<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
FOR THE QUARTER ENDED September 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from -to -
---- ----
COMMISSION FILE NUMBER 000-24653
NORTHEAST OPTIC NETWORK, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3056279
(State or other jurisdiction of incorporation (I.R.S. Identification No.)
or organization)
2200 West Park Drive
Westborough, MASSACHUSETTS 01851
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(508) 616-7800
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes /X/ No / /
At September 30, 1999 there were 16,284,317 shares of the Company's common stock
outstanding.
Page 1 of 20
Exhibit Index at Page 20
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS:
Condensed Consolidated Balance Sheets at September 30, 1999 (Unaudited)
and December 31, 1998.........................................................3
Condensed Consolidated Statements of Operations for the three month and the nine
month periods ended September 30, 1999 and September 30, 1998
(Unaudited)...................................................................4
Condensed Consolidated Statements of Cash Flows for the nine month periods ended
September 30, 1999 and September 30, 1998
(Unaudited)..................................................................5
Notes to Condensed Consolidated Financial Statements.........................6
-------------------
Page 2 of 20
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 5,786,381 $ 57,737,792
Short-term restricted cash and investments 22,229,773 23,149,975
Short-term investments 73,527,466 48,581,949
Accounts receivable, net of allowances of $(280,927) and
$(212,727) at September 30, 1999 and December 31,1998,
respectively 1,292,295 111,915
Prepaid expenses and other current assets 800,823 506,947
Refundable taxes from related party -- 755,838
------------- -------------
Total current assets 103,636,738 130,844,416
------------- -------------
PROPERTY AND EQUIPMENT, NET 87,806,020 52,922,677
LONG-TERM RESTRICTED CASH AND INVESTMENTS 31,272,307 51,371,859
INTANGIBLE ASSETS, NET OF ACCUMULATED AMORTIZATION OF $3,576,464
AND $1,460,191, RESPECTIVELY 57,558,538 56,773,282
------------- -------------
$ 280,273,603 $ 291,912,234
------------- -------------
------------- -------------
CURRENT LIABILITIES:
Current maturities of long-term obligations $ -- $ 127,619
Accounts payable 1,124,963 322,285
Accounts payable - network 11,667,220 2,647,719
Accrued expenses 6,745,085 13,526,702
Accrued right-of-way fees, related party 886,322 1,084,325
Deferred revenue 1,053,927 1,168,900
------------- -------------
Total current liabilities 21,477,517 18,877,550
------------- -------------
LONG-TERM ACCOUNTS PAYABLE 4,293,488 --
------------- -------------
LONG-TERM OBLIGATIONS, NET OF CURRENT MATURITIES (Note 4) 180,000,000 180,000,000
------------- -------------
COMMITMENTS AND CONTINGENCIES (Note 3)
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value-
Authorized--30,000,000 shares; 16,284,317 and 16,066,333
shares issued and outstanding at September 30, 1999 and
December 31, 1998, respectively 162,843 160,663
Warrants -- 8,595
Additional paid-in capital 109,037,405 108,105,684
Accumulated deficit (34,697,650) (15,240,258)
------------- -------------
Total stockholders' equity 74,502,598 93,034,684
------------- -------------
$ 280,273,603 $ 291,912,234
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
Page 3 of 20
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
<S> <C> <C> <C> <C>
REVENUES:
Contract $ 1,023,977 $ 155,766 $ 2,182,918 $ 481,684
Other service 595,440 16,395 1,000,300 24,253
----------- ----------- ------------ -----------
Total revenues 1,619,417 172,161 3,183,218 505,937
----------- ----------- ------------ -----------
EXPENSES:
Cost of sales 1,843,655 546,504 4,221,186 1,604,782
Selling, general and
administrative 1,614,575 2,272,808 5,047,747 3,365,567
Depreciation and
amortization 1,904,083 491,633 3,904,934 1,107,291
----------- ----------- ------------ -----------
Total expenses 5,362,313 3,310,945 13,173,867 6,077,640
----------- ----------- ------------ -----------
Loss from operations (3,742,896) (3,138,784) (9,990,649) (5,571,703)
----------- ----------- ------------ -----------
OTHER INCOME (EXPENSE):
Interest income and other,
