital of $46,199. All par
value amounts have been retroactively restated to reflect the reduction.
In connection with the Reorganization, the conversion rate on the Series A
convertible preferred stock was reduced to a 1:1 ratio and 199,636 additional
shares of Series A Convertible Preferred Stock were issued to adjust for such
reduction.
On June 23, 1998 the Board of Directors voted to increase the authorized
common shares to 30,000,000.
In July 1998, the Company's Board of Directors voted to effect a 2.5- to
- -1 common stock split. Series A and B convertible preferred stock will convert
at a rate equal to the common stock split. All share and per share amounts have
been retroactively restated to reflect the stock split.
(c) Principal Stockholders Agreement
CMP and NU have entered into a Principal Stockholders Agreement dated May
28, 1998, whereby each such party agrees that, following the completion of the
Offerings, it will not permit or cause the Company to (i) merge or consolidate,
liquidate or dissolve, change its form of organization or sell, lease, exchange
or transfer all or substantially all of its assets; or (ii) seek bankruptcy
protection or certain other protection from creditors, unless both parties
agree. After the closing of the proposed equity offering and debt financing,
this agreement will remain in effect for so long as (a) NU owns at least 10% of
the outstanding Common Stock of the Company, fully diluted and (b) the
aggregate Common Stock of the Company owned by NU and CMP is at least 331/3% of
the outstanding Common Stock of the Company, fully diluted. The Company expects
that each of CMP and NU will be major creditors of the Company under their
existing right-of-way agreements.
(d) Qwest Agreement
In July 1998, the Company entered into an agreement (the "Qwest
Agreement") with Qwest Communications Corporation ("Qwest") in which Qwest
agreed to grant to the Company an indefeasible right to use (IRU) in certain
fibers along a route to be constructed between Boston and New York City (the
"Boston-New York Segment"). In consideration of such grant, the Company agreed
to pay to Qwest an aggregate IRU fee to be paid in a series of installments.
The Boston-New York Segment is expected to become available to the Company by
December 31, 1998. The term of the Qwest Agreement is for the longer of 20
years or the useful economic life of the fiber subject
F-20
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(14) SUBSEQUENT EVENTS (Continued)
to the Qwest Agreement, provided, however, that the Qwest Agreement may be
terminated at any time upon the occurrence of certain uncured defaults by the
Company or the loss of certain underlying rights held by Qwest or the other
parties upon whom Qwest depends for its rights in the fiber.
(e) BecoCom/NEES Communications Agreements
In July 1998, the Company entered into a Fiber Optic Lease Agreement with
NEES Communications, Inc., a subsidiary of New England Electric System (the
"NEES Com Agreement"), and a Fiber Optic Use Agreement with BecoCom, Inc., a
subsidiary of Boston Edison Company (the "BecoCom Agreement"). Pursuant to the
terms of these agreements, the Company acquired the right to use certain fibers
(the "Company Fibers") to be constructed and maintained by NEES Communications
and BecoCom, respectively, on routes running from Hudson, New Hampshire to and
within Boston, Massachusetts. Under the terms of these agreements, the Company
is required to pay a monthly fee, and has agreed to share a portion of the
revenue generated from the use of the Company Fibers (in excess of a base
revenue amount specified in each agreement). NEES Communications and BecoCom
are each required to use their best commercial efforts to make the fibers
available to the Company by December 31, 1998. Both the NEES Com Agreement and
the BecoCom Agreement have an initial term of 20 years, with the potential to
negotiate for up to two additional, consecutive five-year extensions.
(15) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED)
The following table sets forth certain unaudited quarterly results of
operations for each of the four quarters ended December 31, 1997 and the
quarter ended March 31, 1998. In management's opinion, this unaudited
information has been prepared on the same basis as the annual financial
statements and includes all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the information for the
quarters presented, when read in conjunction with the financial statements and
notes thereto included elsewhere in this document. The operating results for
any quarter are not necessarily indicative of results for any subsequent
quarter.
F-21
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Including Data Applicable to Unaudited Periods)--(Continued)
(15) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED) (Continued)
<TABLE>
<CAPTION>
Quarter ended
------------------------------------------------------------------------
March 31, June 30, September 30, December 31, March 31,
1997 1997 1997 1997 1998
------------- ------------- --------------- -------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Network service ............................. $ -- $ 106,369 $ 114,784 $ 126,565 $ 146,257
Other service ............................... -- 5,036 18,221 23,729 5,106
---------- ---------- ---------- ---------- ----------
Total revenues ............................. -- 111,405 133,005 150,294 151,363
---------- ---------- ---------- ---------- ----------
Expenses:
Cost of sales ............................... $ 108,358 $ 405,038 $ 289,777 $ 334,770 $ 247,386
Selling, general and administrative ......... 204,275 445,930 172,554 176,365 225,122
Depreciation and amortization ............... 32,987 135,204 137,936 249,843 302,013
---------- ---------- ---------- ---------- ----------
Total expenses ............................. 345,620 986,172 600,267 760,978 774,521
---------- ---------- ---------- ---------- ----------
Loss from operations ....................... (345,620) (874,767) (467,262) (610,684) (623,158)
---------- ---------- ---------- ---------- ----------
Other Income (Expense):
Interest income and other, net .............. 56,638 28,118 38,603 15,559 30,322
Interest expense ............................ -- (481) (37,297) (104,033) (91,816)
---------- ---------- ---------- ---------- ----------
Total other income (expense) ............... 56,638 27,637 1,306 (88,474) (61,494)
---------- ---------- ---------- ---------- ----------
Loss before minority interest in
subsidiaries' earnings and
provision for income taxes ................ (288,982) (847,130) (465,956) (699,158) (684,652)
Minority Interest ............................ 137,620 397,644 218,721 326,215 314,498
Benefit From Income Taxes .................... (33,000) (96,000) (53,000) (79,000) (77,000)
---------- ---------- ---------- ---------- ----------
Net Loss ..................................... $ (118,362) $ (353,486) $ (194,235) $ (293,943) $ (293,154)
========== ========== ========== ========== ==========
Basic and Diluted Loss per Share ............. $ (0.42) $ (1.24) $ (0.68) $ (1.03) $ (1.03)
</TABLE>
F-22
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
The following unaudited consolidated pro forma financial statements give
effect to the Reorganization of entities under common control. These unaudited
consolidated pro forma financial statements have been prepared from, and should
be read in conjunction with, the historical financial statements and notes
thereto of NorthEast Optic Network, Inc.
On July 8, 1998, the Company entered into a Restructuring and Contribution
Agreement with CMP, MaineCom Services (an affiliate of CMP) and Mode 1 (an
affiliate of NU) related to the restructuring of the Company. Pursuant to this
Agreement, each of MaineCom Services and Mode1 exchanged membership interests
in subsidiaries of the Company for shares of the Series B Convertible Preferred
Stock of the Company. In addition, pursuant to the Restructuring and
Contribution Agreement, the Company's President and the Company's Vice
President, Operations, exchanged their membership interests in FiveCom LLC, a
subsidiary of the Company for share of Series B Convertible Preferred Stock of
the Company. In connection with the Reorganization, the Company will record an
intangible asset of approximately $47,000,000 to reflect the Company's exchange
of membership interest (acquisition) related to NU's minority interest in a
subsidiary (NECOM LLC), in accordance with AICPA Accounting Interpretation 39
to APB Opinion No. 16, Business Combinations (AIN-39).
The unaudited Consolidated Pro Forma Balance Sheet gives effect to the
Mergers as if they had occurred on March 31, 1998. The Consolidated Pro Forma
Statement of Operations for the three months ended March 31, 1998 give effect
to the Reorganization as if it had occurred on January 1, 1998. The
Consolidated Pro Forma Statement of Operations for the year ended December 31,
1997 gives effect to the Reorganization as if it had occurred on January 1,
1997.
The Consolidated Pro Forma Financial Statements of the Company do not
purport to present the financial position or results of operations of the
Company had the Mergers or acquisitions been consummated at the dates
indicated, nor is it necessarily indicative of future operating results or
financial position of the reorganized companies.
F-23
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED PRO FORMA BALANCE SHEET
(Unaudited)
<TABLE>
<CAPTION>
March 31, 1998 Adjustments March 31, 1998
Actual As Adjusted
<S> <C> <C> <C>
Assets
Current Assets:
Total current assets ................................ $ 2,006,262 $ 2,006,262
------------ ------------
Property and equipment, net ............................ 19,629,423 19,629,423
Restricted cash ........................................ 839,662 839,662
Intangible Assets, net ................................. 3,708,325 $ 47,076,632(1) 50,784,957
------------ ------------------ ------------
$ 26,183,672 $ 47,076,632 $ 73,260,304
============ ================== ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term obligations ........... $ 1,949,936 $ 1,949,936
Accounts payable and accrued expenses ................. 699,771 699,771
Accounts payable construction in progress ............. 2,786,515 2,786,515
Accrued right-of-way fees--related party .............. 940,848 940,848
Deferred revenue ...................................... 1,129,575 1,129,575
------------ ------------
Total current liabilities ........................... 7,506,645 7,506,645
------------ ------------
Note Payable Related Party ............................. 3,975,000 3,975,000
------------ ------------
Other Long-Term Obligations ............................ 123,833 123,833
Minority Interest in Consolidated Subsidiaries ......... 5,024,288 $ (5,024,288)(2) --
CMP Warrant ............................................ 532,836 (532,836)(3) --
Stockholders' Equity:
Series A convertible preferred stock .................. 783 1,996(7) 2,779
Series B convertible preferred stock .................. 9,627 34,705(6) 44,332
Common stock .......................................... 2,848 2,848
Warrants .............................................. 8,595 8,595
Additional paid-in capital ............................ 11,817,216 52,597,055(1)(2)(3) 64,414,271
Accumulated deficit ................................... (2,817,999) (2,817,999)
------------ ------------
Total stockholders' equity .......................... 9,021,070 61,654,826
------------ ------------
$ 26,183,672 $ 47,076,632 $ 73,260,304
============ ================== ============
</TABLE>
The accompanying notes are an integral part of these consolidated pro forma
financial statements.
F-24
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED PRO FORMA STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Year Ended
December 31,
1997 Adjustments
--------------- ---------------------
Actual
<S> <C> <C>
Revenues: ................... $ 394,704
-------------
Expenses:
Cost of sales .............. 1,137,943
Selling, general and
administrative ........... 1,002,232
Depreciation and
amortization ............. 552,862 1,558,738(4)
------------- -----------
Total expenses ........... 2,693,037 1,558,738
------------- -----------
Loss from
operations ............ (2,298,333) (1,558,738)
------------- ------------
Interest Income
(Expense):
Interest income ............ 138,918
Interest expense ........... (141,811)
-------------
Total interest
expense ............... (2,893)
-------------
Loss before minority
interest in
subsidiaries' earnings
and provision for
(benefit from)
income taxes ............. (2,301,226) (1,558,738)
Minority Interest ........... 1,080,200 (1,080,200)(5)
Provision for (Benefit
From) Income Taxes ......... (261,000)
-------------
Net Loss ................... (960,026) (2,638,938)
============= ============
Basic and Diluted Loss
per Share .................. (3.37)
=============
Basic and Diluted
Weighted Average
Shares Outstanding ......... 284,828
=============
<CAPTION>
Three Months
Year Ended Three Months Ended
December 31, Ended March 31, March 31,
1997 1998 Adjustments 1998
--------------- ----------------- ------------------- ---------------
As Adjusted Adjusted
<S> <C> <C> <C> <C>
Revenues: ................... $ 394,704 $ 151,363 $ 151,363
------------- ----------- -------------
Expenses:
Cost of sales .............. 1,137,943 247,386 247,386
Selling, general and
administrative ........... 1,002,232 225,122 225,122
Depreciation and
amortization ............. 2,111,600 302,013 392,305(4) 694,318
------------- ----------- --------- -------------
Total expenses ........... 4,251,775 774,521 392,305 1,166,826
------------- ----------- --------- -------------
Loss from
operations ............ (3,857,071) (623,158) (392,305) (1,015,463)
------------- ----------- ---------- -------------
Interest Income
(Expense):
Interest income ............ 138,918 30,322 30,322
Interest expense ........... (141,811) (91,816) (91,816)
------------- ----------- -------------
Total interest
expense ............... (2,893) (61,494) (61,494)
------------- ----------- -------------
Loss before minority
interest in
subsidiaries' earnings
and provision for
(benefit from)
income taxes ............. (3,859,964) (684,652) (392,305) (1,076,957)
Minority Interest ........... -- 314,498 (314,498)(5) 0
Provision for (Benefit
From) Income Taxes ......... (261,000) (77,000) (77,000)
------------- ----------- -------------
Net Loss ................... (3,598,964) (293,154) (706,803) (999,957)
============= =========== ========== =============
Basic and Diluted Loss
per Share .................. (12.64) (1.03) (3.51)
============= =========== =============
Basic and Diluted
Weighted Average
Shares Outstanding ......... 284,828 284,828 284,828
============= =========== =============
</TABLE>
The accompanying notes are an integral part of these consolidated pro forma
financial statements.
F-25
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED PRO FORMA FINANCIAL STATEMENTS
(Unaudited)
(1) To record an intangible asset to reflect the step-up in basis resulting
from the Company's acquisition of NU's minority interest in a subsidiary
(NECOM LLC), in accordance with AIN-39.
(2) To record the elimination of minority interest resulting from the exchange
of minority members' interest in subsidiaries of the Company for Company
stock as part of the Reorganization.
(3) To record CMP's exercise in April 1998 of its warrants to purchase 5,876
shares of membership interests in FiveCom LLC for an aggregate exercise
price of $58.76.
(4) To record additional amortization associated with the intangible asset
recorded to reflect the step-up in basis resulting from the Company's
acquisition of NU's minority interest in a subsidiary (NECOM LLC). The
Company is utilizing a 30-year amortization period, reflecting the
assignment of value to goodwill and to the rights-of-way, which have
30-year terms.
(5) To eliminate the allocation of losses to minority members due to the
exchange of such interests' for the Company's stock in the reorganization.
(6) In connection with the Reorganization, the minority interests in the
Company's subsidiaries were exchanged for Series B convertible preferred
stock, resulting in the elimination of any minority interest and an
increase of 3,470,470 shares of Series B convertible preferred stock, of
which 144,172 shares arose from CMP's exercise of a warrant.
(7) In connection with the Reorganization, the conversion rate on the Series A
convertible preferred stock was reduced to a 1 : 1 ratio and 199,636
additional shares of Series A convertible preferred stock were issued to
adjust for such reduction.
F-26
<PAGE>
GLOSSARY
Set forth below are definitions of certain terms used herein.
<TABLE>
<S> <C>
Access charges ................ The fees paid by long distance carriers to LECs for originating and
terminating long distance calls on the LECs' local networks.
Analog Transmission ........... A way of sending voice, video and data signals electronically in which the
transmitted signal is analogous to the original signal.
ATM (Asynchronous
Transfer Mode) ................ An information transfer standard that is one of a general class of packet
technologies that relay traffic by way of an address contained within the first
five bytes of a standard fifty-three-byte-long packet or cell. The ATM format
can be used by many different information systems, including local area
networks, to deliver traffic at varying rates, permitting a mix of voice, data
and video.
Backbone ...................... The through-portions of a transmission network, as opposed to spurs that
branch off the through-portions.
Band .......................... A range of frequencies between two defined limits.
Bandwidth ..................... The relative range of analog frequencies or digital signals that can be passed
through a transmission medium, such as glass fibers, without distortion. The
greater the bandwidth, the greater the information carrying capacity.
Bandwidth is measured in Hertz, or "Hz" (analog), or Bits Per Second or
"bps" (digital).
Bit ........................... A contraction of the term Binary Digit, it is the basic unit in data
communications. Bits are typically represented by ones or zeros.
Bit Error Rate ................ A measure of transmission quality stated as the expected probability of error
per bit transmitted.
CAP ........................... Competitive Access Provider.
Capacity ...................... The information carrying ability of a telecommunications facility.
Carrier ....................... A provider of communications transmission services by fiber, wire or radio.
Carrier Ring .................. Local fiber optic network that connects one or more carrier facilities to a
NEON POP.
Carrier's Carrier ............. A wholesale private telecommunications carrier offering services primarily to
other carriers and not to the general public.
Central Office ................ A telephone company facility where subscribers' lines are joined to switching
equipment for connecting with other subscribers, both locally and for long
distance.
CLEC (Competitive Local
Exchange Carrier) ............. A company that competes with LECs in the local services market.
CMP ........................... Central Maine Power Company
CMP Service Territory ......... The geographical areas prescribed by CMP's franchise service territory in the
State of Maine.
Collocation ................... The physical locating of a telecommunication carrier's switch in another
carrier's premises that facilitates the interconnection of their respective
switching equipment.
Common Carrier ................ A government defined group of private companies offering
telecommunications services or facilities to the general public on a non-
discriminatory basis.
</TABLE>
G-1
<PAGE>
<TABLE>
<S> <C>
Conduit ........................... A pipe, usually made of metal, ceramic or plastic, that protects buried cables.
Dark Fiber ........................ Fiber optic cable without any of the electronic or optronic equipment
necessary to use the fiber for transmission.
Dense Wave Division
Multiplexing ...................... A technique for transmitting 8 or more different light wave frequencies on a
single fiber to increase the information carrying capacity.
Digital ........................... Describes a method of storing, processing and transmitting information
through the use of distinct electronic or optical pulses that represent the binary
digits 0 and 1. Digital transmission/switching technologies employ a sequence
of discrete, distinct pulses to represent information, as opposed to the
continuously variable analog signal.
DS-0, DS-1, DS-3 .................. Standard telecommunications industry digital signal formats, which are
distinguishable by bit rate (the number of binary digits (0 and 1) transmitted
per second). DS-0 service has a bit rate of 64 kilobits per second and
typically transmits only the equivalent of one voice conversation at a time.
DS-1 service has a bit rate of 1.544 megabits per second and typically
transmits the equivalent of 24 simultaneous voice conversations. DS-3 service
has a bit rate of 45 megabits per second and typically transmits the equivalent
of 672 simultaneous voice conversations.
Equal Access ...................... The basis upon which customers of interexchange carriers are able to obtain
access to their Primary Interexchange Carriers' (PIC) long distance telephone
network by dialing "1", thus eliminating the need to dial additional digits and
an authorization code to obtain such access.
Facilities-Based Carriers ......... Facilities-based carriers that own and operate their own network and
equipment.
FCC (Federal
Communications
Commission) ....................... Regulatory body established pursuant to the Communications Act of 1934; it
has the authority to regulate all interstate communications originating in the
United States.
Fiber Miles ....................... The number of strands of fiber in a length of fiber optic cable multiplied by
the length of the cable in miles.
Fiber Optics ...................... A technology in which light is used to transport information from one point to
another. Fiber optic cables are thin filaments of glass through which light
beams are transmitted over long distances carrying large amounts of data.
Modulating light on thin strands of glass produces major benefits in high-
bandwidth, relatively low cost, low power consumption, small space needs,
total insensitivity to electromagnetic interference and great resistance to
bugging.
Frame Relay ....................... A high-speed, data-packet switching service used to transmit data between
computers. Frame Relay supports data units of variable lengths at access
speeds ranging from 56 kilobits per second to 1.5 megabits per second. This
service is well-suited for connecting local area networks, but is not presently
well-suited for voice and video applications due to the variable delays which
can occur. Frame Relay was designed to operate at high speeds on modern
fiber optic networks.
Gbps .............................. Gigabits per second, which is a measurement of speed for digital signal
transmission expressed in billions of bits per second.
ILEC .............................. Incumbent Local Exchange Carrier, an historic provider of local telephone
services.
</TABLE>
G-2
<PAGE>
<TABLE>
<S> <C>
Interconnect .................... Connection of a telecommunications device or service to the public switched
telephone network ("PSTN").
IXC (Interexchange carrier) ..... A company providing inter-LATA or long distance services between LATAs
on an intrastate or interstate basis.
Kbps ............................ Kilobits per second, which is a measurement of speed for digital signal
transmission expressed in thousands of bits per second.
LATAs (Local Access
Transport Areas) ................ The approximately 200 geographic areas that define the areas between which
the RBOCs currently are prohibited from providing long distance services.
LEC (Local Exchange Carrier) A company providing local telephone services.
Lit Fiber ....................... Fiber activated or equipped with the requisite electronic and optronic
equipment necessary to use the fiber for transmission.
Local loop ...................... A circuit that connects an end-user to the LEC central office within a LATA.
Long-haul circuit ............... A dedicated telecommunications circuit generally between locations in
different LATAs.
Mbps ............................ Megabits per second, which is a measurement of speed for digital signal
transmission expressed in millions of bits per second.
Multiplexing .................... An electronic or optical process that combines a large number of lower speed
transmission lines into one high speed line by splitting the total available
bandwidth into narrower bands (frequency division), or by allotting a common
channel to several different transmitting devices, one at a time in sequence
(time division).
NEON ............................ NorthEast Optic Network, the Company's fiber optic network in the Northeast.
NEON POP ........................ A POP owned and operated by the Company.
Non-Zero Dispersion Fiber ....... This fiber was designed and introduced in the early 1990's for communication
systems operating in the 1550 nm transmission window. The refractive index
profile has been selected to provide non-zero dispersion over the Erbium-
doped fiber amplifier passband region. This non-zero dispersion feature is
important for system performance in high bit rate Dense Wavelength Division
Multiplexing (DWDM) applications.
Northeast ....................... Connecticut, Maine, Massachusetts, New Hampshire, New York, Rhode Island
and Vermont.
NU .............................. Northeast Utilities.
NU Service Territory ............ The geographical areas where NU provides retail or wholesale electric service;
owns or operates electric transmission facilities or has obtained rights,
interests or permissions which would allow NU to install transmission or
distribution facilities in such areas.
OC-3, OC-12, OC-48 and
OC-192 .......................... OC is a measure of SONET transmission optical carrier level, which is equal
to a corresponding number of DS-3s (e.g., OC-3 is equal to 3 DS-3s and
OC-48 is equal to 48 DS-3s).
POP (Point of Presence) ......... Locations where a carrier has installed transmission equipment in a service
area to relay telecommunications traffic to a network or a switching center.
PCS (Personal
Communications Services) ........ Services planned for a new digital Radio Frequency (RF) equipment
conveying both voice and data over wireless networks.
</TABLE>
G-3
<PAGE>
<TABLE>
<S> <C>
RBOCs (Regional Bell
Operating Companies) .............. The seven local telephone companies (formerly part of AT&T) established as
a result of the AT&T Divestiture Decree.
Regeneration/amplifier ............ Devices which automatically re-transmit or boost signals on an out-bound
circuit.
Reseller .......................... A carrier that does not own transmission facilities, but obtains
communications services from another carrier for resale to the public.
Route Miles ....................... The number of miles spanned by fiber optic cable calculated without including
physically overlapping segments of cable.
ROWs .............................. Rights-of-way.
Single Mode Fiber ................. A fiber having a small core diameter and in which only one mode (the
fundamental mode which may consist of two polarizations) will propagate at
the wavelengths of interest.
SONET (Synchronous
Optical Network
Technology) ....................... An electronics and network architecture for variable-bandwidth products
which enables transmission of voice, data and video (multimedia) at very high
speeds.
SONET ring ........................ A network architecture which provides for instantaneous restoration of service
in the event of a fiber cut by automatically rerouting traffic along an
alternating path. This occurs so rapidly (in 50 milliseconds) that it is virtually
undetectable to the user.
Switch ............................ A device that selects the paths or circuits to be used for transmission of
information and establishes a connection. Switching is the process of
interconnecting circuits to form a transmission path between users and it also
captures information for billing purposes.
Switched service carriers ......... A carrier that sells switched long distance service and generally refers to a
carrier that owns its switch.
Switchless resellers .............. A carrier that does not own facilities or switches, but purchases minutes in
high volumes from other carriers and resells those minutes.
Tandem Switch ..................... An electronic communications switch located between the LEC switch and the
IXC switch that passes along routing, signaling and billing information.
Telecommunications ................ The transmission, between or among points specified by the user, of
information of the user's choosing, without change in the form or content of
the information as sent or received.
Telecommunications Service The offering of telecommunications for a fee to the public, or to such classes
of users as to be effectively available directly to the public, regardless of the
facilities used.
Telephony ......................... The transmission of sounds between widely removed points with or without
connecting wires.
Unbundled ......................... Services, programs, software and/or training sold separately from the hardware.
Video Services .................... The provision of video over a channel.
Wireless .......................... A communications system that operates without wires, such as cellular services.
</TABLE>
G-4
<PAGE>
- --------------------------------------------------------------------------------
[E] No dealer, salesperson or any other person has been authorized to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company, any Selling
Stockholder or any Underwriter. This Prospectus does not constitute an offer to
sell or the solicitation of an offer to buy any of the securities offered
hereby in any jurisdiction to any person to whom it is unlawful to make such
offer in such jurisdiction. Neither the delivery of this Prospectus nor any
sale made hereunder shall, under any circumstances, create any implication that
the information herein is correct as of any time subsequent to the date hereof
or that there has been no change in the affairs of the Company since such date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
---------
<S> <C>
Prospectus Summary ................................ 3
Risk Factors ...................................... 12
Debt Offering ..................................... 21
Use of Proceeds ................................... 22
Dividend Policy ................................... 22
Dilution .......................................... 23
Capitalization .................................... 24
Selected Consolidated Financial and
Operating Data ................................. 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ..................................... 28
Business .......................................... 32
Management ........................................ 48
Certain Transactions .............................. 52
Principal and Selling Stockholders ................ 54
Description of Capital Stock ...................... 58
Description of Certain Indebtedness ............... 60
Shares Eligible for Future Sale ................... 85
United States Federal Tax Consequences ............ 87
Underwriting ...................................... 92
Notice to Canadian Residents ...................... 96
Legal Matters ..................................... 97
Experts ........................................... 97
Additional Information ............................ 97
Index to Consolidated Financial Statements ........ F-1
Glossary .......................................... G-1
</TABLE>
------------------------
Until , 1998 (25 days after the date of this prospectus), all
dealers effecting transactions in the Common Stock, whether or not
participating in this distribution, may be required to deliver a prospectus.
This is in addition to the obligation of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
[Logo]
NorthEast Optic
Network, Inc.
5,500,000 Shares
Common Stock
($.01 par value)
P R O S P E C T U S
Credit Suisse First Boston
Warburg Dillon Read LLC
- --------------------------------------------------------------------------------
<PAGE>
- --------------------------------------------------------------------------------
[D] No dealer, salesperson or any other person has been authorized to
give any information or to make any representation not contained in this
Prospectus and, if given or made, such information or representation must not
be relied upon as having been authorized by the Company or any Underwriter.
This Prospectus does not constitute an offer to sell or the solicitation of an
offer to buy any of the securities offered hereby in any jurisdiction to any
person to whom it is unlawful to make such offer in such jurisdiction. Neither
the delivery of this Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information herein is correct as
of any time subsequent to the date hereof or that there has been no change in
the affairs of the Company since such date.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
Prospectus Summary .............................. 3
Risk Factors .................................... 12
Equity Offering ................................. 21
Use of Proceeds ................................. 22
Capitalization .................................. 24
Selected Consolidated Financial and
Operating Data ............................... 26
Management's Discussion and Analysis of
Financial Condition and Results of
Operations ................................... 28
Business ........................................ 32
Management ...................................... 48
Certain Transactions ............................ 52
Principal Stockholders .......................... 56
Description of Capital Stock .................... 58
Description of the Notes ........................ 61
United States Federal Income Tax
Consequences ................................. 89
Underwriting .................................... 94
Notice to Canadian Residents .................... 95
Legal Matters ................................... 97
Experts ......................................... 97
Additional Information .......................... 97
Index to Consolidated Financial Statements ...... F-1
Glossary ........................................ G-1
</TABLE>
------------------------
Until , 1998 (90 days after the date of this prospectus), all
dealers effecting transactions in the Notes, whether or not participating in
this distribution, may be required to deliver a prospectus. This delivery
requirement is in addition to the obligation of dealers to deliver a prospectus
when acting as underwriters and with respect to their unsold allotments or
subscriptions.
[Logo]
NorthEast Optic
Network, Inc.
$165,000,000
% Senior Notes
Due 2008
P R O S P E C T U S
Credit Suisse First Boston
Warburg Dillon Read LLC
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
Common Stock being registered. All amounts are estimates except the SEC
registration fee and the NASD filing fee.
<TABLE>
<CAPTION>
Amount to Be
Paid
-------------
<S> <C>
SEC registration fee ............................. $ 74,797
NASD filing fee .................................. $ 25,355
Nasdaq National Market Listing Fee ............... $ 95,000
Printing, mailing and engraving expenses ......... $ 250,000
Legal fees and expenses .......................... $ 390,000
Accounting fees and expenses ..................... $ 300,000
Transfer agent and registrar fees ................ $ 10,000
Trustee fees ..................................... $ 7,000
Miscellaneous expenses ........................... $ 47,848
----------
Total ........................................... $1,200,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers
The Delaware General Corporation Law and the Registrant's Certificate of
Incorporation and By-Laws provide for indemnification of the Registrant's
directors and officers for liabilities and expenses that they may incur in such
capacities. In general, directors and officers are indemnified with respect to
actions taken in good faith in a manner reasonably believed to be in, or not
opposed to, the best interests of the Registrant, and with respect to any
criminal action or proceeding, actions that the indemnitee had no reasonable
cause to believe were unlawful. Reference is made to the Registrant's Form of
Amended and Restated Certificate of Incorporation and Form of Amended and
Restated By-Laws to be filed as Exhibits hereto.
The Underwriting Agreement provides that the Underwriters are obligated,
under certain circumstances, to indemnify directors, officers and controlling
persons of the Company against certain liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Act"). Reference is made to the
form of Underwriting Agreement to be filed as an Exhibit hereto.
The Company has obtained directors' and officers' liability insurance.
Item 15. Recent Sales of Unregistered Securities
Set forth in chronological order is information regarding shares of Common
Stock and Preferred Stock issued, shares of Membership Interest and Sharing
Ratios issued, warrants issued and options granted by the Company since January
1, 1995 (without giving effect to the Company's 2.5-for-1 reverse stock split
to be effected prior to the closing of this offering). Further included is the
consideration, if any, received by the Company for such shares, Sharing Ratios,
warrants and options and information relating to the section of the Securities
Act of 1933, as amended (the "Securities Act"), or rule of the Securities and
Exchange Commission under which exemption from registration was claimed.
1. On April 30, 1996, the Company sold a total of 405,024 shares of Series
B Convertible Preferred Stock to MaineCom for an aggregate purchase price of
$10,000,000 pursuant to the terms of a Stock Subscription Agreement dated
November 22, 1995, as amended, among the Company and MaineCom (the "Series B
Stock Subscription Agreement").
2. On May 23, 1996, the Company issued 40 shares of Membership Interests
representing a 40% interest in a subsidiary of the Company to Mode 1 for an
aggregate capital contribution of $5,333,000. These Membership Interests were
subsequently exchanged for shares of the Company's Series B Convertible
Preferred Stock.
II-1
<PAGE>
3. On May 23, 1996, the Company issued 1,000 shares of Membership Interest
in a subsidiary of the Company to MaineCom for an aggregate capital
contribution of $1.00. These shares were subsequently cancelled.
4. On May 23, 1996, the Company issued a warrant expiring on April 30,
2001 to purchase 2,656 shares of Membership Interest in a subsidiary of the
Company at an exercise price of $125.84 per share to Oppenheimer & Co., Inc.
("Oppenheimer") in connection with its engagement as the Company's placement
agent. This Warrant was subsequently exchanged for warrants to purchase shares
of the Company's Series B Convertible Preferred Stock.
5. On May 23, 1996, the Company issued 5,153 shares of Membership Interest
in a subsidiary of the Company to Northeast Utilities for an aggregate capital
contribution of $653,333. These shares were subsequently cancelled in exchange
for shares of the Company's Series B Convertible Preferred Stock.
6. On May 23, 1996, the Company issued 162,060 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
7. On July 11, 1996, the Company issued 5,835 shares of Membership
Interest in a subsidiary of the Company to Mode 1 for an aggregate capital
contribution of $666,667. These shares were subsequently cancelled in exchange
for shares of the Company's Series B Convertible Preferred Stock.
8. On July 11, 1996, the Company issued 203,131 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
9. On October 28, 1996, the Company issued 1,318 shares of Membership
Interest in a subsidiary of the Company to two employees, as compensation,
pursuant to the provisions of their employment agreements. These shares were
subsequently cancelled in exchange for shares of the Company's Series B
Convertible Preferred Stock.
10. On October 28, 1996, the Company issued 192,519 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
11. On January 17, 1997, the Company issued 66.67 shares of Membership
Interest in a subsidiary of the Company representing a 66.67% interest in the
Company to MaineCom for an aggregate capital contribution of $1,750,088. These
Membership Interests were subsequently exchanged for shares of the Company's
Series B Convertible Preferred Stock.
12. On March 6, 1997, the Company sold a total of 57,144 shares of Series
A Convertible Preferred Stock to an employee and two institutional investors
for an aggregate purchase price of $800,016.
13. On June 30, 1997, the Company issued a warrant expiring August 9, 2000
to purchase 206 shares of Common Stock at an exercise price of $0.15 per share
to ATTI in connection with the execution of an equipment lease.
14. On June 30, 1997, the Company issued a warrant expiring October 11,
2000 to purchase 132 shares of Common Stock at an exercise price of $0.15 per
share to ATTI in connection with the execution of an equipment lease.
15. On October 7, 1997, the Company issued a five-year warrant to CMP to
purchase 5,876 shares of Membership Interest in a subsidiary of the Company, at
an exercise price of $0.01 per share, in connection with the execution of a
Construction Loan Agreement dated October 7, 1997 between the Company and
Central Maine Power Company. This Warrant has been exercised, and the
Membership Interests exchanged for shares of the Company's Series B Convertible
Preferred Stock.
16. On April 17, 1998, the Company issued 5,876 shares of Membership
Interest in a subsidiary of the Company to Central Maine Power Company in
connection with the exercise of warrants for the purchase of such shares for an
aggregate consideration of $58.76. These shares were subsequently exchanged for
shares of the Company's Series B Convertible Preferred Stock.
II-2
<PAGE>
17. On April 17, 1998, the Company issued 645 shares of Membership
Interest in a subsidiary of the Company to Mode 1 Communications, Inc. pursuant
to the anti-dilution provisions of a Letter Agreement dated February 23, 1996,
as amended, between the Company and such investor. Accordingly, the Company did
not receive any consideration for such shares. These shares were subsequently
cancelled in exchange for shares of the Company's Series B Convertible
Preferred Stock.
18. On April 17, 1998, the Company issued 785,268 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
19. On July 8, 1998, the Company issued a warrant expiring on April 30,
2001 to purchase 65,167 shares of Series B Convertible Preferred Stock at an
exercise price of $5.13 per share to Oppenheimer in exchange for its warrants
to purchase shares of Membership Interest in a subsidiary of the Company.
20. On July 8, 1998, the Company issued 2,455,441 shares of Series B
Convertible Preferred Stock to two employees and three institutional investors
in exchange for 118,665 shares of Membership Interest in one subsidiary of the
Company and 106.67 Membership Interests in another subsidiary of the Company.
21. On July 8, 1998, the Company issued 229,761 shares of Series B
Convertible Preferred Stock to MaineCom in accordance with the anti-dilution
provisions of the Series B Stock Subscription Agreement. Accordingly, the
Company did not receive any consideration, over and above the $10,000,000
previously paid on April 30, 1996, for such shares.
Certain of the transactions described above involved promoters, directors,
officers and 5% Stockholders of the Company. See "Certain Transactions."
The Company's 1994 Stock Option Plan was adopted by the Board of Directors
and approved by the stockholders of the Company as of December 2, 1994. As of
June 30, 1998, options to purchase 1,540 shares of Common Stock had been
exercised for an aggregate consideration of $385.00 and no options to purchase
shares of Common Stock were outstanding under such plan.
The Company's 1998 Stock Incentive Plan was adopted by the Board of
Directors on May 18, 1998 and approved by the stockholders of the Company on
May 26, 1998. As of June 30, 1998, no options to purchase shares of Common
Stock had been exercised and 1,705,272 options to purchase shares of Common
Stock were outstanding under such plan.
The securities issued in the foregoing transactions were either (i)
offered and sold in reliance upon exemptions from Securities Act registration
set forth in Sections 3(b) and 4(2) of the Securities Act, or any regulations
promulgated thereunder, relating to sales by an issuer not involving any public
offering, or (ii) in the case of certain options to purchase shares of Common
Stock and shares of Common Stock issued upon the exercise of such options, such
offers and sales were made in reliance upon an exemption from registration
under Rule 701 of the Securities Act. No underwriters were involved in the
foregoing sales of securities.
