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SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to section 14(a) of the Securities Exchange Act of 1934
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<S> <C>
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted
by Rule 14a-6(e)(2))
/X/ Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section240.14a-12
NORTHEAST OPTIC NETWORK, INC.
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(Name of Registrant as Specified In Its Charter)
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(Name of Person(s) Filing Proxy Statement, if other than the
Registrant)
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Payment of Filing Fee (Check the appropriate box):
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/X/ No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(i)(1)
and 0-11.
(1) Title of each class of securities to which transaction
applies:
----------------------------------------------------------
(2) Aggregate number of securities to which transaction
applies:
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(3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (set forth the
amount on which the filing fee is calculated and state how
it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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/ / Fee paid previously with preliminary materials.
/ / Check box if any part of the fee is offset as provided by
Exchange Act Rule 0-11(a)(2) and identify the filing for which
the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or
Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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THE INFORMATION IN THIS PROXY STATEMENT/PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED WITHOUT NOTICE. WE MAY NOT ISSUE THESE SECURITIES UNTIL THE REGISTRATION
STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROXY STATEMENT/PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE
NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE
OFFER OR SALE IS NOT PERMITTED.
<PAGE>
SUBJECT TO COMPLETION, DATED JUNE 22, 2000
PROXY STATEMENT/PROSPECTUS
NorthEast Optic Network, Inc. NEON Communications, Inc.
Dear stockholders:
This proxy statement/prospectus is being provided to you in connection with
the 2000 Annual Meeting of Stockholders of NorthEast Optic Network, Inc. At that
meeting, you will be asked to consider a number of matters, as set forth in the
Notice of Annual Meeting that follows this page.
Among the matters you are being asked to consider at the Annual Meeting is
the approval of the issuance of shares of our common stock to Consolidated
Edison Communications, Inc. and Exelon Corporation in exchange for their
contributions of cash and fiber optic facilities. In connection with the
issuance of those shares, we are organizing a holding company, NEON
Communications, which will acquire and own all of the outstanding capital stock
of Northeast Optic Network, Inc. To create this holding company, we will merge
NEON Communications, a wholly-owned subsidiary of NorthEast Optic Network, into
NorthEast Optic Network. The effect of this merger will be to convert your
shares of NorthEast Optic Network common stock into shares of NEON
Communications common stock. You will receive one share of NEON Communications
common stock for each share of NorthEast Optic Network common stock you
currently own. This proxy statement also constitutes a prospectus for the shares
of NEON Communications common stock that you will receive in the reorganization.
This proxy statement/prospectus gives you detailed information about the
proposed reorganization and the other matters to be voted on at the Annual
Meeting.
YOU SHOULD READ THE "RISK FACTORS" ON PAGES 8 THROUGH 13 BEFORE VOTING.
Neither the Securities and Exchange Commission nor any state securities
regulators have approved or disapproved the NEON Communications common stock to
be issued in the reorganization, or determined if this proxy
statement/prospectus is truthful or complete. Any representation to the contrary
is a criminal offense.
This proxy statement/prospectus is dated June 22, 2000 and was first mailed
to stockholders of NorthEast Optic Network, Inc. on or about June 27, 2000.
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
------------------------
NOTICE OF 2000 ANNUAL MEETING OF STOCKHOLDERS
------------------------
Notice is hereby given that the Annual Meeting of Stockholders of NorthEast
Optic Network, Inc., a Delaware corporation (the "COMPANY"), will be held as
follows:
DATE: Wednesday, July 26, 2000
TIME: 9:00 a.m. local time
PLACE: The Ritz Carlton Hotel
15 Arlington Street
Boston, Massachusetts 02117
The meeting will be held to consider and vote upon the following matters:
1. To elect seven directors to serve until our 2001 annual meeting of
stockholders;
2. To approve (i) the continuance of our amended and restated 1998 stock
incentive plan, as amended to date, and (ii) the amendment of our amended
and restated 1998 stock incentive plan;
3. To approve the adoption of an amendment to our second amended and
restated certificate of incorporation in order to increase the shares of
common stock authorized for issuance from 30,000,000 shares to 60,000,000
shares;
4. To approve the issuance of shares of our common stock to Consolidated
Edison Communications, Inc. and Exelon Corporation in exchange for their
contribution to us of cash and assets consisting of fiber optic
facilities;
5. To ratify the selection of Arthur Andersen LLP as our independent public
accountants for the current year; and
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
The board of directors has fixed the close of business on Thursday, June 1, 2000
as the date for the determination of the stockholders of record entitled to
notice of, and to vote at, the meeting and at any adjournments of the meeting.
By order of the Board of Directors,
Roger M. Barzun, SECRETARY
June 22, 2000
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE, DATE,
SIGN AND RETURN THE ENCLOSED PROXY AND MAIL IT IN THE ENCLOSED ENVELOPE IN
ORDER TO ENSURE REPRESENTATION OF YOUR SHARES. NO POSTAGE NEED BE
AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.
<PAGE>
TABLE OF CONTENTS
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PAGE
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SUMMARY OF THE PROXY STATEMENT/PROSPECTUS................... 1
STATEMENTS REGARDING FORWARD-LOOKING INFORMATION............ 6
SELECTED HISTORICAL FINANCIAL DATA OF NORTHEAST
OPTIC NETWORK, INC........................................ 7
RISK FACTORS................................................ 9
ANNUAL MEETING OF STOCKHOLDERS OF NORTHEAST OPTIC NETWORK,
INC....................................................... 15
PROPOSAL 1--ELECTION OF DIRECTORS........................... 15
Security Ownership of Certain Beneficial Owners
and Management.......................................... 18
Compensation of Executive Officers........................ 19
Stock Performance Graph................................... 27
PROPOSAL 2--APPROVAL OF THE CONTINUANCE OF AND AMENDMENT TO
THE AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN........ 28
PROPOSAL 3--AMENDMENT TO THE CERTIFICATE OF INCORPORATION... 32
PROPOSAL 4--APPROVAL OF ISSUANCE OF SHARES TO CONSOLIDATED
EDISON COMMUNICATIONS AND EXELON CORPORATION.............. 33
Description of NEON Communications Capital Stock.......... 38
Comparison of Capital Stock............................... 38
Market Price of Northeast Optic Network Common Stock...... 39
Dividends................................................. 39
Unaudited Pro Forma Capitalization........................ 40
Management's Discussion and Analysis of Financial
Condition
and Results of Operations............................... 41
Business.................................................. 47
Management................................................ 57
PROPOSAL 5--RATIFICATION OF THE SELECTION OF INDEPENDENT
PUBLIC ACCOUNTANTS........................................ 59
OTHER MATTERS............................................... 60
LEGAL OPINION............................................... 61
EXPERTS..................................................... 61
WHERE YOU CAN FIND MORE INFORMATION......................... 61
FINANCIAL INFORMATION....................................... F-1
EXHIBIT A--FORM OF AGREEMENT AND PLAN OF MERGER............. A-1
</TABLE>
<PAGE>
SUMMARY OF THE PROXY STATEMENT/PROSPECTUS
THIS BRIEF SUMMARY HIGHLIGHTS SELECTED INFORMATION FROM THIS DOCUMENT AND
DOES NOT CONTAIN ALL THE INFORMATION THAT IS IMPORTANT TO YOU. WE URGE YOU TO
READ THIS ENTIRE DOCUMENT, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND
THE NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF NORTHEAST OPTIC
NETWORK, INC. TO FULLY UNDERSTAND THE REORGANIZATION. REFERENCES IN THIS
DOCUMENT TO "WE," "US," "OUR" AND THE COMPANY REFER TO NORTHEAST OPTIC NETWORK.