net 1,816,213 1,615,895 6,058,878 1,702,767
Interest expense (5,356,351) (3,275,400) (15,525,621) (3,732,439)
----------- ----------- ------------ -----------
Total other income
(expense) (3,540,138) (1,659,505) (9,466,743) (2,029,672)
----------- ----------- ------------ -----------
Loss before minority interest
in subsidiaries' earnings and
benefit from income taxes (7,283,034) (4,798,289) (19,457,392) (7,601,375)
MINORITY INTEREST - - - 1,108,933
(BENEFIT FROM) INCOME
TAXES - - - (564,480)
LOSS BEFORE EXTRAORDINARY
ITEM (7,283,034) (4,798,289) (19,457,392) (5,927,962)
EXTRAORDINARY ITEM - (1,335,004) - (1,335,004)
----------- ----------- ------------ -----------
NET LOSS $(7,283,034) $(6,133,293) $(19,457,392) $ (7,262,966)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
BASIC AND DILUTED NET LOSS PER
SHARE BEFORE EXTRAORDINARY ITEM
$ (0.45) $(0.48) $(1.21) $(1.66)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
BASIC AND DILUTED NET LOSS PER
SHARE AFTER EXTRAORDINARY ITEM
$(0.45) $(0.61) $(1.21) $(2.03)
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
BASIC AND DILUTED WEIGHTED
AVERAGE SHARES OUTSTANDING 16,222,425 10,063,870 16,124,868 3,581,332
----------- ----------- ------------ -----------
----------- ----------- ------------ -----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
Page 4 of 20
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
1999 1998
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (19,457,392) $ (7,262,966)
Adjustments to reconcile net loss to net cash (used in)
provided by operating activities-
Extraordinary item - write-off of deferred financing costs -- 1,335,004
Compensation expense related to the issuance of stock
options to non-employees 293,441 --
Loss on disposal of property and equipment -- 8,953
Accretion of long-term obligations -- 62,165
Amortization of deferred financing costs 469,983 104,365
Depreciation and amortization 3,904,934 1,107,291
Changes in assets and liabilities-
Accounts receivable (1,180,380) 901,311
Refundable taxes from related party 755,838 (387,104)
Prepaid expenses and other current assets (293,876) (369,368)
Accounts payable 802,678 402,280
Accrued expenses (6,979,620) 4,455,326
Deferred revenue (114,973) 205,538
Deferred tax liability -- 25,000
------------- -------------
Net cash (used in) provided by operating activities (21,799,367) 587,795
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments, net (24,945,517) (47,939,097)
Purchases of property and equipment (39,594,012) (26,087,605)
Increase in intangible assets (449,504) (6,348,484)
------------- -------------
Net cash used in investing activities (64,989,033) (80,375,186)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in accounts payable - network and long-term
accounts payable 13,312,989 370,457
Proceeds from issuance of long-term obligations -- 180,000,000
Proceeds from note payable to related party -- 15,775,000
Payments on long-term obligations (127,619) (19,785,098)
Decrease (increase) in restricted cash and investments 21,019,754 (72,698,790)
Proceeds from exercise of stock options and warrants 631,865 32,153
Proceeds from initial public offering -- 43,782,528
Minority interest in subsidiary -- (1,108,933)
------------- -------------
Net cash provided by financing activities 34,836,989 146,367,317
------------- -------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (51,951,411) 66,579,926
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 57,737,792 1,098,452
------------- -------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 5,786,381 $ 67,678,378
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for-
Interest $ 23,943,837 $ 636,861
------------- -------------
------------- -------------
Taxes $ -- $ 34,883
------------- -------------
------------- -------------
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Goodwill recorded in connection with the Reorganization $ -- $ 47,871,068
------------- -------------
------------- -------------
Conversion of Minority Interest into Series A convertible
preferred stock in connection with the Reorganization $ -- $ 4,229,853
------------- -------------
------------- -------------
Exercise of CMP warrant $ -- $ 532,836
------------- -------------
------------- -------------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS.