Item 16. Exhibits and Financial Statement Schedules
<TABLE>
<S> <C>
(a) Exhibits
1.1 Form of Underwriting Agreement for Debt Offering.
1.2 Form of Underwriting Agreement for Equity Offering.
**3.1 Restated Certificate of Incorporation of Registrant as currently in effect.
3.2 Form of Second Amended and 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 Amended and Restated 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.
</TABLE>
II-3
<PAGE>
<TABLE>
<S> <C>
4.3 Form of % Senior Notes Due 2008
4.4 Form of Collateral Pledge and Security Agreement
5.1 Opinion of Hale and Dorr LLP
10.1 1998 Stock Incentive Plan.
10.2 Form of Indemnity Agreement among the Registrant and the individual signatories thereto.
**10.3 Stock Subscription Agreement dated November 22, 1995, as amended on April 30, 1996, between
the Registrant and MaineCom Services.
**10.4 Form of Restructuring and Contribution Agreement dated July 8, 1998.
**10.5 Common Stock Warrant dated May 23, 1996 issued to Oppenheimer & Co., Inc.
**10.6 Common Stock Purchase Warrant dated August 19, 1994 issued to Applied Telecommunications
Technologies, Inc. ("ATTI") and assigned to Applied Telecommunications Technologies IV N.V.
("ATT IV").
**10.7 Common Stock Purchase Warrant dated February 15, 1995 issued to ATTI and assigned to ATT IV.
**10.8 Common Stock Purchase Warrant dated April 3, 1995 issued to ATTI and assigned to ATT IV.
**10.9 Common Stock Purchase Warrant dated June 30, 1997 issued to ATT IV.
**10.10 Common Stock Purchase Warrant dated June 30, 1997 issued to ATT IV.
**10.11 Warrant dated October 7, 1997 issued to Central Maine Power Company.
**10.12 Equipment Lease dated August 19, 1994 between the Registrant and Applied Telecommunications
Technologies, Inc. ("ATTI").
**10.13 Equipment Lease dated February 15, 1995 between the Registrant and ATTI.
**10.14 Equipment Lease dated April 3, 1995 between the Registrant and ATTI.
**+10.15 Master Services Agreement dated January 1, 1994 between the Registrant and MCI
Telecommunications Corporation ("MCI").
**+10.16 Fiber Optic Use Agreement dated January 2, 1997 between the Registrant and MCI.
**+10.17 Letter Agreement dated March 1, 1996 between the Registrant and Brooks Fiber Communications
of Massachusetts, Inc.
**+10.18 Fiber Optic Lease Agreement dated March 31, 1998 between the Registrant and Sprint Communications
Company L.P.
**+10.19 Aerial License Agreement dated October 28, 1996 between the Registrant and New England
Telephone and Telegraph Company and Western Massachusetts Electric Company.
**+10.20 Fiber Optic Use Agreement dated September 10, 1997 between the Registrant and New England
Fiber Communications LLC.
**+10.21 Fiber Optic Use Agreement dated November 18, 1997 between the Registrant and Teleport
Communications Boston.
**10.22 Network Products Purchase Agreement dated March 18, 1998 between the Registrant and Northern
Telecom Inc.
**10.23 Support Services Agreement dated as of April 30, 1996 between the Registrant and MaineCom
Services.
**+10.24 Amended and Restated Agreement for the Provision of Fiber Optic Facilities and Services dated as
of February 27, 1998 and effective as of September 27, 1994 among the Registrant and the
Northeast Utilities Services Company ("NUSC"), The Connecticut Light and Power Company
("CLPC"), Western Massachusetts Electric Company ("WMEC") and Public Service Company
of New Hampshire ("PSCNH") (Phase One).
**10.25 Short Form Agreement for the Provision of Fiber Optic Facilities and Services entered into on
February 27, 1998 among the Registrant and NUSC, CLPC, WMEC and PSCNH (Phase One).
**+10.26 Amended and Restated Agreement for the Provision of Fiber Optic Facilities and Services dated as of
February 27, 1998 among the Registrant and NUSC, CLPC, WMEC and PSCNH (Phase Two).
**10.27 Short Form Agreement for the Provision of Fiber Optic Facilities and Services entered into on
February 27, 1998 among the Registrant and NUSC, CLPC, WMEC and PSCNH (Phase Two).
**10.28 Standard Form of Duct Agreement.
**10.29 Construction Contract dated August 14, 1996 between the Registrant and Seaward Corporation.
**10.30 Employment Agreement dated October 15, 1997 between the Registrant and Victor Colantonio.
</TABLE>
II-4
<PAGE>
<TABLE>
<S> <C>
**10.31 Employment Agreement dated September 29, 1994 between the Registrant and Michael A. Musen.
**10.32 Employment Agreement dated May 4, 1998 between the Registrant and James D. Mack, Jr.
**10.33 Loan Agreement dated November 22, 1995 between the Registrant and Central Maine Power
Company.
**10.34 Construction Loan Agreement dated October 7, 1997 between the Registrant and Central Maine
Power Company.
**10.35 Construction Loan Agreement dated March 11, 1997 between FiveCom of Maine, Inc. and Peoples
Heritage Savings Bank.
**+10.36 Agreement dated January 17, 1997 between Registrant and E/Pro Engineering and Environmental
Consulting for the ADSS Cable Project.
**+10.37 Agreement for the Provision of Fiber Optic Facilities and Services dated January 7, 1997 between
Central Maine Power Company and the Registrant.
**10.38 Employment Agreement dated July 7, 1998 between the Registrant and William F. Fennell.
**10.39 Employment Agreement dated July 1, 1998 between the Registrant and Richard A. Crabtree.
**+10.40 IRU Agreement dated July 7, 1998 between the Registrant and QWEST Communications
Corporation.
**+10.41 Fiber Optic Lease Agreement dated July 2, 1998 between the Registrant and NEES
Communications, Inc.
**+10.42 Fiber Optic Use Agreement dated July 2, 1998 between the Registrant and BecoCom.
**12.1 Schedule of Earnings to Fixed Charges.
**21.1 List of Subsidiaries of the Registrant.
23.1 Consent of Arthur Andersen LLP.
23.2 Consent of Hale and Dorr LLP (included in Exhibit 5.1).
**24.1 Power of Attorney (see page II-6).
**25 Statement of Trustee's Eligibility and Qualification.
27 Financial Data Schedule.
**99 Consent of Katherine D. Courage.
</TABLE>
- ---------------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment to be requested.
(b) Financial Statement Schedules
All financial schedules, other than that listed above, have been omitted
because the information required to be set forth therein is not applicable or
is shown in the Financial Statements or Notes thereto.
Item 17. Undertakings.
The Registrant will provide to the Underwriters at the closing specified
in the Underwriting Agreement certificates in such denominations and registered
in such names as required by the Underwriters to permit prompt delivery to each
purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities
(other than the payment by the Registration of expenses incurred or paid by a
director, officer or controlling person of the Registrant in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-5
<PAGE>
The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of a
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein and the Offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant, NorthEast Optic Network, Inc., a corporation organized and existing
under the laws of the State of Delaware, has duly caused this amendment to the
Registration Statement on Form S-1 to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Boston, Commonwealth of
Massachusetts, on this 28th day of July, 1998.
NORTHEAST OPTIC NETWORK, INC.
By /s/ Richard A. Crabtree
-------------------------
Richard A. Crabtree
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this amendment
to the Registration Statement has been signed by the following person in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
- ----------------------------- ------------------------------------------------ --------------
<S> <C> <C>
/s/ Richard A. Crabtree Chairman of the Board of Directors
------------------------- and Chief Executive Officer
Richard A. Crabtree (Principal Executive Officer) July 28, 1998
*
------------------------- President, Chairman of the Company and Director
Victor Colantonio July 28, 1998
* Chief Financial Officer
------------------------- and Treasurer
William F. Fennell (Principal Financial and Accounting Officer) July 28, 1998
*
-------------------------
John H. Forsgren Director July 28, 1998
*
-------------------------
David Marsh Director July 28, 1998
-------------------------
F. Michael McClain Director
*
-------------------------
Gary D. Simon Director July 28, 1998
*By: /s/ Richard A. Crabtree
-------------------------
Richard A. Crabtree
Attorney-in-Fact
</TABLE>
II-7
[Draft--7/21/98]
$165,000,000
NorthEast Optic Network, Inc.
% Senior Notes Due 2008
UNDERWRITING AGREEMENT
----------------------
________________, 1998
CREDIT SUISSE FIRST BOSTON CORPORATION
Warburg Dillon Read LLC
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. NorthEast Optic Network, Inc., a Delaware corporation"
("Company"), proposes to issue and sell $165,000,000 principal amount of its __%
Senior Notes Due 2008 ("Offered Securities") to be issued under an indenture,
dated as of _________, 1998 ("Indenture"),
between the Company and , as Trustee. The Company hereby
agrees with the several Underwriters named in Schedule A hereto ("Underwriters")
as follows:
2. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Underwriters that:
(a) A registration statement (No. 333-53441) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either (i)
has been declared effective under the Securities Act of 1933 ("Act")
and is not proposed to be amended or (ii) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
("initial registration statement") has been declared effective, either
(i) an additional registration statement ("additional registration
statement") relating to the Offered Securities may have been filed with
the Commission pursuant to Rule 462(b) ("Rule 462(b)") under the Act
and, if so filed, has become effective upon filing pursuant to such
Rule and the Offered Securities all have been duly registered under the
Act pursuant to the initial registration statement and, if applicable,
the additional registration statement or (ii) such an additional
registration statement is proposed to be filed with the Commission
pursuant to Rule 462(b) and will become effective upon filing pursuant
to such Rule and upon such filing the Offered Securities will all have
been duly registered under the Act pursuant to the initial registration
statement and such additional registration statement. If the Company
does not propose to amend the initial registration statement or if an
additional registration statement has been filed and the Company does
not propose to amend it, and if any post-effective amendment to either
such registration statement has been filed with the Commission prior to
the execution and delivery of this Agreement, the most recent amendment
(if any) to each such registration statement has been declared
effective by the Commission or has become effective upon filing
pursuant to Rule 462(c) ("Rule 462(c)") under the Act or, in the case
of the additional registration statement, Rule 462(b). For purposes of
this Agreement, "Effective Time" with respect to the initial
registration statement or, if filed prior to the execution and delivery
of this Agreement, the additional registration statement means (i) if
the Company has advised the Representatives that it does not propose to
amend such registration statement, the date and time as of which such
registration statement, or the most recent post-effective amendment
thereto (if any) filed prior to the execution and delivery of this
Agreement, was declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c), or (ii) if the Company
has advised the Representatives that it proposes to file an amendment
or post-effective amendment to such registration statement, the date
and time as of which such registration statement, as amended by
<PAGE>
such amendment or post-effective amendment, as the case may be, is
declared effective by the Commission. If an additional registration
statement has not been filed prior to the execution and delivery of
this Agreement but the Company has advised the Representatives that it
proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration statement,
as amended at its Effective Time, including all information contained
in the additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective Time of
the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration Statement are herein referred to collectively as the
"Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "Prospectus". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(b) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (i)
on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all material respects to
the requirements of the Act, the Trust Indenture Act of 1939 ("Trust
Indenture Act") and the rules and regulations of the Commission ("Rules
and Regulations") and did not include any untrue statement of a
material fact or omit to state any material fact required to be stated
therein or necessary to make the statements therein not misleading,
(ii) on the Effective Date of the Additional Registration Statement (if
any), each Registration Statement conformed, or will conform, in all
material respects to the requirements of the Act, the Trust Indenture
Act and the Rules and Regulations and did not include, or will not
include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading and (iii) on
the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior to
the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required)
at the Effective Date of the Additional Registration Statement in which
the Prospectus is included, each Registration Statement and the
Prospectus will conform, in all material respects to the requirements
of the Act, the Trust Indenture Act and the Rules and Regulations, and
neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all material respects to the requirements of the Act, the
Trust Indenture Act and the Rules and Regulations, neither of such
documents will include any untrue statement of a material fact or will
omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and no
Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the
only such information is that described as such in Section 7(b) hereof.
(c) The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Prospectus; and the
Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification, except where the failure to be so qualified or in good
standing would not have, individually or in the aggregate, a material
adverse effect on the condition (financial or other), business,
properties
2
<PAGE>
or results of operations of the Company and its subsidiaries, taken as
a whole (a "Material Adverse Effect").
(d) Each subsidiary of the Company has been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification in each case,
except as would not have a Material Adverse Effect; all of the issued
and outstanding capital stock of each subsidiary of the Company has
been duly authorized and validly issued and is fully paid and
nonassessable; and the capital stock of each subsidiary owned by the
Company, directly or through subsidiaries, is owned free from liens,
encumbrances and defects except as otherwise described in the
Prospectus.
(e) The Indenture has been duly authorized and, if the
Effective Time of a Registration Statement is prior to the execution
and delivery of this Agreement, has been or otherwise upon such
Effective Time will be duly qualified under the Trust Indenture Act
with respect to the Offered Securities registered thereby; the Pledge
Agreement has been duly authorized; the Offered Securities have been
duly authorized; and when the Offered Securities are delivered and paid
for pursuant to this Agreement on the Closing Date (as defined below),
the Indenture and the Pledge Agreement will have been duly executed and
delivered, such Offered Securities will have been duly executed,
authenticated, issued and delivered and will conform to the description
thereof contained in the Prospectus and the Indenture, the Pledge
Agreement and such Offered Securities will constitute valid and legally
binding obligations of the Company, enforceable in accordance with
their terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general equity
principles.
(f) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required
to be obtained or made by the company for the consummation of the
transactions contemplated by this Agreement in connection with the
issuance and sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and the Trust Indenture
Act, the Securities Exchange Act of 1934 (the "Exchange Act") and such
as may be required under state or foreign securities laws.
(g) The execution, delivery and performance of this Agreement,
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any existing statute, any existing rule,
regulation or order naming the Company of any governmental agency or
body or any court, domestic or foreign, having jurisdiction over the
Company or any subsidiary of the Company or any of their properties, or
any agreement or instrument to which the Company or any such subsidiary
is a party or by which the Company or any such subsidiary is bound or
to which any of the properties of the Company or any such subsidiary is
subject (except as would not have a Material Adverse Effect), or the
charter or by-laws of the Company or any such subsidiary.
(h) This Agreement has been duly authorized, executed and
delivered by the Company.
(i) Except as disclosed in the Prospectus, the Company and its
subsidiaries have good and marketable title to all real properties and
all other properties and assets owned by them, in each case free from
liens, encumbrances and defects that would materially affect the value
thereof or materially interfere with the use made or to be made thereof
by them; except as disclosed in the Prospectus, the Company and its
subsidiaries hold any leased real or personal property under valid and
enforceable leases with no exceptions that would materially interfere
with the use made or to be made thereof by them; and except as
described in the Prospectus, the Company and its subsidiaries hold
easements and indefeasible rights of use under valid and enforceable
agreements with no exceptions that would materially interfere with the
use made or to be made thereof by them.
(j) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them (except where the failure to possess the same would not
individually or in the aggregate have a Material Adverse Effect) and
have not received any notice of proceedings relating to the revocation
or modification of any such certificate, authority or permit that, if
3
<PAGE>
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect.
(k) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
might have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(l) The Company and its subsidiaries own, possess or can
acquire on reasonable terms, adequate trademarks, trade names and other
rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively,
"intellectual property rights") necessary to conduct the business now
operated by them, or presently employed by them, and have not received
any notice of infringement of or conflict with asserted rights of
others with respect to any intellectual property rights that, if
determined adversely to the Company or any of its subsidiaries, could
individually or in the aggregate reasonably be expected to have a
Material Adverse Effect.
(m) Except as disclosed in the Prospectus, neither the Company
nor any of its subsidiaries is in violation of any statute, any rule,
regulation, decision or order of any governmental agency or body or any
court, domestic or foreign, relating to the use, disposal or release of
hazardous or toxic substances or relating to the protection or
restoration of the environment or human exposure to hazardous or toxic
substances (collectively, "environmental laws"), owns or operates any
real property contaminated with any substance that is subject to any
environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim could individually or in the
aggregate reasonably be expected to have a Material Adverse Effect on
the Company and its subsidiaries taken as a whole; and the Company is
not aware of any pending investigation which might lead to such a
claim.
(n) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the Company,
any of its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect, or
would materially and adversely affect the ability of the Company to
perform its obligations under the Indenture or this Agreement, or which
are otherwise material in the context of the sale of the Offered
Securities; and no such actions, suits or proceedings are threatened
or, to the Company's knowledge, contemplated.
(o) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied
on a consistent basis and the assumptions used in preparing the pro
forma financial information included in each Registration Statement and
the Prospectus provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect
the proper application of those adjustments to the corresponding
historical financial statement amounts.
(p) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the Prospectus
there has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
(q) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940.
(r) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida Statutes
and the Company agrees to comply with such Section if prior to the
completion of the distribution of the Offered Securities it commences
doing such business.
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(s) Except as disclosed in the Prospectus, neither the Company
nor any of subsidiaries is currently, nor will the conduct of its
business as described in the Prospectus cause it to be in the future,
subject to the provisions of the Communications Act of 1934, as amended
by the Telecommunications Act of 1996 (the "Communications Act") or to
any rules, regulations and policies of the Federal Communications
Commission (the "FCC") related thereto.
(t) The Company and its subsidiaries are in compliance in all
material respects with all federal, state and local telecommunications
laws, rules, regulations and policies to which they are subject,
including, with respect to subsidiaries, the Communications Act and the
related rules, regulations and policies of the FCC.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company agrees to sell to the
Underwriters, and the Underwriters agree, severally and not jointly, to purchase
from the Company, at a purchase price of % of the principal amount thereof
plus accrued interest from , 1998, to the Closing Date (as
hereinafter defined), the respective principal amounts of Securities set forth
opposite the names of the Underwriters in Schedule A hereto.
The Company will deliver against payment of the purchase price the
Offered Securities in the form of one or more permanent global securities in
definitive form (the "Global Securities") deposited with the Trustee as
custodian for The Depository Trust Company ("DTC") and registered in the name of
Cede & Co., as nominee for DTC. Interests in any permanent Global Securities
will be held only in book-entry form through DTC, except in the limited
circumstances described in the Prospectus. Payment for the Offered Securities
shall be made by the Underwriters in Federal (same day) funds by official bank
check or checks or wire transfer to an account at a bank acceptable to Credit
Suisse First Boston Corporation ("CSFBC") drawn to the order of the Company at
the office of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York, at
10:00 A.M., (New York time), on , 1998, or at such other time not
later than seven full business days thereafter as CSFBC and the Company
determine, such time being herein referred to as the "Closing Date", against
delivery to the Trustee as custodian for DTC of the Global Securities
representing all of the Offered Securities. The Global Securities will be made
available for checking at the above office of Cravath, Swaine & Moore at least
24 hours prior to the Closing Date.
4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company. The Company agrees with the
several Underwriters that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier
of (A) the second business day following the execution and delivery of
this Agreement or (B) the fifteenth business day after the Effective
Date of the Initial Registration Statement. The Company will advise
CSFBC promptly of any such filing pursuant to Rule 424(b). If the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement and an additional registration
statement is necessary to register a portion of the Offered Securities
under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective
amendment thereto with the Commission pursuant to and in accordance
with Rule 462(b) on or prior to 10:00 P.M., New York time, on the date
of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make
such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC promptly of any proposal to
amend or supplement the initial or any additional registration
statement as filed or the related prospectus or the Initial
Registration Statement, the Additional Registration Statement (if any)
or the Prospectus and will not effect such amendment or supplementation
without CSFBC's consent; and the Company will also advise CSFBC
promptly of the effectiveness of each Registration Statement (if its
Effective Time is subsequent to the execution and delivery of this
Agreement) and of any amendment or supplementation of a Registration
Statement or the Prospectus and of the institution by the Commission of
any stop order proceedings in respect of a Registration Statement and
will use its best efforts to prevent the issuance of any such stop
order and to obtain as soon as possible its lifting, if issued.
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(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC of such event and will promptly
prepare and file with the Commission, at its own expense, an amendment
or supplement which will correct such statement or omission or an
amendment which will effect such compliance. Neither CSFBC's consent
to, nor the Underwriters' delivery of, any such amendment or supplement
shall constitute a waiver of any of the conditions set forth in Section
6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally
available to its securityholders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the
Initial Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) that will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding sentence,
"Availability Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "Availability Date" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (three of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so
long as a prospectus relating to the Offered Securities is required to
be delivered under the Act in connection with sales by any Underwriter
or dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC requests. The
Prospectus shall be so furnished on or prior to 5:00 P.M., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other documents shall be so furnished as
soon as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions in the
United States and Canada as CSFBC designates and will continue such
qualifications in effect so long as required for the distribution.
(g) During the period of 3 years hereafter, the Company will
furnish to the Underwriters, as soon as practicable after the end of
each fiscal year, a copy of its annual report to stockholders for such
year; and the Company will furnish to the Underwriters (i) as soon as
available, a copy of each report and any definitive proxy statement of
the Company filed with the Commission under the Securities Exchange Act
of 1934 or mailed to stockholders, and (ii) from time to time, such
other information concerning the Company as CSFBC may reasonably
request, which such other information shall be kept confidential by the
Underwriters.
(h) The Company will pay all expenses incident to the
performance of its obligations under this Agreement, for any filing
fees and other expenses (including fees and disbursements of counsel)
incurred in connection with qualification of the Offered Securities for
sale under the laws of such jurisdictions in the United States and
Canada as CSFBC designates and the printing of memoranda relating
thereto for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the
review by the National Association of Securities Dealers, Inc. of the
Offered Securities, for any travel expenses of the Company's officers
and employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the
Offered Securities and for expenses incurred in distributing
preliminary prospectuses and the Prospectus (including any amendments
and supplements thereto) to the Underwriters.
(i) The Company will purchase U.S. government obligations (the
"Pledged Securities") in an amount sufficient, upon receipt of
scheduled principal and interest payments on such securities, to
provide for payment in full of the first seven regularly scheduled
interest payments due on the Notes. The Pledged Securities will be
pledged by the Company to the Trustee for the benefit of holders of the
Notes pursuant to a pledge agreement dated the Closing Date and between
the Company and the Trustee (the "Pledge Agreement").
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6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Offered Securities on
the Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of Company officers made pursuant to the provisions hereof, to the performance
by the Company of its obligations hereunder and to the following additional
conditions precedent:
(a) The Underwriters shall have received a letter, dated the
date of delivery thereof (which, if the Effective Time of the Initial
Registration Statement is prior to the execution and delivery of this
Agreement, shall be on or prior to the date of this Agreement or, if
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement, shall be prior to the
filing of the amendment or post-effective amendment to the registration
statement to be filed shortly prior to such Effective Time), of Arthur
Andersen LLP confirming that they are independent public accountants
within the meaning of the Act and the applicable published Rules and
Regulations thereunder and stating to the effect that:
(i) in their opinion the financial statements and
schedules, examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial
Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim
financial statements of the Company, inquiries of officials of
the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
(A) the unaudited financial statements
included in the Registration Statements do not comply
as to form in all material respects with the
applicable accounting requirements of the Act and the
related published Rules and Regulations or any
material modifications should be made to such
unaudited financial statements for them to be in
conformity with generally accepted accounting
principles;
(B) at the date of the latest available
balance sheet read by such accountants, or at a
subsequent specified date not more than three
business days prior to the date of this Agreement,
there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt
of the Company and its consolidated subsidiaries or,
at the date of the latest available balance sheet
read by such accountants, there was any decrease in
consolidated net assets, as compared with amounts
shown on the latest balance sheet included in the
Prospectus; or
(C) for the period from the closing date of
the latest income statement included in the
Prospectus to the closing date of the latest
available income statement read by such accountants
there were any decreases, as compared with the
corresponding period of the previous year and with
the period of corresponding length ended the date of
the latest income statement included in the
Prospectus, in consolidated net sales, or net
operating income, or consolidated net income or in
EBITDA or the ratio of earnings to fixed charges,
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur and which are described in such
letter;
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from
the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system
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<PAGE>
or are derived directly from such records by analysis or
computation) with the results obtained from inquiries, a
reading of such general accounting records and other
procedures specified in such letter and have found such dollar
amounts, percentages and other financial information to be in
agreement with such results, except as otherwise specified in
such letter;
(v) they have:
(A) read the unaudited adjusted and pro
forma summary balance sheet data as of December 31,
1997 and March 31, 1998;
(B) inquired of certain officials of the
Company who have responsibility for financial and
accounting matters about (x) the basis for their
determination of the adjustments and (y) whether such
unaudited adjusted and pro forma financial
information comply as to form in all material
respects with the applicable accounting requirements
of the Act; and
(C) confirmed the arithmetic accuracy of the
adjustments; and
(vi) based on the proceedings described in (v),
nothing came to their attention that caused them to believe
that the unaudited adjusted and pro forma financial
information contained in the Registration Statements do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and that the adjustments
have not been properly applied to the historical amounts in
the compilation of that information.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statement is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration is subsequent to such
execution and delivery, "Registration Statements" shall mean the
Initial Registration Statement and the additional registration
statement as proposed to be filed or as proposed to be amended by the
post-effective amendment to be filed shortly prior to its Effective
Time, and (iii) "Prospectus" shall mean the prospectus included in the
Registration Statements.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 P.M., New
York time, on the date of this Agreement or such later date as shall
have been consented to by CSFBC. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 P.M., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by CSFBC. If the Effective Time of
the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with
the Commission in accordance with the Rules and Regulations and Section
5(a) of this Agreement. Prior to the Closing Date, no stop order
suspending the effectiveness of a Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of the Company or the Underwriters,
shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, properties or results of operations of
the Company or its subsidiaries which, in the judgment of a majority in
interest of the Underwriters, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the public
offering or the sale of and payment for the Offered Securities; (ii)
any downgrading in the rating of any debt securities of the Company by
any "nationally recognized statistical rating organization" (as defined
for purposes of Rule 436(g) under the Act), or any public announcement
that any such organization has under surveillance or review its rating
of any debt securities of the Company (other than an announcement with
positive implications of a possible upgrading, and no implication of a
possible downgrading, of such rating); (iii) any suspension or
limitation of trading
8
<PAGE>
in securities generally on the New York Stock Exchange, or any setting
of minimum prices for trading on such exchange, or any suspension of
trading of any securities of the Company on any exchange or in the
over-the-counter market; (iv) any banking moratorium declared by U.S.
Federal or New York authorities; or (v) any outbreak or escalation of
major hostilities in which the United States is involved, any
declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of a majority
in interest of the Underwriters, the effect of any such outbreak,
escalation, declaration, calamity or emergency makes it impractical or
inadvisable to proceed with completion of the public offering or the
sale of and payment for the Offered Securities.
(d) The Underwriters shall have received an opinion, dated
such Closing Date, of Hale and Dorr LLP, counsel for the Company, to
the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own
its properties and conduct its business as described in the
Prospectus; and the Company is duly qualified to do business
as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification;
(ii) The Indenture has been duly authorized, executed
and delivered and has been duly qualified under the Trust
Indenture Act; the Pledge Agreement has been duly authorized,
executed and delivered; the Offered Securities have been duly
authorized, executed, authenticated, issued and delivered and
conform in all material respects to the description thereof
contained in the Prospectus; and the Indenture, the Pledge
Agreement and the Offered Securities constitute valid and
binding obligations of the Company enforceable in accordance
with their respective terms, subject to bankruptcy,
insolvency, fraudulent transfer, usery, reorganization,
moratorium and similar laws of general applicability relating
to or affecting creditors' rights and to general equity
principles;
(iii) There are no contracts, agreements or
understandings known to such counsel between the Company and
any person granting such person the right to require the
Company to file a registration statement under the Act with
respect to any securities of the Company owned or to be owned
by such person or to require the Company to include such
securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Act;
(iv) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required for the consummation of the transactions
contemplated by this Agreement in connection with the issuance
or sale of the Offered Securities by the Company, except such
as have been obtained and made under the Act and the Trust
Indenture Act and such as may be required under state
securities laws;
(v) The execution, delivery and performance of the
Indenture, the Pledge Agreement and this Agreement and the
issuance and sale of the Offered Securities and compliance
with the terms and provisions thereof will not result in a
breach or violation of any of the terms and provisions of, or
constitute a default under, any statute, any rule, regulation
or order of any governmental agency or body or any court
having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a
party or by which the Company or any such subsidiary is bound
or to which any of the properties of the Company or any such
subsidiary is subject, or the charter or by-laws of the
Company or any such subsidiary, and the Company has requisite
corporate power and authority to authorize, issue and sell the
Offered Securities as contemplated by this Agreement;
(vi) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any)
was filed and became effective under the Act as of the date
and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on
the date specified therein or was included in the Initial
Registration Statement or the
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Additional Registration Statement (as the case may be), and,
to the best of the knowledge of such counsel, no stop order
suspending the effectiveness of a Registration Statement or
any part thereof has been issued and no proceedings for that
purpose have been instituted or are pending or contemplated
under the Act, and each Registration Statement and the
Prospectus, and each amendment or supplement thereto, as of
their respective effective or issue dates, complied as to form
in all material respects with the requirements of the Act, the
Trust Indenture Act and the Rules and Regulations; such
counsel have no reason to believe that any part of a
Registration Statement or any amendment thereto, as of its
effective date or as of such Closing Date, contained any
untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to
make the statements therein not misleading or that the
Prospectus or any amendment or supplement thereto, as of its
issue date or as of such Closing Date, contained any untrue
statement of a material fact or omitted to state any material
fact necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading; the descriptions in the Registration Statements
and Prospectus of statutes, legal and governmental proceedings
and contracts and other documents are accurate and fairly
present the information required to be shown; and such counsel
do not know of any legal or governmental proceedings required
to be described in a Registration Statement or the Prospectus
which are not described as required or of any contracts or
documents of a character required to be described in a
Registration Statement or the Prospectus or to be filed as
exhibits to a Registration Statement which are not described
and filed as required; it being understood that such counsel
need express no opinion as to the financial statements or
other financial data contained in the Registration Statements
or the Prospectus;
(vii) This Agreement has been duly authorized,
executed and delivered by the Company;
(viii) Each subsidiary of the Company has been duly
incorporated and is an existing corporation in good standing
under the laws of the jurisdiction of its incorporation, with
power and authority (corporate and other) to own its
properties and conduct its business as described in the
Prospectus; and each subsidiary of the Company is duly
qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification; all of the issued and outstanding capital stock
of each subsidiary of the Company has been duly authorized and
validly issued and is fully paid and nonassessable; and the
capital stock of each subsidiary owned by the Company,
directly or through subsidiaries, is owned free from liens,
encumbrances and defects;
(ix) The Company is not and, after giving effect to
the offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940;
(x) The Company and its Subsidiaries are not, nor
will their respective businesses as described in the
Prospectus cause any of them to be in the future, subject to
the provisions of (x) the Communications Act or to any rules,
regulations and policies of the FCC related thereto or (y) any
state and local telecommunications laws, rules, regulations
and policies other than, in the case of certain of the
Company's subsidiaries, regulation by the FCC as a "common
carrier" under the Communications Act;
(xi) The statements in the Prospectus under the
captions "Regulation" and "Certain United States Federal
Income Tax Consequences", insofar as they constitute summaries
of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with
respect to such legal matters, documents and proceedings and
fairly summarize the matters referred to therein; and
(xii) The Pledge Agreement creates a valid security
interest in favor of the Trustee in all right, title and
interest of the Company in and to the Pledge Account and the
Pledged Securities.
(e) The Underwriters shall have received from Cravath, Swaine
& Moore, counsel for the Underwriters, such opinion or opinions, dated
such Closing Date, with respect to the
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incorporation of the Company, the validity of the Offered Securities,
the Registration Statements, the Prospectus and other related matters
as the Representatives may require, and the Company shall have
furnished to such counsel such documents as they reasonably request for
the purpose of enabling them to pass upon such matters.
(f) The Underwriters shall have received a certificate, dated
the Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, on behalf of the Company shall state that: the
representations and warranties of the Company in this Agreement are
true and correct; the Company has complied with all agreements and
satisfied all conditions on its part to be performed or satisfied
hereunder at or prior to the Closing Date; no stop order suspending the
effectiveness of any Registration Statement has been issued and no
proceedings for that purpose have been instituted or are contemplated
by the Commission; the Additional Registration Statement (if any)
satisfying the requirements of subparagraphs (1) and (3) of Rule 462(b)
was filed pursuant to Rule 462(b), including payment of the applicable
filing fee in accordance with Rule 111(a) or (b) under the Act, prior
to the time the Prospectus was printed and distributed to any
Underwriter; and, subsequent to the dates of the most recent financial
statements in the Prospectus, there has been no material adverse
change, nor any development or event involving a prospective material
adverse change, in the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole except as set forth in or contemplated by the
Prospectus or as described in such certificate.
(g) The Underwriters shall have received a letter, dated the
Closing Date, of Arthur Andersen LLP which meets the requirements of
subsection (a) of this Section, except that the specified date referred
to in such subsection will be a date not more than three business days
prior to the Closing Date for the purposes of this subsection.
(h) The Equity Offering (as defined in the Prospectus) shall
be simultaneously consummated on substantially the same terms as
described in the Registration Statements.
The Company will furnish the Underwriters with such conformed copies of such
opinions, certificates, letters and documents as the Underwriters reasonably
request. CSFBC may in its sole discretion waive on behalf of the Underwriters
compliance with any conditions to the obligations of the Underwriters hereunder.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through CSFBC
specifically for use therein, it being understood and agreed that the only such
information furnished by any Underwriter consists of the information described
as such in subsection (b) below.
(b) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company against any losses, claims, damages or liabilities to which
the Company may become subject, under the Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in any Registration Statement, the Prospectus, or any
amendment or supplement thereto, or any related preliminary prospectus, or arise
out of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, in each case to the extent, but only to the extent, that
such untrue statement or alleged untrue statement or omission or alleged
omission was made in reliance upon and in conformity with written information
furnished to the Company by such Underwriter through the CSFBC specifically for
use therein, and will reimburse any legal or other expenses reasonably incurred
by the Company in connection
11
<PAGE>
with investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred, it being understood and agreed that the
only such information furnished by any Underwriter consists of the following
information in the Prospectus furnished on behalf of each Underwriter: the last
paragraph at the bottom of the cover page concerning the terms of the offering
by the Underwriters, the legend concerning over-allotments and stabilizing on
the inside front cover page, the concession and reallowance figures appearing in
the third paragraph under the caption "Underwriting" and the information
contained in the fourth and sixth paragraphs under the caption "Underwriting".
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under
subsection (a) or (b) above, notify the indemnifying party of the commencement
thereof; but the omission so to notify the indemnifying party will not relieve
it from any liability which it may have to any indemnified party otherwise than
under subsection (a) or (b) above. In case any such action is brought against
any indemnified party and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with counsel satisfactory to such
indemnified party (who shall not, except with the consent of the indemnified
party, be counsel to the indemnifying party), and after notice from the
indemnifying party to such indemnified party of its election so to assume the
defense thereof, the indemnifying party will not be liable to such indemnified
party under this Section for any legal or other expenses subsequently incurred
by such indemnified party in connection with the defense thereof other than
reasonable costs of investigation. No indemnifying party shall, without the
prior written consent of the indemnified party, effect any settlement of any
pending or threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement includes an unconditional release of
such indemnified party from all liability on any claims that are the subject
matter of such action.
(d) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a) or
(b) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in subsection (a) or (b) above (i) in such proportion as
is appropriate to reflect the relative benefits received by the Company on the
one hand and the Underwriters on the other from the offering of the Securities
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault of
the Company on the one hand and the Underwriters on the other in connection with
the statements or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The relative
benefits received by the Company on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company bear to
the total underwriting discounts and commissions received by the Underwriters.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company or the Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
untrue statement or omission. The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any action or claim which is the subject of this
subsection (d). Notwithstanding the provisions of this subsection (d), no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Securities underwritten by it and
distributed to the public were offered to the public exceeds the amount of any
damages which such Underwriter has otherwise been required to pay by reason of
such untrue or alleged untrue statement or omission or alleged omission. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this subsection (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) The obligations of the Company under this Section shall be in
addition to any liability which the Company may otherwise have and shall extend,
upon the same terms and conditions, to each person, if any, who controls any
Underwriter within the meaning of the Act; and the obligations of the
Underwriters under this Section shall be in addition to any liability which the
respective Underwriters may otherwise have and shall extend, upon the same terms
and conditions, to each director of the Company, to each officer of the Company
who has signed a Registration Statement and to each person, if any, who controls
the Company within the meaning of the Act.