IN CERTAIN INSTANCES WHERE APPROPRIATE, "US" OR "OUR" REFERS COLLECTIVELY TO
NEON COMMUNICATIONS AND NORTHEAST OPTIC NETWORK. REFERENCES IN THIS DOCUMENT TO
"NEON COMMUNICATIONS" REFER TO NEON COMMUNICATIONS, INC. AND REFERENCES TO "NEON
ACQUISITION" REFER TO NEON ACQUISITION, INC. NORTHEAST OPTIC NETWORK WILL BECOME
A WHOLLY-OWNED SUBSIDIARY OF NEON COMMUNICATIONS AS A RESULT OF THE
REORGANIZATION.
MATTERS TO BE CONSIDERED AT THE MEETING
1. To elect seven directors to serve until our 2001 annual meeting of
stockholders;
2. To approve (i) the continuance of our amended and restated 1998 stock
incentive plan, as amended to date, and (ii) the amendment of our amended
and restated 1998 stock incentive plan;
3. To approve the adoption of an amendment to our second amended and
restated certificate of incorporation in order to increase the shares of
common stock authorized for issuance from 30,000,000 shares to 60,000,000
shares;
4. To approve the issuance of shares of our common stock to Consolidated
Edison Communications, Inc. and Exelon Corporation in exchange for their
contribution to us of cash and assets consisting of fiber optic
facilities;
5. To ratify the selection of Arthur Andersen LLP as our independent public
accountants for the current year; and
6. To transact such other business as may properly come before the meeting
or any adjournment thereof.
THE 2000 ANNUAL MEETING OF STOCKHOLDERS OF NORTHEAST OPTIC NETWORK
GENERAL
This proxy statement/prospectus is furnished in connection with the
solicitation of proxies by the board of directors of NorthEast Optic Network for
use at our 2000 annual meeting of stockholders to be held on Wednesday,
July 26, 2000 at 9:00 a.m. local time at The Ritz Carlton Hotel, 15 Arlington
Street, Boston, Massachusetts and at any adjournment of that meeting.
All proxies will be voted in accordance with the instructions of the
stockholder. If no choice is specified on a proxy, it will be voted in favor of
the matters set forth in the accompanying notice of meeting. Any proxy may be
revoked by a stockholder at any time before its exercise by delivery to the
company secretary of a written revocation, by submitting a subsequently dated
proxy or by voting in person at the meeting. Attendance at the meeting will not
itself have the effect of revoking a proxy unless the stockholder gives
affirmative notice at the meeting that the stockholder intends to revoke the
proxy and vote in person.
On June 1, 2000, the date for the determination of stockholders of record
entitled to vote at the meeting, there were an aggregate of 16,655,581 shares of
common stock, $.01 par value per share outstanding and entitled to vote. Each
share of common stock entitles the record holder to one vote on each of the
matters to be voted upon at the meeting.
A copy of our annual report to stockholders for the year ended December 31,
1999, which contains financial statements and other information of interest to
stockholders and which accompanies the notice of meeting and this proxy
statement/prospectus, is being mailed to stockholders on or about June 13, 2000.
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Copies of our annual report on Form 10-K for the year ended December 31, 1999
and our quarterly report on Form 10-Q for the quarter ended March 31, 2000 are
also available upon request.
VOTES REQUIRED
The holders of a majority of the shares of our common stock issued and
outstanding and entitled to vote at the meeting constitutes a quorum for the
transaction of business at the meeting. Holders of shares of common stock
present in person or represented by proxy (including holders of shares who
abstain or do not vote with respect to one or more of the matters presented for
stockholder approval) will be counted for purposes of determining whether a
quorum exists at the meeting.
Of the holders of shares who are entitled to vote and who are present or
represented by proxy at the meeting, the affirmative vote of the holders of a
plurality of the shares voted is required for the election of the directors. The
affirmative vote of the holders of a majority of the shares voted is required
for approval of the other proposals described in this proxy
statement/prospectus.
Holders of shares who abstain from voting as to a particular matter, and
shares held in "street name" by brokers or nominees who indicate on their
proxies that they do not have discretionary authority to vote such shares as to
a particular matter, will not be counted as votes in favor of such matter and
will also not be counted as votes cast or shares voting on such matter.
Accordingly, abstentions and such "broker non-votes" will have no effect on the
voting on the election of the directors or on the other proposals described in
this proxy statement prospectus.
THE REORGANIZATION
FORMATION OF A HOLDING COMPANY WHICH WILL OWN NORTHEAST OPTIC NETWORK
Our board of directors has voted to organize a holding company, NEON
Communications, which will acquire and own all of the issued and outstanding
capital stock of NorthEast Optic Network. We refer to the organization of the
holding company and its acquisition and ownership of all of NorthEast Optic
Network's capital stock as the "reorganization". The Board of Directors of
NorthEast Optic Network believes that the holding company structure will provide
greater flexibility in terms of operations, expansion, and diversification,
especially given variations in the regulation of telecommunications facilities
and services from state to state. In addition, as discussed in greater detail
under the heading "Business--NorthEast Optic Network Consolidated Edison
Communications Agreement and Exelon Corporation Agreement" beginning on page 51
of this proxy statement/prospectus, we have entered into agreements with
Consolidated Edison Communications and Exelon Corporation pursuant to which they
will contribute assets consisting of fiber optic facilities and make cash
payments to us in exchange for shares of our stock. The reorganization into a
holding company structure is also intended to allow Consolidated Edison
Communications and Exelon Corporation to realize certain tax benefits with
respect to their contribution of assets to our business, and is intended to be
accomplished immediately prior to the closing of the transactions with
Consolidated Edison Communications and Exelon Corporation.
In the reorganization, NorthEast Optic Network will continue in its
operations as presently conducted under its current management, but will be a
wholly-owned subsidiary of NEON Communications. We have attached the form of
agreement and plan of merger relating to the reorganization as Exhibit A at the
back of this proxy statement/prospectus. The boards of directors of NorthEast
Optic Network, NEON Communications and NEON Acquisition may elect to abandon the
reorganization at any time prior to consummation.
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THE COMPANIES
NORTHEAST OPTIC NETWORK
Northeast Optic Network owns and operates a technologically advanced,
high-bandwidth fiber optic network providing capacity on a wholesale basis to
telecommunications service providers, including local, long distance and
wireless telephone companies and Internet service providers. Our network
currently extends from Portland, Maine to New York City and agreements currently
in place would, subject to regulatory approval, extend our network to
Philadelphia, Baltimore and Washington, D.C. and expand the reach of our network
in and around New York City.