Page 5 of 20
<PAGE>
(1) OPERATIONS AND REORGANIZATION
NorthEast Optic Network, Inc. (the Company or NEON) (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.
On August 5, 1998, the Company completed an initial public offering (IPO)
of 4,500,000 shares of its common stock at $12.00 per share, and sold
$180 million of 12-3/4% Senior Notes due 2008 (the Senior Notes) to the
public in a debt offering.
To date, the Company has recorded limited revenues principally from
contract and other services and has incurred cumulative operating losses.
The Company is 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 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.
(2) SIGNIFICANT ACCOUNTING POLICIES
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) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission, and reflect all
adjustments, consisting of only normal recurring adjustments,
which, in the opinion of management, are necessary for a fair
statement of the results of the interim periods presented. These
financial statements do not include disclosures associated with
the annual financial statements and, accordingly, should be read
in conjunction with the attached Management's Discussion and
Analysis of Financial Condition and Results of Operation and the
financial statements and footnotes for the year ended December 31,
1998 included in the Company's Form 10-K.
(b) 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.
(c) REVENUE RECOGNITION
Revenues on telecommunications network services are recognized
ratably over the term of the applicable agreements with customers,
which range from 1 to 20 years. Other service revenue, which
consists primarily of design and installation work, is recognized
as services are performed.
(d) EARNINGS PER SHARE
In accordance with SFAS No. 128, EARNINGS PER SHARE, basic and
diluted loss per share were computed by dividing net loss by the
weighted average number of common shares outstanding during the
first nine months of 1999 and 1998. Diluted net loss per share
excludes shares issuable from the assumed exercise of stock
options, as their effect would be antidilutive.
(e) COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted Financial
Accounting Standards Board (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. The comprehensive
net loss is the same as reported net loss for all periods
presented.
(f) RECLASSIFICATIONS
Page 6 of 20
<PAGE>
Certain prior period amounts have been reclassified to conform
with current period presentation.
(3) CONTINGENCIES
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 they believe there is no potential liability.
(4) 12-3/4% SENIOR NOTES
In August 1998, the Company sold $180 million of 12-3/4% Senior Notes due
2008 to the public in the debt offering. The Senior Notes are due on
August 15, 2008 and scheduled interest payments are due on February 15
and August 15 of each year, commencing February 15, 1999. Upon closing of
the Senior Notes, the Company purchased approximately $72 million in U.S.
government obligations, with an average maturity of 645 days, to provide
for payment in full of the first seven scheduled interest payments on the
Senior Notes. Such securities are pledged as security for the benefit of
the holders of the Senior Notes, are classified as held-to-maturity and
reported at amortized cost and are included as restricted cash and
investments in the accompanying consolidated balance sheet. The Senior
Notes are redeemable in whole or in part at the option of the Company at
any time on or after August 15, 2003 at the following redemption prices
expressed as a percentage of principal plus accrued interest through the
date of redemption:
<TABLE>
<CAPTION>
PERIOD REDEMPTION
PRICE
<S> <C>
2003 106.375%
2004 104.250
2005 102.125
Thereafter 100.000
</TABLE>
In the event of a change in control, as defined, each holder of the notes
will be entitled to require the Company to purchase all or a portion of
such holder's Senior 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. The Senior Notes are unsecured obligations and rank
PARI PASSU in right of payment with all existing and future indebtedness
of the Company that is not by its terms in right of payment and priority
to the Senior Notes and is senior in right of payment to all future
subordinated indebtedness of the Company.
In connection with this financing, the Company incurred approximately
$6.3 million of issuance costs. These costs have been classified as
intangible assets in the accompanying condensed consolidated balance
sheets and are being amortized, as interest expense, over the term of the
Notes.