12
<PAGE>
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder and arrangements
satisfactory to CSFBC and the Company for the purchase of such Offered
Securities by other persons are not made within 36 hours after such default,
this Agreement will terminate without liability on the part of any
non-defaulting Underwriter or the Company, except as provided in Section 9. As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Company or its officers and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless of
any investigation, or statement as to the results thereof, made by or on behalf
of any Underwriter, the Company or any of their respective representatives,
officers or directors or any controlling person, and will survive delivery of
and payment for the Offered Securities. If this Agreement is terminated pursuant
to Section 8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company shall remain responsible for the
expenses to be paid or reimbursed by it pursuant to Section 5 and the respective
obligations of the Company and the Underwriters pursuant to Section 7 shall
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company will reimburse the
Underwriters for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department-Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at Hale and Dorr LLP, 60
State Street, Boston, MA 02109, Attention: Alexander A. Bernhard, Esq.;
provided, however, that any notice to an Underwriter pursuant to Section 7 will
be mailed, delivered or telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation of Underwriters. Any action under this Agreement
taken by CSFBC will be binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
The Company hereby submits to the non-exclusive jurisdiction of the
Federal and state courts in the Borough of Manhattan in The City of New York in
any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
13
<PAGE>
If the foregoing is in accordance with the Underwriters' understanding
of our agreement, kindly sign and return to the Company one of the counterparts
hereof, whereupon it will become a binding agreement between the Company and the
several Underwriters in accordance with its terms.
Very truly yours,
NORTHEAST OPTIC NETWORK, INC.,
by
---------------------------
[Insert Title]
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
WARBURG DILLON READ LLC
By CREDIT SUISSE FIRST BOSTON CORPORATION
by
-----------------------------------
14
<PAGE>
SCHEDULE A
Principal
Amount of
Underwriter Offered Securities
----------- ------------------
Credit Suisse First Boston Corporation...................... $
Warburg Dillon Read LLC.....................................
----------------
Total..................................... $
================
15
[Draft--7/21/98]
5,500,000 Shares
NorthEast Optic Network, Inc.
Common Stock
UNDERWRITING AGREEMENT
__________, 1998
CREDIT SUISSE FIRST BOSTON CORPORATION
WARBURG DILLON READ LLC,
As Representatives of the Several Underwriters,
c/o Credit Suisse First Boston Corporation,
Eleven Madison Avenue,
New York, N.Y. 10010-3629
Dear Sirs:
1. Introductory. NorthEast Optic Network, Inc., a Delaware corporation
("Company"), proposes to issue and sell 4,000,000 shares of its Common Stock
("Securities") and the stockholders listed in Schedule A hereto ("Selling
Stockholders") propose severally to sell an aggregate of 1,500,000 outstanding
shares of the Securities (such 5,500,000 shares of Securities being hereinafter
referred to as the "Firm Securities"). The Company also proposes to sell to the
Underwriters, at the option of the Underwriters, an aggregate of not more than
825,000 additional shares of its Securities (the "Optional Securities"). The
Firm Securities and the Optional Securities are herein collectively called the
"Offered Securities". The Company and the Selling Stockholders hereby agree with
the several Underwriters named in Schedule B hereto ("Underwriters") as follows:
2. Representations and Warranties of the Company and the Selling
Stockholders. (a) The Company represents and warrants to, and agrees with, the
several Underwriters that:
(i) A registration statement (No. 333-53441) relating to the
Offered Securities, including a form of prospectus, has been filed with
the Securities and Exchange Commission ("Commission") and either (A)
has been declared effective under the Securities Act of 1933 ("Act")
and is not proposed to be amended or (B) is proposed to be amended by
amendment or post-effective amendment. If such registration statement
(the "initial registration statement") has been declared effective,
either (A) an additional registration statement (the "additional
registration statement") relating to the Offered Securities may have
been filed with the Commission pursuant to Rule 462(b) ("Rule 462(b)")
under the Act and, if so filed, has become effective upon filing
pursuant to such Rule and the Offered Securities all have been duly
registered under the Act pursuant to the initial registration statement
and, if applicable, the additional registration statement or (B) such
an additional registration statement is proposed to be filed with the
Commission pursuant to Rule 462(b) and will become effective upon
filing pursuant to such Rule and upon such filing the Offered
Securities will all have been duly registered under the Act pursuant to
the initial registration statement and such additional registration
statement. If the Company does not propose to amend the initial
registration statement or if an additional registration statement has
been filed and the Company does not propose to amend it, and if any
post-effective amendment to either such registration statement has been
filed with the Commission prior to the execution and delivery of this
Agreement, the most recent amendment (if any) to each such registration
statement has been declared effective by the Commission or has become
effective upon filing pursuant to Rule 462(c) ("Rule 462(c)") under the
Act or, in the case of the additional registration statement, Rule
462(b). For purposes of this Agreement, "Effective Time" with respect
to the initial registration statement or, if filed prior to the
execution and delivery of this Agreement, the additional registration
statement means (A) if the Company has advised the Representatives that
it does not propose to amend such registration statement, the date and
time as of which such registration statement, or the most recent
post-effective amendment thereto (if any) filed prior to the execution
and delivery of this Agreement, was declared effective by the
Commission or has
<PAGE>
become effective upon filing pursuant to Rule 462(c), or (B) if the
Company has advised the Representatives that it proposes to file an
amendment or post-effective amendment to such registration statement,
the date and time as of which such registration statement, as amended
by such amendment or post-effective amendment, as the case may be, is
declared effective by the Commission. If an additional registration
statement has not been filed prior to the execution and delivery of
this Agreement but the Company has advised the Representatives that it
proposes to file one, "Effective Time" with respect to such additional
registration statement means the date and time as of which such
registration statement is filed and becomes effective pursuant to Rule
462(b). "Effective Date" with respect to the initial registration
statement or the additional registration statement (if any) means the
date of the Effective Time thereof. The initial registration statement,
as amended at its Effective Time, including all information contained
in the additional registration statement (if any) and deemed to be a
part of the initial registration statement as of the Effective Time of
the additional registration statement pursuant to the General
Instructions of the Form on which it is filed and including all
information (if any) deemed to be a part of the initial registration
statement as of its Effective Time pursuant to Rule 430A(b) ("Rule
430A(b)") under the Act, is hereinafter referred to as the "Initial
Registration Statement". The additional registration statement, as
amended at its Effective Time, including the contents of the initial
registration statement incorporated by reference therein and including
all information (if any) deemed to be a part of the additional
registration statement as of its Effective Time pursuant to Rule
430A(b), is hereinafter referred to as the "Additional Registration
Statement". The Initial Registration Statement and the Additional
Registration are hereinafter referred to collectively as the
"Registration Statements" and individually as a "Registration
Statement". The form of prospectus relating to the Offered Securities,
as first filed with the Commission pursuant to and in accordance with
Rule 424(b) ("Rule 424(b)") under the Act or (if no such filing is
required) as included in a Registration Statement, is hereinafter
referred to as the "Prospectus". No document has been or will be
prepared or distributed in reliance on Rule 434 under the Act.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A)
on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all material respects to
the requirements of the Act and the rules and regulations of the
Commission ("Rules and Regulations") and did not include any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary to make the statements
therein not misleading, (B) on the Effective Date of the Additional
Registration Statement (if any), each Registration Statement conformed
or will conform, in all material respects to the requirements of the
Act and the Rules and Regulations and did not include, or will not
include, any untrue statement of a material fact and did not omit, or
will not omit, to state any material fact required to be stated therein
or necessary to make the statements therein not misleading, and (C) on
the date of this Agreement, the Initial Registration Statement and, if
the Effective Time of the Additional Registration Statement is prior to
the execution and delivery of this Agreement, the Additional
Registration Statement each conforms, and at the time of filing of the
Prospectus pursuant to Rule 424(b) or (if no such filing is required)
at the Effective Date of the Additional Registration Statement in which
the Prospectus is included, each Registration Statement and the
Prospectus will conform, in all material respects to the requirements
of the Act and the Rules and Regulations, and neither of such documents
includes, or will include, any untrue statement of a material fact or
omits, or will omit, to state any material fact required to be stated
therein or necessary to make the statements therein not misleading. If
the Effective Time of the Initial Registration Statement is subsequent
to the execution and delivery of this Agreement: on the Effective Date
of the Initial Registration Statement, the Initial Registration
Statement and the Prospectus will conform in all material respects to
the requirements of the Act and the Rules and Regulations, neither of
such documents will include any untrue statement of a material fact or
will omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading, and no
Additional Registration Statement has been or will be filed. The two
preceding sentences do not apply to statements in or omissions from a
Registration Statement or the Prospectus based upon written information
furnished to the Company by any Underwriter through the Representatives
specifically for use therein, it being understood and agreed that the
only such information is that described as such in Section 7(c) hereof.
(iii) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the State of
Delaware, with power and authority (corporate and other) to own its
properties and conduct its business as described in the Prospectus; and
the Company is duly qualified to do business as a foreign corporation
in good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification, except where the failure to be so qualified or in good
standing would not have, individually or in
2
<PAGE>
the aggregate, a material adverse effect on the condition (financial or
other), business, properties or results of operations of the Company
and its subsidiaries, taken as a whole (a "Material Adverse Effect").
(iv) Each subsidiary of the Company has been duly incorporated
and is an existing corporation in good standing under the laws of the
jurisdiction of its incorporation, with power and authority (corporate
and other) to own its properties and conduct its business as described
in the Prospectus; and each subsidiary of the Company is duly qualified
to do business as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or the
conduct of its business requires such qualification in each case except
as would not have a Material Adverse Effect; all of the issued and
outstanding capital stock of each subsidiary of the Company has been
duly authorized and validly issued and is fully paid and nonassessable;
and the capital stock of each subsidiary owned by the Company, directly
or through subsidiaries, is owned free from liens, encumbrances and
defects except as otherwise described in the Prospectus.
(v) The Offered Securities and all other outstanding shares of
capital stock of the Company have been duly authorized; all outstanding
shares of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with this
Agreement on each Closing Date (as defined below), such Offered
Securities will have been, validly issued, fully paid and nonassessable
and conform to the description thereof contained in the Prospectus; and
the stockholders of the Company have no preemptive rights with respect
to the Securities.
(vi) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person that would give rise to a valid claim against the Company or any
Underwriter for a brokerage commission, finder's fee or other like
payment in connection with this offering.
(vii) Except as described in the Prospectus, there are no
contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Act with respect to any securities of
the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered
pursuant to a Registration Statement or in any securities being
registered pursuant to any other registration statement filed by the
Company under the Act.
(viii) The Securities have been approved for listing subject
to notice of issuance on the Nasdaq Stock Market's National Market.
(ix) No consent, approval, authorization, or order of, or
filing with, any governmental agency or body or any court is required
to be obtained or made by the Company for the consummation of the
transactions contemplated by this Agreement in connection with the sale
of the Offered Securities, except such as have been obtained and made
under the Act and the Securities Exchange Act of 1934, as amended (the
"Exchange Act") and such as may be required under state or foreign
securities laws.
(x) The execution, delivery and performance of this Agreement,
and the consummation of the transactions herein contemplated will not
result in a breach or violation of any of the terms and provisions of,
or constitute a default under, any existing statute, any existing rule,
regulation or order naming the Company or any Selling Stockholder of
any governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any subsidiary of the Company
or any of their properties, or any agreement or instrument to which the
Company or any such subsidiary is a party or by which the Company or
any such subsidiary is bound or to which any of the properties of the
Company or any such subsidiary is subject (except such as would not
have a material adverse effect), or the charter or by-laws of the
Company or any such subsidiary.
(xi) This Agreement has been duly authorized, executed and
delivered by the Company.
(xii) Except as disclosed in the Prospectus, the Company and
its subsidiaries have good and marketable title to all real properties
and all other properties and assets owned by them, in each case free
from liens, encumbrances and defects that would materially affect the
value thereof or materially interfere with the use made or to be made
thereof by them; except as disclosed in the Prospectus, the Company and
its subsidiaries hold any leased real or personal property under valid
and enforceable leases with no exceptions that would materially
interfere with the use made or to be made thereof by them; and except
as disclosed in the Prospectus, the Company and its
3
<PAGE>
Subsidiaries hold easements and indefeasible rights of use under valid
and enforceable agreements with no exceptions that would materially
interfere with the use made or to be made thereof by them.
(xiii) The Company and its subsidiaries possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them (except where the failure to possess the same would not
individually or in the aggregate have a Material Adverse Effect) and
have not received any notice of proceedings relating to the revocation
or modification of any such certificate, authority or permit that, if
determined adversely to the Company or any of its subsidiaries, could
individually or in the aggregate reasonably be expected to have a
Material Adverse Effect.
(xiv) No labor dispute with the employees of the Company or
any subsidiary exists or, to the knowledge of the Company, is imminent
that might have a material adverse effect on the Company and its
subsidiaries taken as a whole.
(xv) The Company and its subsidiaries own, possess or can
acquire on reasonable terms, adequate trademarks, trade names and other
rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively,
"intellectual property rights") necessary to conduct the business now
operated by them, or presently employed by them, and have not received
any notice of infringement of or conflict with asserted rights of
others with respect to any intellectual property rights that, if
determined adversely to the Company or any of its subsidiaries, could
individually or in the aggregate reasonably be expected to have a
Material Adverse Effect.
(xvi) Except as disclosed in the Prospectus, neither the
Company nor any of its subsidiaries is in violation of any statute, any
rule, regulation, decision or order of any governmental agency or body
or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection
or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, "environmental laws"), owns or operates
any real property contaminated with any substance that is subject to
any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim could individually or in the
aggregate reasonably be expected to have a Material Adverse Effect and
the Company is not aware of any pending investigation which might lead
to such a claim.
(xvii) Except as disclosed in the Prospectus, there are no
pending actions, suits or proceedings against or affecting the Company,
any of its subsidiaries or any of their respective properties that, if
determined adversely to the Company or any of its subsidiaries, would
individually or in the aggregate have a Material Adverse Effect would
materially and adversely affect the ability of the Company to perform
its obligations under this Agreement, or which are otherwise material
in the context of the sale of the Offered Securities; and no such
actions, suits or proceedings are threatened or, to the Company's
knowledge, contemplated.
(xviii) The financial statements included in each Registration
Statement and the Prospectus present fairly the financial position of
the Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied
on a consistent basis and the assumptions used in preparing the pro
forma financial information included in each Registration Statement and
the Prospectus provide a reasonable basis for presenting the
significant effects directly attributable to the transactions or events
described therein, the related pro forma adjustments give appropriate
effect to those assumptions, and the pro forma columns therein reflect
the proper application of those adjustments to the corresponding
historical financial statement amounts.
(xix) Except as disclosed in the Prospectus, since the date of
the latest audited financial statements included in the Prospectus
there has been no material adverse change, nor any development or event
involving a prospective material adverse change, in the condition
(financial or other), business, properties or results of operations of
the Company and its subsidiaries taken as a whole, and, except as
disclosed in or contemplated by the Prospectus, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
4
<PAGE>
(xx) The Company is not and, after giving effect to the
offering and sale of the Offered Securities and the application of the
proceeds thereof as described in the Prospectus, will not be an
"investment company" as defined in the Investment Company Act of 1940.
(xxi) Neither the Company nor any of its affiliates does
business with the government of Cuba or with any person or affiliate
located in Cuba within the meaning of Section 517.075, Florida Statutes
and the Company agrees to comply with such Section if prior to the
completion of the distribution of the Offered Securities it commences
doing such business.
(xxii) Except as disclosed in the Prospectus, neither the
Company nor any of its subsidiaries are currently, nor will the conduct
of their business as described in Prospectus cause any of them to be in
the future, subject to the provisions of the Communications Act of
1934, as amended by the Telecommunications Act of 1996 (the
"Communications Act") or to any rules, regulations and policies of the
Federal Communications Commission (the "FCC") related thereto.
(xxiii) The Company and its subsidiaries are in compliance in
all material respects with all federal, state and local
telecommunications laws, rules, regulations and policies to which they
are subject, including, with respect to subsidiaries, the
Communications Act and the related rules, regulations and policies of
the FCC.
(b) Each Selling Stockholder severally represents and warrants
to, and agrees with, the several Underwriters that:
(i) Such Selling Stockholder has and on the First Closing Date
(hereinafter defined) will have valid and unencumbered title to the
Offered Securities to be delivered by such Selling Stockholder on such
Closing Date and full right, power and authority to enter into this
Agreement and to sell, assign, transfer and deliver the Offered
Securities to be delivered by such Selling Stockholder on such Closing
Date hereunder; and upon the delivery of and payment for the Offered
Securities on the First Closing Date, the several Underwriters will
acquire valid and unencumbered title to the Offered Securities to be
delivered by such Selling Stockholder on such Closing Date.
(ii) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement: (A)
on the Effective Date of the Initial Registration Statement, the
Initial Registration Statement conformed in all material respects to
the requirements of the Act and the Rules and Regulations and did not
include any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading, (B) on the Effective Date of the
Additional Registration Statement (if any), each Registration Statement
conformed, or will conform, in all material respects to the
requirements of the Act and the Rules and Regulations did not include,
or will not include, any untrue statement of a material fact and did
not omit, or will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading, and (C) on the date of this Agreement, the Initial
Registration Statement and, if the Effective Time of the Additional
Registration Statement is prior to the execution and delivery of this
Agreement, the Additional Registration Statement each conforms, and at
the time of filing of the Prospectus pursuant to Rule 424(b) or (if no
such filing is required) at the Effective Date of the Additional
Registration Statement in which the Prospectus is included, each
Registration Statement and the Prospectus will conform, in all material
respects to the requirements of the Act and the Rules and Regulations,
and neither of such documents includes, or will include, any untrue
statement of a material fact or omits, or will omit, to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading. If the Effective Time of the Initial
Registration Statement is subsequent to the execution and delivery of
this Agreement: on the Effective Date of the Initial Registration
Statement, the Initial Registration Statement and the Prospectus will
conform in all material respects to the requirements of the Act and the
Rules and Regulations, neither of such documents will include any
untrue statement of a material fact or will omit to state any material
fact required to be stated therein or necessary to make the statements
therein not misleading. The two preceding sentences do not apply to
statements in or omissions from a Registration Statement or the
Prospectus based upon written information furnished to the Company by
any Underwriter through the Representatives specifically for use
therein, it being understood and agreed that the only such information
is that described as such in Section 7(c).
(iii) Except as disclosed in the Prospectus, there are no
contracts, agreements or understandings between such Selling
Stockholder and any person that would give rise to a valid
5
<PAGE>
claim against such Selling Stockholder or any Underwriter for a
brokerage commission, finder's fee or other like payment in connection
with this offering.
3. Purchase, Sale and Delivery of Offered Securities. On the basis of
the representations, warranties and agreements herein contained, but subject to
the terms and conditions herein set forth, the Company and each Selling
Stockholder agree, severally and not jointly, to sell to each Underwriter, and
each Underwriter agrees, severally and not jointly, to purchase from the Company
and each Selling Stockholder, at a purchase price of $ per share,
that number of Firm Securities (rounded up or down, as determined by Credit
Suisse First Boston Corporation ("CSFBC") in its discretion, in order to avoid
fractions) obtained by multiplying Firm Securities in the
case of the Company and the number of Firm Securities set forth opposite the
name of such Selling Stockholder in Schedule A hereto, in the case of a Selling
Stockholder, in each case by a fraction the numerator of which is the number of
Firm Securities set forth opposite the name of such Underwriter in Schedule B
hereto and the denominator of which is the total number of Firm Securities.
Certificates in negotiable form for the Offered Securities to be sold
by the Selling Stockholders hereunder have been placed in custody, for delivery
under this Agreement, under Custody Agreements made with the Company, as
custodian ("Custodian"). Each Selling Stockholder agrees that the shares
represented by the certificates held in custody for the Selling Stockholders
under such Custody Agreements are subject to the interests of the Underwriters
hereunder, that the arrangements made by the Selling Stockholders for such
custody are to that extent irrevocable, and that the obligations of the Selling
Stockholders hereunder shall not be terminated by operation of law or the
occurrence of any other event. If such event should occur before the delivery of
the Offered Securities hereunder, certificates for such Offered Securities shall
be delivered by the Custodian in accordance with the terms and conditions of
this Agreement as if such event had not occurred, regardless of whether or not
the Custodian shall have received notice of such event.
The Company and the Custodian will deliver the Firm Securities to the
Representatives for the accounts of the Underwriters, against payment of the
purchase price in Federal (same day) funds by official bank check or checks or
wire transfer to an account at a bank acceptable to CSFBC drawn to the order of
the Company in the case of shares of Firm Securities being sold by the Company
and each of the Selling Stockholders in the case of Firm Securities being sold
by the Selling Stockholders, at the office of Cravath, Swaine & Moore, 825
Eighth Avenue, New York, New York, at 10:00 New York time, on , 1998
or at such other time not later than seven full business days thereafter as
CSFBC and the Company determine, such time being herein referred to as the
"First Closing Date". The certificates for the Firm Securities so to be
delivered will be in definitive form, in such denominations and registered in
such names as CSFBC requests and will be made available for checking and
packaging at the office of Cravath, Swaine & Moore at least 24 hours prior to
the First Closing Date.
In addition, upon written notice from CSFBC given to the Company from
time to time not more than 30 days subsequent to the date of the Prospectus, the
Underwriters may purchase all or less than all of the Optional Securities at the
purchase price per Security to be paid for the Firm Securities. Such Optional
Securities shall be purchased from the Company for the account of each
Underwriter in the same proportion as the number of Firm Securities set forth
opposite such Underwriter's name bears to the total number of Firm Securities
(subject to adjustment by CSFBC to eliminate fractions) and may be purchased by
the Underwriters only for the purpose of covering over-allotments made in
connection with the sale of the Firm Securities. No Optional Securities shall be
sold or delivered unless the Firm Securities previously have been, or
simultaneously are, sold and delivered. The right to purchase the Optional
Securities or any portion thereof may be exercised from time to time and to the
extent not previously exercised may be surrendered and terminated at any time
upon notice by CSFBC to the Company.
Each time for the delivery of and payment for the Optional Securities,
being herein referred to as an "Optional Closing Date", which may be the First
Closing Date (the First Closing Date and each Optional Closing Date, if any,
being sometimes referred to as a "Closing Date"), shall be determined by CSFBC
but shall be not later than five full business days after written notice of
election to purchase Optional Securities is given. The Company will deliver the
Optional Securities being purchased on each Optional Closing Date to the
Representatives for the accounts of the several Underwriters, against payment of
the purchase price therefor in Federal (same day) funds by official bank check
or checks or wire transfer to an account at a bank acceptable to CSFBC drawn to
the order of the Company, at the above office of Cravath, Swaine & Moore. The
certificates for the Optional Securities being purchased on each Optional
Closing Date will be in definitive form, in such denominations and registered in
such names as CSFBC requests upon reasonable notice prior to such Optional
Closing Date and will be made available for checking and packaging at the office
of Cravath, Swaine & Moore at a reasonable time in advance of such Optional
Closing Date.
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4. Offering by Underwriters. It is understood that the several
Underwriters propose to offer the Offered Securities for sale to the public as
set forth in the Prospectus.
5. Certain Agreements of the Company and the Selling Stockholders. The
Company agrees with the several Underwriters and the Selling Stockholders that:
(a) If the Effective Time of the Initial Registration
Statement is prior to the execution and delivery of this Agreement, the
Company will file the Prospectus with the Commission pursuant to and in
accordance with subparagraph (1) (or, if applicable and if consented to
by CSFBC, subparagraph (4)) of Rule 424(b) not later than the earlier
of (A) the second business day following the execution and delivery of
this Agreement or (B) the fifteenth business day after the Effective
Date of the Initial Registration Statement. The Company will advise
CSFBC and the Selling Stockholders promptly and the Selling
Stockholders of any such filing pursuant to Rule 424(b). If the
Effective Time of the Initial Registration Statement is prior to the
execution and delivery of this Agreement and an additional registration
statement is necessary to register a portion of the Offered Securities
under the Act but the Effective Time thereof has not occurred as of
such execution and delivery, the Company will file the additional
registration statement or, if filed, will file a post-effective
amendment thereto with the Commission pursuant to and in accordance
with Rule 462(b) on or prior to 10:00 p.m., New York time, on the date
of this Agreement or, if earlier, on or prior to the time the
Prospectus is printed and distributed to any Underwriter, or will make
such filing at such later date as shall have been consented to by
CSFBC.
(b) The Company will advise CSFBC and the Selling Stockholders
promptly of any proposal to amend or supplement the initial or any
additional registration statement as filed or the related prospectus or
the Initial Registration Statement, the Additional Registration
Statement (if any) or the Prospectus and will not effect such amendment
or supplementation without CSFBC's consent; and the Company will also
advise CSFBC and the Selling Stockholders promptly of the effectiveness
of each Registration Statement (if its Effective Time is subsequent to
the execution and delivery of this Agreement) and of any amendment or
supplementation of a Registration Statement or the Prospectus and of
the institution by the Commission of any stop order proceedings in
respect of a Registration Statement and will use its best efforts to
prevent the issuance of any such stop order and to obtain as soon as
possible its lifting, if issued.
(c) If, at any time when a prospectus relating to the Offered
Securities is required to be delivered under the Act in connection with
sales by any Underwriter or dealer, any event occurs as a result of
which the Prospectus as then amended or supplemented would include an
untrue statement of a material fact or omit to state any material fact
necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply with the Act,
the Company will promptly notify CSFBC and the Selling Stockholders of
such event and will promptly prepare and file with the Commission, at
its own expense, an amendment or supplement which will correct such
statement or omission or an amendment which will effect such
compliance. Neither CSFBC's consent to, nor the Underwriters' delivery
of, any such amendment or supplement shall constitute a waiver of any
of the conditions set forth in Section 6.
(d) As soon as practicable, but not later than the
Availability Date (as defined below), the Company will make generally
available to its securityholders an earnings statement covering a
period of at least 12 months beginning after the Effective Date of the
Initial Registration Statement (or, if later, the Effective Date of the
Additional Registration Statement) which will satisfy the provisions of
Section 11(a) of the Act. For the purpose of the preceding sentence,
"Availability Date" means the 45th day after the end of the fourth
fiscal quarter following the fiscal quarter that includes such
Effective Date, except that, if such fourth fiscal quarter is the last
quarter of the Company's fiscal year, "Availability Date" means the
90th day after the end of such fourth fiscal quarter.
(e) The Company will furnish to the Representatives copies of
each Registration Statement (three of which will be signed and will
include all exhibits), each related preliminary prospectus, and, so
long as a prospectus relating to the Offered Securities is required to
be delivered under the Act in connection with sales by any Underwriter
or dealer, the Prospectus and all amendments and supplements to such
documents, in each case in such quantities as CSFBC requests. The
Prospectus shall be so furnished on or prior to 5:00 p.m., New York
time, on the business day following the later of the execution and
delivery of this Agreement or the Effective Time of the Initial
Registration Statement. All other such documents shall be so furnished
as soon
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<PAGE>
as available. The Company will pay the expenses of printing and
distributing to the Underwriters all such documents.
(f) The Company will arrange for the qualification of the
Offered Securities for sale under the laws of such jurisdictions in the
United States and Canada as CSFBC designates and will continue such
qualifications in effect so long as required for the distribution of
the Offered Securities; provided, however, that in connection therewith
the Company shall not be required to qualify as a foreign corporation
or to file a general consent to service of process in any jurisdiction.
(g) During the period of 3 years hereafter, the Company will
furnish to the Representatives and, upon request, to each of the other
Underwriters, as soon as practicable after the end of each fiscal year,
a copy of its annual report to stockholders for such year; and the
Company will furnish to the Representatives (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the Securities Exchange Act of 1934 or
mailed to stockholders, and (ii) from time to time, such other
information concerning the Company as CSFBC may reasonably request,
which such other information shall be kept confidential by the
Underwriters.
(h) For a period of 180 days after the date of the initial
public offering of the Offered Securities, the Company will not offer,
sell, contract to sell, pledge or otherwise dispose of, directly or
indirectly, or file with the Commission a registration statement under
the Act (Other than on Form S-8 and relating to resales of securities
as described in the general instructions to Form S-8) relating to, any
additional shares of its Securities or securities convertible into or
exchangeable or exercisable for any shares of its Securities, or
publicly disclose the intention to make any such offer, sale, pledge,
disposition or filing, without the prior written consent of CSFBC,
except grants of stock or options therefor to employees pursuant to the
terms of an incentive plan in effect on the date hereof, issuances of
Securities pursuant to the exercise of such options or the exercise of
any other employee stock options outstanding on the date hereof or
issuances of Securities pursuant to the Company's dividend reinvestment
plan.
(i) The Company and each Selling Stockholder agree with the
several Underwriters that the Company and such Selling Stockholder will
pay all expenses incident to the performance of the obligations of the
Company and such Selling Stockholder, as the case may be, under this
Agreement, for any filing fees and other expenses (including fees and
disbursements of counsel) in connection with qualification of the
Offered Securities for sale under the laws of such jurisdictions in the
U.S. as CSFBC designates and the printing of memoranda relating
thereto, for the filing fee incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the
review by the National Association of Securities Dealers, Inc. of the
Offered Securities, for any travel expenses of the Company's officers
and employees and any other expenses of the Company in connection with
attending or hosting meetings with prospective purchasers of the
Offered Securities, for any transfer taxes on the sale by the Selling
Stockholders of the Offered Securities to the Underwriters and for
expenses incurred in distributing preliminary prospectuses and the
Prospectus (including any amendments and supplements thereto) to the
Underwriters.
(j) Each Selling Stockholder agrees severally and not jointly
to deliver to CSFBC, attention: Transactions Advisory Group on or prior
to the First Closing Date a properly completed and executed United
States Treasury Department Form W-9 (or other applicable form or
statement specified by Treasury Department regulations in lieu
thereof).
(k) Each Selling Stockholder agrees, for a period of 180 days
after the date of the initial public offering of the Offered
Securities, not to offer, sell, contract to sell, pledge or otherwise
dispose of, directly or indirectly, any additional shares of the
Securities of the Company or securities convertible into or
exchangeable or exercisable for any shares of Securities, or publicly
disclose the intention to make any such offer, sale, pledge or
disposition, without the prior written consent of CSFBC, other than
transfers to affiliated entities.
6. Conditions of the Obligations of the Underwriters. The obligations
of the several Underwriters to purchase and pay for the Firm Securities on the
First Closing Date and the Optional Securities to be purchased on each Optional
Closing Date will be subject to the accuracy of the representations and
warranties on the part of the Company and the Selling Stockholders herein, to
the accuracy of the statements of Company officers made pursuant to the
provisions hereof, to the performance
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by the Company and the Selling Stockholders of their obligations hereunder and
to the following additional conditions precedent:
(a) The Representatives shall have received a letter, dated
the date of delivery thereof (which, if the Effective Time of the
Initial Registration Statement is prior to the execution and delivery
of this Agreement, shall be on or prior to the date of this Agreement
or, if the Effective Time of the Initial Registration Statement is
subsequent to the execution and delivery of this Agreement, shall be
prior to the filing of the amendment or post-effective amendment to the
registration statement to be filed shortly prior to such Effective
Time), of Arthur Andersen LLP confirming that they are independent
public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating to the effect
that:
(i) in their opinion the financial statements and
schedules examined by them and included in the Registration
Statements comply as to form in all material respects with the
applicable accounting requirements of the Act and the related
published Rules and Regulations;
(ii) they have performed the procedures specified by
the American Institute of Certified Public Accountants for a
review of interim financial information as described in
Statement of Auditing Standards No. 71, Interim Financial
Information, on the unaudited financial statements included in
the Registration Statements;
(iii) on the basis of the review referred to in
clause (ii) above, a reading of the latest available interim
financial statements of the Company, inquiries of officials of
the Company who have responsibility for financial and
accounting matters and other specified procedures, nothing
came to their attention that caused them to believe that:
(A) the unaudited financial statements
included in the Registration Statements do not comply
as to form in all material respects with the
applicable accounting requirements of the Act and the
related published Rules and Regulations or any
material modifications should be made to such
unaudited financial statements for them to be in
conformity with generally accepted accounting
principles;
(B) at the date of the latest available
balance sheet read by such accountants, or at a
subsequent specified date not more than three
business days prior to the date of this Agreement,
there was any change in the capital stock or any
increase in short-term indebtedness or long-term debt
of the Company and its consolidated subsidiaries or,
at the date of the latest available balance sheet
read by such accountants, there was any decrease in
consolidated net assets, as compared with amounts
shown on the latest balance sheet included in the
Prospectus; or
(C) for the period from the closing date of
the latest income statement included in the
Prospectus to the closing date of the latest
available income statement read by such accountants
there were any decreases, as compared with the
corresponding period of the previous year and with
the period of corresponding length ended the date of
the latest income statement included in the
Prospectus, in consolidated net sales or net
operating income in the total or per share amounts of
consolidated income before extraordinary items or net
income or in EBITDA or the ratio of earnings to fixed
charges;
except in all cases set forth in clauses (B) and (C) above for
changes, increases or decreases which the Prospectus discloses
have occurred or may occur or which are described in such
letter;
(iv) they have compared specified dollar amounts (or
percentages derived from such dollar amounts) and other
financial information contained in the Registration Statements
(in each case to the extent that such dollar amounts,
percentages and other financial information are derived from
the general accounting records of the Company and its
subsidiaries subject to the internal controls of the Company's
accounting system or are derived directly from such records by
analysis or computation) with the results obtained from
inquiries, a reading of such general accounting records and
other procedures specified in such letter and have found such
dollar amounts, percentages and
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other financial information to be in agreement with such
results, except as otherwise specified in such letter;
(v) they have:
(A) read the unaudited adjusted and pro
forma summary balance sheet data as of December 31,
1997 and March 31, 1998;
(B) inquired of certain officials of the
Company who have responsibility for financial and
accounting matters about (x) the basis for their
determination of the adjustments and (y) whether such
unaudited adjusted and pro forma financial
information comply as to form in all material
respects with the applicable accounting requirements
of the Act; and
(C) confirmed the arithmetic accuracy of
the adjustments; and
(vi) based on the proceedings described in (v),
nothing came to their attention that caused them to believe
that the unaudited adjusted and pro forma financial
information contained in the Registration Statements do not
comply as to form in all material respects with the applicable
accounting requirements of the Act and that the adjustments
have not been properly applied to the historical amounts in
the compilation of that information.
For purposes of this subsection, (i) if the Effective Time of the
Initial Registration Statements is subsequent to the execution and
delivery of this Agreement, "Registration Statements" shall mean the
initial registration statement as proposed to be amended by the
amendment or post-effective amendment to be filed shortly prior to its
Effective Time, (ii) if the Effective Time of the Initial Registration
Statements is prior to the execution and delivery of this Agreement but
the Effective Time of the Additional Registration Statement is
subsequent to such execution and delivery, "Registration Statements"
shall mean the Initial Registration Statement and the additional
registration statement as proposed to be filed or as proposed to be
amended by the post-effective amendment to be filed shortly prior to
its Effective Time, and (iii) "Prospectus" shall mean the prospectus
included in the Registration Statements.
(b) If the Effective Time of the Initial Registration
Statement is not prior to the execution and delivery of this Agreement,
such Effective Time shall have occurred not later than 10:00 p.m., New
York time, on the date of this Agreement or such later date as shall
have been consented to by CSFBC. If the Effective Time of the
Additional Registration Statement (if any) is not prior to the
execution and delivery of this Agreement, such Effective Time shall
have occurred not later than 10:00 p.m., New York time, on the date of
this Agreement or, if earlier, the time the Prospectus is printed and
distributed to any Underwriter, or shall have occurred at such later
date as shall have been consented to by CSFBC. If the Effective Time of
the Initial Registration Statement is prior to the execution and
delivery of this Agreement, the Prospectus shall have been filed with
the Commission in accordance with the Rules and Regulations and Section
5(a) of this Agreement. Prior to such Closing Date, no stop order
suspending the effectiveness of a Registration Statement shall have
been issued and no proceedings for that purpose shall have been
instituted or, to the knowledge of any Selling Stockholder, the Company
or the Representatives, shall be contemplated by the Commission.
(c) Subsequent to the execution and delivery of this
Agreement, there shall not have occurred (i) any change, or any
development or event involving a prospective change, in the condition
(financial or other), business, properties or results of operations of
the Company or its subsidiaries which, in the judgment of a majority in
interest of the Underwriters including the Representatives, is material
and adverse and makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities; (ii) any downgrading in the rating of any debt
securities of the Company by any "nationally recognized statistical
rating organization" (as defined for purposes of Rule 436(g) under the
Act), or any public announcement that any such organization has under
surveillance or review its rating of any debt securities of the Company
(other than an announcement with positive implications of a possible
upgrading, and no implication of a possible downgrading, of such
rating); (iii) any suspension or limitation of trading in securities
generally on the New York Stock Exchange, or any setting of minimum
prices for trading on such exchange, or any suspension of trading of
any securities of the Company on any exchange or in the
over-the-counter market; (iv) any banking moratorium declared by U.S.