As of March 31, 2000, our network extended more than 1,100 miles, and, since
it consists of an average of 57 fibers per mile, included approximately 65,000
fiber miles. We have built connections to 43 points in 28 cities and towns where
customers can connect directly to our network, and we are building or preparing
to build an additional 56 connection points in New England, New York and the
Mid-Atlantic region. Our planned network expansion into and within New York City
and the Mid-Atlantic region associated with our agreements with Consolidated
Edison Communications and Exelon Corporation, described below, would add 441
miles, 9,072 fiber miles and 75 additional connection points to our network.
NEON COMMUNICATIONS
NEON Communications has not engaged in any business since its incorporation
in Delaware in November 1999. After the reorganization, NEON Communications will
become a holding company whose principal asset will be all of the outstanding
shares of the capital stock of NorthEast Optic Network.
NEON ACQUISITION
NEON Acquisition is a Delaware corporation newly organized as a wholly-owned
subsidiary of NEON Communications, Inc. in November 1999. NEON Acquisition's
sole purpose is to merge into NorthEast Optic Network to facilitate the
reorganization. NEON Acquisition will disappear after the reorganization.
RECENT DEVELOPMENTS
In November 1999, we entered into agreements with Consolidated Edison
Communications, Inc., a wholly-owned subsidiary of Consolidated Edison, Inc.,
and with Exelon Corporation, a wholly-owned subsidiary of PECO Energy, Inc.
Consolidated Edison Communications and Exelon Corporation have agreed to provide
us with fiber optic filaments and interconnections, which, once received, will
enable us to operate our network through significant portions of their coverage
areas, including New York City and Philadelphia, and enter into cooperative
marketing arrangements with us.
Consolidated Edison Communications has agreed to provide us with a
telecommunications facility to house our equipment and the equipment of our
customers in Manhattan and to provide high-capacity connections to 26 carrier
buildings in key areas of Manhattan. These buildings include major long distance
telephone company facilities, large collocation facilities, telephone company
local offices and other high traffic buildings.
Exelon Corporation has agreed to provide us with a new telecommunications
facility for our use in Philadelphia and provide connections to 40 carrier sites
in metropolitan Philadelphia and to one site in each of Baltimore and
Washington, D.C.
Under these agreements, we have agreed to issue 2,448,240 shares of our
common stock to Consolidated Edison Communications and 2,106,625 shares of our
common stock to Exelon Corporation, which would result in Consolidated Edison
Communications and Exelon Corporation owning approximately 10.75% and 9.25% of
our outstanding common stock, respectively. Each of these companies also would
receive the right to nominate one member to our board of directors. In an
unrelated
3
<PAGE>
transaction, Consolidated Edison, Inc., the parent holding company of
Consolidated Edison Communications, has previously announced that it has entered
into an agreement to acquire Northeast Utilities, a holder of approximately 29%
of our common stock.
Both of these agreements are subject to regulatory and municipal approval
and other conditions beyond our control, and are terminable if the closing has
not occurred by September 7, 2000. Prior to closing, we intend to obtain
shareholder approval of the transactions. Our two largest shareholders,
Northeast Utilities and an affiliate of CMP Group, Inc., have agreed to vote to
approve these transactions.
Our agreement with Consolidated Edison Communications is conditioned upon
that company and its parent, Consolidated Edison, receiving approvals from
agencies of the City of New York. Because these approvals may not be granted, we
have separately applied for and obtained approval from the City of New York
Franchise Concession Review Committee for the execution and registration of a
franchise agreement with the City of New York that will permit us to install and
operate our network and offer high-bandwidth services in New York City
independent of Consolidated Edison Communications.
THE MANAGEMENT OF NORTHEAST OPTIC NETWORK WILL CONTINUE AFTER THE REORGANIZATION
The directors and officers of NorthEast Optic Network will continue to be
directors and officers of NorthEast Optic Network following the reorganization.
After the reorganization, the present directors and officers of NorthEast Optic
Network will also become the directors and officers of NEON Communications.
YOU WILL RECEIVE ONE SHARE OF NEON COMMUNICATIONS COMMON STOCK FOR EACH SHARE OF
NORTHEAST OPTIC NETWORK COMMON STOCK YOU OWN
When the reorganization is accomplished, you will receive one share of NEON
Communications common stock for each share of NorthEast Optic Network common
stock you own immediately prior to the reorganization.
THE REORGANIZATION DOES NOT REQUIRE STOCKHOLDER APPROVAL
Under Section 251(g) of the Delaware general corporation law, you do not
have the right to vote on the reorganization.
STOCKHOLDERS DO NOT HAVE APPRAISAL RIGHTS
Under Section 251(g) of the Delaware general corporation law, you are not
entitled to appraisal rights for your shares of NorthEast Optic Network stock
with respect to the reorganization.
THE REORGANIZATION WILL BE TAX-FREE TO YOU
We expect that, for federal income tax purposes, the reorganization will be
tax-free to holders of NorthEast Optic Network common stock, to NorthEast Optic
Network and to NEON Communications. However, because tax matters are
complicated, and tax results may vary among stockholders, we urge you to contact
your own tax advisor to understand fully how the reorganization will affect you.
THERE ARE NO SIGNIFICANT DIFFERENCES BETWEEN NEON COMMUNICATIONS' AND NORTHEAST
OPTIC NETWORK'S CHARTER DOCUMENTS
The certificate of incorporation and by-laws of NEON Communications are
substantially the same as the certificate of incorporation and by-laws of
NorthEast Optic Network. The certificates of incorporation and by-laws of both
companies contain certain provisions relating to the board of directors and
certain business combinations, all of which may be deemed to have
"anti-takeover" effects, including limitations on the call of a special meeting
of stockholders, elimination of action by written consent of stockholders,
removal of directors only for cause and with the approval of 75% of the
outstanding shares, elimination of
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cumulative voting and a 75% vote to approve or amend certain provisions of the
certificate of incorporation.
BENEFITS OF THE REORGANIZATION TO DIRECTORS AND OFFICERS
The reorganization will not directly provide any substantive benefits to
directors and officers of NorthEast Optic Network, who will continue to be
directors and officers of NEON Communications.
EXISTING OPTIONS TO ACQUIRE NORTHEAST OPTIC NETWORK COMMON STOCK WILL REPRESENT
THE RIGHT TO PURCHASE NEON COMMUNICATIONS COMMON STOCK AFTER THE REORGANIZATION.
After the reorganization is completed, all of the obligations of NorthEast
Optic Network under our amended and restated 1998 stock incentive plan will
become obligations of NEON Communications on the same terms and conditions, with
the exception that the securities issued pursuant to the amended and restated
1998 stock incentive plan will be NEON Communications common stock.