(5) STOCKHOLDERS' EQUITY
(a) 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 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. At September 30,
1999, no such shares are issued and outstanding.
Page 7 of 20
<PAGE>
(b) COMMON STOCK
In June 1998, the Company's Board of Directors authorized the
issuance of up to 30,000,000 shares of common stock.
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.
On August 5, 1998, the Company completed the sale of 4,500,000
shares of its Common Stock at a price of $12.00 per share. Of the
aggregate shares of Common Stock sold, 4,000,000 were sold for the
account of the Company generating net proceeds to the Company of
approximately $44,640,000 and 500,000 shares were sold for account
of certain stockholders of the Company.
(6) DISCLOSURE ABOUT SEGMENTS OF THE ENTERPRISE AND SIGNIFICANT CUSTOMERS
In fiscal year ended December 31, 1998 the Company adopted 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. The Company analyzes segment reporting based on dark fiber
and lit fiber facilities revenue only.
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER, 30
1999 1998 1999 1998
<S> <C> <C> <C> <C>
Dark fiber revenues $ 540,866 $ 86,166 $1,381,253 $ 412,084
Lit fiber revenues 483,111 69,600 801,665 69,600
--------- --------- --------- ---------
Total contract revenues $1,023,977 $ 155,766 $2,182,918 $ 481,684
--------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
SFAS No. 105, Disclosure of information about financial instruments with
off balance sheet risk and financial instruments with concentration of
credit risk requires disclosure of any significant off-balance sheet and
credit risk concentration. Financial instruments that potentially expose
the Company to concentrations of credit risk consist primarily of cash
and cash equivalents, short-term investments and accounts receivable. The
Company has not experienced significant losses related to receivables
from any individual or groups of customers or any specific industry or
geographic region. Due to these factors, no additional credit risk is
believed by management to be inherent in the Company's accounts
receivable. For the nine months ended September 30, 1999 and September
30, 1998, 6 and 2 customers represented 76% and 78% of revenues,
respectively. At September 30, 1999 and December 31, 1998, 4 and 2
customers represented 66% and 78% of accounts receivable, respectively.
-----------------------------------------
Page 9 of 20
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CAUTIONARY STATEMENT
In addition to historical information contained herein, this report
contains certain "forward looking statements" within the meaning of
section 27A of the Securities Act of 1933, as amended, and Section 21E
of the Securities and Exchange Act of 1934, as amended, and are subject
to the safe harbors created thereby. All statements included in this
report regarding the Company's financial position, business strategy
and plans, objectives for the future operations, technical
developments, Year 2000 compliance and industry conditions--other than
statements of historical facts--are forward looking statements. While
these statements reflect the Company's reasonable assumptions, based
upon management's beliefs and information currently available to it,
the company can give no assurance that such expectations will prove to
be correct.
These forward looking statements are subject to certain risks,
uncertainties and assumptions related to certain factors including
without limitation, the factors described under the heading "Certain
Factors That May Affect Future Results" below.
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 1000 route miles, or approximately 65,000
fiber miles, in New York and New England ("the Northeast").
The Company generates revenue primarily through 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 when services are performed.
RESULTS OF OPERATIONS
Revenues for the quarter ended September 30, 1999 were $1,619,417,
an increase of $1,447,256 or 841% compared to $172,161 in the same
quarter in 1998. The increase in revenues reflects the Company's
continuing expansion of lit services on the system, coupled with
recurring collocation revenues as well as the leased dark fibers to
existing customers that came on line during 1998 and 1997. Other
service revenue during the quarter consists of design, engineering
and installation work associated with the build-out of our
facilities.
Revenues for the nine months ended September 30, 1999 were
$3,183,218 compared to $505,937 for the nine months ended September
30,1998 which represents an increase of $2,677,281 or 529%. The
increase in revenue reflects the Company's continued penetration
into the Northeast service territory.