Federal or New York authorities; or (v) any outbreak or escalation
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of major hostilities in which the United States is involved, any
declaration of war by Congress or any other substantial national or
international calamity or emergency if, in the judgment of a majority
in interest of the Underwriters including the Representatives, the
effect of any such outbreak, escalation, declaration, calamity or
emergency makes it impractical or inadvisable to proceed with
completion of the public offering or the sale of and payment for the
Offered Securities.
(d) The Representatives and the Selling Stockholders shall
have received an opinion, dated such Closing Date, of Hale and Dorr
LLP, counsel for the Company, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware, with corporate power and authority to own
its properties and conduct its business as described in the
Prospectus; and the Company is duly qualified to do business
as a foreign corporation in good standing in all other
jurisdictions in which its ownership or lease of property or
the conduct of its business requires such qualification;
(ii) The Firm Securities delivered on such Closing
Date and all other outstanding shares of the Common Stock of
the Company have been duly authorized; all outstanding shares
of capital stock of the Company are, and, when the Offered
Securities have been delivered and paid for in accordance with
this Agreement on each Closing Date (as defined below), such
Offered Securities will have been, validly issued, are fully
paid and nonassessable and do conform in all material respects
to the description thereof contained in the Prospectus; and
the stockholders of the Company have and will have no
preemptive rights with respect to the Securities;
(iii) Except as described in the Prospectus, there
are no contracts, agreements or understandings between the
Company and any person granting such person the right to
require the Company to file a registration statement under the
Act with respect to any securities of the Company owned or to
be owned by such person or to require the Company to include
such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered
pursuant to any other registration statement filed by the
Company under the Act;
(iv) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by the Company for the
consummation of the transactions contemplated by this
Agreement or the Custody Agreement in connection with the sale
of the Offered Securities, except such as have been obtained
and made under the Act and such as may be required under state
securities laws or under the rules of the NASD;
(v) The execution, delivery and performance of this
Agreement or the Custody Agreement and the consummation of the
transactions herein or therein contemplated will not result in
a breach or violation of any of the terms and provisions of,
or constitute a default under, any statute, any rule or
regulation known to such counsel or order of any governmental
agency or body naming the Company or any Selling Stockholder
or any court having jurisdiction over the Company or any
subsidiary of the Company or any of their properties, or any
agreement or instrument to which the Company or any such
subsidiary is a party or by which the Company or any such
subsidiary is bound or to which any of the properties of the
Company or any such subsidiary is subject, or the charter or
by-laws of the Company or any such subsidiary;
(vi) The Initial Registration Statement was declared
effective under the Act as of the date and time specified in
such opinion, the Additional Registration Statement (if any)
was filed and became effective under the Act as of the date
and time (if determinable) specified in such opinion, the
Prospectus either was filed with the Commission pursuant to
the subparagraph of Rule 424(b) specified in such opinion on
the date specified therein or was included in the Initial
Registration Statement or the Additional Registration
Statement (as the case may be), and, to the best of the
knowledge of such counsel, no stop order suspending the
effectiveness of a Registration Statement or any part thereof
has been issued and no proceedings for that purpose have been
instituted or are pending or contemplated under the Act, and
each Registration Statement and the Prospectus, and each
amendment or supplement thereto, as of their respective
effective or issue dates, complied as to form in all material
respects with the requirements
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of the Act and the Rules and Regulations; such counsel have no
reason to believe that any part of a Registration Statement or
any amendment thereto, as of its effective date or as of such
Closing Date, contained any untrue statement of a material
fact or omitted to state any material fact required to be
stated therein or necessary to make the statements therein not
misleading; or that the Prospectus or any amendment or
supplement thereto, as of its issue date or as of such Closing
Date, contained any untrue statement of a material fact or
omitted to state any material fact necessary in order to make
the statements therein, in the light of the circumstances
under which they were made, not misleading; the descriptions
in the Registration Statements and Prospectus under the
caption "Description of Capital Stock" of statutes, legal and
governmental proceedings are accurate in all material respects
and fairly present the information required to be shown; and
such counsel do not know of any legal or governmental
proceedings required to be described in a Registration
Statement or the Prospectus which are not described as
required or of any contracts or documents of a character
required to be described in a Registration Statement or the
Prospectus or to be filed as exhibits to a Registration
Statement which are not described and filed as required; it
being understood that such counsel need express no opinion or
belief as to the financial statements and related schedules or
other financial data contained in the Registration Statements
or the Prospectus;
(vii) This Agreement has been duly authorized,
executed and delivered by the Company;
(viii) Each subsidiary of the Company has been duly
incorporated and is an existing corporation in good standing
under the laws of the jurisdiction of its incorporation, with
power and authority to own its properties and conduct its
business as described in the Prospectus; and each subsidiary
of the Company is duly qualified to do business as a foreign
corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its
business requires such qualification; all of the issued and
outstanding capital stock of each subsidiary of the Company
has been duly authorized and validly issued and is and will be
fully paid and nonassessable; and the capital stock of each
subsidiary owned by the Company, directly or through
subsidiaries, is owned free from liens, encumbrances and
defects;
(ix) The Offered Securities have been approved for
listing subject to notice of issuance on the Nasdaq Stock
Market's National Market;
(x) The Company is not and, after giving effect to
the offering and sale of the Offered Securities and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as defined in
the Investment Company Act of 1940; and
(xi) The statements in the Prospectus under the
caption "Certain United States Federal Tax Consequences for
Non-United States Holders", insofar as they constitute
summaries of the legal matters, documents or proceedings
referred to therein, fairly present the information called for
with respect to such legal matters, documents and proceedings
and fairly summarize the matters referred to therein.
(e) The Representatives shall have received an Opinion dated
such Closing Date, of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo,
counsel for the Company to the effect that:
(i) The Company and its Subsidiaries are not, nor
will the conduct of their respective businesses as described
in the Prospectus cause any of them to be, subject to the
provisions of (x) the Communications Act or to any rules,
regulations and policies of the FCC related thereto or (y)
state or local telecommunications laws, rules, regulations and
policies other than, in the case of certain of the Company's
subsidiaries, regulation by the FCC as a "common carrier"
under the Act; and
(ii) The statements in the Prospectus under the
captions "Regulation" and "Risk Factors--Regulatory Risks",
insofar as they constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present
the information called for with respect to such legal matters,
documents and proceedings and fairly summarize the matters
referred to therein.
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(f) The Representatives shall have received the opinion
contemplated in the Power of Attorney executed and delivered by each
Selling Stockholder and an opinion, dated such Closing Date, of
, counsel for the Selling Stockholders, to the effect that:
(i) Such Selling Stockholder has valid and
unencumbered title to the Offered Securities delivered by such
Selling Stockholder on such Closing Date and has full right,
power and authority to sell, assign, transfer and deliver the
Offered Securities delivered by such Selling Stockholder on
such Closing Date hereunder; and the several Underwriters have
acquired valid and unencumbered title to the Offered
Securities purchased by them from the Selling Stockholders on
such Closing Date hereunder;
(ii) No consent, approval, authorization or order of,
or filing with, any governmental agency or body or any court
is required to be obtained or made by any Selling Stockholder
for the consummation of the transactions contemplated by [the
Custody Agreement or] this Agreement in connection with the
sale of the Offered Securities sold by the Selling
Stockholders, except such as have been obtained and made under
the Act and such as may be required under state securities
laws;
(iii) The execution, delivery and performance of [the
Custody Agreement and] this Agreement and the consummation of
the transactions [therein and] herein contemplated will not
result in a breach or violation of any of the terms and
provisions of, or constitute a default under, any statute, any
rule, regulation or order of any governmental agency or body
or any court having jurisdiction over any Selling Stockholder
or any of their properties or any agreement or instrument to
which any Selling Stockholder is a party or by which any
Selling Stockholder is bound or to which any of the properties
of any Selling Stockholder is subject, or the charter or
by-laws of any Selling Stockholder which is a corporation;
(iv) The Power of Attorney and related Custody
Agreement with respect to each Selling Stockholder has been
duly authorized, executed and delivered by such Selling
Stockholder and constitute valid and legally binding
obligations of each such Selling Stockholder enforceable in
accordance with their terms, subject to bankruptcy,
insolvency, fraudulent transfer, reorganization, moratorium
and similar laws of general applicability relating to or
affecting creditors' rights and to general equity principles;
and
(v) This Agreement has been duly authorized, executed
and delivered by each Selling Stockholder.
(g) The Representatives shall have received from Cravath,
Swaine and Moore, counsel for the Underwriters, such opinion or
opinions, dated such Closing Date, with respect to the incorporation of
the Company, the validity of the Offered Securities delivered on such
Closing Date, the Registration Statements, the Prospectus and other
related matters as the Representatives may require, and the Selling
Stockholders and the Company shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them
to pass upon such matters.
(h) The Representatives and the Selling Stockholders shall
have received a certificate, dated such Closing Date, of the President
or any Vice President and a principal financial or accounting officer
of the Company in which such officers, to the best of their knowledge
after reasonable investigation, on behalf of the Company shall state
that: the representations and warranties of the Company in this
Agreement are true and correct; the Company has complied with all
agreements and satisfied all conditions on its part to be performed or
satisfied hereunder at or prior to such Closing Date; no stop order
suspending the effectiveness of any Registration Statement has been
issued and no proceedings for that purpose have been instituted or are
contemplated by the Commission; the Additional Registration Statement
(if any) satisfying the requirements of subparagraphs (1) and (3) of
Rule 462(b) was filed pursuant to Rule 462(b), including payment of the
applicable filing fee in accordance with Rule 111(a) or (b) under the
Act, prior to the time the Prospectus was printed and distributed to
any Underwriter; and, subsequent to the dates of the most recent
financial statements in the Prospectus, there has been no material
adverse change, nor any development or event involving a prospective
material adverse change, in the condition (financial or other),
business, properties or results of operations of the Company and its
subsidiaries taken as a whole except as set forth in or contemplated by
the Prospectus or as described in such certificate.
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<PAGE>
(i) The Representatives shall have received a letter, dated
such Closing Date, of Arthur Andersen LLP that meets the requirements
of subsection (a) of this Section, except that the specified date
referred to in such subsection will be a date not more than three
business days prior to such Closing Date for the purposes of this
subsection.
(j) The Debt Offering (as defined in the Prospectus) shall
have been consummated on substantially the same terms as described in
the Registration Statements, and the Company's Preferred Stock shall
have been converted into shares of the Securities.
The Selling Stockholders and the Company will furnish the Representatives with
such conformed copies of such opinions, certificates, letters and documents as
the Representatives reasonably request. CSFBC may in its sole discretion waive
on behalf of the Underwriters' compliance with any conditions to the obligations
of the Underwriters hereunder, whether in respect of an Optional Closing Date or
otherwise.
7. Indemnification and Contribution. (a) The Company will indemnify and
hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Company will not be liable in any such case to the
extent that any such loss, claim, damage or liability arises out of or is based
upon an untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity with
written information furnished to the Company by any Underwriter through the
Representatives specifically for use therein, it being understood and agreed
that the only such information furnished by any Underwriter consists of the
information described as such in subsection (c) below.
(b) The Selling Stockholders, severally and not jointly, will indemnify
and hold harmless each Underwriter against any losses, claims, damages or
liabilities, joint or several, to which such Underwriter may become subject,
under the Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
any Registration Statement, the Prospectus, or any amendment or supplement
thereto, or any related preliminary prospectus, or arise out of or are based
upon the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein not misleading,
and will reimburse each Underwriter for any legal or other expenses reasonably
incurred by such Underwriter in connection with investigating or defending any
such loss, claim, damage, liability or action as such expenses are incurred;
provided, however, that the Selling Stockholders will not be liable in any such
case to the extent that any such loss, claim, damage or liability arises out of
or is based upon an untrue statement or alleged untrue statement in or omission
or alleged omission from any of such documents in reliance upon and in
conformity with written information furnished to the Company by an Underwriter
through the Representatives specifically for use therein, it being understood
and agreed that the only such information furnished by any Underwriter consists
of the information described as such in subsection (c) below.
(c) Each Underwriter will severally and not jointly indemnify and hold
harmless the Company and each Selling Stockholder against any losses, claims,
damages or liabilities to which the Company or such Selling Stockholder may
become subject, under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material fact
contained in any Registration Statement, the Prospectus, or any amendment or
supplement thereto, or any related preliminary prospectus, or arise out of or
are based upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements therein
not misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in reliance upon and in conformity with written information furnished to
the Company by such Underwriter through the Representatives specifically for use
therein, and will reimburse any legal or other expenses reasonably incurred by
the Company and each Selling Stockholder in connection with investigating or
defending any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Underwriter consists of the following information in the
Prospectus furnished on behalf of each Underwriter: the last paragraph at the
bottom of the cover page concerning the terms of the offering by the
Underwriters, the legend concerning
14
<PAGE>
over-allotments, stabilizing and passive market making on the inside front cover
page, the concession and reallowance figures appearing in the fourth paragraph
under the caption "Underwriting" and the information contained in the tenth and
eleventh paragraphs under the caption "Underwriting".
(d) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against an indemnifying party under
subsection (a), (b) or (c) above, notify the indemnifying party of the
commencement thereof; but the omission so to notify the indemnifying party will
not relieve it from any liability which it may have to any indemnified party
otherwise than under subsection (a), (b) or (c) above. In case any such action
is brought against any indemnified party and it notifies an indemnifying party
of the commencement thereof, the indemnifying party will be entitled to
participate therein and, to the extent that it may wish, jointly with any other
indemnifying party similarly notified, to assume the defense thereof, with
counsel satisfactory to such indemnified party (who shall not, except with the
consent of the indemnified party, be counsel to the indemnifying party), and
after notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will not be
liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement of any pending or threatened action in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party unless such settlement includes an
unconditional release of such indemnified party from all liability on any claims
that are the subject matter of such action.
(e) If the indemnification provided for in this Section is unavailable
or insufficient to hold harmless an indemnified party under subsection (a), (b)
or (c) above, then each indemnifying party shall contribute to the amount paid
or payable by such indemnified party as a result of the losses, claims, damages
or liabilities referred to in subsection (a), (b) or (c) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other from the offering of the Securities or (ii) if the allocation provided by
clause (i) above is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company and the Selling Stockholders on
the one hand and the Underwriters on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or liabilities as
well as any other relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on the one hand and the
Underwriters on the other shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting expenses) received by the
Company and the Selling Stockholders bear to the total underwriting discounts
and commissions received by the Underwriters. The relative fault shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company, the Selling
Stockholders or the Underwriters and the parties' relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission. The amount paid by an indemnified party as a result of
the losses, claims, damages or liabilities referred to in the first sentence of
this subsection (e) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any action or claim which is the subject of this subsection (e).
Notwithstanding the provisions of this subsection (e), no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Securities underwritten by it and distributed to the public
were offered to the public exceeds the amount of any damages which such
Underwriter has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this subsection
(e) to contribute are several in proportion to their respective underwriting
obligations and not joint.
(f) The obligations of the Company and the Selling Stockholders under
this Section shall be in addition to any liability which the Company and the
Selling Stockholders may otherwise have and shall extend, upon the same terms
and conditions, to each person, if any, who controls any Underwriter within the
meaning of the Act; and the obligations of the Underwriters under this Section
shall be in addition to any liability which the respective Underwriters may
otherwise have and shall extend, upon the same terms and conditions, to each
director of the Company, to each officer of the Company who has signed a
Registration Statement and to each person, if any, who controls the Company
within the meaning of the Act.
15
<PAGE>
8. Default of Underwriters. If any Underwriter or Underwriters default
in their obligations to purchase Offered Securities hereunder on either the
First or any Optional Closing Date and the aggregate number of shares of Offered
Securities that such defaulting Underwriter or Underwriters agreed but failed to
purchase does not exceed 10% of the total number of shares of Offered Securities
that the Underwriters are obligated to purchase on such Closing Date, CSFBC may
make arrangements satisfactory to the persons from whom such Offered Securities
are to be purchased for the purchase of such Offered Securities by other
persons, including any of the Underwriters, but if no such arrangements are made
by such Closing Date, the non-defaulting Underwriters shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Offered Securities that such defaulting Underwriters agreed but failed to
purchase on such Closing Date. If any Underwriter or Underwriters so default and
the aggregate number of shares of Offered Securities with respect to which such
default or defaults occur exceeds 10% of the total number of shares of Offered
Securities that the Underwriters are obligated to purchase on such Closing Date
and arrangements satisfactory to CSFBC and the persons from whom such Offered
Securities are to be purchased for the purchase of such Offered Securities by
other persons are not made within 36 hours after such default, this Agreement
will terminate without liability on the part of any non-defaulting Underwriter,
the Company or the Selling Stockholders, except as provided in Section 9,
(provided that if such default occurs with respect to Optional Securities after
the First Closing Date, this Agreement will not terminate as to the Firm
Securities or any Optional Securities purchased prior to such termination). As
used in this Agreement, the term "Underwriter" includes any person substituted
for an Underwriter under this Section. Nothing herein will relieve a defaulting
Underwriter from liability for its default.
9. Survival of Certain Representations and Obligations. The respective
indemnities, agreements, representations, warranties and other statements of the
Selling Stockholders, of the Company or its officers and of the several
Underwriters set forth in or made pursuant to this Agreement will remain in full
force and effect, regardless of any investigation, or statement as to the
results thereof, made by or on behalf of any Underwriter, any Selling
Stockholder, the Company or any of their respective representatives, officers or
directors or any controlling person, and will survive delivery of and payment
for the Offered Securities. If this Agreement is terminated pursuant to Section
8 or if for any reason the purchase of the Offered Securities by the
Underwriters is not consummated, the Company and the Selling Stockholders shall
remain responsible for the expenses to be paid or reimbursed by them pursuant to
Section 5 and the respective obligations of the Company, the Selling
Stockholders, and the Underwriters pursuant to Section 7 shall remain in effect,
and if any Offered Securities have been purchased hereunder the representations
and warranties in Section 2 and all obligations under Section 5 shall also
remain in effect. If the purchase of the Offered Securities by the Underwriters
is not consummated for any reason other than solely because of the termination
of this Agreement pursuant to Section 8 or the occurrence of any event specified
in clause (iii), (iv) or (v) of Section 6(c), the Company and the Selling
Stockholders will, jointly and severally, reimburse the Underwriters for all
out-of-pocket expenses (including fees and disbursements of counsel) reasonably
incurred by them in connection with the offering of the Offered Securities.
10. Notices. All communications hereunder will be in writing and, if
sent to the Underwriters, will be mailed, delivered or telegraphed and confirmed
to the Representatives, c/o Credit Suisse First Boston Corporation, Eleven
Madison Avenue, New York, N.Y. 10010-3629, Attention: Investment Banking
Department-Transactions Advisory Group, or, if sent to the Company, will be
mailed, delivered or telegraphed and confirmed to it at Hale and Dorr LLP, 60
State St., Boston, MA 02109, Attention: Alexander A. Bernhard, Esq.; or, if sent
to Central Maine Power Company, will be mailed, delivered or telegraphed and
confirmed to it at ; or, if sent to Mainecom Services,
will be mailed, delivered or telegraphed and confirmed to it at ;
or if sent to Mode 1 Communications, Inc., will be mailed, delivered or
telegraphed and confirmed to it at ; provided, however, that
any notice to an Underwriter pursuant to Section 7 will be mailed, delivered or
telegraphed and confirmed to such Underwriter.
11. Successors. This Agreement will inure to the benefit of and be
binding upon the parties hereto and their respective successors and the officers
and directors and controlling persons referred to in Section 7, and no other
person will have any right or obligation hereunder.
12. Representation. The Representatives will act for the several
Underwriters in connection with the transactions contemplated by this Agreement,
and any action under this Agreement taken by the Representatives jointly or by
CSFBC will be binding upon all the Underwriters.
13. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
16
<PAGE>
14. Applicable Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of New York, without regard to
principles of conflicts of laws.
The Company and each Selling Stockholder hereby submits to the
non-exclusive jurisdiction of the Federal and state courts in the Borough of
Manhattan in The City of New York in any suit or proceeding arising out of or
relating to this Agreement or the transactions contemplated hereby.
17
<PAGE>
If the foregoing is in accordance with the Representatives'
understanding of our agreement, kindly sign and return to the Company one of the
counterparts hereof, whereupon it will become a binding agreement among the
Selling Stockholders, the Company and the several Underwriters in accordance
with its terms.
Very truly yours,
NORTHEAST OPTIC NETWORKS, INC.
by
--------------------------------
[Insert Title]
CENTRAL MAINE POWER COMPANY
by
--------------------------------
Attorney in Fact
MAINECOM SERVICES
by
--------------------------------
Attorney in Fact
MODE 1 COMMUNICATIONS, INC.
by
--------------------------------
Attorney in Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
SBC WARBURG DILLON READ INC.,
by CREDIT SUISSE FIRST BOSTON CORPORATION
by
------------------------------------------
Acting on behalf of themselves and as the
Representatives of the several Underwriters
18
<PAGE>
SCHEDULE A
Number of Firm
Securities
Selling Stockholder to be Sold
- ------------------- ----------
Central Maine Power Company 360,430
Mainecom Services 485,639
Mode 1 Communications, Inc. 653,931
-------
Total ..................................... =======
<PAGE>
SCHEDULE B
Number of
Firm Securities
Underwriter to be Purchased
----------- ---------------
Credit Suisse First Boston Corporation.......................
Warburg Dillon Read LLC......................................
--------------
Total................................................ 5,500,000
==============
Exhibit 3.2
SECOND
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
NORTHEAST OPTIC NETWORK, INC.
NorthEast Optic Network, Inc., a corporation organized and existing under
and by virtue of the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify as follows:
1. That the Corporation filed its original Certificate of Incorporation
with the Secretary of State of the State of Delaware on May 14, 1998 and an
Amended and Restated Certificate of Incorporation with the Secretary of State of
the State of Delaware on July 7, 1998.
2. By written consent of the Board of Directors of the Corporation, a
resolution was adopted, pursuant to Sections 141(f), 242 and 245 of the General
Corporation Law of the State of Delaware, setting forth a Second Amended and
Restated Certificate of Incorporation of the Corporation (the "Amended and
Restated Certificate of Incorporation") and declaring said Amended and Restated
Certificate of Incorporation advisable. The stockholders of the Corporation duly
approved said proposed amendment by written consent in accordance with Sections
228, 242 and 245 of the General Corporation Law of the State of Delaware, and
written notice of such consent has been or will be given to all stockholders who
have not consented in writing to said amendment. The resolution setting forth
the Amended and Restated Certificate of Incorporation is as follows:
RESOLVED: That the Certificate of Incorporation of the Corporation, be and
hereby is amended and restated in its entirety so that the same
shall read as follows:
FIRST. The name of the Corporation is: NorthEast Optic Network, Inc.
SECOND. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
<PAGE>
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH: The total number of shares of all classes of stock which the
Corporation shall have authority to issue is 32,000,000 shares, consisting of
(i) 30,000,000 shares of Common Stock, $0.01 par value per share ("Common
Stock"), and (ii) 6,776,331 shares of Preferred Stock, $0.01 par value per share
("Preferred Stock") which may be issued from time to time in one or more series
as set forth in Part B of this Article FOURTH.
From and after the conversion of all outstanding shares of Preferred Stock
into Common Stock, such shares shall be retired and shall not be reissued, and,
upon the filing of a certificate in accordance with Section 243 of the General
Corporation Law of the State of Delaware, the authorized shares of Preferred
Stock shall be reduced to 2,000,000 shares.
The following is a statement of the designations and the powers, privileges
and rights, and the qualifications, limitations or restrictions thereof in
respect of each class of capital stock of the Corporation.
A. COMMON STOCK.
-------------
1. General. The voting, dividend and liquidation rights of the holders of
the Common Stock are subject to and qualified by the rights of the holders of
the Preferred Stock of any series as may be designated by the Board of Directors
upon any issuance of the Preferred Stock of any series.
2. Voting. The holders of the Common Stock are entitled to one vote for
each share held at all meetings of stockholders. There shall be no cumulative
voting.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
3. Dividends. Dividends may be declared and paid on the Common Stock from
funds lawfully available therefor as and when determined by the Board of
Directors and subject to any preferential dividend rights of any then
outstanding Preferred Stock.
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<PAGE>
4. Liquidation. Upon the dissolution or liquidation of the Corporation,
whether voluntary or involuntary, holders of Common Stock will be entitled to
receive all assets of the Corporation available for distribution to its
stockholders, subject to any preferential rights of any then outstanding
Preferred Stock.
B. PREFERRED STOCK.
----------------
Preferred Stock may be issued from time to time in one or more series, each
of such series to have such terms as stated or expressed herein and in the
resolution or resolutions providing for the issue of such series adopted by the
Board of Directors of the Corporation as hereinafter provided. Any shares of
Preferred Stock which may be redeemed, purchased or acquired by the Corporation
may be reissued except as otherwise provided by law. Different series of
Preferred Stock shall not be construed to constitute different classes of shares
for the purposes of voting by classes unless expressly provided.
Authority is hereby expressly granted to the Board of Directors from time
to time to issue the Preferred Stock in one or more series, and in connection
with the creation of any such series, by resolution or resolutions providing for
the issue of the shares thereof, to determine and fix such voting powers, full
or limited, or no voting powers, and such designations, preferences and relative
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, including without limitation thereof, dividend rights,
conversion rights, redemption privileges and liquidation preferences, as shall
be stated and expressed in such resolutions, all to the full extent now or
hereafter permitted by the General Corporation Law of Delaware. Without limiting
the generality of the foregoing, the resolutions providing for issuance of any
series of Preferred Stock may provide that such series shall be superior or rank
equally or be junior to the Preferred Stock of any other series to the extent
permitted by law. Except as otherwise provided in this Amended and Restated
Certificate of Incorporation, no vote of the holders of the Preferred Stock or
Common Stock shall be a prerequisite to the designation or issuance of any
shares of any series of the Preferred Stock authorized by and complying with the
conditions of this Amended and Restated Certificate of Incorporation, the right
to have such vote being expressly waived by all present and future holders of
the capital stock of the Corporation.
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
3
<PAGE>
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt, amend or repeal
the By-Laws of the Corporation.
SEVENTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this provision shall apply to or have
any effect on the liability or alleged liability of any director of the
Corporation for or with respect to any acts or omissions of such director
occurring prior to such amendment.
EIGHTH. The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of Delaware, as amended from time to time,
indemnify each person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative, by reason of the fact that he
or she is or was, or has agreed to become, a director or officer of the
Corporation, or is or was serving, or has agreed to serve, at the request of the
Corporation, as a director, officer or trustee of, or in a similar capacity
with, another corporation, partnership, joint venture, trust or other enterprise
(including any employee benefit plan) (all such persons being referred to
hereafter as an "Indemnitee"), or by reason of any action alleged to have been
taken or omitted in such capacity, against all expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by or on behalf of an Indemnitee in connection with such action, suit
or proceeding and any appeal therefrom.
As a condition precedent to his or her right to be indemnified, the
Indemnitee must notify the Corporation in writing as soon as practicable of any
action, suit, proceeding or investigation involving him for which indemnity will
or could be sought. With respect to any action, suit, proceeding or
investigation of which the Corporation is so notified, the Corporation will be
entitled to participate therein at its own expense and/or to assume the defense
thereof at its own expense, with legal counsel reasonably acceptable to the
Indemnitee.
In the event that the Corporation does not assume the defense of any
action, suit, proceeding or investigation of which the Corporation receives
notice under this Article, the Corporation shall pay in advance of the final
disposition of such matter any expenses (including attorneys' fees) incurred by
an Indemnitee in defending a civil or criminal action, suit, proceeding or
investigation or any appeal therefrom; provided,
4
<PAGE>
however, that the payment of such expenses incurred by an Indemnitee in advance
of the final disposition of such matter shall be made only upon receipt of an
undertaking by or on behalf of the Indemnitee to repay all amounts so advanced
in the event that it shall ultimately be determined that the Indemnitee is not
entitled to be indemnified by the Corporation as authorized in this Article,
which undertaking shall be accepted without reference to the financial ability
of the Indemnitee to make such repayment; and further provided that no such
advancement of expenses shall be made if it is determined that (i) the
Indemnitee did not act in good faith and in a manner he reasonably believed to
be in, or not opposed to, the best interests of the Corporation, or (ii) with
respect to any criminal action or proceeding, the Indemnitee had reasonable
cause to believe his conduct was unlawful.
The Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by such Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation. In addition, the Corporation shall not indemnify an Indemnitee to
the extent such Indemnitee is reimbursed from the proceeds of insurance, and in
the event the Corporation makes any indemnification payments to an Indemnitee
and such Indemnitee is subsequently reimbursed from the proceeds of insurance,
such Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.
All determinations hereunder as to the entitlement of an Indemnitee to
indemnification or advancement of expenses shall be made in each instance by (a)
a majority vote of the directors of the Corporation consisting of persons who
are not at that time parties to the action, suit or proceeding in question
("disinterested directors"), whether or not a quorum, (b) a majority vote of a
quorum of the outstanding shares of stock of all classes entitled to vote for
directors, voting as a single class, which quorum shall consist of stockholders
who are not at that time parties to the action, suit or proceeding in question,
(c) independent legal counsel (who may, to the extent permitted by law, be
regular legal counsel to the Corporation), or (d) a court of competent
jurisdiction.
The indemnification rights provided in this Article (i) shall not be deemed
exclusive of any other rights to which an Indemnitee may be entitled under any
law, agreement or vote of stockholders or disinterested directors or otherwise,
and (ii) shall inure to the benefit of the heirs, executors and administrators
of the Indemnitees. The Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.
5
<PAGE>
NINTH. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Amended and Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Amended and Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
TENTH. This Article is inserted for the management of the business and for
the conduct of the affairs of the Corporation.
1. Number of Directors. The number of directors of the Corporation shall
not be less than three. The exact number of directors within the limitations
specified in the preceding sentence shall be fixed from time to time by, or in
the manner provided in, the Corporation's By-Laws.
2. Election of Directors. Elections of directors need not be by written
ballot except as and to the extent provided in the By-Laws of the Corporation.
3. Terms of Office. Each director shall serve for a term ending on the date
of the first annual meeting following the annual meeting at which such director
was elected; provided, that the term of each director shall be subject to the
election and qualification of his or her successor and to his or her earlier
death, resignation or removal.
4. Quorum; Action at Meeting. A majority of the total number of the whole
Board of Directors shall constitute a quorum at all meetings of the Board of
Directors. In the event one or more of the directors shall be disqualified to
vote at any meeting, then the required quorum shall be reduced by one for each
such director so disqualified; provided, however, that in no case shall less
than one-third of the number fixed pursuant to Section 1 above constitute a
quorum. In the absence of a quorum at any such meeting, a majority of the
directors present may adjourn the meeting from time to time without further
notice other than announcement at the meeting, until a quorum shall be present.
At any meeting of the Board of Directors at which a quorum is present, the vote
of a majority of those present shall be sufficient to take any action, unless a
different vote is specified by law, by the ByLaws of the Corporation or by this
Amended and Restated Certificate of Incorporation.
5. Removal. Directors of the Corporation may be removed only for cause by
the affirmative vote of the holders of at least seventy-five percent (75%) of
the shares of the capital stock of the Corporation issued and outstanding and
entitled to vote.
6. Vacancies. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the board, shall be filled
only by a
6
<PAGE>
vote of a majority of the directors then in office, although less than a quorum,
or by a sole remaining director. A director elected to fill a vacancy shall be
elected to hold office until the next election of directors, subject to the
election and qualification of his or her successor and to his or her earlier
death, resignation or removal.
7. Stockholder Nominations and Introduction of Business, Etc. Advance
notice of stockholder nominations for election of directors and other business
to be brought by stockholders before a meeting of stockholders shall be given in
the manner provided by the By-Laws of the Corporation.
ELEVENTH. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting. Notwithstanding any other provisions of
law, the Amended and Restated Certificate of Incorporation or the By-Laws of the
Corporation, and notwithstanding the fact that a lesser percentage may be
specified by law, the affirmative vote of the holders of at least seventy-five
percent (75%) of the shares of capital stock of the Corporation issued and
outstanding and entitled to vote shall be required to amend or repeal, or to
adopt any provision inconsistent with, this Article ELEVENTH.
TWELFTH. Special meetings of stockholders may be called at any time only by
the Chairman of the Board of Directors, the President or the Board of Directors.
Business transacted at any special meeting of stockholders shall be limited to
matters relating to the purpose or purposes stated in the notice of meeting.
Notwithstanding any other provision of law, this Amended and Restated
Certificate of Incorporation or the By-Laws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
shares of capital stock of the Corporation issued and outstanding and entitled
to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with, this Article TWELFTH.
THIRTEENTH. In addition to any other considerations which the Board of
Directors may lawfully take into account in determining whether to take or to
refrain from taking corporate action on any matter, including proposing any
matter to the stockholders of the Corporation, the Board of Directors may take
into account the interests of creditors, customers, employees and other
constituencies of the Corporation and its subsidiaries and the effect thereof
upon communities in which the Corporation and its subsidiaries do business.
Notwithstanding any other provision of law, this Amended and Restated
Certificate of Incorporation or the By-Laws of the Corporation, and
notwithstanding the fact that a lesser percentage may be specified by law, the
affirmative vote of the holders of at least seventy-five percent (75%) of the
shares of capital stock of the Corporation issued and outstanding and entitled
to vote shall be required to amend or repeal, or to adopt any provision
inconsistent with, this Article THIRTEENTH.
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<PAGE>
FOURTEENTH. In furtherance and not in limitation of the powers conferred by
law or in this Amended and Restated Certificate of Incorporation, the Board of
Directors (and any committee of the Board of Directors) is expressly authorized
to take such action or actions as the Board or such committee may determine to
be reasonably necessary or desirable to (a) encourage any person to enter into
negotiations with the Board of Directors and management of the Corporation with
respect to any transaction which may result in a change in control of the
Corporation which is proposed or initiated by such person, or (b) contest or
oppose any such transaction which the Board of Directors or such committee
determines to be unfair, abusive or otherwise undesirable with respect to the
Corporation and its business, assets or properties or the stockholders of the
Corporation, including, without limitation, the adoption of such plans or the
issuance of such rights, options, capital stock, notes, debentures or other
evidence of indebtedness or other securities of the Corporation, which rights,
options, capital stock, notes, debentures or other evidences of indebtedness and
other securities (i) may be exchangeable for or convertible into cash or other
securities on such terms and conditions as may be determined by the Board of
Directors (or any such committee) and (ii) may provide for the treatment of any
holder or class of holders thereof designated by the Board of Directors (or any
such committee) in respect of the terms, conditions, provisions and rights of
such securities which is different from, and unequal to, the terms, conditions,
provisions and rights applicable to all other holders thereof. Notwithstanding
any other provision of law, this Amended and Restated Certificate of
Incorporation or the By-Laws of the Corporation, and notwithstanding the fact
that a lesser percentage may be specified by law, the affirmative vote of the
holders of at least seventy-five percent (75%) of the shares of capital stock of
the Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
FOURTEENTH.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Amended and Restated Certificate of Incorporation to be
signed by its President this ____ day of ______________, 1998.
NORTHEAST OPTIC NETWORK, INC.
By: _______________________________
Victor Colantonio, President
8
Exhibit 3.4
AMENDED AND RESTATED BY-LAWS
OF
NORTHEAST OPTIC NETWORK, INC.