ACCOUNTING TREATMENT
For accounting and financial reporting purposes, the reorganization will be
treated similarly to a "pooling of interests," which means that NorthEast Optic
Network's assets and liabilities will be carried forward at their previously
recorded amounts, without change, as the consolidated assets and liabilities of
NEON Communications following the reorganization.
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STATEMENTS REGARDING FORWARD-LOOKING INFORMATION
This proxy statement/prospectus includes and incorporates forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. All statements, other than
statements of historical facts, included or incorporated in this prospectus
regarding our strategy, future operations, financial position, future revenues,
projected costs, prospects, plans and objectives of management are
forward-looking statements. The words "anticipates," "believes," "estimates,"
"expects," "intends," "may," "plans," "projects," "will," "would" and similar
expressions are intended to identify forward-looking statements, although not
all forward-looking statements contain these identifying words. In particular,
but without limiting the foregoing, our statements about our agreements with
Consolidated Edison Communications and Exelon Corporation, the satisfaction of
the conditions under those agreements and the extent of our network following
the consummation of the closing under each of those agreements constitute
forward-looking statements. We cannot guarantee that we actually will achieve
the plans, intentions or expectations disclosed in our forward-looking
statements and you should not place undue reliance on our forward-looking
statements. Actual results or events could differ materially from the plans,
intentions and expectations disclosed in the forward-looking statements we make.
We have included important factors in the cautionary statements included or
incorporated in this prospectus, particularly under the heading "Risk Factors,"
that we believe could cause actual results or events to differ materially from
the forward-looking statements that we make. Our forward-looking statements do
not reflect the potential impact of any future acquisitions, mergers,
dispositions, joint ventures or investments we may make. We do not assume any
obligation to update any forward-looking statements.
You should carefully consider the discussion of these and other factors in
the section entitled "Risk Factors" beginning on page 8.
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<PAGE>
SELECTED HISTORICAL FINANCIAL DATA OF NORTHEAST OPTIC NETWORK, INC.
We have summarized below our historical consolidated financial data as of
December 31, 1999 and for each of the three years in the period ended
December 31, 1999, derived from our consolidated financial statements audited by
Arthur Andersen LLP, independent public accountants. The selected consolidated
financial data and balance sheet data as of and for the three months ended
March 31, 1999 and 2000 have been derived from our unaudited consolidated
financial statements, which we believe include all adjustments necessary for a
fair presentation of the financial condition and results of operations for such
period. When you read the information below, you should refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and the notes to those consolidated
financial statements included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
----------------------------------------- ---------------------------------------
1997 1998(1) 1999 MARCH 31, 1999 MARCH 31, 2000
----------- ------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA
Revenues......................... $ 394,704 $ 863,672 $ 5,665,276 $ 520,956 $ 2,652,706
Operating expenses............... 2,693,037 9,175,280 19,895,829 3,045,339 7,078,057
----------- ------------ ------------ ------------- -------------
Loss from operations............. (2,298,333) (8,311,608) (14,230,553) (2,524,383) (4,425,351)
Interest expense net............. (2,893) (4,464,583) (13,299,215) (2,738,897) (3,848,866)
Minority interest(2)............. 1,080,200 1,108,933 -- -- --
Benefit from income taxes........ (261,000) (315,000) -- -- --
----------- ------------ ------------ ------------- -------------
Loss before extraordinary item... (960,026) (11,352,258) (27,529,768) (5,263,280) (8,274,217)
Extraordinary item(3)............ -- (1,363,155) -- -- --
----------- ------------ ------------ ------------- -------------
Net loss......................... $ (960,026) $(12,715,413) $(27,529,768) $ (5,263,280) $ (8,274,217)
=========== ============ ============ ============= =============
Basic and diluted loss per share
before extraordinary item...... $ (3.37) $ (1.70) $ (1.70) $ (0.33) $ (0.50)
=========== ============ ============ ============= =============
Basic and diluted loss per
share.......................... $ (3.37) $ (1.90) $ (1.70) $ (0.33) $ (0.50)
=========== ============ ============ ============= =============
Basic and diluted weighted
average shares outstanding..... 284,828 6,675,717 16,172,026 16,070,027 16,301,443
=========== ============ ============ ============= =============
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- MARCH 31, MARCH 31,
1997 1998 1999 1999 2000
----------- ------------ ------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA
Cash and cash equivalents....... $ 1,098,452 $57,737,792 $ 4,768,389 $ 43,273,561 $ 6,665,050
Short-term investments.......... -- 48,581,949 66,803,311 55,133,067 52,032,524
Restricted investments.......... 819,923 79,923,257 54,212,154 63,338,681 43,374,580
Property, plant and equipment... 16,534,703 52,922,677 94,924,843 67,364,457 106,420,815
Working capital................. (3,463,011) 112,995,534 68,928,133 93,824,925 57,722,197
Total assets(4)................. 24,461,000 291,912,234 280,633,376 286,851,781 267,841,739
Long-term account payable--
Communications Network........ -- -- 4,682,858 2,099,585 922,538
Long-term debt, including
current maturities............ 2,118,905 180,127,619 180,000,000 180,019,225 180,000,000
Stockholders' equity............ 9,314,224 93,034,684 67,466,790 87,772,091 62,177,650
</TABLE>
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<TABLE>
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YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
------------------------------------------- ---------------------------------
1997 1998 1999 MARCH 31, 1999 MARCH 31, 2000
----------- ------------- ------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF CASH FLOW DATA
Cash provided by (used in)
operating activities......... $ (813,704) $ 2,954,322 $ (17,970,325) $ (6,561,738) $ (6,770,312)
Cash (used in) provided by
investing activities......... (8,798,251) (93,772,328) (68,323,061) (21,771,729) 1,184,556
Cash provided by financing
activities................... 5,845,482 147,457,346 33,323,983 13,869,236 7,482,417
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED
----------------------------------------- -------------------------------
1997 1998 1999 MARCH 31, 1999 MARCH 31, 2000
----------- ------------ ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA
EBITDA(5).......................... $ (665,271) $ (6,767,536) $ (8,080,833) $(1,729,405) $ (1,966,410)
Depreciation and amortization...... 552,862 1,798,294 6,149,720 794,978 2,458,941
Capital expenditures............... 5,609,459 38,947,267 48,583,642 14,837,780 13,555,938
Ratio of deficiency to fixed
charges(6)....................... (10.11)x (.45)x (.23)x (.02)x (.40)x
</TABLE>
--------------------------
(1) If our July 1998 reorganization into a Delaware corporation had occurred on
January 1, 1998, our pro forma basic and diluted weighted average shares
outstanding and the loss per share for the year ended December 31, 1998
would have amounted to 16,065,285 and $(.79), respectively.
(2) Minority interest consisted of the interests of members other than Central
Maine Power Company in our former subsidiaries, FiveCom LLC, NECOM LLC and
FiveCom of Maine LLC. In July 1998, these subsidiaries were merged into
FiveCom, Inc. and FiveCom, Inc. was reincorporated in Delaware under the
name "NorthEast Optic Network, Inc." Changes in minority interest reflected
members' capital adjusted by their portion of the net loss.