Cost of sales for the three months ended September 30, 1999 were
$1,843,655 an increase of $1,297,151 compared to $546,504 in the
same period last year. The increased costs reflect the addition of
lease expenses, right of way fees and property taxes resulting from
the Company's continuing network expansion into the Northeast
service territory.
Cost of sales for the nine months ended September 30, 1999 amounted
to $4,221,186 compared to $1,604,782 in the same period last year,
an increase of $2,616,404 or 163%. The increased costs reflect the
continuing build-out and expansion of the communications network
into the Northeast service territory.
Selling, general and administrative expenses were $1,614,575 for
the quarter ending September 30, 1999 compared to $2,272,808 for
the same quarter in 1998, which represents a decrease of $658,233
or 29% . The decrease in expenses primarily reflects the one time
bonus payment of $1.0 million made in September 1998.
<PAGE>
Selling, general and administrative expenses for the nine months ended
September 30,1999 were $5,047,747, an increase of $1,682,180 or 50%.
Increased personnel and related costs to develop management and sales
activities continue to grow as the Company expands its efforts to meet
customer requirements. The Company's headcount has increased to 40 at
September 30, 1999 from 14 or approximately 186% since September 30,
1998.
Depreciation and amortization expense was $1,904,083 for the quarter
ended September 30, 1999 compared to $491,633 for the quarter ended
September 30, 1998.
Depreciation and amortization expense was $3,904,934 for the nine months
ended September 30, 1999 compared to $1,107,291 for the same nine month
period as of September 30,1998. The increase resulted from putting into
service
Page 10 of 20
<PAGE>
additional portions of the NEON System and the amortization of goodwill
resulting from the reorganization on July 8, 1998 referred to below.
Net interest expense totaled $3,540,138 and $1,659,505 for the quarters
ending September 30,1999 and September 30,1998, respectively. For the
nine month periods ending September 30,1999 and September 30, 1998 net
interest expense was $9,466,743 and $2,029,672 respectively. The
increased interest expense reflects the sale of $180.0 million of 12 3/4%
Senior Notes partially offset by the higher cash and investment balances
resulting from the public offerings of debt and equity on August 5, 1998.
(See Note 1).
The Company's net loss for the quarter ended September 30, 1999 was
$7,283,034 or $0.45 per share loss. This compares to a net loss before
extraordinary item of $4,798,298 or $.48 per share net loss in the same
period last year. If the reorganization had occurred on January 1, 1998
instead of July 8,1998,the pro forma per share net loss before
extraordinary item for the quarter ended September 30, 1998 would have
been $0.30. The Company's net loss for the nine months ended
September 30, 1999 was $19,457,392 or $1.21 per share net loss. This
compares to a net loss before extraordinary item of $5,927,962 or $1.66
per share net loss in the same nine month period last year. If the
reorganization had occurred on January 1, 1998 instead of July 8,1998,the
pro forma per share net loss before extraordinary item for the nine
months ended September 30, 1998 would have been $0.37. The
extraordinary item in the third quarter ending September 30, 1998
amounted to $1,335,004 and would have been a per share net loss of
$0.08. The extraordinary item represented the write off of deferred
financing costs associated with two construction loans repaid in the
third quarter with the proceeds from the Company's public offerings.
On July 8, 1998, the Company's entered into a Restructuring and
Contribution Agreement (the "Reorganization") with major shareholders
Central Maine Power Company ("CMP"), Maine Com Services, a wholly owned
subsidiary of CMP, and Mode 1, an affiliate of Northeast Utilities ("NU")
(see Note 1 to the Consolidated Financial Statements included in the
Company's Form 10K for the year ended December 31, 1998).
LIQUIDITY AND CAPITAL RESOURCES
Net cash (used in) provided by operating activities was $(21,799,367)and
$587,795 for the quarters ended September 30, 1999 and 1998,
respectively. Net cash used by operating activities for the quarter ended
September 30, 1999 was due primarily to the net operating loss of the
Company.