<PAGE>
AMENDED AND RESTATED BY-LAWS
OF
NORTHEAST OPTIC NETWORK, INC.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE 1 - Stockholders......................................................1
1.1 Place of Meetings...........................................1
1.2 Annual Meeting..............................................1
1.3 Special Meetings............................................1
1.4 Notice of Meetings..........................................1
1.5 Voting List.................................................2
1.6 Quorum......................................................2
1.7 Adjournments................................................2
1.8 Voting and Proxies..........................................2
1.9 Action at Meeting...........................................2
1.10 Nomination of Directors.....................................3
1.11 Notice of Business at Annual Meetings.......................3
1.12 Organization................................................5
ARTICLE 2 - Directors.........................................................5
2.1 General Powers..............................................5
2.2 Number; Election and Qualification..........................5
2.3 Terms of Office.............................................5
2.4 Vacancies...................................................5
2.5 Resignation.................................................5
2.6 Regular Meetings............................................5
2.7 Special Meetings............................................6
2.8 Notice of Special Meetings..................................6
2.9 Meetings by Telephone Conference Calls......................6
2.10 Quorum......................................................6
2.11 Action at Meeting...........................................6
2.12 Action by Consent...........................................6
2.13 Removal.....................................................7
2.14 Committees..................................................7
2.15 Compensation of Directors...................................7
ARTICLE 3 - Officers..........................................................7
3.1 Enumeration.................................................7
3.2 Election....................................................8
<PAGE>
3.3 Qualification...............................................8
3.4 Tenure......................................................8
3.5 Resignation and Removal.....................................8
3.6 Vacancies...................................................8
3.7 Chairman of the Board and Vice Chairman of the Board........8
3.8 President...................................................9
3.9 Vice Presidents.............................................9
3.10 Secretary and Assistant Secretaries.........................9
3.11 Treasurer and Assistant Treasurers.........................10
3.12 Salaries...................................................10
ARTICLE 4 - Capital Stock....................................................10
4.1 Issuance of Stock..........................................10
4.2 Certificates of Stock......................................10
4.3 Transfers..................................................11
4.4 Lost, Stolen or Destroyed Certificates.....................11
4.5 Record Date................................................11
ARTICLE 5 - General Provisions...............................................12
5.1 Fiscal Year................................................12
5.2 Corporate Seal.............................................12
5.3 Waiver of Notice...........................................12
5.4 Voting of Securities.......................................12
5.5 Evidence of Authority......................................12
5.6 Certificate of Incorporation...............................12
5.7 Transactions with Interested Parties.......................12
5.8 Severability...............................................13
5.9 Pronouns...................................................13
ARTICLE 6 - Amendments.......................................................13
6.1 By the Board of Directors..................................13
6.2 By the Stockholders........................................13
6.3 Certain Provisions.........................................14
</TABLE>
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<PAGE>
AMENDED AND RESTATED BY-LAWS
OF
NORTHEAST OPTIC NETWORK, INC.
ARTICLE 1 - Stockholders
------------------------
1.1 Place of Meetings. All meetings of stockholders shall be held at such
place within or without the State of Delaware as may be designated from time to
time by the Board of Directors or the President or, if not so designated, at the
registered office of the corporation.
1.2 Annual Meeting. The annual meeting of stockholders for the election of
directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors or the President (which date shall not be a legal holiday in the place
where the meeting is to be held) at the time and place to be fixed by the Board
of Directors or the President and stated in the notice of the meeting. If no
annual meeting is held in accordance with the foregoing provisions, the Board of
Directors shall cause the meeting to be held as soon thereafter as convenient.
If no annual meeting is held in accordance with the foregoing provisions, a
special meeting may be held in lieu of the annual meeting, and any action taken
at that special meeting shall have the same effect as if it had been taken at
the annual meeting, and in such case all references in these ByLaws to the
annual meeting of the stockholders shall be deemed to refer to such special
meeting.
1.3 Special Meetings. Special meetings of stockholders may be called at any
time by the Chairman of the Board of Directors, the President or the Board of
Directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting.
1.4 Notice of Meetings. Except as otherwise provided by law, written notice
of each meeting of stockholders, whether annual or special, shall be given not
less than 10 nor more than 60 days before the date of the meeting to each
stockholder entitled to vote at such meeting. The notices of all meetings shall
state the place, date and hour of the meeting. The notice of a special meeting
shall state, in addition, the purpose or purposes for which the meeting is
called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
<PAGE>
1.5 Voting List. The officer who has charge of the stock ledger of the
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each stockholder.
Such list shall be open to the examination of any stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
10 days prior to the meeting, at a place within the city where the meeting is to
be held. The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and may be inspected by any
stockholder who is present.
1.6 Quorum. Except as otherwise provided by law, the Certificate of
Incorporation or these By-Laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 Adjournments. Any meeting of stockholders may be adjourned to any other
time and to any other place at which a meeting of stockholders may be held under
these By-Laws by the stockholders present or represented at the meeting and
entitled to vote, although less than a quorum, or, if no stockholder is present,
by any officer entitled to preside at or to act as Secretary of such meeting. It
shall not be necessary to notify any stockholder of any adjournment of less than
30 days if the time and place of the adjourned meeting are announced at the
meeting at which adjournment is taken, unless after the adjournment a new record
date is fixed for the adjourned meeting. At the adjourned meeting, the
corporation may transact any business which might have been transacted at the
original meeting.
1.8 Voting and Proxies. Each stockholder shall have one vote for each share
of stock entitled to vote held of record by such stockholder and a proportionate
vote for each fractional share so held, unless otherwise provided by the General
Corporation Law of the State of Delaware, the Certificate of Incorporation or
these By-Laws. Each stockholder of record entitled to vote at a meeting of
stockholders may vote in person or may authorize another person or persons to
vote or act for him by written proxy executed by the stockholder or his
authorized agent and delivered to the Secretary of the corporation. No such
proxy shall be voted or acted upon after three years from the date of its
execution, unless the proxy expressly provides for a longer period.
1.9 Action at Meeting. When a quorum is present at any meeting, the holders
of a majority of the stock present or represented and voting on a matter (or if
there are two or more classes of stock entitled to vote as separate classes,
then in the case of each such class, the holders of a majority of the stock of
that class present or represented and
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<PAGE>
voting on a matter) shall decide any matter to be voted upon by the stockholders
at such meeting, except when a different vote is required by express provision
of law, the Certificate of Incorporation or these By-Laws. Any election by
stockholders shall be determined by a plurality of the votes cast by the
stockholders entitled to vote at the election.
1.10 Nomination of Directors. Only persons who are nominated in accordance
with the following procedures shall be eligible for election as directors.
Nomination for election to the Board of Directors of the corporation at a
meeting of stockholders may be made by the Board of Directors or by any
stockholder of the corporation entitled to vote for the election of directors at
such meeting who complies with the notice procedures set forth in this Section
1.10. Such nominations, other than those made by or on behalf of the Board of
Directors, shall be made by notice in writing delivered or mailed by first class
United States mail, postage prepaid, to the Secretary, and received not less
than 60 days nor more than 90 days prior to such meeting; provided, however,
that if less than 70 days' notice or prior public disclosure of the date of the
meeting is given to stockholders, such nomination shall have been mailed or
delivered to the Secretary not later than the close of business on the 10th day
following the date on which the notice of the meeting was mailed or such public
disclosure was made, whichever occurs first. Such notice shall set forth (a) as
to each proposed nominee (i) the name, age, business address and, if known,
residence address of each such nominee, (ii) the principal occupation or
employment of each such nominee, (iii) the number of shares of stock of the
corporation which are beneficially owned by each such nominee, and (iv) any
other information concerning the nominee that must be disclosed as to nominees
in proxy solicitations pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to be named as
a nominee and to serve as a director if elected); and (b) as to the stockholder
giving the notice (i) the name and address, as they appear on the corporation's
books, of such stockholder and (ii) the class and number of shares of the
corporation which are beneficially owned by such stockholder. The corporation
may require any proposed nominee to furnish such other information as may
reasonably be required by the corporation to determine the eligibility of such
proposed nominee to serve as a director of the corporation.
The chairman of the meeting may, if the facts warrant, determine and
declare to the meeting that a nomination was not made in accordance with the
foregoing procedure, and if he should so determine, he shall so declare to the
meeting and the defective nomination shall be disregarded.
1.11 Notice of Business at Annual Meetings. At an annual meeting of the
stockholders, only such business shall be conducted as shall have been properly
brought before the meeting. To be properly brought before an annual meeting,
business must be (a) specified in the notice of meeting (or any supplement
thereto)
3
<PAGE>
given by or at the direction of the Board of Directors, (b) otherwise properly
brought before the meeting by or at the direction of the Board of Directors, or
(c) otherwise properly brought before an annual meeting by a stockholder. For
business to be properly brought before an annual meeting by a stockholder, if
such business relates to the election of directors of the corporation, the
procedures in Section 1.10 must be complied with. If such business relates to
any other matter, the stockholder must have given timely notice thereof in
writing to the Secretary. To be timely, a stockholder's notice must be delivered
to or mailed and received at the principal executive offices of the corporation
not less than 60 days nor more than 90 days prior to the meeting; provided,
however, that in the event that less than 70 days' notice or prior public
disclosure of the date of the meeting is given or made to stockholders, notice
by the stockholder to be timely must be so received not later than the close of
business on the 10th day following the date on which such notice of the date of
the meeting was mailed or such public disclosure was made, whichever occurs
first. A stockholder's notice to the Secretary shall set forth as to each matter
the stockholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name and
address, as they appear on the corporation's books, of the stockholder proposing
such business, (c) the class and number of shares of the corporation which are
beneficially owned by the stockholder, and (d) any material interest of the
stockholder in such business. Notwithstanding anything in these By-Laws to the
contrary, no business shall be conducted at any annual meeting except in
accordance with the procedures set forth in this Section 1.11 and except that
any stockholder proposal which complies with Rule 14a-8 of the proxy rules (or
any successor provision) promulgated under the Securities Exchange Act of 1934,
as amended, and is to be included in the corporation's proxy statement for an
annual meeting of stockholders shall be deemed to comply with the requirements
of this Section 1.11.
The chairman of the meeting shall, if the facts warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 1.11, and if he should so
determine, the chairman shall so declare to the meeting that any such business
not properly brought before the meeting shall not be transacted.
1.12 Organization. The Chairman of the Board, or in his absence the Vice
Chairman of the Board designated by the Chairman of the Board, or the President,
in the order named, shall call meetings of the stockholders to order, and shall
act as chairman of such meeting; provided, however, that the Board of Directors
may appoint any stockholder to act as chairman of any meeting in the absence of
the Chairman of the Board. The Secretary of the corporation shall act as
secretary at all meetings of the
4
<PAGE>
stockholders; but in the absence of the Secretary at any meeting of the
stockholders, the presiding officer may appoint any person to act as secretary
of the meeting.
ARTICLE 2 - Directors
---------------------
2.1 General Powers. The business and affairs of the corporation shall be
managed by or under the direction of a Board of Directors, who may exercise all
of the powers of the corporation except as otherwise provided by law, the
Certificate of Incorporation or these By-Laws. In the event of a vacancy in the
Board of Directors, the remaining directors, except as otherwise provided by
law, may exercise the powers of the full Board until the vacancy is filled.
2.2 Number; Election and Qualification. The number of directors which shall
constitute the whole Board of Directors shall be determined by resolution of the
Board of Directors, but in no event shall be less than three. The number of
directors may be decreased at any time and from time to time by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
directors. The directors shall be elected at the annual meeting of stockholders
by such stockholders as have the right to vote on such election. Directors need
not be stockholders of the corporation.
2.3 Terms of Office. Each director shall serve for a term ending on the
date of the first annual meeting following the annual meeting at which such
director was elected; provided, that the term of each director shall be subject
to the election and qualification of his or her successor and to his or her
earlier death, resignation or removal.
2.4 Vacancies. Any vacancy in the Board of Directors, however occurring,
including a vacancy resulting from an enlargement of the Board, shall be filled
only by vote of a majority of the directors then in office, although less than a
quorum, or by a sole remaining director. A director elected to fill a vacancy
shall be elected for the unexpired term of his predecessor in office, and a
director chosen to fill a position resulting from an increase in the number of
directors shall hold office until the next election of directors, subject to the
election and qualification of his successor and to his earlier death,
resignation or removal.
2.5 Resignation. Any director may resign by delivering his written
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
5
<PAGE>
2.6 Regular Meetings. Regular meetings of the Board of Directors may be
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
2.7 Special Meetings. Special meetings of the Board of Directors may be
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in office.
2.8 Notice of Special Meetings. Notice of any special meeting of directors
shall be given to each director by the Secretary or by the officer or one of the
directors calling the meeting. Notice shall be duly given to each director (i)
by giving notice to such director in person or by telephone at least 24 hours in
advance of the meeting, (ii) by sending a telegram, telecopy, or telex, or
delivering written notice by hand, to his last known business or home address at
least 24 hours in advance of the meeting, or (iii) by mailing written notice to
his last known business or home address at least 72 hours in advance of the
meeting. A notice or waiver of notice of a meeting of the Board of Directors
need not specify the purposes of the meeting.
2.9 Meetings by Telephone Conference Calls. Directors or any members of any
committee designated by the directors may participate in a meeting of the Board
of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.10 Quorum. A majority of the total number of the whole Board of Directors
shall constitute a quorum at all meetings of the Board of Directors. In the
event one or more of the directors shall be disqualified to vote at any meeting,
then the required quorum shall be reduced by one for each such director so
disqualified; provided, however, that in no case shall less than one-third (1/3)
of the number fixed pursuant to Section 2.2 above constitute a quorum. In the
absence of a quorum at any such meeting, a majority of the directors present may
adjourn the meeting from time to time without further notice other than
announcement at the meeting, until a quorum shall be present.
2.11 Action at Meeting. At any meeting of the Board of Directors at which a
quorum is present, the vote of a majority of those present shall be sufficient
to take any action, unless a different vote is specified by law, the Certificate
of Incorporation or these By-Laws.
6
<PAGE>
2.12 Action by Consent. Any action required or permitted to be taken at any
meeting of the Board of Directors or of any committee of the Board of Directors
may be taken without a meeting, if all members of the Board or committee, as the
case may be, consent to the action in writing, and the written consents are
filed with the minutes of proceedings of the Board or committee.
2.13 Removal. Directors of the corporation may be removed only for cause by
the affirmative vote of the holders of at least seventy-five percent (75%) of
the shares of the capital stock of the corporation issued and outstanding and
entitled to vote.
2.14 Committees. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the corporation
and may authorize the seal of the corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine, any committee may make rules for the conduct
of its business, but unless otherwise provided by the directors or in such
rules, its business shall be conducted as nearly as possible in the same manner
as is provided in these By-laws for the Board of Directors.
2.15 Compensation of Directors. Directors may be paid such compensation for
their services and such reimbursement for expenses of attendance at meetings as
the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE 3 - Officers
--------------------
3.1 Enumeration. The officers of the corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of
7
<PAGE>
Directors shall determine, including a Chairman of the Board, a Vice Chairman of
the Board, a Chairman of the Corporation and one or more Vice Presidents,
Assistant Treasurers, and Assistant Secretaries. The Board of Directors may
appoint such other officers as it may deem appropriate.
3.2 Election. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders. Other officers may be appointed by the Board of
Directors at such meeting or at any other meeting.
3.3 Qualification. No officer need be a stockholder. Any two or more
offices may be held by the same person.
3.4 Tenure. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-Laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5 Resignation and Removal. Any officer may resign by delivering his
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote of a
majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer who
resigns or is removed shall have any right to any compensation as an officer for
any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise, unless such compensation is expressly provided in a duly
authorized written agreement with the corporation.
3.6 Vacancies. The Board of Directors may fill any vacancy occurring in any
office for any reason and may, in its discretion, leave unfilled for such period
as it may determine any offices other than those of President, Treasurer and
Secretary. Each such successor shall hold office for the unexpired term of his
predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
3.7 Chairman of the Board and Vice Chairman of the Board. The Board of
Directors may appoint a Chairman of the Board. If the Board of Directors
appoints a Chairman of the Board, he shall perform such duties and possess such
powers as are
8
<PAGE>
assigned to him by the Board of Directors. If the Board of Directors appoints a
Vice Chairman of the Board, he shall, in the absence or disability of the
Chairman of the Board, perform the duties and exercise the powers of the
Chairman of the Board and shall perform such other duties and possess such other
powers as may from time to time be vested in him by the Board of Directors.
3.8 President. The President shall, subject to the direction of the Board
of Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders, if he is a director, at all
meetings of the Board of Directors. Unless the Board of Directors has designated
the Chairman of the Board or another officer as Chief Executive Officer, the
President shall be the Chief Executive Officer of the corporation. The President
shall perform such other duties and shall have such other powers as the Board of
Directors may from time to time prescribe.
3.9 Vice Presidents. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.10 Secretary and Assistant Secretaries. The Secretary shall perform such
duties and shall have such powers as the Board of Directors or the President may
from time to time prescribe. In addition, the Secretary shall perform such
duties and have such powers as are incident to the office of the secretary,
including without limitation the duty and power to give notices of all meetings
of stockholders and special meetings of the Board of Directors, to attend all
meetings of stockholders and the Board of Directors and keep a record of the
proceedings, to maintain a stock ledger and prepare lists of stockholders and
their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such powers
as the Board of Directors, the President or the Secretary may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Secretary, the Assistant Secretary (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
9
<PAGE>
In the absence of the Secretary or any Assistant Secretary at any meeting
of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 Treasurer and Assistant Treasurers. The Treasurer shall perform such
duties and shall have such powers as may from time to time be assigned to him by
the Board of Directors or the President. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-Laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such powers
as the Board of Directors, the President or the Treasurer may from time to time
prescribe. In the event of the absence, inability or refusal to act of the
Treasurer, the Assistant Treasurer (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 Salaries. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 4 - Capital Stock
-------------------------
4.1 Issuance of Stock. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 Certificates of Stock. Every holder of stock of the corporation shall
be entitled to have a certificate, in such form as may be prescribed by law and
by the Board of Directors, certifying the number and class of shares owned by
him in the corporation. Each such certificate shall be signed by, or in the name
of the corporation by, the
10
<PAGE>
Chairman or Vice Chairman, if any, of the Board of Directors, or the President
or a Vice President, and the Treasurer or an Assistant Treasurer, or the
Secretary or an Assistant Secretary of the corporation. Any or all of the
signatures on the certificate may be a facsimile.
Each certificate for shares of stock which are subject to any restriction
on transfer pursuant to the Certificate of Incorporation, the By-Laws,
applicable securities laws or any agreement among any number of stockholders or
among such holders and the corporation shall have conspicuously noted on the
face or back of the certificate either the full text of the restriction or a
statement of the existence of such restriction.
4.3 Transfers. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-Laws, the corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-Laws.
4.4 Lost, Stolen or Destroyed Certificates. The corporation may issue a new
certificate of stock in place of any previously issued certificate alleged to
have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.5 Record Date. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders, or entitled to receive payment of any
dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such meeting, nor more than 60 days prior to any other action to
which such record date relates.
If no record date is fixed, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the
11
<PAGE>
day before the day on which notice is given, or, if notice is waived, at the
close of business on the day before the day on which the meeting is held. The
record date for determining stockholders for any other purpose shall be at the
close of business on the day on which the Board of Directors adopts the
resolution relating to such purpose.
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 - General Provisions
------------------------------
5.1 Fiscal Year. Except as from time to time otherwise designated by the
Board of Directors, the fiscal year of the corporation shall begin on the first
day of January in each year and end on the last day of December in each year.
5.2 Corporate Seal. The corporate seal shall be in such form as shall be
approved by the Board of Directors.
5.3 Waiver of Notice. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-Laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
5.4 Voting of Securities. Except as the directors may otherwise designate,
the President or Treasurer may waive notice of, and act as, or appoint any
person or persons to act as, proxy or attorney-in-fact for this corporation
(with or without power of substitution) at, any meeting of stockholders or
shareholders of any other corporation or organization, the securities of which
may be held by this corporation.
5.5 Evidence of Authority. A certificate by the Secretary, or an Assistant
Secretary, or a temporary Secretary, as to any action taken by the stockholders,
directors, a committee or any officer or representative of the corporation shall
as to all persons who rely on the certificate in good faith be conclusive
evidence of such action.
12
<PAGE>
5.6 Certificate of Incorporation. All references in these By-Laws to the
Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 Transactions with Interested Parties. No contract or transaction
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the Board of
Directors or the committee, and the Board or committee in good faith
authorizes the contract or transaction by the affirmative votes of a
majority of the disinterested directors, even though the disinterested
directors be less than a quorum;
(2) The material facts as to his relationship or interest and as to
the contract or transaction are disclosed or are known to the stockholders
entitled to vote thereon, and the contract or transaction is specifically
approved in good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of
the time it is authorized, approved or ratified, by the Board of Directors,
a committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the presence
of a quorum at a meeting of the Board of Directors or of a committee which
authorizes the contract or transaction.
5.8 Severability. Any determination that any provision of these By-Laws is
for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-Laws.
5.9 Pronouns. All pronouns used in these By-Laws shall be deemed to refer
to the masculine, feminine or neuter, singular or plural, as the identity of the
person or persons may require.
13
<PAGE>
ARTICLE 6 - Amendments
----------------------
6.1 By the Board of Directors. These By-Laws may be altered, amended or
repealed or new by-laws may be adopted by the affirmative vote of a majority of
the directors present at any regular or special meeting of the Board of
Directors at which a quorum is present.
6.2 By the Stockholders. Except as otherwise provided in Section 6.3, these
By-Laws may be altered, amended or repealed or new by-laws may be adopted by the
affirmative vote of the holders of a majority of the shares of the capital stock
of the corporation issued and outstanding and entitled to vote at any regular or
special meeting of stockholders, provided notice of such alteration, amendment,
repeal or adoption of new by-laws shall have been stated in the notice of such
regular or special meeting.
6.3 Certain Provisions. Notwithstanding any other provision of law, the
Certificate of Incorporation or these By-Laws, and notwithstanding the fact that
a lesser percentage may be specified by law, the affirmative vote of the holders
of at least seventy-five percent (75%) of the shares of the capital stock of the
corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with Section 1.2,
Section 1.3, Section 1.10, Section 1.11, Section 1.12, Section 1.13, Article 2
or Article 6 of these By-Laws.
14
[Draft--7/21/98]
================================================================================
NorthEast Optic Network, Inc.
[ ]% Senior Notes Due 2008
--------------------
INDENTURE
Dated as of [ ]
---------------------
U.S. Bank Trust National Association
Trustee
================================================================================
<PAGE>
CROSS-REFERENCE TABLE
TIA Indenture
Section Section
310(a)(1) .............................. 7.10
(a)(2) .............................. 7.10
(a)(3) .............................. N.A.
(a)(4) .............................. N.A.
(b) .............................. 7.08; 7.10
(c) .............................. N.A.
311(a) .............................. 7.11
(b) .............................. 7.11
(c) .............................. N.A.
312(a) .............................. 2.05
(b) .............................. 10.03
(c) .............................. 10.03
313(a) .............................. 7.06
(b)(1) .............................. N.A.
(b)(2) .............................. 7.06
(c) .............................. 10.02
(d) .............................. 7.06
314(a) .............................. 4.02;
4.13; 10.02
(b) .............................. N.A.
(c)(1) .............................. 10.04
(c)(2) .............................. 10.04
(c)(3) .............................. N.A.
(d) .............................. N.A.
(e) .............................. 10.05
(f) .............................. 4.13
315(a) .............................. 7.01
(b) .............................. 7.05; 10.02
(c) .............................. 7.01
(d) .............................. 7.01
(e) .............................. 6.11
316(a)(last sentence) .............................. 10.06
(a)(1)(A) .............................. 6.05
(a)(1)(B) .............................. 6.04
(a)(2) .............................. N.A.
(b) .............................. 6.07
317(a)(1) .............................. 6.08
(a)(2) .............................. 6.09
(b) .............................. 2.04
318(a) .............................. 10.01
N.A. means Not Applicable.
- --------------------
Note: This Cross-Reference Table shall not, for any
purpose, be deemed to be part of the Indenture.
<PAGE>
TABLE OF CONTENTS
ARTICLE 1 Page
----
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions ............................ 1
SECTION 1.02. Other Definitions ...................... 24
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act ........................ 24
SECTION 1.04. Rules of Construction .................. 25
ARTICLE 2
The Securities
--------------
SECTION 2.01. Form and Dating ........................ 25
SECTION 2.02. Execution and Authentication ........... 25
SECTION 2.03. Registrar and Paying Agent ............. 26
SECTION 2.04. Paying Agent To Hold Money in Trust..... 27
SECTION 2.05. Securityholder Lists ................... 27
SECTION 2.06. Transfer and Exchange .................. 27
SECTION 2.07. Replacement Securities ................. 28
SECTION 2.08. Outstanding Securities ................. 29
SECTION 2.09. Temporary Securities ................... 29
SECTION 2.10. Cancellation ........................... 29
SECTION 2.11. Defaulted Interest ..................... 30
SECTION 2.12. CUSIP Numbers .......................... 30
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee ..................... 30
SECTION 3.02. Selection of Securities To Be
Redeemed ............................. 30
SECTION 3.03. Notice of Redemption ................... 31
SECTION 3.04. Effect of Notice of Redemption ......... 32
SECTION 3.05. Deposit of Redemption Price ............ 32
SECTION 3.06. Securities Redeemed in Part ............ 32
<PAGE>
2
ARTICLE 4
Covenants
---------
SECTION 4.01. Payment of Securities .................. 32
SECTION 4.02. SEC Reports ............................ 33
SECTION 4.03. Limitation on Indebtedness ............. 33
SECTION 4.04. Limitation on Restricted Payments ...... 36
SECTION 4.05. Limitation on Restrictions on
Distributions from Restricted
Subsidiaries ........................ 39
SECTION 4.06. Limitation on Sales of Assets and
Subsidiary Stock .................... 40
SECTION 4.07. Limitation on Affiliate Transactions ... 44
SECTION 4.08. Limitation on the Sale or Issuance
of Capital Stock of Restricted
Subsidiaries......................... 45
SECTION 4.09. Change of Control ...................... 45
SECTION 4.10. Limitation on Liens..................... 47
SECTION 4.11. Limitation on Sale/Leaseback
Transactions ........................ 47
SECTION 4.12. Future Guarantors....................... 47
SECTION 4.13. Compliance Certificate.................. 47
SECTION 4.14. Further Instruments and Acts............ 48
SECTION 4.15 Pledge Account.......................... 48
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer
Assets ............................... 48
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default ...................... 49
SECTION 6.02. Acceleration ........................... 52
SECTION 6.03. Other Remedies ......................... 52
SECTION 6.04. Waiver of Past Defaults ................ 52
SECTION 6.05. Control by Majority .................... 53
SECTION 6.06. Limitation on Suits .................... 53
SECTION 6.07. Rights of Holders To Receive Payment ... 53
SECTION 6.08. Collection Suit by Trustee ............. 54
SECTION 6.09. Trustee May File Proofs of Claim ....... 54
SECTION 6.10. Priorities ............................. 54
SECTION 6.11. Undertaking for Costs .................. 55
SECTION 6.12. Waiver of Stay or Extension Laws ....... 55
<PAGE>
3
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee ...................... 55
SECTION 7.02. Rights of Trustee ...................... 57
SECTION 7.03. Individual Rights of Trustee ........... 57
SECTION 7.04. Trustee's Disclaimer ................... 57
SECTION 7.05. Notice of Defaults ..................... 58
SECTION 7.06. Reports by Trustee to Holders .......... 58
SECTION 7.07. Compensation and Indemnity ............. 58
SECTION 7.08. Replacement of Trustee ................. 59
SECTION 7.09. Successor Trustee by Merger ............ 60
SECTION 7.10. Eligibility; Disqualification .......... 60
SECTION 7.11. Preferential Collection of Claims
Against Company ...................... 61
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Securities;
Defeasance ........................... 61
SECTION 8.02. Conditions to Defeasance ............... 62
SECTION 8.03. Application of Trust Money ............. 63
SECTION 8.04. Repayment to Company ................... 63
SECTION 8.05. Indemnity for Government
Obligations .......................... 64
SECTION 8.06. Reinstatement .......................... 64
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders ............. 64
SECTION 9.02. With Consent of Holders ................ 65
SECTION 9.03. Compliance with Trust Indenture ........ 66
SECTION 9.04. Revocation and Effect of Consents
and Waivers .......................... 66
SECTION 9.05. Notation on or Exchange of
Securities ........................... 67
SECTION 9.06. Trustee To Sign Amendments ............. 67
SECTION 9.07. Payment for Consent .................... 68
<PAGE>
4
ARTICLE 10
Miscellaneous
-------------
SECTION 10.01. Trust Indenture Act Controls ........... 68
SECTION 10.02. Notices ................................ 68
SECTION 10.03. Communication by Holders with Other
Holders .............................. 68
SECTION 10.04. Certificate and Opinion as to
Conditions Precedent ................. 69
SECTION 10.05. Statements Required in Certificate
or Opinion ........................... 69
SECTION 10.06. When Securities Disregarded ............ 69
SECTION 10.07. Rules by Trustee, Paying Agent and
Registrar ............................ 70
SECTION 10.08. Legal Holidays ......................... 70
SECTION 10.09. Governing Law .......................... 70
SECTION 10.10. No Recourse Against Others ............. 70
SECTION 10.11. Successors ............................. 70
SECTION 10.12. Multiple Originals ..................... 70
SECTION 10.13. Table of Contents; Headings ............ 71
Exhibit A - Form of Security
<PAGE>
[Draft--06/20/98]
INDENTURE dated as of , 1998, between
NORTHEAST OPTIC NETWORK INC., a Delaware corporation
(the "Company") and U.S. BANK TRUST NATIONAL
ASSOCIATION, a national banking organization (the
"Trustee").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of the Company's
% Senior Notes Due 2008 (the "Securities"):
ARTICLE 1
Definitions and Incorporation by Reference
------------------------------------------
SECTION 1.01. Definitions.
------------
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary; provided, however, that any
such Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such 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 Sections 4.04, 4.06 and 4.07 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
<PAGE>
2
Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (iii) any
other assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary (other than, in
the case of (i), (ii) and (iii) above, (A) a disposition by a Restricted
Subsidiary to the Company or by the Company or a Restricted Subsidiary to a
Wholly Owned Subsidiary, (B) for purposes of Section 4.06 only, a disposition
that constitutes a Restricted Payment permitted by Section 4.04 or a Permitted
Investment, (C) exchanges of Telecommunications Assets for other
Telecommunications Assets where the Fair Market Value of the Telecommunications
Assets received is at least equal to the Fair Market Value of the
Telecommunications Assets disposed of or, if less, the difference is received in
cash and such cash shall be deemed to be Net Available Cash, (D) Permitted
Telecommunications Capital Asset Dispositions and (E) disposition of assets with
a fair market value of less than $250,000); provided, however, that transfers of
fiber capacity in exchange for indefeasible rights of use and long-term leases
of fiber capacity shall be treated as made in the ordinary course of business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Securities, 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 the 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.
<PAGE>
3
"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 Monday, Tuesday, Wednesday, Thursday
or Friday that is not a day on which banking institutions in the City of New
York are authorized or obliged by law, executive order or regulation to close.
"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, participation 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.
"Change of Control" means the occurrence of any of
the following events:
(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 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 3d-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
<PAGE>
4
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 defined in clause (i) above), 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 66-2/3% 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 Person
or transferee that represent immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of
the surviving Person or transferee.
"Code" means the Internal Revenue Code of 1986, as amended.
"Company" means the party named as such in this Indenture
until a successor replaces it and, thereafter,
<PAGE>
5
means the successor and, for purposes of any provision contained herein and
required by the TIA, each other obligor on the indenture securities.
"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 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
(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
<PAGE>
6
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.
<PAGE>
7
"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;
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company or its consolidated
Subsidiaries (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
<PAGE>
8
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 purpose of Section 4.04 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
Section pursuant to clause (a)(3)(D) thereof.
"Credit Agreement" 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
<PAGE>
9
months following the Stated Maturity of the Securities; 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
repurchase or redeem such Capital Stock upon the occurrence of an "asset sale"
or "change of control" occurring prior to a date that is six months following
the Stated Maturity of the Securities 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 provisions of Sections 4.07 and 4.10 and (y) any such requirement only
becomes operative after compliance with such terms applicable to the Securities
including the purchase of any Securities 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.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" means, with respect to any asset or
property (including Capital Stock), the price that could be negotiated in an
arm's-length free market
<PAGE>
10
transaction, for cash, between a willing seller and a willing buyer, neither of
whom is under pressure or compulsion to complete the transaction. Fair Market
Value shall be determined by the Board of Directors of the Company acting in
good faith and shall be evidenced by a resolution of the Board of Directors of
the Company delivered to the Trustee; provided, however, that if the Fair Market
Value as determined by the Board of Directors for any transaction or series of
related transactions exceeds $5.0 million, such determination of Fair Market
Value shall be determined by a U.S. investment banking firm nationally
recognized in the United States or by a nationally recognized expert in the U.S.
telecommunications industry with experience in valuing such assets and property.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those set
forth in (i) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in this Indenture shall be computed in
conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any other
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
<PAGE>
11
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 "Securityholder" means the Person in whose name a
Security 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
<PAGE>
12
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 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 (but
excluding, in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the value of such property or assets or the amount of the obligation so
secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date; provided, however, that
the amount outstanding at any time of any Indebtedness issued with original
issue discount is the amount of the liability in respect thereof determined in
accordance with GAAP.
"Indenture" means this Indenture as amended or supplemented
from time to time.
"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
<PAGE>
13
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 Section 4.04, (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 Securities 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
<PAGE>
14
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
Subsidiaries or joint ventures 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.
"Officer" means the Chairman of the Board, the President, any
Vice President, the Treasurer or the Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Opinion of Counsel" means a written opinion from legal
counsel who is acceptable to the Trustee. The counsel may be an employee of or
counsel to the Company or the Trustee.
"Permitted Holders" means (i) Central Maine Power Company, a
Maine corporation, and its Affiliates and (ii) Northeast Utilities, a
Massachusetts business trust, and its Affiliates.
"Permitted Investment" means an Investment by the Company or
any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a
Person that will, upon the making of such Investment, become a Restricted
Subsidiary; provided, however, that the primary business of such Restricted
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company
<PAGE>
15
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 the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to Section
4.06 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
$10,000,000.
"Permitted Liens" means, with respect to any Person, (a)
pledges or deposits by such Person under workers' 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 by
appropriate proceedings;
<PAGE>
16
(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 clause (b)(1) of
Section 4.03; (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 including liens created by other persons affecting
any easement, indefeasible right to use or other property right granted to the
Company or any Restricted Subsidiary; provided, however, that such Liens are not
created, incurred or assumed in connection with, or in contemplation of, such
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
including Liens created by other Persons affecting any easement, indefeasible
right to use or other property right granted to the Company or any Restricted
Subsidiary; provided, however, that such Liens are not created, incurred or
assumed in connection with, or in contemplation of, such acquisition; provided
further,
<PAGE>
17
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 this 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; (o) Liens on the
Pledged Securities and the Pledge Account pursuant to the Pledge Agreement; and
(p) 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 Section 4.06. For purposes of
this definition, the term "Indebtedness" shall be deemed to include interest on
such Indebtedness.
"Permitted Telecommunications Capital Asset Disposition" means
the transfer, conveyance, sale, lease or other disposition of dark fiber,
conduit or components of the conduit system, (i) the proceeds of which are
treated as revenues by the Company in accordance with GAAP and (ii) that, in the
case of the sale of dark fiber, would not
<PAGE>
18
result in the Company retaining less than 24 fibers per route mile on any
segment of the Company's network.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Pledge Account" means an account established in the United
States with the Trustee pursuant to the terms of the Pledge Agreement for the
deposit of the Pledged Securities purchased by the Company with a portion of the
net proceeds from the offering of the Securities by the Company.
"Pledge Agreement" means the Collateral Pledge and Security
Agreement, dated as of the date of this Indenture, by and between the Trustee
and the Company, governing the disbursement of funds from the Pledge Account, as
amended from time to time.
"Pledged Securities" means the securities purchased by the
Company with a portion of the net proceeds from the offering of the Securities
by the Company, which shall consist of U.S. Government Obligations, to be
deposited in the Pledge Account.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
dissolution of such Person, over shares of Capital Stock of any other class of
such Person.
"principal" of a Security means the principal of the Security
plus the premium, if any, payable on the Security 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.
"Public Market" means any time after (x) a Public Equity
Offering has been consummated and (y) at least 15% of the total issued and
outstanding common stock of the Company has been distributed by means of an
effective registration
<PAGE>
19
statement under the Securities Act or sales pursuant to Rule 144 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 this Indenture, including Indebtedness
that Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company (except to the extent
such Refinanced Indebtedness was guaranteed by such subsidiary) or (y)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a
<PAGE>
20
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.
"Securities" means the Securities issued under this Indenture.
"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 Securities; provided, however, that Senior Indebtedness shall not
include (1) any
<PAGE>
21
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
this 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 beyond the control of the issuer 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 Securities pursuant to a
written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Telecommunications Assets" means all assets, rights
(contractual or otherwise) and properties, whether tangible or intangible, used
or intended for use in connection with a Telecommunications Business.
"Telecommunications Business" means the business of (i)
transmitting or providing services relating to the
<PAGE>
22
transmission of, voice, video or data through owned or leased transmission
facilities, (ii) constructing, creating, developing or marketing communications
related network equipment, software and other devices for use in a
telecommunications business or (iii) evaluating, participating or pursuing any
other activity or opportunity that is primarily related to those identified in
clause (i) or (ii) above.
"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 of America, 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 that 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.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. ss.ss.
77aaa-77bbbb) as in effect on the date of this Indenture.