(3) Extraordinary item reflects the write-off of deferred financing cost of
$1,363,155 related to the extinguishment of debt with a portion of the
proceeds of our concurrent public offerings of debt and equity in
July 1998.
(4) In connection with our July 1998 reorganization, we recorded an intangible
asset of $47,871,068 to reflect our acquisiton of Northeast Utilities'
minority interest in a subsidiary, NECOM LLC, in accordance with AICPA
Accounting Interpretation 39 to APB Opinion No. 16, Business Combinations
(AIN-39).
(5) EBITDA is defined as net loss before: interest expense, net; loan commitment
fees; benefit from income taxes; and depreciation and amortization. EBITDA
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. EBITDA is not necessarily
comparable to similarly titled measures for other companies and does not
necessarily represent the amount of funds available for management's use.
(6) For purposes of calculating the ratio of deficiency to fixed charges:
earnings consist of loss before income tax benefit, plus fixed charges,
excluding capitalized interest, and fixed charges consist of interest
expenses and capitalized interest, plus amortization of deferred financing
costs. For the periods ended December 31, 1997, 1998, 1999 and March 31,
1999 and 2000, our earnings were insufficient to cover fixed charges by
approximately $3,124,000, $4,795,000, $5,721,000 and $92,000 and $2,520,000,
respectively.
8
<PAGE>
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS AND THE OTHER INFORMATION
INCLUDED IN THIS PROXY STATEMENT/PROSPECTUS. IF ANY OF THE FOLLOWING RISKS
ACTUALLY OCCURS, OUR BUSINESS, FINANCIAL CONDITION OR RESULTS OF OPERATIONS
COULD BE MATERIALLY AND ADVERSELY AFFECTED. THIS COULD CAUSE THE MARKET PRICE OF
OUR COMMON STOCK TO DECLINE, AND YOU COULD LOSE ALL OR PART OF YOUR INVESTMENT.
RISKS RELATING TO OUR BUSINESS STRATEGY
WE HAVE HAD SIGNIFICANT NET LOSSES AND OUR OPERATING RESULTS HAVE VARIED AND
WILL CONTINUE TO VARY SIGNIFICANTLY.
Our current business has a very limited history. We have incurred net losses
since our inception. Our future operating results will fluctuate annually and
quarterly due to several factors, some of which are outside our control. These
factors include pricing strategies for our services, changes in
telecommunications technology, changes in the regulatory environment, cost and
timely availability of equipment, cost of construction and changes in general
and local economic conditions.
OUR BUSINESS STRATEGY DEPENDS UPON ANTICIPATED CUSTOMER DEMAND FOR OUR SERVICES,
AND OUR FAILURE TO OBTAIN CUSTOMERS FOR OUR SERVICES AT PROFITABLE RATES WOULD
ADVERSELY AFFECT OUR BUSINESS RESULTS.
Our ability to become profitable depends upon our ability to secure a market
for our services and obtain service contracts with our communications customers.
Many of our targeted customers may also be our potential competitors. If our
services are not satisfactory or cost competitive, our targeted customers may
utilize other providers where available, or construct their own networks, which
would reduce their need for our services and create future sources of
competition for us.
INTENSE COMPETITION IN THE TELECOMMUNICATIONS INDUSTRY FROM A BROAD RANGE OF
COMPETITORS MAY PREVENT US FROM OBTAINING CUSTOMERS AND REQUIRE US TO CUT
PRICES.
The telecommunications industry is highly competitive. We face substantial
competition from companies with significantly greater financial and other
resources whose capacity is interchangeable with the capacity we offer,
including incumbent local telephone companies, competitive local telephone
companies and major long distance companies. In addition, potential competitors
capable of offering services similar to those offered by us include other
communications service providers that own and operate their own networks and
equipment, including cable television companies, electric utilities, microwave
carriers, satellite carriers, wireless communication system operators and
end-users with private communications networks. Two of our principal
stockholders, Northeast Utilities and CMP Group, Inc., each own or have rights
to fibers in the cable that includes a portion of our network, which permits
each of them to compete directly with us in the future if they use these fibers
for purposes other than their corporate requirements. Our rights-of-way are
non-exclusive so that other service providers (including the utilities
themselves) could install competing networks using the same rights-of-way.
BECAUSE WE OFFER A RELATIVELY NARROW RANGE OF SERVICES IN COMPARISON TO SOME OF
OUR COMPETITORS, WE CANNOT ACHIEVE REVENUES COMPARABLE TO COMPANIES OFFERING A
BROADER ARRAY OF SERVICES AND MAY BE AT A COMPETITIVE DISADVANTAGE WITH RESPECT
TO THE SERVICES WE OFFER.
Unlike more diversified telecommunications companies, we derive and expect
to continue to derive substantially all of our revenues from the leasing of
fiber optic capacity on a wholesale basis to our customers, most of whom are
telecommunications companies and Internet service providers serving end-users.
The limited nature of our current services could limit our potential revenues
and result in our having lower revenues than competitors which provide a wider
array of services.
9
<PAGE>
DUE TO RAPIDLY EVOLVING TECHNOLOGIES IN OUR INDUSTRY AND THE UNCERTAINTY OF
FUTURE GOVERNMENT REGULATION, OUR CURRENT BUSINESS PLAN MAY BECOME OBSOLETE AND
WE MAY BE UNABLE TO MAINTAIN A COMPETITIVE POSITION IF WE ARE UNABLE TO
SUCCESSFULLY ADJUST OUR PRODUCTS, SERVICES AND BUSINESS STRATEGIES AS REQUIRED.
In the future, we may become 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
services and products or the emergence of new technologies may change the cost
or increase the supply of services and products similar to those which we
provide. We cannot predict which of many possible future product and service
offerings will be crucial to maintain our competitive position or what
expenditures will be required to develop profitably and provide such products
and services. Prices for our services to carriers specifically, and interstate
services in general, may decline over the next several years due primarily to
price competition to the extent that network providers continue to install
networks that compete with our network. We also believe that there will be
technological advances that will permit substantial increases in the
transmission capacity of both new and existing fiber.
A LIMITED NUMBER OF CUSTOMERS HAS ACCOUNTED FOR A SIGNIFICANT PERCENTAGE OF OUR
REVENUES.
Historically, a limited number of customers has accounted for a significant
percentage of our revenues. In 1998, three customers accounted for 50%, 19% and
12% of revenues, respectively. In 1999, three customers accounted for 18%, 16%
and 13% of revenues, respectively. In the three month period ended March 31,
2000, three customers each accounted for 12% of revenues. We anticipate that our
results of operations in any given period will continue to depend to a
significant extent upon revenues of a small number of customers.
RISKS RELATING TO THE EXPANSION AND OPERATION OF OUR FIBER OPTIC NETWORK
THE SUCCESSFUL, TIMELY AND COST-EFFECTIVE EXPANSION OF OUR FIBER OPTIC NETWORK
WITHIN THE NORTHEAST AND INTO THE MID-ATLANTIC REGION IS CRUCIAL TO OUR BUSINESS
PLAN, AND DEPENDS UPON NUMEROUS FACTORS BEYOND OUR CONTROL.