Cash used in investing activities totaled $64,989,033 and $80,375,186 for
the nine months ended September 30, 1999 and 1998, respectively. Cash
requirements consisted primarily of the cost of network construction and
equipment, and purchases of short-term investments.
Cash flow from financing activities totaled $34,836,989 and $146,367,317
for the nine months ended September 30, 1999 and 1998, respectively. Cash
flow from financing activities during the nine months ended September 30,
1999 was due to a decrease in restricted cash and investments associated
with the payment of interest amounting to $22,950,000 on the 12 3/4%
Senior Notes and an increase in network and long-term accounts payable.
Cash flow from financing activities during the nine months ended
September 30,1998 was due primarily to the completed initial public
offerings of 4,000,000 common shares at $12.00 and sold $180.0 million of
12 3/4% Senior Notes and an advance on a construction loan from CMP.
The Company anticipates that it will continue to experience negative cash
flow as it expands the NEON fiber optic network, constructs additional
networks and markets its services to an expanding customer base. 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 the proceeds from the August 5, 1998 Public
Offering to fund this expansion and development. Management believes it
has sufficient funds to substantially complete the NEON system as
currently planned as well as fund the Company's other working capital
requirements. The expectations of 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.
<PAGE>
YEAR 2000 READINESS
The Year 2000 issue is faced by substantially every company in the
computer or information technology industries, as well as every company
which relies on computer systems. The Company has assessed its exposure
to the
Page 11 of 20
<PAGE>
Year 2000 problem in the following major areas: (i) Year 2000 problems
relating to the Company's internal systems; (ii) Year 2000 problems of
the Company's critical vendors, namely those that could have a material
adverse effect on the Company's business, results of operations or
financial condition; and (iii) Year 2000 problems of the Company's
customers that could result in a reduction in demand for the Company's
fiber optic products and services.
INTERNAL SYSTEMS. The Company has determined the nature and extent of the
work required to make its internal information technology ("IT") and
non-IT systems Year 2000 compliant and has used a third party consultant
to assist it in this effort. The Company's internal information systems
consist of accounting and project management software. The licensors of
the software have advised the Company that their products are Year 2000
compliant. The Company is also evaluating its non-IT systems such as
micro-controllers. The Company has yet to determine whether these systems
will be remedied or replaced. However, all current hardware and software
used by the Company is less than two years old, and the Company does not
foresee a material adverse effect on the Company's business, operating
results and financial condition from Year 2000 issues related to its
internal software or hardware. The Company's costs of addressing its Year
2000 issues amounted to less than $10,000.
CRITICAL VENDORS. The Company relies on third party vendors of products
and services in the conduct of its business and as a result, received
assurances from its critical vendors that there will not be a material
interruption in their supply of those products and services as a result
of the Year 2000 problem. Failure of a critical supplier to solve a Year
2000 problem in its accounting systems, production control and/or
shipping systems could have a material adverse effect on the Company's
business, operating results and financial condition. From the responses
the Company has received to date, the Company's critical vendors are
either Year 2000 compliant or have developed or put in place an
aggressive and comprehensive readiness strategy. The Company's fiber
optic network system (the "NEON" system) is also dependent upon the
transmission and distribution infrastructure of electric utilities in the
Northeast. Should one or more of these utilities experience disruption in
providing electricity to their customers as a result of a Year 2000
problem, the utility has the right under its agreements with the Company
to take the necessary action to restore electrical service to their
customers, which could in turn disrupt the operation of the NEON system.
However, these electric utilities are committed to minimizing risks to
the NEON system and to providing adequate resources to implement any
changes necessary to be Year 2000 compliant. See "Certain Factors That
May Affect Future Results C ROWS AND IRUS" below).
CUSTOMERS. The Company is also conducting a survey of its major customers
to determine their Year 2000 readiness. Although responses to date
indicate that they are either Year 2000 compliant or have put in place a
comprehensive readiness strategy, there can be no assurance that the
Company's customers will not delay scheduled projects as a result of
their own Year 2000 problems. Any such delays could have a material
adverse effect on the Company's business, operating results and financial
condition. To date the Company has not experienced any lack of demand for
its services related to the Year 2000 problem.