<PAGE>
23
"Trustee" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President
or any other officer or assistant officer of the Trustee assigned by the Trustee
to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"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 of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of,
or owns 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 Section
4.04. 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) the Company could Incur $1.00 of additional Indebtedness
under Section 4.03(a) 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 or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of
Capital Stock or other interests (including partnership
<PAGE>
24
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.
SECTION 1.02. Other Definitions.
------------------
Defined in
Term Section
---- -------
"Affiliate Transaction" ................ 4.07(a)
"Bankruptcy Law" ....................... 6.01
"covenant defeasance option" ........... 8.01(b)
"Custodian" ............................ 6.01
"Default Amount"........................ 6.02
"Event of Default" ..................... 6.01
"legal defeasance option" .............. 8.01(b)
"Legal Holiday" ........................ 10.08
"Offer" ............................... 4.06(b)
"Offer Amount" ........................ 4.06(c)(2)
"Offer Period" ........................ 4.06(c)(2)
"Paying Agent" ......................... 2.03
"Purchase Date" ....................... 4.06(c)(1)
"Registrar"............................. 2.03
"Successor Company" .................... 5.01
SECTION 1.03. Incorporation by Reference of Trust Indenture
Act. This Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC;
"indenture securities" means the Securities;
"indenture security holder" means a Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the indenture securities means the Company and
any other obligor on the indenture securities.
<PAGE>
25
All other TIA terms used in this Indenture that are defined by
the TIA, defined by TIA reference to another statute or defined by SEC rule have
the meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context
otherwise requires:
(1) a term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
(4) "including" means including without limitation;
(5) words in the singular include the plural and
words in the plural include the singular;
(6) unsecured Indebtedness shall not be deemed to be
subordinate or junior to Secured Indebtedness merely by virtue of its
nature as unsecured Indebtedness;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof
that would be shown on a balance sheet of the issuer dated such date
prepared in accordance with GAAP; and
(8) the principal amount of any Preferred Stock shall be (i)
the maximum liquidation value of such Preferred Stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with
respect to such Preferred Stock, whichever is greater.
ARTICLE 2
The Securities
--------------
SECTION 2.01. Form and Dating. The Securities and the
Trustee's certificate of authentication shall be substantially in the form of
Exhibit A, which is hereby incorporated in and expressly made a part of this
Indenture. The Securities may have notations, legends or endorsements required
by law, stock exchange rule, agreements to which the Company is subject, if any,
or usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Security shall be dated the date of
<PAGE>
26
its authentication. The terms of the Securities set forth in Exhibit A are part
of the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers shall
sign the Securities for the Company by manual or facsimile signature. The
Company's seal shall be impressed, affixed, imprinted or reproduced on the
Securities and may be in facsimile form.
If an Officer whose signature is on a Security no longer holds
that office at the time the Trustee authenticates the Security, the Security
shall be valid nevertheless.
A Security shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Security.
The signature shall be conclusive evidence that the Security has been
authenticated under this Indenture.
The Trustee shall authenticate and deliver Securities for
original issue in an aggregate principal amount of $165,000,000, upon a written
order of the Company signed by two Officers or by an Officer and either an
Assistant Treasurer or an Assistant Secretary of the Company. Such order shall
specify the amount of the Securities to be authenticated and the date on which
the original issue of Securities is to be authenticated. The aggregate principal
amount of Securities outstanding at any time may not exceed that amount except
as provided in Section 2.07.
The Trustee may appoint an authenticating agent reasonably
acceptable to the Company to authenticate the Securities. Unless limited by the
terms of such appointment, an authenticating agent may authenticate Securities
whenever the Trustee may do so. Each reference in this Indenture to
authentication by the Trustee includes authentication by such agent. An
authenticating agent has the same rights as any Registrar, Paying Agent or agent
for service of notices and demands.
SECTION 2.03. Registrar and Paying Agent. The Company shall
maintain an office or agency where Securities may be presented for registration
of transfer or for exchange (the "Registrar") and an office or agency where
Securities may be presented for payment (the "Paying Agent"). The Registrar
shall keep a register of the Securities and of their transfer and exchange. The
Company may have one or more co-registrars and one or more additional
<PAGE>
27
paying agents. The term "Paying Agent" includes any additional paying agent.
The Company shall enter into an appropriate agency agreement
with any Registrar, Paying Agent or co-registrar not a party to this Indenture,
which shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall
notify the Trustee of the name and address of any such agent. If the Company
fails to maintain a Registrar or Paying Agent, the Trustee shall act as such
and shall be entitled to appropriate compensation therefor pursuant to Section
7.07. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and
Paying Agent in connection with the Securities.
SECTION 2.04. Paying Agent To Hold Money in Trust. Prior to
each due date of the principal and interest on any Security, the Company shall
deposit with the Paying Agent a sum sufficient to pay such principal and
interest when so becoming due. The Company shall require each Paying Agent
(other than the Trustee) to agree in writing that the Paying Agent shall hold in
trust for the benefit of Securityholders or the Trustee all money held by the
Paying Agent for the payment of principal of or interest on the Securities and
shall notify the Trustee of any default by the Company in making any such
payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate
the money held by it as Paying Agent and hold it as a separate trust fund. The
Company at any time may require a Paying Agent to pay all money held by it to
the Trustee and to account for any funds disbursed by the Paying Agent. Upon
complying with this Section, the Paying Agent shall have no further liability
for the money delivered to the Trustee.
SECTION 2.05. Securityholder Lists. The Trustee shall preserve
in as current a form as is reasonably practicable the most recent list
available to it of the names and addresses of Securityholders. If the Trustee is
not the Registrar, the Company shall furnish to the Trustee, in writing at least
five Business Days before each interest payment date and at such other times as
the Trustee may request in writing, a list in such form and as of such date as
the Trustee may reasonably require of the names and addresses of
Securityholders.
<PAGE>
28
SECTION 2.06. Transfer and Exchange. The Securities shall be
issued in registered form and shall be transferable only upon the surrender of a
Security for registration of transfer. When a Security is presented to the
Registrar or a co-registrar with a request to register a transfer, the Registrar
shall register the transfer as requested if the requirements of Section 8-401(1)
of the Uniform Commercial Code are met. When Securities are presented to the
Registrar or a co-registrar with a request to exchange them for an equal
principal amount of Securities of other denominations, the Registrar shall make
the exchange as requested if the same requirements are met. To permit
registration of transfers and exchanges, the Company shall execute and the
Trustee shall authenticate Securities at the Registrar's or co-registrar's
request. The Company may require payment of a sum sufficient to pay all taxes,
assessments or other governmental charges in connection with any transfer or
exchange pursuant to this Section. The Company shall not be required to make and
the Registrar need not register transfers or exchanges of Securities selected
for redemption (except, in the case of Securities to be redeemed in part, the
portion thereof not to be redeemed) or any Securities for a period of 15 days
before a selection of Securities to be redeemed or 15 days before an interest
payment date.
Prior to the due presentation for registration of transfer of
any Security, the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Trustee, the Paying Agent, the Registrar or any co-registrar shall be
affected by notice to the contrary.
All Securities issued upon any transfer or exchange pursuant
to the terms of this Indenture will evidence the same debt and will be entitled
to the same benefits under this Indenture as the Securities surrendered upon
such transfer or exchange.
SECTION 2.07. Replacement Securities. If a mutilated Security
is surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate a replacement Security if the requirements of
Section 8-405 of the Uniform Commercial Code are met and the Holder satisfies
any other reasonable requirements of the Trustee. If required by the Trustee or
<PAGE>
29
the Company, such Holder shall furnish an indemnity bond sufficient in the
judgment of the Company and the Trustee to protect the Company, the Trustee, the
Paying Agent, the Registrar and any co-registrar from any loss which any of them
may suffer if a Security is replaced. The Company and the Trustee may charge the
Holder for their expenses in replacing a Security.
Every replacement Security is an additional obligation of the
Company.
SECTION 2.08. Outstanding Securities. Securities outstanding
at any time are all Securities authenticated by the Trustee except for those
canceled by it, those delivered to it for cancellation and those described in
this Section as not outstanding. A Security does not cease to be outstanding
because the Company or an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases
to be outstanding unless the Trustee and the Company receive proof satisfactory
to them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in
accordance with this Indenture, on a redemption date or maturity date money
sufficient to pay all principal and interest payable on that date with respect
to the Securities (or portions thereof) to be redeemed or maturing, as the case
may be, and the Paying Agent is not prohibited from paying such money to the
Securityholders on that date pursuant to the terms of this Indenture, then on
and after that date such Securities (or portions thereof) cease to be
outstanding and interest on them ceases to accrue.
SECTION 2.09. Temporary Securities. Until definitive
Securities are ready for delivery, the Company may prepare and the Trustee shall
authenticate temporary Securities. Temporary Securities shall be substantially
in the form of definitive Securities but may have variations that the Company
considers appropriate for temporary Securities. Without unreasonable delay, the
Company shall prepare and the Trustee shall authenticate definitive Securities
and deliver them in exchange for temporary Securities.
SECTION 2.10 Cancellation. The Company at any time may deliver
Securities to the Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one
<PAGE>
30
else shall cancel and destroy (subject to the record retention requirements of
the Exchange Act) all Securities surrendered for registration of transfer,
exchange, payment or cancellation and deliver a certificate of such destruction
to the Company unless the Company directs the Trustee to deliver canceled
Securities to the Company. The Company may not issue new Securities to replace
Securities it has redeemed, paid or delivered to the Trustee for cancellation.
SECTION 2.11. Defaulted Interest. If the Company defaults in a
payment of interest on the Securities, the Company shall pay defaulted interest
(plus interest on such defaulted interest to the extent lawful) in any lawful
manner. The Company may pay the defaulted interest to the persons who are
Securityholders on a subsequent special record date. The Company shall fix or
cause to be fixed any such special record date and payment date to the
reasonable satisfaction of the Trustee and shall promptly mail to each
Securityholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid.
SECTION 2.12. CUSIP Numbers. The Company in issuing the
Securities may use "CUSIP" numbers (if then generally in use) and, if so, the
Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to
Holders; provided, however, that any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Securities or as contained in any notice of a redemption and that
reliance may be placed only on the other identification numbers printed on the
Securities, and any such redemption shall not be affected by any defect in or
omission of such numbers.
ARTICLE 3
Redemption
----------
SECTION 3.01. Notices to Trustee. If the Company elects to
redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date, the principal amount of Securities to
be redeemed and the paragraph of the Securities pursuant to which the redemption
will occur.
The Company shall give each notice to the Trustee provided for
in this Section at least 60 days before the redemption date unless the Trustee
consents to a shorter period. Such notice shall be accompanied by an Officers'
<PAGE>
31
Certificate and an Opinion of Counsel from the Company to the effect that such
redemption will comply with the conditions herein.
SECTION 3.02. Selection of Securities To Be Redeemed. If fewer
than all the Securities are to be redeemed, the Trustee shall select the
Securities to be redeemed pro rata or by lot or by a method that complies with
applicable legal and securities exchange requirements, if any, and that the
Trustee in its sole discretion shall deem to be fair and appropriate and in
accordance with methods generally used at the time of selection by fiduciaries
in similar circumstances. The Trustee shall make the selection from outstanding
Securities not previously called for redemption. The Trustee may select for
redemption portions of the principal of Securities that have denominations
larger than $1,000. Securities and portions of them the Trustee selects shall be
in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture
that apply to Securities called for redemption also apply to portions of
Securities called for redemption. The Trustee shall notify the Company promptly
of the Securities or portions of Securities to be redeemed.
SECTION 3.03. Notice of Redemption. At least 30 days but not
more than 60 days before a date for redemption of Securities, the Company shall
mail a notice of redemption by first-class mail to each Holder of Securities to
be redeemed at such Holder's registered address.
The notice shall identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be surrendered
to the Paying Agent to collect the redemption price;
(5) if fewer than all the outstanding Securities are to be
redeemed, the identification and principal amounts of the particular
Securities to be redeemed;
(6) that, unless the Company defaults in making such
redemption payment or the Paying Agent is prohibited from making such
payment pursuant to the terms of this Indenture, interest on Securities
(or portion
<PAGE>
32
thereof) called for redemption ceases to accrue on and after the
redemption date;
(7) the paragraph of the Securities pursuant to which the
Securities called for redemption are being redeemed; and
(8) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on the related interest payment date). Failure to give
notice or any defect in the notice to any Holder shall not affect the validity
of the notice to any other Holder.
SECTION 3.05. Deposit of Redemption Price. By 11:00 p.m.
eastern standard time on the redemption date, the Company shall deposit with the
Paying Agent (or, if the Company or a Subsidiary is the Paying Agent, shall
segregate and hold in trust) money sufficient to pay the redemption price of and
accrued interest on all Securities to be redeemed on that date other than
Securities or portions of Securities called for redemption which have been
delivered by the Company to the Trustee for cancellation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate for the Holder (at the Company's expense) a new Security
equal in principal amount to the unredeemed portion of the Security
surrendered.
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33
ARTICLE 4
Covenants
---------
SECTION 4.01. Payment of Securities. The Company shall
promptly pay the principal of and interest on the Securities on the dates and in
the manner provided in the Securities and in this Indenture. Principal and
interest shall be considered paid on the date due if on such date the Trustee or
the Paying Agent holds in accordance with this Indenture money sufficient to pay
all principal and interest then due and the Trustee or the Paying Agent, as the
case may be, is not prohibited from paying such money to the Securityholders on
that date pursuant to the terms of this Indenture.
The Company shall pay interest on overdue principal at the
rate specified therefor in the Securities, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.02. 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
Securityholders 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 reports to be so filed and provided at the times specified for the
filing of such information, documents and reports under such Sections. The
Company also shall comply with the other provisions of TIA ss. 314(a) and, so
long as the Pledge Agreement is in effect, TIA ss. 314(b).
SECTION 4.03. 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 if such Indebtedness
is Incurred prior to December 31, 2000 or 5.0 to 1 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:
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34
(1) Indebtedness Incurred pursuant to Credit Agreements;
provided, however, that, after giving effect to any such Incurrence,
the aggregate principal amount of such Indebtedness then outstanding
does not exceed $50,000,000 less the sum of all principal payments with
respect to such Indebtedness pursuant to Section 4.06(a)(ii)(A);
(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
who 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 Securities;
(3) the Securities;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this Section
4.03(b));
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to Section 4.03(a) or pursuant to clause (3) or (4)
of this Section 4.03(b) or 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 Incurred pursuant to clause (10), such
Refinancing Indebtedness shall be Incurred only by such Restricted
Subsidiary;
(6) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company or any Restricted Subsidiary pursuant to this Indenture;
(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
<PAGE>
35
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;
(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 Section 4.05(a)(3)(B) or Section 4.05(b)(i) to make a
Restricted Payment; provided, however, that such Indebtedness does not
mature prior to the Stated Maturity of the Securities and has an
Average Life longer than the Average Life of the Securities;
(9) Guarantees by any Restricted Subsidiary of the Securities,
Indebtedness Incurred pursuant to paragraph (a) above and any
Indebtedness that Refinances the Securities 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 Restricted 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 Indebtedness
pursuant to Section 4.03(a);
(11) Indebtedness in an aggregate principal amount which,
together with all other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the date of such Incurrence (other than
Indebtedness permitted by clauses (1) through (10) of this Section
4.03(b) or Section 4.03(a)) does not exceed $5,000,000.
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36
(c) Notwithstanding the foregoing, the Company shall not Incur
any Indebtedness pursuant to Section 4.03(b) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Securities to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with this Section
4.03, (i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described herein, 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 herein. 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.
SECTION 4.04. 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 under Section 4.03(a); 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 (treated as one 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
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37
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 Section 4.05(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
<PAGE>
38
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
Section 4.04(a);
(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 Section 4.03; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement
for value shall be excluded in the calculation of the amount of
Restricted Payments;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with Section 4.04(a); 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.
SECTION 4.05. 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
<PAGE>
39
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, 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 Section 4.05 or
this clause (iii) or contained in any amendment to an agreement
referred to in clause (i) or (ii) of this Section 4.05 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 favor able to the Securityholders
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 Section
4.03(b)(1); 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
<PAGE>
40
the Indebtedness including pursuant to offers to purchase) according to
the terms of this Indenture and the Securities 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 distributions
listed in clauses (a), (b) and (c) above upon the occurrence and during
the continuance of any payment default under any such agreement or
instrument (for purposes of this clause (iv), any determination as to
what is customary shall be conclusively determined in good faith by the
Chief Financial Officer of the Company as certified to the Trustee at
the time such agreement or instrument is entered into);
(v) any such encumbrance or restriction consisting of
customary nonassignment 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.
SECTION 4.06. 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
<PAGE>
41
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) 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 Securities to purchase Securities pursuant to and
subject to the conditions of Section 4.06(b); 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
Section 4.06, the Company and the Restricted Subsidiaries shall not be required
to apply any Net Avail able Cash in accordance with this Section 4.06(a) except
to the extent that the aggregate Net Available Cash from all Asset Dispositions
which are not applied in accordance with this Section 4.06(a) exceeds
$5,000,000. Pending application of Net Available Cash pursuant to this Section
4.06(a), such Net Available Cash shall be invested in Permitted Investments or
used to reduce outstanding borrowings under revolving credit facilities.
For the purposes of Section 4.06(a)(i), 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.
<PAGE>
42
(b) In the event of an Asset Disposition that requires the
purchase of Securities pursuant to Section 4.06(a)(ii)(C), the Company shall be
required to purchase Securities tendered pursuant to an offer by the Company
for the Securities (the "Offer") at a purchase price of 100% of their principal
value (without premium) plus accrued but unpaid interest in accordance with the
procedures (including prorating in the event of oversubscription) set forth in
Section 4.06(c). The Company shall not be required to make an Offer to purchase
Securities pursuant to this Section 4.06 if the Net Available Cash available
therefor is less than $5,000,000 (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) (1) Promptly, and in any event within 10 days after the
Company becomes obligated to make an Offer, the Company shall be
obligated to deliver to the Trustee and send, by first-class mail to
each Holder, a written notice stating that the Holder may elect to have
his Securities purchased by the Company either in whole or in part
(subject to prorating as hereinafter described in the event the Offer
is oversubscribed) in integral multiples of $1,000 of principal amount,
at the applicable purchase price. The notice shall specify a purchase
date not less than 30 days nor more than 60 days after the date of such
notice (the "Purchase Date") and shall contain such information
concerning the business of the Company which the Company in good faith
believes will enable such Holders to make an informed decision (which
at a minimum will include (i) the most recently filed Annual Report on
Form 10-K (including audited consolidated financial statements) of the
Company, the most recent subsequently filed quarterly report on Form
10-Q and any current report on Form 8-K of the Company filed subsequent
to such quarterly report, other than current reports describing Asset
Dispositions otherwise described in the offering materials (or
corresponding successor reports), (ii) a description of material
developments in the Company's business subsequent to the date of the
latest of such reports, and (iii) if material, appropriate pro forma
financial information) and all instructions and materials necessary to
tender Securities pursuant to the Offer, together with the information
contained in clause (3).
(2) Not later than the date upon which written notice of an
Offer is delivered to the Trustee, the
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43
Company shall deliver to the Trustee an Officers' Certificate as to (i)
the amount of the Offer (the "Offer Amount"), (ii) the allocation of
the Net Available Cash from the Asset Dispositions pursuant to which
such Offer is being made and (iii) the compliance of such allocation
with the provisions of Section 4.06(a). On such date, the Company shall
also irrevocably deposit with the Trustee or with a paying agent (or,
if the Company is acting as its own paying agent, segregate and hold in
trust) in Temporary Cash Investments, maturing on the last day prior to
the Purchase Date or on the Purchase Date if funds are immediately
available by open of business, an amount equal to the Offer Amount to
be held for payment in accordance with the provisions of this Section.
Upon the expiration of the period for which the Offer remains open (the
"Offer Period"), the Company shall deliver to the Trustee for
cancellation the Securities or portions thereof which have been
properly tendered to and are to be accepted by the Company. The Trustee
shall, on the Purchase Date, mail or deliver payment to each tendering
Holder in the amount of the purchase price. In the event that the
aggregate purchase price of the Securities delivered by the Company to
the Trustee is less than the Offer Amount, the Trustee shall deliver
the excess to the Company immediately after the expiration of the Offer
Period for application in accordance with this Section.
(3) Holders electing to have a Security purchased shall be
required to surrender the Security, with an appropriate form duly
completed, to the Company at the address specified in the notice at
least three Business Days prior to the Purchase Date. Holders shall be
entitled to withdraw their election if the Trustee or the Company
receives not later than one Business Day prior to the Purchase Date, a
telex, facsimile transmission or letter setting forth the name of the
Holder, the principal amount of the Security which was delivered for
purchase by the Holder and a statement that such Holder is withdrawing
his election to have such Security purchased. If at the expiration of
the Offer Period the aggregate principal amount of Securities
surrendered by holders thereof exceeds the Offer Amount, the Company
shall select the Securities to be purchased on a pro rata basis (with
such adjustments as may be deemed appropriate by the Company so that
only Securities in denominations of $1,000, or integral multiples
thereof, shall be purchased). Holders whose Securities are purchased
only in part shall be issued new Securities equal in principal
<PAGE>
44
amount to the unpurchased portion of the Securities surrendered.
(4) At the time the Company delivers Securities to the Trustee
which are to be accepted for purchase, the Company shall also deliver
an Officers' Certificate stating that such Securities are to be
accepted by the Company pursuant to and in accordance with the terms of
this Section. A Security shall be deemed to have been accepted for
purchase at the time the Trustee, directly or through an agent, mails
or delivers payment therefor to the surrendering Holder.
(d) 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 Securities pursuant to
this Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.07. 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 (i) 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,
(ii) if such Affiliate Transaction involves an amount in excess of $1,000,000,
(1) are set forth in writing and (2) have been approved by a majority of the
members of the Board of Directors having no personal stake in such Affiliate
Transaction and (iii) if such Affiliate Transaction involves an amount in excess
of $5,000,000, have been determined by a nationally recognized investment
banking firm to be fair, from a financial standpoint, to the Company and its
Restricted Subsidiaries.
(b) The provisions of Section 4.07(a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to Section 4.04, (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
<PAGE>
45
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 $1,000,000 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.
SECTION 4.08. 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 in Section 4.04 if
made on the date of such issuance, sale or other disposition.
SECTION 4.09. Change of Control. (a) Upon the occurrence of a
Change of Control, each Holder shall have the right to require that the Company
repurchase such Holder's Securities at a purchase price in cash equal to 101% of
the principal 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), in accordance with the terms contemplated in Section 4.09(b).
<PAGE>
46
(b) 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
Securities at a purchase price in cash equal to 101% of the principal
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, each after giving effect to such
Change of Control);
(3) the repurchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent
with this Section, that a Holder must follow in order to have its
Securities purchased.
(c) Holders electing to have a Security purchased will be
required to surrender the Security, with an appropriate form duly completed, to
the Company at the address specified in the notice at least three Business Days
prior to the purchase date. Holders will be entitled to withdraw their election
if the Trustee or the Company receives not later than one Business Day prior to
the purchase date, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Security which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the
Company under this Section shall be delivered by the Trustee for cancellation,
and the Company shall pay the purchase price plus accrued and unpaid interest,
if any, to the Holders entitled thereto.
(e) If a Holder's Securities are redeemed by the Company
pursuant to its option to redeem Securities pursuant to paragraph 5 of the
Securities prior to the date on which
<PAGE>
47
the Company would be obligated to pay for such Securities tendered pursuant to a
Change of Control Offer, such Holder will be entitled to receive only the
redemption price. Notwithstanding the foregoing provisions of this Section, the
Company will not be required to make a Change of Control Offer upon 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 this
Section 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.
(f) 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 Securities pursuant to
this Section. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.10. 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 Securities shall be secured equally and ratably with (or
prior to) the obligations so secured for so long as such obligations are so
secured.
SECTION 4.11. 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 Section 4.03 and (B) create a Lien on such property
securing such Attributable Debt without equally and ratably securing the
Securities pursuant to Section 4.10, (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 Section 4.06.
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48
SECTION 4.12. Future Guarantors. The Company shall cause each
Restricted Subsidiary that Guarantees any Indebtedness of the Company (other
than the Securities) pursuant to Section 4.03(b)(9) to guarantee the Securities
on substantially the same terms and conditions as such Guarantee.
SECTION 4.13. Compliance Certificate. The Company shall
deliver to the Trustee within 120 days after the end of each fiscal year of the
Company an Officers' Certificate stating that in the course of the performance
by the signers of their duties as Officers of the Company they would normally
have knowledge of any Default and whether or not the signers know of any Default
that occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with TIA ss. 314(a)(4).
SECTION 4.14. Further Instruments and Acts. Upon request of
the Trustee, the Company will execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
SECTION 4.15. Pledge Account. (a) Upon the closing of the
offering of the Securities by the Company, the Company shall purchase, and
deposit in the Pledge Account for the benefit of Holders and owners of
beneficial ownership interests in the Notes, Pledged Securities in an amount
which, in the opinion of an internationally recognized firm of independent
public accountants expressed in a written certification thereof delivered to the
Trustee, will result in the receipt of United States dollars in immediately
available funds in an amount and at a time sufficient to provide for payment in
full when due of the seven regularly scheduled interest payments due on the
Notes from , 1999 through , 2002 upon receipt of
scheduled principal and interest payments on the Pledged Securities.
(b) The Company hereby agrees that all of its rights and
obligations with respect to the Pledged Securities shall be as set forth in the
Pledge Agreement.
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49
ARTICLE 5
Successor Company
-----------------
SECTION 5.01. When Company May Merge or Transfer Assets. (a)
The Company shall not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the
"Successor Company") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the District
of Columbia and the Successor Company (if not the Company) shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form satisfactory to the Trustee, all the
obligations of the Company under the Securities and this 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 the 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 this 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 this 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 Securities.
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50
ARTICLE 6
Defaults and Remedies
---------------------
SECTION 6.01. Events of Default. An "Event of Default" occurs if:
(1) the Company defaults in any payment of interest on any
Security when the same becomes due and payable, as to any interest
payment date falling on or prior to , 2002, and any such
default in the payment of interest on the Notes continued for a period
of 30 days as to any interest payment date thereafter;
(2) the Company defaults in the payment of the principal of
any Security when the same becomes due and payable at its Stated
Maturity, upon redemption, upon declaration or otherwise;
(3) the Company fails to comply with Section 5.01;
(4) the Company fails to comply with Section 4.02, 4.03, 4.04,
4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13, 4.14 or 4.15
(other than a failure to purchase Securities when required under
Section 4.06 or 4.09) and such failure continues for 30 days after the
notice specified below;
(5) the Company fails to comply with any of its agreements in
the Securities or this Indenture (other than those referred to in
clause (1), (2), (3) or (4) above) and such failure continues for 60
days after the notice specified below;
(6) 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 $5.0
million, or its foreign currency equivalent at the time;
(7) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
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51
(C) consents to the appointment of a Custodian of it
or for any substantial part of its property; or
(D) makes a general assignment for the benefit of its
creditors;
or takes any comparable action under any foreign laws
relating to insolvency;
(8) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or
any Significant Subsidiary or for any substantial
part of its property; or
(C) orders the winding up or liquidation of
the Company or any Significant Subsidiary;
or any similar relief is granted under any foreign laws and in each of
(A), (B) and (C) above, the order or decree remains unstayed and in
effect for 60 days;
(9) any judgment or decree for the payment of money in excess
of $5.0 million or its foreign currency equivalent at the time is
entered against the Company or any Significant Subsidiary, remains
outstanding for a period of 60 days following the entry of such
judgment or decree and is not discharged, waived or the execution
thereof stayed within 10 days after the notice specified below; or
(10) the security interest under the Pledge Agreement shall
cease to be in full force and effect for any reason other than in
accordance with its terms or such security interest shall be declared
invalid or unenforceable or the Company shall assert, if any pleading
in any court of competent jurisdiction that such security interest is
invalid and unenforceable.
The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or involuntary
or is effected by operation of law or pursuant to any judgment, decree or order
of any court or any order, rule or regulation of any administrative or
governmental body.
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52
The term "Bankruptcy Law" means Title 11, United States Code,
or any similar Federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
A Default under clauses (4), (5), or (9) is not an Event of
Default until the Trustee or the holders of at least 25% in principal amount of
the outstanding Securities notify the Company of the Default and the Company
does not cure such Default within the time specified after receipt of such
notice. Such notice must specify the Default, demand that it be remedied and
state that such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after
the occurrence thereof, written notice in the form of an Officers' Certificate
of any Event of Default under clause (6) and any event which with the giving of
notice or the lapse of time would become an Event of Default under clause (4),
(5) or (9), its status and what action the Company is taking or proposes to take
with respect thereto.
SECTION 6.02. Acceleration. If an Event of Default (other than
an Event of Default specified in Section 6.01(7) or (8) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in principal amount of the Securities by notice to the
Company and the Trustee, may declare the principal value of and accrued but
unpaid interest on all the Securities (collectively, the "Default Amount") to be
due and payable. Upon such a declaration, the Default Amount shall be due and
payable immediately. If an Event of Default specified in Section 6.01(7) or (8)
with respect to the Company occurs, the Default Amount on all the Securities
shall ipso facto become and be immediately due and payable without any
declaration or other act on the part of the Trustee or any Securityholders. The
Holders of a majority in principal amount of the Securities by notice to the
Trustee may rescind an acceleration and its consequences if the rescission would
not conflict with any judgment or decree and if all existing Events of Default
have been cured or waived except nonpayment of principal or interest that has
become due solely because of acceleration. No such rescission shall affect any
subsequent Default or impair any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs
and is continuing, the Trustee may pursue any available remedy to collect the
payment of principal of or
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53
interest on the Securities or to enforce the performance of any provision of the
Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the proceeding.
A delay or omission by the Trustee or any Securityholder in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a
majority in principal amount of the Securities by notice to the Trustee may
waive an existing Default and its consequences except (i) a Default in the
payment of the principal of or interest on a Security (ii) a Default arising
from the failure to redeem or purchase any Security when required pursuant to
this Indenture or (iii) a Default in respect of a provision that under Section
9.02 cannot be amended without the consent of each Securityholder affected. When
a Default is waived, it is deemed cured, but no such waiver shall extend to any
subsequent or other Default or impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority
in principal amount of the Securities may 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. However, the Trustee may
refuse to follow any direction that conflicts with law or this Indenture or the
Pledge Agreement or, subject to Section 7.01, that the Trustee determines is
unduly prejudicial to the rights of other Securityholders or would involve the
Trustee in personal liability; provided, however, that the Trustee may take any
other action deemed proper by the Trustee that is not inconsistent with such
direction. Prior to taking any action hereunder, the Trustee shall be entitled
to indemnification satisfactory to it in its sole discretion against all losses
and expenses caused by taking or not taking such action.
SECTION 6.06. Limitation on Suits. Except to enforce the right
to receive payment of principal, premium (if any) or interest when due, no
Securityholder may pursue any remedy with respect to this Indenture, the Pledge
Agreement or the Securities unless:
(1) the Holder gives to the Trustee written notice stating
that an Event of Default is continuing;
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54
(2) the Holders of at least 25% in principal amount of the
Securities make a written request to the Trustee to pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of security or
indemnity; and
(5) the Holders of a majority in principal amount of the
Securities do not give the Trustee a direction inconsistent with the
request during such 60-day period.
A Securityholder may not exercise its rights under this
Indenture to prejudice the rights of another Securityholder or to obtain a
preference or priority over another Securityholder.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of principal of and interest on the Securities held by such
Holder, on or after the respective due dates expressed in the Securities, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.
SECTION 6.08. Collection Suit by Trustee. If an Event of
Default specified in Section 6.01(1) or (2) occurs and is continuing, the
Trustee may recover judgment in its own name and as trustee of an express trust
against the Company for the whole amount then due and owing (together with
interest on any unpaid interest to the extent lawful) and the amounts provided
for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee
may file such proofs of claim and other papers or documents as may be necessary
or advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
<PAGE>
55
directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, and any other amounts due the Trustee under Section
7.07.
SECTION 6.10. Priorities. If the Trustee collects any money
or property pursuant to this Article 6, it shall pay out the money or property
in the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any
payment to Securityholders pursuant to this Section. At least 15 days before
such record date, the Company shall mail to each Securityholder and the Trustee
a notice that states the record date, the payment date and amount to be paid.
SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any
party litigant in the suit, having due regard to the merits and good faith of
the claims or defenses made by the party litigant. This Section does not apply
to a suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit
by Holders of more than 10% in principal amount of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company
(to the extent it may lawfully do so) shall not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Indenture; and
the Company (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and shall not hinder, delay or
<PAGE>
56
impede the execution of any power herein granted to the Trustee, but shall
suffer and permit the execution of every such power as though no such law had
been enacted.
ARTICLE 7
Trustee
-------
SECTION 7.01. Duties of Trustee. (a) If an Event of Default
has occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent Person would exercise or use under the circumstances
in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture and the
Pledge Agreement and no implied covenants or obligations shall be read
into this Indenture and the Pledge Agreement against the Trustee; and
(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements
of this Indenture and the Pledge Agreement. However, the Trustee shall
examine the certificates and opinions to determine whether or not they
conform to the requirements of this Indenture and the Pledge Agreement.
(c) The Trustee may not be relieved from liability for its
own negligent action, its own negligent failure to act or its own wilful
misconduct, except that:
(1) this paragraph does not limit the effect of paragraph (b)
of this Section;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith
<PAGE>
57
in accordance with a direction received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(g) No provision of this Indenture or the Pledge Agreement
shall require the Trustee to expend or risk its own funds or otherwise incur
financial liability in the performance of any of its duties hereunder or in the
exercise of any of its rights or powers, if it shall have reasonable grounds to
believe that repayment of such funds or adequate indemnity against such risk or
liability is not reasonably assured to it.
(h) Every provision of this Indenture or the Pledge Agreement
relating to the conduct or affecting the liability of or affording protection to
the Trustee shall be subject to the provisions of this Section and to the
provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely on
any document believed by it to be genuine and to have been signed or presented
by the proper per son. The Trustee need not investigate any fact or matter
stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall
not be liable for any action it takes or omits to take in good faith in reliance
on the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that the Trustee's conduct does not
constitute wilful misconduct or negligence.
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58
(e) The Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture and
the Securities shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it here under
in good faith and in accordance with the advice or opinion of such counsel.
(f) Except with respect to Section 4.01, the Trustee shall
have no duty to inquire as to the performance of the Company with respect to the
covenants contained in Article 4. In addition, the Trustee shall not be deemed
to have knowledge of an Event of Default except (i) any Default or Event of
Default occurring pursuant to Sections 4.01, 6.01(1) or 6.01(2) or (ii) any
Default or Event of Default of which the Trustee shall have received written
notification or obtained actual knowledge.
(g) Delivery of reports, information and documents to the
Trustee under Section 4.02 is for informational purposes only and the Trustee's
receipt of the foregoing shall not constitute constructive notice of any
information contained therein or determinable from information contained
therein, including the Company's compliance with any of their covenants
hereunder (as to which the Trustee is entitled to rely exclusively on Officers'
Certificates).
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar
or co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture, the Pledge Agreement or the Securities, it shall not be
accountable for the Company's use of the proceeds from the Securities, and it
shall not be responsible for any statement of the Company in the Indenture or in
any document issued in connection with the sale of the Securities or in the
Securities other than the Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case
<PAGE>
59
of a Default in payment of principal of or interest on any Security (including
payments pursuant to the mandatory redemption provisions of such Security, if
any), the Trustee may withhold the notice if and so long as a committee of its
Trust Officers in good faith determines that withholding the notice is in the
interests of Securityholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
practicable after each May 15 beginning with the May 15 following the date of
this Indenture, and in any event prior to July 15 in each year, the Trustee
shall mail to each Securityholder a brief report dated as May 15 that complies
with TIA ss. 313(a). The Trustee also shall comply with TIA ss. 313(b).
A copy of each report at the time of its mailing to
Securityholders shall be filed with the SEC and each stock exchange (if any) on
which the Securities are listed. The Company agrees to notify promptly the
Trustee whenever the Securities become listed on any stock exchange and of any
delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall
pay to the Trustee from time to time reasonable compensation for its services.
The Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it,
including costs of collection, in addition to the compensation for its services.
Such expenses shall include the reasonable compensation and expenses,
disbursements and advances of the Trustee's agents, counsel, accountants and
experts. The Company shall indemnify the Trustee against any and all loss,
liability or expense (including attorneys' fees) incurred by it in connection
with the administration of this trust and the performance of its duties
hereunder. The Trustee shall notify the Company promptly of any claim for which
it may seek indemnity. Failure by the Trustee to so notify the Company shall not
relieve the Company of its obligations hereunder. The Company shall defend the
claim and the Trustee may have separate counsel and the Company shall pay the
fees and expenses of such counsel. The Company need not reimburse any expense or
indemnify against any loss, liability or expense incurred by the Trustee through
the Trustee's own wilful misconduct, negligence or bad faith.