Our ability to achieve our strategic objectives depends in large part upon
the successful, timely and cost-effective expansion of our fiber optic network
within the Northeast and into the Mid-Atlantic region. Among the major factors
that could affect our success are:
- the inability to consummate, or a delay in consummating, our agreement
with Consolidated Edison Communications, which remains subject to
substantial regulatory conditions which have already resulted in delays;
and
- the failure of both affiliated and third-party suppliers or contractors to
meet their obligations to construct and maintain significant portions of
our fiber optic network in a timely and cost-effective manner.
Either of these factors, or other factors, over which we have little
control, could significantly hinder our ability to complete our network and
execute our business plan.
EACH OF OUR AGREEMENTS WITH CONSOLIDATED EDISON COMMUNICATIONS AND EXELON
CORPORATION IS SUBJECT TO POSSIBLE TERMINATION IF THE CLOSING UNDER THAT
AGREEMENT DOES NOT OCCUR BY SEPTEMBER 7, 2000.
Each of our agreements with Consolidated Edison Communications and Exelon
Corporation is subject to termination by either party if the closing conditions
under that agreement have not been satisfied by September 7, 2000. Both of these
agreements are subject to substantial closing conditions that may not be
satisfied by September 7, 2000. If one or both of these agreements is
terminated, our business plan will be adversely affected.
10
<PAGE>
OUR AGREEMENT WITH CONSOLIDATED EDISON COMMUNICATIONS FOR THE EXPANSION OF OUR
NETWORK IN NEW YORK CITY HAS ENCOUNTERED REGULATORY DELAYS.
Consolidated Edison Communications' application for a municipal franchise to
operate as a telecommunications carrier in New York City and the application of
its parent, Consolidated Edison, which would enable it to install fiber optic
cable in its conduits, have encountered delays, and we cannot be sure when they
will be granted, if at all. Our agreement with Consolidated Edison
Communications is contingent on this approval, and if the necessary approvals
are not forthcoming, we may be forced to serve New York City using alternative
rights of way shared by other carriers that would not provide the same route
diversity as those offered by Consolidated Edison Communications. A significant
delay in obtaining the necessary approvals, or in our decision to select an
alternative means of serving this area, would delay our expansion into New York
City.
THE EXPENDITURES NECESSARY TO SUFFICIENTLY EXPAND OUR FIBER OPTIC NETWORK AND
DEVELOP OUR SERVICES IN ORDER TO SATISFY THE CURRENT AND FORECASTED DEMANDS OF
OUR CUSTOMERS MAY SURPASS OUR AVAILABLE CASH, AND WE MAY BE UNABLE TO OBTAIN
ADDITIONAL CAPITAL TO DEVELOP OUR SERVICES ON A TIMELY BASIS AND ON ACCEPTABLE
TERMS.
Although we have expended significant resources in building our network from
Portland, Maine to New York City and the development of our customer base, we
will require significant additional cash in order to expand our geographic
coverage and the range of services which we can offer throughout our service
area in order to be competitive in our market. These expenditures for expansion
and for more services, together with associated operating expenses, will reduce
our cash flow and profitability until we establish an adequate customer base
throughout all of our coverage areas. To date, we have expended substantial
amounts on construction of our network from the proceeds of our financing
activities and, accordingly, we have generated negative cash flow. We may need
to obtain additional capital to expand our services and increase our service
territory, and cannot guarantee that additional financing will be available to
us or, if available, that we can obtain it on a timely basis and on acceptable
terms.
WE OBTAIN SOME OF THE KEY COMPONENTS USED IN OUR FIBER OPTIC NETWORK FROM A
SINGLE SOURCE OR A LIMITED GROUP OF SUPPLIERS, AND THE PARTIAL OR COMPLETE LOSS
OF ONE OF THESE SUPPLIERS COULD DISRUPT OUR OPERATIONS AND RESULT IN A
SUBSTANTIAL LOSS OF REVENUE.
We depend upon a small group of suppliers for some of the key components and
parts used in our network. In particular, we purchase cable from Lucent-Fitel
and from Corning, and we purchase fiber optic equipment from Nortel Networks,
Cerent Corporation and Sycamore Networks. Any delay or extended interruption in
the supply of any of the key components, changes in the pricing arrangements
with our suppliers and manufacturers or delay in transitioning a replacement
supplier's product into our network could disrupt our operations.
OUR FIBER OPTIC NETWORK, WHICH IS OUR SOLE SOURCE OF REVENUE, IS VULNERABLE TO
PHYSICAL DAMAGE, CATASTROPHIC OUTAGES, POWER LOSS AND OTHER DISRUPTIONS BEYOND
OUR CONTROL, AND THE OCCURRENCE OF ANY OF THESE FAILURES COULD RESULT IN
IMMEDIATE LOSS OF REVENUE, PAYMENT OF OUTAGE CREDITS TO OUR CUSTOMERS AND, MORE
IMPORTANTLY, THE LOSS OF OUR CUSTOMERS' CONFIDENCE AND OUR BUSINESS REPUTATION.
Our success in marketing our services to our customers requires that we
provide high reliability, high bandwidth and a secure network. Our network and
the infrastructure upon which it depends are subject to physical damage, power
loss, capacity limitations, software defects, breaches of security and other
disruptions beyond our control that may cause interruptions in service or
reduced capacity for customers. Our agreements with our customers typically
provide for the payment of outage related credits (a predetermined reduction or
offset against our 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. These credits or damages could
be substantial and could significantly decrease our net revenue. Significant or
lengthy outages would also undermine our customers' confidence in our fiber
optic network and injure our business reputation.
11
<PAGE>
RISKS RELATING TO OUR RIGHTS-OF-WAY
WE COULD LOSE THE CONTRACT RIGHTS UPON WHICH WE RELY TO OPERATE AND MAINTAIN OUR
NETWORK IN THE EVENT OF BANKRUPTCY PROCEEDINGS RELATING TO ONE OR MORE OF THE
THIRD PARTIES THAT HAVE GRANTED TO US THE RIGHT TO BUILD AND OPERATE OUR NETWORK
USING THEIR RIGHTS-OF-WAY.
The construction and operation of significant portions of our fiber optic
network depend upon contract rights known as indefeasible rights-of-use.
Indefeasible rights-of-use are commonly used in the telecommunications industry,
but remain a relatively new concept in property law. Although indefeasible
rights-of-use give the holder a number of rights to control the relevant
rights-of-way or fiber optic filaments, legal title remains with the grantor of
the rights. Therefore, the legal status of indefeasible rights-of-use remains
uncertain, and our indefeasible rights-of-use might be voidable in the event of
bankruptcy of the grantor. If we were to lose an indefeasible right-of-use in a
key portion of our network, our ability to service our customers could become
seriously impaired and we could be required to incur significant expense to
resume the operation of our fiber optic network in the affected areas.