The Company through September 30, 1999 has not incurred nor does it
expect to incur any material
Page 12 of 20
<PAGE>
costs directly related to the Year 2000 computer problem. Pending
continuing investigation of its exposure to the Year 2000 problem the
Company is unable to determine the costs of solving any Year 2000 problem
that may occur in the future.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The future financial and operating results of the Company remain
difficult to predict and are subject to various risks and uncertainties
described below as well as elsewhere in this Report.
LIMITED OPERATING HISTORY; CASH FLOW. The Company's current business has
only a very limited history. As a facilities-based provider of fiber
optic transmission capacity, the Company is in the early stages of
constructing the NEON system throughout the Northeast. Although portions
of the NEON system are currently operational, the Company does not expect
to begin to realize any substantial revenue until the NEON system is
substantially completed. The Company does not expect to achieve
substantial completion of the NEON system as currently planned until the
end of the first quarter in the year 2000. The Company has incurred net
losses from inception. 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 rights-of-way ("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.
COMPLETION OF THE NEON SYSTEM. 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. There can be no assurance that the Company will not
need to obtain additional capital to complete the NEON system, 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.
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 or the failure of third-party suppliers or contractors to meet
their obligations in a timely and cost-effective manner.
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
Page 13 of 20
<PAGE>
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. 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. 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.
CUSTOMERS; MARKET DEMAND. The Company's ability to implement its business
strategy is also 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. 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.
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.
The Company is aware that certain inter-exchange carriers are
constructing or considering the construction of new networks, or buying
companies with local networks, which could reduce their need for the
Company's services.
DEPENDENCE ON MANAGEMENT. The Company's future performance will depend to
a significant extent upon the efforts and abilities of its senior
executives. There can be no assurance that the Company will be able to
attract and retain qualified executives to achieve its business
operations.
ROWS AND IRUS. 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 NU 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 agreements with NU would be recognized in the
event of the foreclosure of the related mortgage. Although agreements
have been obtained from certain of the indenture trustees, if such an
agreement is not obtained from the trustees for one or more of the NU
companies, a default by any such company under its mortgage that resulted
in the foreclosure of the mortgage
Page 14 of 20
<PAGE>
could result in the Company losing its rights under the NU Agreements in
the state in which such company operates. The Company has not sought such
acknowledgments from CMP's indenture trustee because, unlike the NU
agreements, under the terms of the agreement with CMP, the Company is not
entitled to such acknowledgments. A default by CMP under its mortgage
that results 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, 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.
The agreements with NU and CMP 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.
COMPETITION. The telecommunications industry is highly competitive. The
Company faces substantial competition from incumbent local exchange
carriers ("ILECs"), which currently dominate their local
telecommunications markets, and competitive local exchange carriers
("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 interchange carriers ("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. 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. 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
"1996 Act"). The introduction of new products or emergence of new
technologies may reduce the cost or increase
Page 15 of 20
<PAGE>
the supply of certain services similar to those provided by the Company.
The Company cannot predict which of many possible future product and
service offerings will be crucial to maintain its competitive position or
what expenditures will be required to develop profitably and provide such
products and services.
REGULATORY RISKS. Regulation of the telecommunications industry is
changing rapidly. Existing and future federal, state, and local
governmental regulations will greatly influence the viability of the
Company. Consequently, undesirable regulatory changes could adversely
affect the Company's business, financial conditions and results of
operations. For instance, while the Company does not believe that its
fiber 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 to the extent its subsidiaries in New York and Connecticut offer
telecommunications services on a common carrier basis, 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. 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
interrelationships 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 obtained authority to provide telecommunications
services on a certificated common carrier basis. Therefore, such
subsidiaries are subject to the obligations that applicable law places on
all similarly certificated common carriers including: the filling 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.
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.