To secure the Company's payment obligations in this Section,
the Trustee shall have a lien prior to the Securities on all money or property
held or collected by the
<PAGE>
60
Trustee other than money or property held in trust to pay principal of and
interest on particular Securities.
The Company's payment obligations pursuant to this Section
shall survive the discharge of this Indenture. When the Trustee incurs expenses
after the occurrence of a Default specified in Section 6.01(7) or (8) with
respect to the Company, the expenses are intended to constitute expenses of
administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign
at any time by so notifying the Company. The Holders of a majority in principal
amount of the Securities may remove the Trustee by so notifying the Trustee and
may appoint a successor Trustee. The Company shall remove the Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the
Holders of a majority in principal amount of the Securities and such Holders do
not reasonably promptly appoint a successor Trustee, or if a vacancy exists in
the office of Trustee for any reason (the Trustee in such event being referred
to herein as the retiring Trustee), the Company shall promptly appoint a
successor Trustee.
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.07.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee or the
Holders of 10% in principal amount of the Securities may petition any court of
competent jurisdiction for the appointment of a successor Trustee.
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61
If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to
this Section, the Company's obligations under Section 7.07 shall continue for
the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor to the Trustee; and in all such cases such certificates shall have the
full force which it is anywhere in the Securities or in this Indenture provided
that the certificate of the Trustee shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall
at all times satisfy the requirements of TIA ss. 310(a). The Trustee shall have
a combined capital and surplus of at least $25,000,000 as set forth in its most
recent published annual report of condition. The Trustee shall comply with
TIA ss. 310(b); provided, however, that there shall be excluded from the
operation of TIA ss. 310(b)(1) any indenture or indentures under which other
securities or certificates of interest or participation in other securities of
the Company are out standing if the requirements for such exclusion set forth in
TIA ss. 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against
Company. The Trustee shall comply with TIA ss. 311(a), excluding any creditor
relationship listed in TIA ss. 311(b). A Trustee who has resigned or been
removed shall be subject to TIA ss. 311(a) to the extent indicated.
<PAGE>
62
ARTICLE 8
Discharge of Indenture; Defeasance
----------------------------------
SECTION 8.01. Discharge of Liability on Securities;
Defeasance. (a) When (i) the Company delivers to the Trustee all outstanding
Securities (other than Securities replaced pursuant to Section 2.07) for
cancellation or (ii) all outstanding Securities have become due and payable,
whether at maturity or as a result of the mailing of a notice of redemption
pursuant to Article 3 hereof and the Company irrevocably deposits with the
Trustee funds sufficient to pay at maturity or upon redemption all outstanding
Securities, including interest thereon to maturity or such redemption date
(other than Securities replaced pursuant to Section 2.07), and if in either case
the Company pays all other sums payable hereunder by the Company, then this
Indenture shall, subject to Sections 8.01(c), cease to be of further effect. The
Trustee shall acknowledge satisfaction and discharge of this Indenture on demand
of the Company accompanied by an Officers' Certificate and an Opinion of Counsel
and at the cost and expense of the Company.
(b) Subject to Sections 8.01(c) and 8.02, the Company at any
time may terminate (i) all its obligations under the Securities and this
Indenture ("legal defeasance option") or (ii) its obligations under Sections
4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13 and 4.14
and the operation of Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8) and 6.01(9)
(but, in the case of Sections 6.01(7) and (8), with respect only to Significant
Subsidiaries) and the limitations contained in Sections 5.01(a)(iii) and (iv)
("covenant defeasance option"). 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 Securities may not be accelerated because of an Event of Default with
respect thereto. If the Company exercises its covenant defeasance option,
payment of the Securities may not be accelerated because of an Event of Default
specified in Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8) and 6.01(9) (but, in
the case of Sections 6.01(7) and (8), with respect only to Significant
Subsidiaries) or because of the failure of the Company to comply with Section
5.01(a)(iii) or (iv).
Upon satisfaction of the conditions set forth herein and upon
request of the Company, the Trustee shall
<PAGE>
63
acknowledge in writing the discharge of those obligations that the Company
terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.07 and 7.08 and in
this Article 8 shall survive until the Securities have been paid in full.
Thereafter, the Company's obligations in Sections 7.07 and 8.05 shall survive.
SECTION 8.02. Conditions to Defeasance. The Company may
exercise its legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee
money or U.S. Government Obligations for the payment of principal of
and interest on the Securities to maturity or redemption, as the case
may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations plus
any deposited money without investment will provide cash at such times
and in such amounts as will be sufficient to pay principal and interest
when due on all the Securities to maturity or redemption, as the case
may be;
(3) 123 days pass after the deposit is made and during the
123-day period no Default specified in Sections 6.01(7) or (8) with
respect to the Company occurs which is continuing at the end of the
period;
(4) the deposit does not constitute a default under any other
agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel
to the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company under
the Investment Company Act of 1940;
(6) in the case of the legal defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(i) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (ii) since the date of this
Indenture there has been a change in the applicable Federal income tax
law, in either case to
<PAGE>
64
the effect that, and based thereon such Opinion of Counsel shall
confirm that, the Securityholders will not recognize income, gain or
loss for Federal income tax purposes as a result of such defeasance and
will be subject to Federal income tax on the same amounts, in the same
manner and at the same times as would have been the case if such
defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Security holders will not recognize income, gain or loss for
Federal income tax purposes as a result of such covenant defeasance
and will be subject to Federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such
covenant defeasance had not occurred; and
(8) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance and discharge of the Securities as
contemplated by this Article 8 have been complied with.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date in
accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall
hold in trust money or U.S. Government Obligations deposited with it pursuant
to this Article 8. It shall apply the deposited money and the money from U.S.
Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of principal of and interest on the Securities.
SECTION 8.04. Repayment to Company. The Trustee and the Paying
Agent shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee
and the Paying Agent shall pay to the Company upon request any money held by
them for the payment of principal or interest that remains unclaimed for two
years, and, thereafter, Securityholders entitled to the money must look to the
Company for payment as general creditors.
SECTION 8.05. Indemnity for Government Obligations. The Company shall
pay and shall indemnify the Trustee against any tax, fee or other charge imposed
on or
<PAGE>
65
assessed against deposited U.S. Government Obligations or the principal and
interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government Obligations in accordance with this
Article 8 by reason of any legal proceeding or by reason of any order or
judgment of any court or governmental authority enjoining, restraining or
otherwise prohibiting such application, the Company's obligations under this
Indenture and the Securities shall be revived and reinstated as though no
deposit had occurred pursuant to this Article 8 until such time as the Trustee
or Paying Agent is permitted to apply all such money or U.S. Government
Obligations in accordance with this Article 8; provided, however, that, if the
Company has made any payment of interest on or principal of any Securities
because of the reinstatement of its obligations, the Company shall be subrogated
to the rights of the Holders of such Securities to receive such payment from the
money or U.S. Government Obligations held by the Trustee or Paying Agent.
ARTICLE 9
Amendments
----------
SECTION 9.01. Without Consent of Holders. The Company and the Trustee
may amend this Indenture or the Securities without notice to or consent of any
Security holder:
(1) to cure any ambiguity, omission, defect or inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or
in place of certificated Securities; provided, however, that the
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(4) to add guarantees with respect to the Securities or to
secure the Securities;
(5) to add to the covenants of the Company for the benefit of
the Holders or to surrender any right or power herein conferred upon
the Company;
<PAGE>
66
(6) to comply with any requirements of the SEC in connection
with qualifying, or maintaining the qualification of, this Indenture
under the TIA;
(7) to make any change that does not adversely affect the
rights of any Securityholder; or
(8) make any change in the Pledge Agreement that would
adversely affect the rights of any Securityholder.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment under this
Section.
SECTION 9.02. With Consent of Holders. The Company and the
Trustee may amend this Indenture or the Securities without notice to any
Securityholder but with the written consent of the Holders of at least a
majority in principal amount of the Securities then outstanding (including
consents obtained in connection with a tender offer or exchange for the
Securities). However, without the consent of each Securityholder affected
thereby, an amendment may not:
(1) reduce the amount of Securities whose Holders must consent
to an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any Security;
(3) reduce the principal of or extend the Stated Maturity of
any Security;
(4) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed in
accordance with Article 3;
(5) make any Security payable in money other than that stated
in the Security;
(6) impair the right of any Securityholder to receive payment
of principal of and interest on such Holder's Securities on or after
the due dates therefor or to institute suit for any payment on or with
respect to such Holder's Securities;
<PAGE>
67
(7) make any change in Section 6.04 or 6.07 or the second
sentence of this Section; or
(8) make any changes in the Pledge Agreement that would
adversely affect the rights of any Security holders.
It shall not be necessary for the consent of the Holders under
this Section to approve the particular form of any proposed amendment, but it
shall be sufficient if such consent approves the substance thereof.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment under this
Section.
SECTION 9.03. Compliance with Trust Indenture Act. Every
amendment to this Indenture or the Securities shall comply with the TIA as then
in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers. A
consent to an amendment or a waiver by a Holder of a Security shall bind the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent or waiver is not made on the Security. However, any such
Holder or subsequent Holder may revoke the consent or waiver as to such
Holder's Security or portion of the Security if the Trustee receives the notice
of revocation before the date the amendment or waiver becomes effective. After
an amendment or waiver becomes effective, it shall bind every Security holder.
An amendment or waiver becomes effective upon the execution of such amendment or
waiver by the Trustee.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Securityholders entitled to give their
consent or take any other action described above or required or permitted to be
taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Securityholders at such record date (or their duly designated proxies), and only
those Persons, shall be entitled to give such consent or to revoke any consent
previously given or to take any such action, whether or not such Persons
continue to be Holders after such record date. No such consent shall be valid or
effective for more than 120 days after such record date.
<PAGE>
68
SECTION 9.05. Notation on or Exchange of Securities. If an
amendment changes the terms of a Security, the Trustee may require the Holder of
the Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and return it to the
Holder. Alternatively, if the Company or the Trustee so determines, the Company
in exchange for the Security shall issue and the Trustee shall authenticate a
new Security that reflects the changed terms. Failure to make the appropriate
notation or to issue a new Security shall not affect the validity of such
amendment.
SECTION 9.06. Trustee To Sign Amendments. The Trustee shall
sign any amendment authorized pursuant to this Article 9 if the amendment does
not adversely affect the rights, duties, liabilities or immunities of the
Trustee. If it does, the Trustee may but need not sign it. In signing such
amendment the Trustee shall be entitled to receive indemnity reasonably
satisfactory to it and to receive, and (subject to Section 7.01) shall be fully
protected in relying upon, an Officers' Certificate and an Opinion of Counsel
stating that such amendment is authorized or permitted by this Indenture.
SECTION 9.07. Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 10
Miscellaneous
-------------
SECTION 10.01. Trust Indenture Act Controls. If any provision
of this Indenture limits, qualifies or conflicts with another provision which
is required to be included in this Indenture by the TIA, the required provision
shall control.
<PAGE>
69
SECTION 10.02. Notices. Any notice or communication shall be
in writing and delivered in person or mailed by first-class mail addressed as
follows:
if to the Company:
Attention of
if to the Trustee:
The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Security holder shall
be mailed to the Securityholder at the Securityholder's address as it appears
on the registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder
or any defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 10.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA ss. 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, the Trustee, the Registrar and anyone else shall have
the protection of TIA ss. 312(c).
SECTION 10.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to take
or refrain from taking any action under this Indenture, the Company shall
furnish to the Trustee:
<PAGE>
70
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
SECTION 10.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture shall include:
(1) a statement that the individual making such certificate or
opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 10.06. When Securities Disregarded. In determining
whether the Holders of the required principal amount of Securities have
concurred in any direction, waiver or consent, Securities owned by the Company
or by any Person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Company shall be disregarded and
deemed not to be outstanding, except that, for the purpose of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent, only Securities which the Trustee knows are so owned shall be so
disregarded. Also, subject to the foregoing, only Securities outstanding at the
time shall be considered in any such determination.
SECTION 10.07. Rules by Trustee, Paying Agent and Registrar.
The Trustee may make reasonable rules for action
<PAGE>
71
by or a meeting of Securityholders. The Registrar and the Paying Agent may make
reasonable rules for their functions.
SECTION 10.08. Legal Holidays. A "Legal Holiday" is a
Saturday, a Sunday or a day on which banking institutions are not required to
be open in the State of New York. If a payment date is a Legal Holiday, payment
shall be made on the next succeeding day that is not a Legal Holiday, and no
interest shall accrue for the intervening period. If a regular record date is a
Legal Holiday, the record date shall not be affected.
SECTION 10.09. Governing Law. This Indenture and the
Securities shall be governed by, and construed in accordance with, the laws of
the State of New York but without giving effect to applicable principles of
conflicts of law to the extent that the application of the laws of another
jurisdiction would be required thereby.
SECTION 10.10. No Recourse Against Others. A director,
officer, employee or stockholder, as such, of the Company shall not have any
liability for any obligations of the Company under the Securities or this
Indenture or for any claim based on, in respect of or by reason of such
obligations or their creation. By accepting a Security, each Securityholder
shall waive and release all such liability. The waiver and release shall be
part of the consideration for the issue of the Securities.
SECTION 10.11. Successors. All agreements of the Company in
this Indenture and the Securities shall bind its successors. All agreements of
the Trustee in this Indenture shall bind its successors.
SECTION 10.12. Multiple Originals. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an original, but
all of them together represent the same agreement. One signed copy is enough to
prove this Indenture.
SECTION 10.13. Table of Contents; Headings. The table of
contents, cross-reference sheet and headings of the Articles and Sections of
this Indenture have been inserted
<PAGE>
72
for convenience of reference only, are not intended to be considered a part
hereof and shall not modify or restrict any of the terms or provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture to
be duly executed as of the date first written above.
NORTHEAST OPTIC NETWORK, INC.,
by
-------------------------------
Name:
Title:
U.S. BANK TRUST NATIONAL
ASSOCIATION,
by
-------------------------------
Name: Richard H. Prokosch
Title: Assistant Vice President
[Draft--July 21, 1998]
EXHIBIT A
FORM OF FACE OF SECURITY
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF
THE DEPOSITARY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW
YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR
PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR
SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY
PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN
AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED
OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN
WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE
INDENTURE REFERRED TO ON THE REVERSE HEREOF.
No.$
% Senior Note Due
NorthEast Optic Network, Inc., a Delaware corporation, promises to pay to
, or registered assigns, the principal sum of
Dollars on , 2008.
Interest Payment Dates: and .
Record Dates: and .
Additional provisions of this Security are set forth on the other side of this
Security.
Dated:
NorthEast Optic Network, Inc.,
by
--------------------------
President
--------------------------
Secretary
<PAGE>
2
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
U.S. BANK TRUST NATIONAL
ASSOCIATION,
as Trustee, certifies
[Seal] that this
is one of the Securities
referred to in the Indenture.
by
--------------------------
Authorized Signatory
<PAGE>
3
FORM OF REVERSE SIDE OF SECURITY
% Senior Note Due 2008
1. Interest
--------
NorthEast Optic Network, Inc., a Delaware corporation (such
corporation, and its successors and assigns under the Indenture hereinafter
referred to, being herein called the "Company"), promises to pay interest on the
principal amount of this Security at the rate per annum shown above. The Company
will pay interest semiannually on and of each
year. Interest on the Securities will accrue from the most recent date to which
interest has been paid or, if no interest has been paid, from , 1998.
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Company shall pay interest on overdue principal at the rate borne by
the Securities plus 1% per annum, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
2. Method of Payment
-----------------
The Company will pay interest on the Securities (except defaulted
interest) to the Persons who are registered holders of Securities at the close
of business on the or next preceding the
interest payment date even if Securities are canceled after the record date and
on or before the interest payment date. Holders must surrender Securities to a
Paying Agent to collect principal payments. The Company will pay principal and
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. Payments in respect of
Securities (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by the holders
thereof or, if no U.S. dollar account maintained by the payee with a bank in the
United States is designated by any holder to the Trustee or the Paying Agent at
least 30 days prior to the relevant due date for payment (or such other date as
the Trustee may accept in its discretion), by mailing a check to the registered
address of such holder.
<PAGE>
4
3. Paying Agent and Registrar
--------------------------
Initially, , a
corporation ("Trustee"), will act as Paying Agent and Registrar.
The Company may appoint and change any Paying Agent, Registrar or co-registrar
without notice. The Company or any of its domestically incorporated Wholly Owned
Subsidiaries may act as Paying Agent, Registrar or co-registrar.
4. Indenture
---------
The Company issued the Securities under an Indenture dated as of
, 1998 ("Indenture"), between the Company and the Trustee. The
terms of the Securities include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
ss.ss. 77aaa-77bbbb) as in effect on the date of the Indenture (the "Act").
Terms defined in the Indenture and not defined herein have the meanings ascribed
thereto in the Indenture. The Securities are subject to all such terms, and
Securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are general unsecured obligations of the Company limited
to $165,000,000 aggregate principal amount (subject to Section 2.07 of the
Indenture). 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 such limitations and prohibitions, however, are subject to a
number of important qualifications and exceptions.
5. Optional Redemption
-------------------
Except as set forth in the next paragraph, the Securities may not be
redeemed by the Company prior to , 2003. On and after that date,
the Company may redeem the Securities in whole at any time or in part from time
to time at the following redemption prices (expressed in percentages of
principal amount), plus accrued interest to
<PAGE>
5
the redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the related interest payment date):
if redeemed during the 12-month period beginning -----------,
Period Percentage
------ ----------
2003 %
2004
2005
2006 and thereafter 100
In addition, at any time prior to , 2001, the Company
may redeem up to 35% of the aggregate principal amount of Securities with the
proceeds of a Public Equity Offering following which there is a Public Market,
at any time or from time to time, at a redemption price (expressed as a
percentage of Principal Value) of ___% plus accrued and unpaid interest, if any,
to redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the related interest payment date).
6. Notice of Redemption
--------------------
Notice of redemption will be mailed at least 30 days but not more than
60 days before the redemption date to each Holder of Securities to be redeemed
at his registered address. Securities in denominations larger than $1,000 may be
redeemed in part but only in whole multiples of $1,000. If money sufficient to
pay the redemption price of and accrued interest on all Securities (or portions
thereof) to be redeemed on the redemption date is deposited with the Paying
Agent on or before the redemption date and certain other conditions are
satisfied, on and after such date interest ceases to accrue on such Securities
(or such portions thereof) called for redemption.
7. Put Provisions
--------------
Upon a Change of Control, any Holder of Securities will have the right
to cause the Company to repurchase all or any part of the Securities of such
Holder at a repurchase price equal to 101% of the principal amount of the
Securities to be repurchased plus accrued and unpaid interest to the date of
repurchase (subject to the right of holders of record on the relevant record
date to receive interest due on the related interest payment date) as provided
in, and subject to the terms of, the Indenture.
<PAGE>
6
8. Denominations; Transfer; Exchange
---------------------------------
The Securities are in registered form without coupons in denominations
of $1,000 and whole multiples of $1,000. A Holder may transfer or exchange
Securities in accordance with the Indenture. The Registrar may require a Holder,
among other things, to furnish appropriate endorsements or transfer documents
and to pay any taxes and fees required by law or permitted by the Indenture. The
Registrar need not register the transfer of or exchange any Securities selected
for redemption (except, in the case of a Security to be redeemed in part, the
portion of the Security not to be redeemed) or any Securities for a period of 15
days before a selection of Securities to be redeemed or 15 days before an
interest payment date.
9. Persons Deemed Owners
---------------------
The registered Holder of this Security may be treated as the owner of
it for all purposes.
10. Unclaimed Money
---------------
If money for the payment of principal or interest remains unclaimed for
two years, the Trustee or Paying Agent shall pay the money back to the Company
at its request unless an abandoned property law designates another Person. After
any such payment, Holders entitled to the money must look only to the Company
and not to the Trustee for payment.
11. Discharge and Defeasance
------------------------
Subject to certain conditions, the Company at any time may terminate
some or all of its obligations under the Securities and the Indenture if the
Company deposits with the Trustee money or U.S. Government Obligations for the
payment of principal and interest on the Securities to redemption or maturity,
as the case may be.
12. Amendment, Waiver
-----------------
Subject to certain exceptions set forth in the Indenture, (i) the
Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount outstanding of the Securities
and (ii) any default or noncompliance with any provision may be waived with the
written consent of the Holders of a majority in principal amount outstanding of
the Securities. Subject to certain exceptions set forth in the Indenture,
without the consent of any Securityholder, the Company and the Trustee may amend
the Indenture or the Securities to
<PAGE>
7
cure any ambiguity, omission, defect or inconsistency, or to comply with Article
5 of the Indenture, or to provide for uncertificated Securities in addition to
or in place of certificated Securities, or to add guarantees with respect to the
Securities or to secure the Securities, or to add additional covenants or
surrender rights and powers conferred on the Company, or to comply with any
request of the SEC in connection with qualifying the Indenture under the Act, or
to make any change that does not adversely affect the rights of any
Securityholder.
13. Defaults and Remedies
---------------------
Under the Indenture, Events of Default include (i) default in payment
of interest on the Securities upon its occurrence prior to , 2002
and after continuing 30 days thereafter; (ii) default in payment of principal on
the Securities at maturity, upon redemption pursuant to paragraph 5 or 6 of the
Securities, upon acceleration or otherwise, or failure by the Company to redeem
or purchase Securities when required; (iii) failure by the Company to comply
with other agreements in the Indenture or the Securities, in certain cases
subject to notice and lapse of time; (iv) certain accelerations (including
failure to pay within any grace period after final maturity) of other
Indebtedness of the Company if the amount accelerated (or so unpaid) exceeds
$5,000,000; (v) certain events of bankruptcy or insolvency with respect to the
Company or a Significant Subsidiary; (vi) certain judgments or decrees for the
payment of money in excess of $5,000,000; and (vii) the security interest under
the Pledge Agreement ceasing to be in full force and effect. If an Event of
Default occurs and is continuing, the Trustee or the Holders of at least 25% in
principal amount of the Securities may declare all the Securities to be due and
payable immediately. Certain events of bankruptcy or insolvency are Events of
Default which will result in the Securities being due and payable immediately
upon the occurrence of such Events of Default.
Securityholders may not enforce the Indenture or the Securities except
as provided in the Indenture. The Trustee may refuse to enforce the Indenture or
the Securities unless it receives reasonable indemnity or security. Subject to
certain limitations, Holders of a majority in principal amount of the Securities
may direct the Trustee in its exercise of any trust or power. The Trustee may
with hold from Securityholders notice of any continuing Default (except a
Default in payment of principal or interest) if it determines that withholding
notice is in the interest of the Holders.
<PAGE>
8
14. Trustee Dealings with the Company
---------------------------------
Subject to certain limitations imposed by the Act, the Trustee under
the Indenture, in its individual or any other capacity, may become the owner or
pledgee of Securities and may otherwise deal with and collect obligations owed
to it by the Company or its Affiliates and may other wise deal with the Company
or its Affiliates with the same rights it would have if it were not Trustee.
15. No Recourse Against Others
--------------------------
A director, officer, employee or stockholder, as such, of the Company
or the Trustee shall not have any liability for any obligations of the Company
under the Securities or the Indenture or for any claim based on, in respect of
or by reason of such obligations or their creation. By accepting a Security,
each Securityholder waives and releases all such liability. The waiver and
release are part of the consideration for the issue of the Securities.
16. Authentication
--------------
This Security shall not be valid until an authorized signatory of the
Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
17. Abbreviations
-------------
Customary abbreviations may be used in the name of a Securityholder or
an assignee, such as TEN COM (=tenants in common), TEN ENT (=tenants by the
entireties), JT TEN (=joint tenants with rights of survivorship and not as
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
18. CUSIP Numbers
-------------
Pursuant to a recommendation promulgated by the Committee on Uniform
Security Identification Procedures the Company has caused CUSIP numbers to be
printed on the Securities and has directed the Trustee to use CUSIP numbers in
notices of redemption as a convenience to Securityholders. No representation is
made as to the accuracy of such numbers either as printed on the Securities or
as contained in any notice of redemption and reliance may be placed only on the
other identification numbers placed thereon.
<PAGE>
9
19. Eligible Securities Account; Pledge Account
-------------------------------------------
Upon the closing of the offering, the Company shall purchase U.S.
Government Obligations in an amount sufficient to provide for payment in full
when due of the seven regularly scheduled interest payments due on the Notes
from , 1999 through , 2002, upon receipt of
scheduled principal and interest payments on such securities (the "Pledged
Securities"). The Pledged Securities (but not the Eligible Securities) shall be
pledged by the Company to the Trustee for the benefit of the Holders.
20. Governing Law.
--------------
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO APPLICABLE
PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF THE LAWS OF
ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
<PAGE>
10
The Company will furnish to any Securityholder upon written request and
without charge to the Security holder a copy of the Indenture which has in it
the text of this Security in larger type. Requests may be made to:
Attention of
- --------------------------------------------------------------------------------
ASSIGNMENT FORM
To assign this Security, fill in the form below:
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to transfer this
Security on the books of the Company. The agent may substitute another to act
for him.
- -------------------------------------------------------------------------------
Date: Your Signature:
-------------------- -----------------------------------
- -------------------------------------------------------------------------------
Sign exactly as your name appears on the other side of this Security.
<PAGE>
11
OPTION OF HOLDER TO ELECT PURCHASE
If you want to elect to have this Security purchased by the Company
pursuant to Section 4.07 of the Indenture, check the box:
[ ]
If you want to elect to have only part of this Security purchased by
the Company pursuant to Section 4.07 of the Indenture, state the amount:
$
Date:_______________________ Your Signature: _________________________
(Sign exactly as your name appears on
the other side of the Security)
Signature Guarantee: _________________________________________
(Signature must be guaranteed by a
member firm of the New York Stock
Exchange or a commercial bank or trust
company)
[Draft--7/20/98]
COLLATERAL PLEDGE AND SECURITY AGREEMENT, dated as of
, 1998, among NorthEast Optic Network, Inc.,
a Delaware corporation ("NEON" and the "Pledgor"),
and U.S. Bank Trust National Association, as trustee
(the "Trustee"), for the holders of the Notes (as
defined herein) (the "Pledge Agreement" or the
"Agreement"). Capitalized terms used but not
otherwise defined herein shall have the meanings
given to such terms in the Indenture (as defined
herein).
W I T N E S S E T H :
WHEREAS the Pledgor and the Trustee have entered into that certain
Indenture dated as of , 1998 (as amended, restated, supplemented
or otherwise modified from time to time, the "Indenture"), pursuant to which the
Pledgor is issuing $165,000,000 in aggregate principal amount of its % Senior
Notes due 2008 (the "Notes");
WHEREAS the Pledgor has agreed, pursuant to the Indenture to (i)
purchase a portfolio of U.S. Government Obligations, (the "Pledged Securities")
with scheduled principal and interest payments on such Pledged Securities that
will result in the receipt of cash in an amount and at a time sufficient, upon
receipt of the scheduled interest and principal payments in respect of the
Pledged Securities, based upon the certificate furnished to the Representatives
and the Trustee of an internationally recognized firm of independent certified
public accountants selected by the Pledgor, to provide for payment in full of
the seven regularly scheduled interest payments due on the Notes from
, 1999 through , 2002 (the "Secured Payments") and
(ii) place the Pledged Securities in the Pledge Account (as defined herein) held
by the Trustee for the benefit of the holders of the Notes;
WHEREAS the Pledgor is to be the sole legal and beneficial owner of the
Pledged Securities; and
WHEREAS, to secure the payment and performance by the Pledgor of its
respective obligations under the Indenture and the Notes (collectively, the
"Obligations"), the Pledgor has agreed to pledge to the Trustee for the ratable
benefit of the holders of the Notes a security interest in the Pledged
Securities and the Pledge Account and execute and deliver this Pledge Agreement.
<PAGE>
2
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Pledge and Grant of Security Interest. The Pledgor hereby pledges to
the Trustee for the ratable benefit of the holders of the Notes, and grants to
the Trustee for the ratable benefit of the holders of the Notes, a continuing
first priority security interest in and to (i) all of the Pledgor's right, title
and interest in the Pledged Securities and the Pledge Account, (ii) all
certificates or other evidence of ownership representing the Pledged Securities
and the Pledge Account and (iii) all products and proceeds of any of the Pledged
Securities, including, without limitation, all dividends, interest, principal
payments, cash, options, warrants, rights, instruments, subscriptions and other
property or proceeds from time to time received, receivable or otherwise
distributed or distributable in respect of or in exchange for any or all of the
Pledged Securities (collectively, the "Collateral").
2. Security for Obligations. This Pledge Agreement and the Collateral
secure the prompt and complete payment and performance when due (whether at
stated maturity, by acceleration or otherwise) of all of the Obligations.
3. Delivery of Collateral; Pledge Account; Interest. (a) All
certificates or instruments representing or evidencing the Pledged Securities
shall be delivered to and held by or on behalf of the Trustee pursuant hereto
and shall be in suitable form for transfer and delivery, or shall be accompanied
by instruments of transfer or assignment duly executed in blank all in form
satisfactory to the Trustee, or shall be delivered to the Trustee through the
book-entry facilities of the applicable depositary.
(b) Concurrently with the execution and delivery of this Pledge
Agreement, the Trustee shall establish an account entitled the "NEON PLEDGE
ACCOUNT" for the deposit of the Pledged Securities (the "Pledge Account") at its
offices at . Subject to the other terms and conditions
of this Pledge Agreement, all funds or other property accepted by the Trustee
pursuant to this Pledge Agreement shall be held in the Pledge Account for the
ratable benefit of the holders of the Notes. The Pledged Securities shall be
registered in the name of the Trustee or its nominee, as Trustee for the benefit
of the holders of the Notes, and the proceeds of any such Pledged Securities
shall remain on deposit in the Pledge Account until withdrawn in accordance with
this Agreement. If and to the
<PAGE>
3
extent the Pledged Securities comprise certificated securities (as defined in
Section 8-102 of the Uniform Commercial Code in the State of New York), such
Pledged Securities shall be registered in the name of the Trustee or its
nominee, as Trustee for the benefit of the holders of the Notes, and possession
thereof shall be maintained by the Trustee within the State of New York.
(c) All interest earned on or other distributions or amounts paid
with respect to any Collateral shall be retained in the Pledge Account and may
be reinvested by and at the direction of the Pledgor in other Pledged
Securities; provided that the Pledgor may only so reinvest such interest,
distributions or amounts if, based on the report of an internationally
recognized firm of independent public accountants selected by the Pledgor and
addressed to the Trustee, scheduled principal and interest payments on the
Pledged Securities retained in the Pledge Account will result in receipt of
United States dollars in an amount and at a time sufficient to provide for
payment in full when due of each of the Secured Payments (or, in the event any
such Secured Payments have been made, the remaining unpaid Secured Payments).
4. Disbursements. (a) Not less than three Business Days prior to the
date of any of the Secured Payments, the Pledgor may direct the Trustee in
writing to transfer from the Pledge Account to the Trustee in its capacity as
Paying Agent (or, if applicable, any successor Paying Agent), United States
dollars in immediately available funds necessary to provide for payment in full
of or any portion of the next regularly scheduled interest payment on the Notes.
Upon receipt of such written request, the Trustee shall take such action as is
necessary to provide for the timely payment of such amount of United States
dollars in immediately available funds directly to the Trustee as Paying Agent
(or, if applicable, any successor Paying Agent) from proceeds of the Pledged
Securities held in the Pledge Account.
(b) If the Pledgor elects to pay any of the Secured Payments (or any
portion thereof) from a source of funds other than the Pledge Account (the
"Pledgor's Funds"), then the Pledgor may on at least two Business Days' prior
written notice, after payment of such Secured Payment or portion thereof
(evidenced by an Officers' Certificate delivered to the Trustee stating that
such regularly scheduled interest payment or portion thereof has been made in
accordance with the terms of the Indenture), direct the Trustee in writing to
release to the Pledgor or as it may direct an amount of funds or Pledged
Securities, at the
<PAGE>
4
Pledgor's sole option, from the Pledge Account less than or equal to the amount
of Pledgor's Funds so expended, without accounting for any Pledgor's Funds so
expended in payment of Defaulted Interest. Upon receipt of such written
direction from the Pledgor, together with the certificate described in the
preceding sentence, the Trustee shall take such action as is necessary to
provide for the prompt payment to the Pledgor of the amount of funds or Pledged
Securities requested from the Pledge Account.
(c) If at any time the scheduled payments of principal of and
interest on the Pledged Securities exceeds 100% of the amount in cash
sufficient, based on the report of an internationally recognized firm of
independent certified public accountants selected by the Pledgor and addressed
to the Trustee, to provide for timely payment in full of the Secured Payments
(or, in the event any Secured Payments have been made, an amount in cash
sufficient to provide for timely payment in full of the remaining unpaid Secured
Payments), the Pledgor may direct the Trustee in writing to release to the
Pledgor or as it directs an amount of funds or Pledged Securities, at the
Pledgor's sole option, less than or equal to such excess. Upon receipt of such
written direction from the Pledgor, together with such report of such
internationally recognized firm of independent certified public accountants, the
Trustee shall take such action as is necessary to provide for the prompt payment
to the Pledgor of the amount of funds or Pledged Securities requested from the
Pledge Account.
(d) Upon payment in full of the Secured Payments, evidenced by an
Officers' Certificate delivered to the Trustee stating that such regularly
scheduled interest payments have been made in full in accordance with the
Indenture, the security interest in the Collateral evidenced by this Pledge
Agreement shall terminate and be of no further force and effect. Furthermore,
upon release of any Collateral from the Pledge Account in accordance with the
terms of this Pledge Agreement, the security interest evidenced by this Pledge
Agreement in the Collateral so released shall terminate and be of no further
force and effect.
5. Representations and Warranties. The Pledgor hereby represents and
warrants that:
(a) the execution, delivery and performance by the Pledgor of
this Pledge Agreement has been duly authorized by the Pledgor and does
not contravene or constitute a default under any provision of
applicable law, regulation, the certificate of incorporation or
<PAGE>
5
the by-laws, as the case may be, of the Pledgor, or of any judgment,
injunction, order, decree or any material agreement or instrument
binding upon the Pledgor, and does not result in the creation or
imposition of any Lien on any asset of the Pledgor, except for the
security interests granted under this Pledge Agreement;
(b) no financing statement covering the Pledged Securities is
on file in any public office, other than financing statements filed
pursuant to this Pledge Agreement;
(c) upon the delivery to the Trustee of the certificates, if
any, representing the Pledged Securities, any filing of financing
statements required by the Uniform Commercial Code (the "UCC") and
notation on the records of the Trustee that it holds the Pledged
Securities as pledgee, the pledge of the Collateral pursuant to this
Pledge Agreement will constitute a valid and perfected first priority
security interest in and to the Collateral, securing the payment and
performance of the Obligations for the ratable benefit of the holders
of the Notes, enforceable as such against all creditors of the Pledgor
and any persons purporting to purchase any of the Collateral from the
Pledgor;
(d) no consent of any other person and no consent,
authorization, approval, or other action by, and no notice to or filing
with, any governmental authority or regulatory body in the United
States, Canada or otherwise, including, without limitation, any taxing
authority, is required to be obtained or made by the Pledgor as of the
date hereof either (i) for the pledge by the Pledgor of the Collateral
pursuant to this Pledge Agreement or for the execution, delivery or
performance of this Pledge Agreement by the Pledgor (except for any
filings and notations necessary to perfect the security interest
created hereby in the Collateral) or (ii) for the exercise by the
Trustee of the rights provided for in this Pledge Agreement or the
remedies in respect of the Collateral pursuant to this Pledge
Agreement; and
(e) the pledge of the Collateral pursuant to this Pledge
Agreement is not prohibited by any applicable law or government
regulation, release, interpretation or opinion of the Board of
Governors of the Federal Reserve System or other regulatory agency in
the United States, Canada or otherwise (including, without limitation,
any taxing authority or Regulations G, T, U
<PAGE>
6
and X of the Board of Governors of the Federal Reserve System).
6. Further Assurances. The Pledgor agrees to promptly take such actions
and to execute and deliver or cause to be executed and delivered, or use its
best efforts to procure, such stock or bond powers, proxies, assignments,
instruments and such other or different writings as the Trustee may reasonably
request, all in form and substance satisfactory to the Trustee, deliver any
instruments to the Trustee and take any other actions that are necessary or, in
the opinion of the Trustee, desirable, to perfect, continue the perfection of,
confirm and assure the first priority of the Trustee's security interest in the
Collateral, to protect the Collateral against the rights, claims or interests of
third persons, or to otherwise effect the purposes of this Pledge Agreement.