DESPITE OUR EXISTING RIGHTS-OF-WAY, WE MAY BE FORCED TO MAKE SUBSTANTIAL
ADDITIONAL PAYMENTS TO THE AFFECTED LANDOWNERS OR REMOVE OUR NETWORK FROM THEIR
PROPERTY, WHICH WOULD SIGNIFICANTLY HARM OUR BUSINESS AND OUR RESULTS OF
OPERATIONS.
Our indefeasible rights-of-use depend on the grantor's interest in the
property on which our network is located. To the extent that a grantor of an
indefeasible right-of-use has a limited easement in the underlying property and
not full legal title, the adequacy of our indefeasible rights-of-use could be
challenged in court. For example, in May 1999, AT&T entered into a costly
settlement of a class action suit brought by landowners who asserted that the
railroad-based rights-of-way upon which AT&T had relied to build portions of its
fiber optic network were insufficient to permit AT&T to use these rights-of-way
for telecommunications purposes.
We believe that it is likely that a number of landowners may make similar
claims against us based on our use of utility rights-of-way for our
telecommunications purposes. In fact, some landowners have already asserted
claims against us on this basis, and, to date, in two cases, rather than
electing to contest the landowners' interpretation of the scope of the easement,
we have made a payment to such landowners to acquire rights-of-way meeting our
requirements. We believe that the easements granted by a substantial number of
landowners to grantors of our indefeasible rights-of-use are similar in scope to
those with respect to which claims have been asserted, and we cannot guarantee
that additional claims will not be made in the future.
BECAUSE SIGNIFICANT PORTIONS OF OUR FIBER OPTIC NETWORK ARE CONSTRUCTED UPON
RIGHTS-OF-WAY CONTROLLED BY ELECTRIC UTILITY COMPANIES WHICH GENERALLY PLACE THE
OPERATION OF THEIR ELECTRICAL FACILITIES AHEAD OF THE OPERATION OF OUR FIBER
OPTIC NETWORK, WE MAY BE UNABLE TO CONSTRUCT AND OPERATE OUR FIBER OPTIC NETWORK
IN THE AFFECTED AREAS WITHOUT PERIODIC INTERRUPTIONS AND DELAYS CAUSED BY THE
DAY-TO-DAY OPERATIONS OF THESE UTILITY COMPANIES.
Our rights-of-way agreements with Northeast Utilities and Central Maine
Power Company contain provisions which acknowledge the right of Northeast
Utilities and Central Maine Power, respectively, to make the provision of
electrical services to their own customers their top priority. Northeast
Utilities and Central Maine Power are required only to exercise "reasonable
care" with respect to our 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 operation of our
network. In addition, some of our ongoing operational efforts are constrained by
the limited ability of the utilities to de-energize segments of their
transmission and distribution facilities in order to permit construction crews
to work safely. We have experienced construction delays in the past as a result
of such inability to timely de-energize certain segments and we may experience
such delays in the future.
12
<PAGE>
RISKS RELATING TO GOVERNMENT REGULATION
FEDERAL REGULATION OF THE TELECOMMUNICATIONS INDUSTRY IS CHANGING RAPIDLY AND WE
COULD BECOME SUBJECT TO UNFAVORABLE NEW RULES AND REQUIREMENTS WHICH COULD
IMPOSE SUBSTANTIAL FINANCIAL AND ADMINISTRATIVE BURDENS ON US AND INTERFERE WITH
OUR ABILITY TO SUCCESSFULLY EXECUTE OUR BUSINESS STRATEGIES.
Regulation of the telecommunications industry is changing rapidly. Existing
and future federal, state, and local governmental regulations will greatly
influence our viability. Consequently, undesirable regulatory changes could
adversely affect our business, financial condition and results of operations.
REVENUES FROM LIT SERVICES TO INTERNET SERVICE PROVIDERS, WHICH REPRESENT A
PORTION OF OUR REVENUES, ARE SUBJECT TO CONTRIBUTIONS TO THE FCC'S UNIVERSAL
SERVICE FUND.
While we generally do not deal directly with end-users of telecommunications
services and are therefore generally exempt from contributing to the FCC's
Universal Service Fund, the FCC treats Internet service providers purchasing lit
services as end-users for these purposes. Our revenues from providing these
services, which represent a portion of our revenues, are therefore subject to an
assessment of 5.8% of gross interstate revenue for the fourth quarter of 1999,
and this assessment could increase.
IF WE BECOME SUBJECT TO REGULATION AS A COMMON CARRIER IN THE FUTURE, WE WOULD
BE SUBJECT TO ADDITIONAL REGULATORY REQUIREMENTS.
We do not believe that we are currently a "common carrier," but that status
could change based on differing interpretations of current regulations,
regulatory changes and changes in the way we conduct our business. If we become
regulated as a common carrier, we would have to file tariffs for our services
with the FCC and submit other reports, and would be required to contribute to
federal funds including, but not limited to, those established for
Telecommunications Relay Services and for the management of the North American
Numbering Plan. These regulatory requirements could impose substantial burdens
on us.
A recent FCC decision requiring incumbent local telephone companies to
provide their dark fiber to third parties may increase competition among
providers of dark fiber services.
The Communications Act of 1934 requires incumbent local telephone companies
to provide elements of their networks to competitors on an unbundled basis. In a
recent decision, the FCC determined that dark fiber is a network element that
incumbent local telephone companies must provide to others. The availability of
this alternative source of supply could decrease the demand for our dark fiber.
REGULATORY CHANGES COULD AFFECT RELATIONSHIPS BETWEEN US, OUR COMPETITORS AND
CUSTOMERS IN UNFORSEEABLE WAYS THAT COULD REDUCE OUR BUSINESS OPPORTUNITIES.
Our relationships with the telecommunications companies with whom we deal
are all affected by our respective positions in the FCC's regulatory scheme.
Accordingly, changes in federal telecommunications law may affect our business
by virtue of the interrelationships that exist among us and many of these
regulated telecommunications entities. It is difficult for us to forecast at
this time how these changes will affect us in light of the complex
interrelationships that exist in the industry and the different levels of
regulation.
STATE REGULATION OF COMPANIES PROVIDING TELECOMMUNICATIONS SERVICES VARIES
SUBSTANTIALLY FROM STATE TO STATE AND WE MAY BECOME SUBJECT TO BURDENSOME AND
RESTRICTIVE STATE REGULATIONS AS WE EXPAND OUR FIBER OPTIC NETWORK INTO A
BROADER GEOGRAPHIC AREA, WHICH COULD INTERFERE WITH OUR OPERATIONS AND OUR
ABILITY TO MEET OUR STRATEGIC OBJECTIVES.
We may be subject to state regulation, which can vary substantially from
state to state. Our subsidiaries in New York and Connecticut have obtained
authority to provide intrastate telecommunications services on a competitive
common carrier basis. Therefore, these subsidiaries are subject to the
obligations that applicable law places on all similarly certificated common
carriers including
13
<PAGE>
the filing of tariffs, state regulation of certain service offerings, pricing,
payment of regulatory fees and reporting requirements. The costs of compliance
with these regulatory obligations, or any of the regulatory requirements of
other states to which we might become subject, could have a material adverse
effect on our operations. Moreover, some of our rights-of-way depend on our
status as a common carrier in these states, and if that status were to be
successfully challenged, those rights-of-way could be terminated.