RELIANCE ON THIRD PARTIES; SOURCES OF SUPPLY. 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,
Page 16 of 20
<PAGE>
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. 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 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.
TECHNOLOGICAL CHANGES. The telecommunications industry is subject to
rapid and significant changes in technology. For instance, recent
technological advances permit substantial increases in transmission
capacity of both new and existing fiber and the introduction of new
products or emergence of new technologies may reduce the cost or increase
the supply of certain services similar to those provided by the Company.
OTHER FACTORS. 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.
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.
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, the Company, unlike some telecommunications companies,
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.
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
Page 17 of 20
<PAGE>
control of the Company that may cause interruptions in service or reduced
capacity for customers. 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.
The Company is highly leveraged. The Company's high degree of leverage
could have adverse consequences to the holders of the Company's
securities, including, among other things: (i) commencing on August 15,
2002, a substantial portion of the Company's cash flow will be dedicated
to the payment of the Company's interest expense with respect to the
Company's 12 3/4% Senior Notes (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. There can be no assurance that the Company
will be able to generate sufficient cash flow to pay its indebtedness and
its other obligations as they become due.
The indenture under which the Notes were issued imposes significant
operating and financing 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 or subsidiaries, guarantee certain indebtedness, sell
assets or consolidate, merge or transfer all or substantially all of
their assets.
CONTROLLING STOCKHOLDERS. CMP and NU beneficially own or control a
majority of the outstanding Common Stock of the Company. 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 and certain conflicts may arise
between the interests of CMP and NU and the security holders of the
Company.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risk related to changes in interest
rates, but does not believe that this exposure is material. The Company
does not use derivative financial instruments for speculative or trading
purposes.
INTEREST RATE SENSITIVITY
The Company maintains a short-term investment portfolio consisting mainly
of corporate debt securities and U.S. government agency discount notes
with an average maturity of less than six months. These held-to-maturity
securities are subject to interest rate risk and will fall in value if
Page 18 of 20
<PAGE>
market interest rates increase. If market interest rates were to increase
immediately and uniformly by 10% from levels that existed at September
30, 1999, the fair value of the portfolio would decline by an immaterial
amount. Since the Company has the ability to hold its fixed income
investments until maturity, the Company would not expect its operating
results or cash flows to be materially affected.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Exhibit 27 - Financial Data Schedule (EDGAR filing only)
(b) REPORTS ON FORM 8-K
No Reports on Form 8-K were filed during the quarter covered by
this Report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHEAST OPTIC NETWORK, INC.
(Registrant)
Date: Nov. 15, 1999 By: /s/ Vincent C. Bisceglia
-------------------------------------
Vincent C. Bisceglia
Chairman & Chief Executive Officer
Date: Nov. 15, 1999 By: /s/ William F. Fennell
-------------------------------------
William F. Fennell
Chief Financial Officer
Page 19 of 20
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
<S> <C>
27 Financial Data Schedule
</TABLE>
Page 20 of 20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 5,786,381
<SECURITIES> 95,757,239
<RECEIVABLES> 1,573,222
<ALLOWANCES> (280,927)
<INVENTORY> 0
<CURRENT-ASSETS> 103,636,738
<PP&E> 91,776,611
<DEPRECIATION> (3,970,591)
<TOTAL-ASSETS> 280,273,603
<CURRENT-LIABILITIES> 21,477,517
<BONDS> 180,000,000
0
0
<COMMON> 162,843
<OTHER-SE> 74,339,755
<TOTAL-LIABILITY-AND-EQUITY> 280,273,603
<SALES> 3,183,218
<TOTAL-REVENUES> 3,183,218
<CGS> 4,221,186
<TOTAL-COSTS> 9,268,933
<OTHER-EXPENSES> 3,904,934
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,525,621
<INCOME-PRETAX> (19,457,392)
<INCOME-TAX> 0
<INCOME-CONTINUING> (19,457,392)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (19,457,392)
<EPS-BASIC> (1.21)
<EPS-DILUTED> (1.21)
</TABLE>