Notwithstanding the foregoing, the Trustee shall have no duty or obligation to
ensure the maintenance or perfection of any security interest hereunder.
7. Covenants. The Pledgor covenants and agrees with the Trustee and the
holders of the Notes from and after the date of this Pledge Agreement until the
earlier of payment in full of cash of (A) each of the Secured Payments under the
terms of the Indenture or (B) all Obligations due and owing under the Indenture
and the Notes in the event such Obligations become due and payable prior to the
payment in full of any of the Secured Payments as follows:
(a) The Pledgor agrees that it (i) will not sell or otherwise
dispose of, or grant any option or other interest with respect to, any of the
Collateral, (ii) will not create or permit to exist any Lien upon or with
respect to any of the Collateral, except for the Liens created pursuant to this
Pledge Agreement and (iii) will at all times be the sole beneficial owner of the
Collateral.
(b) The Pledgor agrees that it will not (i) enter into any
agreement or understanding that purports to or may restrict or inhibit the
Trustee's rights or remedies hereunder, including, without limitation, the
Trustee's right to sell or otherwise dispose of the Collateral, or (ii) with
regard to the Collateral, fail to pay or discharge any tax, assessment or levy
of any nature due with respect thereto later than five days prior to the date of
any proposed sale under any judgment, writ or warrant of attachment.
8. Power of Attorney. (a) The Pledgor hereby appoints and constitutes
the Trustee as the Pledgor's
<PAGE>
7
attorney-in-fact to exercise to the fullest extent permitted by law all of the
following powers upon and at any time after the occurrence and during the
continuance of an Event of Default:
(i) collection of proceeds of any Collateral;
(ii) conveyance of any item of Collateral to any purchaser
thereof as specified herein;
(iii) giving of any notices or recording of any Liens pursuant
to Section 6 hereof;
(iv) making any payments or taking any acts pursuant to
Section 9 hereof; and
(v) paying or discharging taxes or Liens levied or placed upon
the Collateral, the legality or validity thereof and the amounts
necessary to discharge the same to be determined by the Trustee in its
sole and reasonable discretion, and any such payments made by the
Trustee shall become Obligations of the Pledgor to the Trustee, due and
payable immediately upon demand.
(b) The Trustee's authority under this Section 8 shall include,
without limitation, the authority to endorse and negotiate any checks or
instruments representing proceeds of Collateral in the name of the Pledgor,
execute and give receipt for any certificate of ownership or any document
constituting Collateral, transfer title to any item of Collateral, to the extent
permitted by applicable law, sign the Pledgor's name on all financing statements
or any other documents deemed necessary or appropriate by the Trustee to
preserve, process or perfect the security interest in the Collateral, and to
file the same, and to prepare, sign the Pledgor's name and file any notice of
Lien, and to take any other actions arising from or incident to the powers
granted to the Trustee in this Pledge Agreement. This power of attorney is
coupled with an interest and shall be irrevocable by the Pledgor.
9. Trustee May Perform. If the Pledgor fails to perform any agreement
contained herein, the Trustee may, but shall not be obligated to, itself perform
or cause performance of such agreement, and the reasonable expenses incurred by
or on behalf of the Trustee in connection therewith shall be payable by the
Pledgor under Section 13 hereof.
10. No Assumption of Duties; Reasonable Cure. The rights and powers
granted to the Trustee hereunder are
<PAGE>
8
being granted in order to preserve and protect the security interest of the
holders of Notes in and to the Collateral granted hereby and shall not be
interpreted to, and shall not, impose any duties on the Trustee in connection
therewith other than those imposed under applicable law.
11. Indemnity. The Pledgor shall indemnify, defend and hold harmless
the Trustee and its directors, officers, agents and employees from and against
all claims, actions, obligations, losses, liabilities and expenses, including
costs, fees and disbursements of counsel, the costs of investigations, and
claims for damages, arising from the Trustee's performance under this Pledge
Agreement, except insofar as the same may have been caused by such indemnified
person's own negligent action, its own negligent failure to act or its own
willful misconduct. The obligations of the Pledgor under this Section 11 shall
survive the resignation or removal of the Trustee and the termination of this
Agreement.
12. Remedies upon Event of Default. If an Event of Default shall have
occurred:
(a) The Trustee shall have and may exercise with reference to the
Collateral any or all of the rights and remedies of a secured party under the
UCC in effect in the State of New York, and as otherwise granted herein or under
any other applicable law or under any other agreement now or hereafter in effect
executed by the Pledgor, including, without limitation, the right and power to
sell, at public or private sale or sales, or otherwise dispose of, or otherwise
utilize the Collateral and any part or parts thereof, in any manner authorized
or permitted under said UCC after default by a debtor, and to apply the proceeds
thereof toward payment of any costs and expenses and attorneys' fees and
expenses thereby incurred by the Trustee and toward payment of the Obligations
in such order or manner as the Trustee may elect. Specifically, and without
limiting the foregoing, the Trustee shall have the right to take possession of
all or any part of the Collateral or any security therefor and of all books,
records, papers and documents of the Pledgor or in the Pledgor's possession or
control relating to the Collateral that are not already in the Trustee's
possession, and for such purposes may enter upon any premises upon which any of
the Collateral or any security therefor or any of said books, records, papers
and documents are situated and remove the same therefrom without any liability
for trespass or damages thereby occasioned. To the extent permitted by law, the
Pledgor expressly waives any notice of sale or other disposition of the
Collateral and all other rights or remedies of the Pledgor or
<PAGE>
9
formalities prescribed by law relative to sale or disposition of the Collateral
or exercise of any other right or remedy of the Trustee existing after Default
or Event of Default hereunder. To the extent any such notice is required and
cannot be waived, the Pledgor agrees that if such notice is given in the manner
provided in Section 17 hereof at least three days before the time of the sale or
disposition, such notice shall be deemed reasonable and shall fully satisfy any
requirement for giving of said notice. The Trustee shall not be obligated to
make any sale of Collateral regardless of notice of sale having been given. The
Trustee may adjourn any public or private sale. The Pledgor further agrees to
use its best efforts to do or cause to be done all such other acts as may be
necessary to effect the intention of this Section 12.
(b) All rights to marshalling of assets of the Pledgor, including
any such right with respect to the Collateral, are hereby waived by the Pledgor.
The Pledgor shall not contest or support any other person in contesting the
validity or priority of the security interests created under this Pledge
Agreement.
(c) Any money collected by the Trustee pursuant to this Section 12
shall be applied in the following order, at the date or dates fixed by the
Trustee and, in case of the distribution of such money on account of principal
(or premium, if any) or interest, upon presentation of the Notes and the
notation thereon of the payment if only partially paid and upon surrender
thereof if fully paid:
(i) FIRST: to the payment of the amounts then due and unpaid
for interest on the Notes, ratably, without preference or priority of
any kind, according to the amounts due and payable on such Notes for
interest; and
(ii) SECOND: to the payment of the amounts then due and unpaid
for principal of (and premium, if any) on the Notes, ratably without
preference or priority of any kind, according to the amounts due and
payable on such Notes for principal (and premium, if any); and
(iii) THIRD: to the payment of all amounts due the Trustee
under Sections 11 and 13 of the Pledge Agreement; and
(iv) FOURTH: to the Pledgor.
The Trustee may fix a record date and payment date for any payment to
holders of the Notes pursuant to this Section 12. At least 15 calendar days
before such record
<PAGE>
10
date, the Trustee at the expense of the Pledgor shall send to each holder of a
Note by first class mail, postage prepaid, a notice prepared by the Pledgor that
states such record date, the payment date and amount to be paid.
13. Fees and Expenses. The Pledgor shall, upon demand, pay to the
Trustee the amount of its fees (which shall be in an amount previously agreed to
by the Pledgor and the Trustee) and any and all reasonable expenses (including,
without limitation, the reasonable fees, expenses and disbursements of counsel,
experts and agents retained by the Trustee) that the Trustee may incur in
connection with (i) the administration of this Pledge Agreement, (ii) the
custody or preservation of, or the sale of, collection from, or other
realization upon, any of the Collateral, (iii) the exercise or enforcement of
any of the rights of the Trustee and the holders of the Notes hereunder or (iv)
the failure by the Pledgor to perform or observe any of the provisions hereof.
The obligations of the Pledgor under this Section 13 shall survive the
resignation or removal of the Trustee and the termination of this Agreement.
14. Security Interest Absolute. All rights of the Trustee and the
holders of the Notes, and the security interests created hereunder, and all
obligations of the Pledgor hereunder, shall be absolute and unconditional
irrespective of:
(a) any lack of validity or enforceability of the
Indenture or any other agreement or instrument relating
thereto;
(b) any change in the time, manner or place of payment of, or
in any other term of, all or any of the Obligations, or any other
amendment or waiver of or any consent to any departure from the
Indenture;
(c) any exchange, surrender, release or
nonperfection of any Liens on any other collateral for
all or any of the Obligations; or
(d) any other circumstance that might otherwise constitute a
defense available to, or a discharge of, the Pledgor in respect of the
Obligations or of this Pledge Agreement.
15. Continuing Security Interest; Termination. (a) This Pledge
Agreement shall create a continuing security interest in and to the Collateral
and shall, unless otherwise provided in the Indenture or in this Pledge
<PAGE>
11
Agreement, remain in full force and effect until the earlier of payment in full
in cash of (i) each of the Secured Payments to the holders thereof under the
terms of the Indenture or (ii) all Obligations due and owing under the Indenture
and the Notes in the event such Obligations become payable prior to the payment
of any of the Secured Payments. This Pledge Agreement shall be binding upon the
Pledgor, its successors and assigns, and shall inure, together with the rights
and remedies of the Trustee hereunder, to the benefit of the Trustee and the
holders of the Notes and their respective successors, transferees and assigns.
(b) This Pledge Agreement shall terminate upon the earlier of (i)
payment in full in cash of each of the Secured Payments to the holders thereof
under the terms of the Indenture or (ii) the date on which all Obligations due
and owing under the Indenture and the Notes have been paid in full in the event
such Obligations become payable prior to the payment of any of the Secured
Payments. At such time, the Trustee shall, at the written request of the
Pledgor, reassign and redeliver to the Pledgor all of the Collateral hereunder
that has not been sold, disposed of, retained or applied by the Trustee in
accordance with the terms of this Pledge Agreement and the Indenture. Such
reassignment and redelivery shall be without warranty (either express or
implied) by or recourse to the Trustee, except as to the absence of any prior
assignments by the Trustee of its interest in the Collateral, and shall be at
the expense of the Pledgor.
16. Authority of the Trustee. (a) The Trustee shall have and be
entitled to exercise all powers hereunder that are specifically granted to the
Trustee by the terms hereof, together with such powers as are reasonably
incident thereto. The Trustee may perform any of its duties hereunder or in
connection with the Collateral by or through agents or employees and shall be
entitled to retain counsel and to act in reliance upon the advice of counsel
concerning all such matters. None of the Trustee or any director, officer,
employee, attorney or agent of the Trustee shall be liable to the Pledgor for
any action taken or omitted to be taken by it or them hereunder, except for its
or their own negligent action, negligent failure to act or willful misconduct;
provided that (i) each such person shall not be liable for any error of judgment
made in good faith by it unless it is proved that such person was negligent in
ascertaining the pertinent facts and (ii) the Trustee shall not be liable with
respect to any action it takes or omits to take in good faith in accordance with
a direction or request received by it pursuant to Section 6.05 of the Indenture
or Section 16(d) hereof. The Trustee shall not be
<PAGE>
12
responsible for the validity, effectiveness or sufficiency hereof or of any
document or security furnished pursuant hereto. The Trustee and its directors,
officers, employees, attorneys and agents shall be entitled to rely on any
communication, instrument or document believed by it or them to be genuine and
correct and to have been signed or sent by the proper Person or Persons.
(b) The Pledgor acknowledges that the rights and responsibilities
of the Trustee under this Pledge Agreement with respect to any action taken by
the Trustee or the exercise or nonexercise by the Trustee of any option, right,
request, judgment or other right or remedy provided for herein or resulting or
arising out of this Pledge Agreement shall, as between the Trustee and the
holders of the Notes, be governed by the Indenture and by such other agreements
with respect thereto as may exist from time to time among them, but, as between
the Trustee and the Pledgor, the Trustee shall be conclusively presumed to be
acting as agent for the holders of the Notes with full and valid authority so to
act or refrain from acting, and the Pledgor shall not be obligated or entitled
to make any inquiry respecting such authority.
(c) The Trustee undertakes to perform such duties and only such
duties as are specifically set forth in this Agreement and no implied covenants
or obligations shall be read in this Agreement against the Trustee. The Trustee
shall not be deemed to have knowledge of a Default or an Event of Default under
the Indenture unless informed in writing by the Pledgor or the holder of any
Note or unless a Trust Officer shall have actual knowledge thereof.
(d) The Trustee shall not be required to exercise any remedies
hereunder unless requested in writing to do so by the holders of not less than a
majority in principal amount of the outstanding Notes and only if furnished with
indemnity satisfactory to the Trustee. The Trustee may consult with counsel and
shall not be liable for any action taken in good faith in reliance upon advice
of counsel except for its bad faith, its own negligent action, its own negligent
failure to act or its own wilful misconduct. The Trustee makes no representation
or warranty and shall have no responsibility concerning the value or validity of
the Collateral or the validity or perfection of the pledge thereof.
(e) Any resignation or removal of the Trustee under the Indenture
shall result in the simultaneous resignation or removal, as the case may be, of
the Trustee hereunder and any appointment of a successor Trustee under
<PAGE>
13
the Indenture shall result in the simultaneous appointment of the same successor
Trustee hereunder.
(f) The Trustee shall be deemed to have exercised reasonable care
in the custody and preservation of the Collateral in its possession if the
Collateral is accorded treatment substantially equal to that which a reasonable
person accords its own property, it being understood that neither the Trustee
nor the holders of the Notes shall have responsibility for (i) ascertaining or
taking action with respect to calls, conversions, exchanges, maturities, tenders
or other matters relative to any Collateral, whether or not any such Person has
or is deemed to have knowledge of such matters, or (ii) taking any necessary
steps to preserve rights against any parties with respect to any Collateral.
(g) Notwithstanding anything herein to the contrary, the
exculpations, immunities and protections available to the Trustee under the
Indenture shall be available to the Trustee hereunder.
17. Notices. Any communication, notice or demand to be given hereunder
shall be in writing and delivered in person or mailed by first class mail,
postage prepaid, addressed as follows: If to the Trustee: ;
if to the Company: . Notice may also be
given in such other form and manner or to such other address as shall be
designated by any party hereto to each other party hereto in a written notice
delivered in accordance with the terms of the Indenture.
18. No Waiver; Cumulative Rights. No failure on the part of the Trustee
to exercise, and no delay in exercising, any right, remedy or power hereunder
shall operate as a waiver thereof, nor shall any single or partial exercise by
the Trustee of any right, remedy or power hereunder preclude any other or future
exercise of any other right, remedy or power. Each and every right, remedy and
power hereby granted to the Trustee or allowed it by law or other agreement
shall be cumulative and not exclusive the one of any other, and may be exercised
by the Trustee from time to time.
19. Benefits of Pledge Agreement. Nothing in this Pledge Agreement,
whether express or implied, shall give to any Person other than the parties
hereto and their successors hereunder, and the holders of the Notes, any benefit
or any legal or equitable right, remedy or claim under this Pledge Agreement.
<PAGE>
14
20. Applicable Law. THIS PLEDGE AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL 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 LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
21. Calculation of Interest. For purposes of this Agreement, all
calculations of the Secured Payments shall be calculated on the basis of a
360-day year of 12 30-day months, with interest accruing on the Notes at the
rate of % per annum and being payable semiannually in arrears on ,
and of each year, and interest on overdue installments of
interest, to the extent lawful, accruing at the rate of % per annum. References
to payments "in full" in this Pledge Agreement shall include, to the extent
lawful, payments of accrued overdue interest.
22. Execution in Counterparts. This Pledge Agreement may be executed in
any number of counterparts, each of which shall be an original, but such
counterparts shall together constitute one and the same instrument.
23. Settlement. Amounts, if any, held in the Pledge Account pending
settlement of purchase of the Pledged Securities shall constitute Collateral
hereunder, shall be held by the Trustee for the benefit of the holders of the
Notes and a portion thereof equal to the aggregate price paid for such Pledged
Securities shall be released by the Trustee (without further direction or
instruction required from any other party hereto) against delivery of such
Pledged Securities, and any excess funds remaining in the Pledge Account after
giving effect to such settlement shall be promptly forwarded to the Pledgor at
the following account:
Bank:
ABA No.:
Account Name:
24. Trust Indenture Act. From and after qualification of the Indenture
under the Trust Indenture Act, the Pledgor shall provide the annual opinion
required by Section 314(b) of the Trust Indenture Act and shall comply with
Section 314(d) thereof, to the extent applicable, in connection with any release
or substitution of Collateral hereunder.
<PAGE>
15
IN WITNESS WHEREOF, the parties hereto have caused this Pledge
Agreement to be duly executed all as of the day and year first above written.
NORTHEAST OPTIC NETWORKS, INC.
by
--------------------------
Name:
Title:
U.S. BANK TRUST NATIONAL
ASSOCIATION, as Trustee,
by
--------------------------
Name:
Title:
EXHIBIT 5.1
July 28, 1998
NorthEast Optic Network, Inc.
391 Totten Pond Road, Suite 401
Waltham, Massachusetts 02154
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-1 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), for the registration of (i) 6,325,000 shares of
Common Stock, $.01 par value per share (the "Shares"), of NorthEast Optic
Network, Inc., a Delaware Corporation (the "Company"), including 825,000 Shares
issuable upon exercise of an overallotment option granted by the Company and
(ii) $165,000,000 aggregate principal amount of Senior Notes due 2008
("Debentures").
The Shares are to be sold by the Company and certain selling stockholders
pursuant to an underwriting agreement (the "Equity Underwriting Agreement"), to
be entered into by and among the Company, the selling stockholders, and Credit
Suisse First Boston Corporation and Warburg Dillon Read LLC, as representatives
of the several underwriters named in the Equity Underwriting Agreement. The
Debentures are to be sold by the Company pursuant to an underwriting agreement
(the "Debt Underwriting Agreement") to be entered into by and among the Company
and Credit Suisse First Boston Corporation and Warburg Dillon Read LLC.
We have examined signed copies of the Registration Statement and all
exhibits thereto, all as filed with the Commission. We have also examined and
relied upon the original or copies of minutes of the meetings of the
stockholders and the Board of Directors of the Company, stock record books of
the Company, a copy of the ByLaws of the Company, as amended, a copy of the
Certificate of Incorporation of the Company, as amended, and such other
documents as we have deemed necessary for purposes of rendering the opinions
hereinafter set forth.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as copies, and the authenticity of the originals of such documents. Our
opinion expressed below with respect to the Debentures being binding obligations
of the Company is
<PAGE>
NorthEast Optic Network, Inc.
July 28, 1998
Page 2
qualified to the extent that it may be subject to or affected by (i) applicable
bankruptcy, insolvency, reorganization, moratorium, fraudulent transfer or other
laws relating to or affecting the rights of creditors generally, (ii) statutory
or decisional law concerning recourse by creditors to security in the absence of
notice and hearing, and (iii) duties and standards imposed on creditors,
including, without limitation, requirements of good faith, reasonableness and
fair dealing.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares and Debentures, to register and qualify the Shares and
Debentures for sale under all applicable state securities or "blue sky" laws.
Based upon and subject to the foregoing, we are of the opinion that the
Shares and Debentures have been duly authorized and, when issued and sold
pursuant to the Equity Underwriting Agreement and the Debt Underwriting
Agreement, respectively, (i) such Shares and Debentures will be validly issued,
fully paid and nonassessable and (ii) such Debentures will be binding
obligations of the Company.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement and to the use of our name therein and in
the related Prospectuses under the caption "Legal Matters." In giving such
consent, we do not hereby admit that we are in the category of persons whose
consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission.
It is understood that this opinion is to be used only in connection with
the offer and sale of the Shares and Debentures while the Registration Statement
is in effect.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions, and we disclaim any obligations to advise you of any
change in any of these sources of law or subsequent legal or factual
developments which might affect any matters or opinions set forth herein.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
NORTHEAST OPTIC NETWORK, INC.
AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN
1. Purpose
-------
The purpose of this 1998 Stock Incentive Plan (the "Plan") of NorthEast
Optic Network, Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's shareholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's shareholders.
Except where the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporations of NorthEast Optic Network, Inc.,
as defined in Section 424(f) of the Internal Revenue Code of 1986, as amended,
and any regulations promulgated thereunder (the "Code").
2. Eligibility
-----------
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other
stock-based awards (each, an "Award") under the Plan. Any person who has been
granted an Award under the Plan shall be deemed a "Participant".
3. Administration, Delegation
---------------------------
(a) Administration by Board of Directors. The Plan will be administered by
the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. No member of the Board shall be liable for any action
or determination relating to the Plan. All decisions by the Board shall be made
in the Board's sole discretion and shall be final and binding on all persons
having or claiming any interest in the Plan or in any Award. No director or
person acting pursuant to the authority delegated by the Board shall be liable
for any action or determination under the Plan made in good faith.
<PAGE>
(b) Delegation to Executive Officers. To the extent permitted by applicable
law, the Board may delegate to one or more executive officers of the Company the
power to make Awards and exercise such other powers under the Plan as the Board
may determine, provided that the Board shall fix the maximum number of shares
subject to Awards and the maximum number of shares for any one Participant to be
made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). At such time as the
common stock, $.01 par value per share, of the Company (the "Common Stock") is
registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the
Board shall appoint one such Committee of not less than two members, each member
of which shall be an "outside director" within the meaning of Section 162(m) of
the Code and a "non-employee director" as defined in Rule 16b-3 promulgated
under the Exchange Act." All references in the Plan to the "Board" shall mean a
Committee or the Board or the executive officer referred to in Section 3(b) to
the extent that the Board's powers or authority under the Plan have been
delegated to such Committee or executive officer.
4. Stock Available for Awards
--------------------------
(a) Number of Shares. Subject to adjustment under Section 4(c), Awards may
be made under the Plan for up to 2,436,105 shares of Common Stock (after giving
effect to a 2.5-for-1 stock split effected by means of a stock dividend on or
about July 29, 1998). If any Award expires or is terminated, surrendered or
canceled without having been fully exercised or is forfeited in whole or in part
or results in any Common Stock not being issued, the unused Common Stock covered
by such Award shall again be available for the grant of Awards under the Plan,
subject, however, in the case of Incentive Stock Options (as hereinafter
defined), to any limitation required under the Code. Shares issued under the
Plan may consist in whole or in part of authorized but unissued shares or
treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 4(c), for
Awards granted after the Common Stock is registered under the Exchange Act, the
maximum number of shares with respect to which an Award may be granted to any
participant under the Plan shall be 100,000 per calendar year. The
per-Participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m) of the Code.
(c) Adjustment to Common Stock. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or
- 2 -
<PAGE>
event, or any distribution to holders of Common Stock other than a normal cash
dividend, (i) the number and class of securities available under this Plan, (ii)
the number and class of security and exercise price per share subject to each
outstanding Option, (iii) the repurchase price per security subject to each
outstanding Restricted Stock Award, and (iv) the terms of each other outstanding
stock-based Award shall be appropriately adjusted by the Company (or substituted
Awards may be made, if applicable) to the extent the Board shall determine, in
good faith, that such an adjustment (or substitution) is necessary and
appropriate. If this Section 4(c) applies and Section 8(e)(1) also applies to
any event, Section 8(e)(1) shall be applicable to such event, and this Section
4(c) shall not be applicable.
5. Stock Options
-------------
(a) General. The Board may grant options to purchase Common Stock (each, an
"Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times and
subject to such terms and conditions as the Board may specify in the applicable
option agreement.
(e) Exercise of Option. Options may be exercised only by delivery to the
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of
- 3 -
<PAGE>
an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option, delivery
of an irrevocable and unconditional undertaking by a credit worthy broker to
deliver promptly to the Company sufficient funds to pay the exercise price, or
delivery by the Participant to the Company of a copy of irrevocable and
unconditional instructions to a credit worthy broker to deliver promptly to the
Company cash or a check sufficient to pay the exercise price;
(3) (i) by delivery of shares of Common Stock owned by the Participant
valued at their fair market value as determined by the Board in good faith
("Fair Market Value"), which Common Stock was owned by the Participant at least
six months prior to such delivery, (ii) by delivery of a promissory note of the
Participant to the Company on terms determined by the Board, or (iii) by payment
of such other lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. Restricted Stock
----------------
(a) Grants. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
- 4 -
<PAGE>
7. Other Stock-Based Awards
------------------------
The Board shall have 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.
8. General Provisions Applicable to Awards
---------------------------------------
(a) Transferability of Awards. Except as the Board may otherwise determine
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award under the Plan shall be evidenced by a
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each type
of Award may be made alone in addition or in relation to any other type of
Award. The terms of each type of Award need not be identical, and the Board need
not treat Participants uniformly.
(d) Termination of Status. The Board shall determine the effect on an Award
of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Extraordinary Corporate Transactions.
(1) Change in Control. A "Change of Control of the Company" (as
defined in Section 9) shall have the effects set forth in Section 9.
(2) Assumption of Options Upon Certain Events. The Board may grant
Awards under the Plan in substitution for stock and stock-based awards held by
employees of another corporation who become employees of the Company as a result
of a merger or consolidation of the employing corporation with the Company or
the
- 5 -
<PAGE>
acquisition by the Company of property or stock of the employing corporation.
The substitute Awards shall be granted on such terms and conditions as the Board
considers appropriate in the circumstances.
(f) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(h) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(i) Acceleration. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
9. Change in Control
-----------------
(a) Acceleration. Notwithstanding any other provision of the Plan and
except as otherwise provided in the relevant option agreement, in the event of a
"Change in
- 6 -
<PAGE>
Control of the Company" (as defined below), the exercise dates of all Options
(or the vesting of all Restricted Stock Awards or other stock based Awards, as
the case may be) granted to such Participant then outstanding shall be
accelerated in full and any restrictions on exercising outstanding options or
other Awards issued to such Participant pursuant to the Plan shall terminate.
For purposes of the Plan, the term "Change in Control of the Company" shall have
the following meaning: A "Change in Control of the Company" shall occur or be
deemed to have occurred only if (i) any "person", as such term is used in
Sections 13(d) and 14(d) of the Exchange Act (other than the Company, any
trustee or other fiduciary holding securities under an employee benefit plan of
the Company, or any corporation owned directly or indirectly by the stockholders
of the Company in substantially the same proportion as their ownership of stock
of the Company), becomes (after the date of the adoption of this Plan) the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities; (ii) during
any period of two consecutive years ending during the term of the Plan (not
including any period prior to the adoption of the Plan), individuals who at the
beginning of such period constitute the Board of Directors of the Company, and
any new director (other than a director designated by a person who has entered
into an agreement with the Company to effect any transaction described in clause
(i), (iii) or (iv) of this Section 9) whose election by the Board of Directors
or nomination for election by the Company's stockholders was approved by a vote
of at least two-thirds of the directors then still in office who were either
directors at the beginning of the period or whose election or whose nomination
for election was previously so approved, cease for any reason to constitute a
majority of the Board of Directors; (iii) the stockholders of the Company
approve a merger or consolidation of the Company with any other corporation,
other than (A) a merger or consolidation which would result in the voting
securities of the Company outstanding immediately prior thereto continuing to
represent (either by remaining outstanding or by being converted into voting
securities of the surviving entity) more than 50% of the combined voting power
of the voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (B) a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction)
in which no "person" (as hereinabove defined) acquires more than 50% of the
combined voting power of the Company's then outstanding securities; or (iv) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets.
(b) Consequences of Change in Control of the Company. Upon the occurrence
of a Change in Control of the Company, or the execution by the Company of any
agreement which results in a Change in Control of the Company, the Board shall
take any one or more of the following actions with respect to then outstanding
Awards:
- 7 -
<PAGE>
(i) provide that outstanding Options shall be assumed, or equivalent Options
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof), provided that any such Options substituted for Incentive
Stock Options shall satisfy, in the determination of the Board, the requirements
of Section 424(a) of the Code; (ii) in the event of a transaction resulting in a
Change in Control of the Company under the terms of which holders of Common
Stock will receive upon consummation thereof a cash payment for each share of
Common Stock surrendered pursuant to such transaction (the "Acquisition Price"),
provide that all outstanding Options shall terminate upon consummation of such
transaction and that Participants shall receive, in exchange therefor, a cash
payment equal to the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to such outstanding
Options (whether or not then exercisable), exceeds (B) the aggregate exercise
price of such Options; and (iii) provide that any other stock-based Awards
outstanding shall be assumed, or equivalent Awards shall be substituted, by the
acquiring or succeeding corporation (or an affiliate thereof).
10. Miscellaneous
-------------
(a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
(c) Effective Date and Term of Plan. The Plan shall become effective on the
later of (i) date on which it is adopted by the Board and (ii) the date of the
closing of the IPO. No Awards shall be granted under the Plan after the
ocompletion of ten years from the earlier of (i) the date on which the Plan was
adopted by the Board or (ii) the date the Plan was approved by the Company's
shareholders, but Awards previously granted may extend beyond that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time, provided that no amendment shall be made
without stockholder approval if such approval is necessary to comply with any
applicable tax or regulatory requirements. Amendments requiring stockholder
approval shall become effective when adopted by the Board, but no Award granted
to a
- 8 -
<PAGE>
Participant designated as subject to Section 162(m) by the Board shall become
exercisable, realizable or vested (to the extent that such amendment to the Plan
was required to grant such Award to a particular Participant) unless and until
such amendment shall have been approved by the Company's shareholders.
(e) Governing Law. The provisions of the Plan and all Awards made hereunder
shall be governed by and interpreted in accordance with the laws of the State of
Delaware, without regard to any applicable conflicts of law.
(f) Stockholder Approval. For purposes of the Plan, stockholder approval
shall mean approval by a vote of Stockholders in accordance with Section 162(m)
of the Code.
Adopted by the Board of Directors on July __, 1998
Approved by the Stockholders on July __, 1998
- 9 -
[Draft--7/21/98]
INDEMNITY AGREEMENT, dated as of July ___, 1998, among
each individual who is a signatory hereto (each, an "S
Shareholder") and Northeast Optic Network, Inc., a Delaware
corporation (the "Company").
WHEREAS the Company was an "S corporation" within the meaning of
Section 1361(a)(1) of the Internal Revenue Code of 1986, as amended (the
"Code"), during the period beginning July 13, 1989 and ending July 28, 1994 and
the S Shareholders were the shareholders of the Company as of July 28, 1994; and
WHEREAS the Company is conducting an initial public offering, in
conjunction with which, the Company desires to obtain from the S Shareholders
and the S Shareholders are willing to provide an indemnity for the period during
which the Company was an S corporation.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements herein made, the parties hereto hereby agree as follows:
SECTION 1. Tax Indemnification. (a) Each S Shareholder executing this
Indemnity Agreement shall indemnify the Company and hold it harmless from all
liability for his or her Allocable Share of:
(i) Federal income Taxes attributable to the failure of the
Company to be an S corporation (within the meaning of Section
1361(a)(1) of the Code) at all times during each taxable year included
in the period beginning July 13, 1989 and ending July 28, 1994;
(ii) state, local or foreign income or franchise Taxes in the
jurisdictions set forth in Schedule A attributable to the failure of
the Company to be an "S corporation" under the comparable provisions
of the laws of such jurisdictions at all times during each taxable
year included in the period beginning July 13, 1989 and ending July
28, 1994; and
(iii) all liability for reasonable legal fees and expenses
attributable to any item in clause (i) or (ii) above.
<PAGE>
2
(b) The Allocable Share of each S Shareholder shall be:
<TABLE>
<CAPTION>
Shareholder Allocable Share
----------- ---------------
<S> <C>
Charles Aucoin 2.8329%
Joseph A. Bruno 1.4164%
Victor Colantonio 50.9915%
Charles A. Decas 28.3286%
William Fotsch and Jay 5.0047%
Fotsch, as Joint Tenants
Michael Musen 11.4259%
</TABLE>
(c) For purposes of the indemnity provided in this Agreement, any
payments hereunder to the Company shall include such amount (the "Gross-Up") as
is necessary to hold the Company harmless on an after-Tax basis from all Taxes,
if any, required to be paid as a result of the Company's receiving or accruing
such payment (including in respect of a Gross-Up). Further, for purposes of
calculating the amount of Taxes under this Section 1.01(b), it shall be assumed
that such Taxes are payable at the highest effective statutory Federal, state,
local, foreign or provincial Tax rates that could apply to the Company with
respect to the relevant payment for the relevant period.
(d) If at any time and from time to time the Company notifies an S
Shareholder in writing (i) that the Company is entitled to indemnification
pursuant to this Section 1 and (ii) of the amount of indemnification due (the
"Indemnity Amount") showing (x) the liability incurred by the Company for Taxes
set forth in Section 1(a)(i) and (ii) and for fees and expenses set forth in
Section 1(a)(iii), (y) such S Shareholder's Allocable Share thereof and (z) a
calculation of the Gross-Up payable by such S Shareholder pursuant to Section
1(c), then such S Shareholder shall, within 15 New York banking days after the
date of receipt of such written notice from the Company, transfer and deliver to
the Company payment in U.S. dollars in an amount equal to the Indemnity Amount
payable by such S Shareholder.
(e) For purposes of this Agreement, the term "Taxes" shall mean all
Federal, state and local, domestic and foreign, income, franchise, property,
sales, excise, employment, payroll, social security, value-added, ad valorem,
transfer, withholding and other taxes, including
<PAGE>
3
taxes based on or measured by gross receipts, profits, sales, use or occupation,
tariffs, levies, impositions, assessments or governmental charges of any nature
whatsoever, including any interest, penalties or additions with respect thereto.
SECTION 2. No Offset. Any payments required to be made pursuant to the
terms of this Agreement shall not be subject to offset for claims or other
payments required to be made under this Agreement or any other agreement.
SECTION 3. Successors and Assigns. None of the S Shareholders shall
assign or delegate its duties under this Agreement to any other person without
the Company's prior written consent, which may be given or withheld in the
Company's sole discretion. This Agreement shall inure to the benefit of and
shall be binding upon the heirs, executors, administrators or other
representatives, successors and assigns of the respective parties hereto.
SECTION 4. Governing Law. This Agreement and the rights of the parties
hereunder shall be governed by and construed in accordance with the law of the
State of New York.
SECTION 5. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed an original but all of which when
taken together shall constitute one and the same instrument.
SECTION 6. Effectiveness. This Agreement shall become effective as to
each S Shareholder upon execution of this Agreement by such S Shareholder.
<PAGE>
4
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed the day and year first above written.
Northeast Optic Network, Inc.,
by
-------------------------------
Name:
Title:
Charles Aucoin
-------------------------------
Joseph A. Bruno
-------------------------------
Victor Colantonio
-------------------------------
Charles A. Decas
-------------------------------
William Fotsch and Jay Fotsch, as
joint tenants
-------------------------------
Michael Musen
-------------------------------
Exhibit 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
and to all references to our Firm included in or made a part of this
Registration Statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
July 7, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001062233
<NAME> NorthEast Optic Network, Inc.
<MULTIPLIER> 1
<CURRENCY> U.S DOLLARS
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 MAR-31-1998
<EXCHANGE-RATE> 1 1
<CASH> 1,098,452 1,232,254
<SECURITIES> 0 0
<RECEIVABLES> 1,034,391 168,740
<ALLOWANCES> 0 0
<INVENTORY> 0 0
<CURRENT-ASSETS> 2,515,149 2,006,262
<PP&E> 16,972,533 20,269,596
<DEPRECIATION> 437,830 640,173
<TOTAL-ASSETS> 23,461,000 26,183,672
<CURRENT-LIABILITIES> 5,978,160 7,506,645
<BONDS> 0 0
0 0
10,410 10,410
<COMMON> 2,848 2,848
<OTHER-SE> 9,300,966 9,007,812
<TOTAL-LIABILITY-AND-EQUITY> 23,461,000 26,183,672
<SALES> 0 0
<TOTAL-REVENUES> 394,704 151,363
<CGS> 1,137,943 247,386
<TOTAL-COSTS> 2,693,037 774,521
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 141,811 91,816
<INCOME-PRETAX> (1,221,026) (370,154)
<INCOME-TAX> (261,000) (77,000)
<INCOME-CONTINUING> (960,026) (293,154)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (960,026) (293,154)
<EPS-PRIMARY> (3.37) (1.03)
<EPS-DILUTED> (3.37) (1.03)
</TABLE>