MUNICIPAL REGULATION OF OUR ACCESS TO PUBLIC RIGHTS-OF-WAY IS SUBJECT TO CHANGE
AND COULD IMPOSE ADMINISTRATIVE BURDENS THAT WOULD ADVERSELY AFFECT OUR
BUSINESS.
Local governments typically retain the ability to license public
rights-of-way, subject to the federal requirement that local governments may not
prohibit the provision of telecommunications services. Changes in local
government regulation could impose additional costs on our business and limit
our operations. Local authorities affect the timing and costs associated with
our use of public rights-of-way.
RISKS RELATING TO OUR CAPITALIZATION
BECAUSE WE HAVE A LARGE AMOUNT OF DEBT, WE WILL BE REQUIRED TO DEVOTE A
SIGNIFICANT PORTION OF OUR CASH FLOW TO PAY INTEREST AND WE MAY NOT HAVE
SUFFICIENT REMAINING CASH FLOW TO MEET OUR OTHER OBLIGATIONS AND EXECUTE OUR
BUSINESS STRATEGIES.
We are highly leveraged. Our high degree of debt, including our
$180 million 12 3/4% Senior Notes Due 2008, could have adverse consequences to
the holders of our equity securities. Commencing on August 15, 2002, a
substantial portion of our cash flow will be dedicated to the payment of the
$22,950,000 per annum of interest expense associated with our debt and such cash
flow may be insufficient to meet our payment obligations on our debt in addition
to paying our other obligations as they become due. In addition, due to our
leverage ratio, our ability to obtain any necessary financing in the future for
completion of our network or other purposes may be impaired. Also, certain of
our future borrowings may be at variable rates of interest that could cause us
to be vulnerable to increases in interest rates. Because we are highly
leveraged, we may be at a competitive disadvantage to our competitors and may be
especially vulnerable to a downturn in our business or the economy generally, or
to delays in or increases in the costs of operating and constructing our
network.
IN CONNECTION WITH OUR SUBSTANTIAL PUBLIC DEBT, WE HAVE AGREED TO SIGNIFICANT
RESTRICTIONS ON OUR OPERATIONS THAT LIMIT OUR ABILITY TO ENTER INTO MAJOR
CORPORATE TRANSACTIONS, AND AS A RESULT WE MAY BE UNABLE TO PURSUE POTENTIAL
CORPORATE OPPORTUNITIES WHICH WOULD BENEFIT US AND OUR STOCKHOLDERS.
The indenture under which our debt was issued imposes significant operating
and financing restrictions on us and our present and future subsidiaries. These
restrictions affect, and in certain cases significantly limit or prohibit, among
other things, our ability to incur indebtedness, pay dividends and make other
restricted payments, create liens, issue and sell capital stock of subsidiaries,
guarantee indebtedness, sell assets or consolidate, merge or transfer all or
substantially all of our assets. These limitations could prevent us from
exploiting corporate opportunities as they arise, which could be detrimental to
the interests of our stockholders. It is possible that the holders of our
12 3/4% Senior Notes would argue that the corporate reorganization that may be
required under our agreements with Exelon and Consolidated Edison constitutes a
change in control under the indenture and thereby gives rise to an obligation on
our part to repurchase the 12 3/4% Senior notes at 101% of their principal
amount plus accrued but unpaid interest. While we believe any such claim would
be meritless, it could result in costs to us, including, if successful, the need
to refinance the 12 3/4% Senior Notes and the costs and risks associated with
any such refinancing.
14
<PAGE>
ANNUAL MEETING OF STOCKHOLDERS OF NORTHEAST OPTIC NETWORK
PROPOSAL 1--ELECTION OF DIRECTORS
We have seven directors and their terms of office expire at the 2000 annual
meeting of stockholders. The board of directors proposes that the nominees
described below, each of whom is currently serving as a director, be elected to
a new term of one year, to serve until the 2001 annual meeting of stockholders
and until their successors are elected and qualified.
The persons named in the enclosed proxy will vote to elect each of the
nominees named below unless the proxy is marked otherwise. Each of the nominees
has indicated his or her willingness to serve, if elected; but if any nominee
should be unable to serve, the person acting under the proxy may vote the proxy
for a substitute nominee. The board of directors has no reason to believe that
any of the nominees will be unable to serve if elected.
If the nominees described below are elected as directors of NorthEast Optic
Network, they will become directors of NEON Communications upon the closing of
the reorganization.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE ELECTION OF THE NOMINEES
Listed below is information that has been furnished by each director as to
his or her age at April 1, 2000, the year he or she was first elected a
director, his or her principal occupation and business experience for the past
five years and directorships with other publicly held companies.
<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE
NAME AGE SINCE DURING THE PAST FIVE YEARS, AND OTHER DIRECTORSHIPS
---- -------- -------- ---------------------------------------------------
<S> <C> <C> <C>
Vincent C. Bisceglia 45 1998 Chairman and chief executive officer since November
1998. Independent consultant from December 1997 to
November 1998. President and chief executive
officer and a director of Technology Service Group,
Inc., a manufacturer of advanced technology pay
telephones from February 1994 to December 1997.
Victor Colantonio 52 1989 Founder. President since 1994 and Vice Chairman of
the Board of Directors since 1998.
Katherine Dietze Courage 41 1998 Managing Director at Credit Suisse First Boston
since 1996. Account Officer at Salomon Brothers
from 1986 to 1996. Director of LightPath
Technologies, a publicly-traded glass lens
production company.
John H. Forsgren 53 1998 Executive Vice President and Chief Financial
Officer of Northeast Utilities and various
subsidiaries since 1996. Managing Director of Chase
Manhattan Bank from 1995 to 1996. Senior Vice
President of The Walt Disney Company from 1990 to
1994. Mr. Forsgren serves as a director at the
request of the management of Northeast Utilities.
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE
NAME AGE SINCE DURING THE PAST FIVE YEARS, AND OTHER DIRECTORSHIPS
---- -------- -------- ---------------------------------------------------
<S> <C> <C> <C>
Arthur W. Adelberg 48 1999 Executive vice president and chief financial
officer of CMP Group, Inc. since December 1999.
Executive vice president of CMP Group, Inc. from
September 1998 through November 1999. Vice
president, law and power supply of Central Maine
Power Company from March 1994 through August 1998.
F. Michael McClain 50 1996 Vice President, Corporate Development of CMP Group,
Inc. since 1998. Vice President, Corporate
Development of Central Maine Power Company from
February to September 1998. Group Vice
President--Petroleum of Dead River Company from
1979 to 1996.
Gary D. Simon 51 1998 Senior Vice President-Strategy and Development for
Northeast Utilities Service Company, a subsidiary
of Northeast Utilities, since 1998. Senior Director
of Cambridge Energy Research Associates, an
independent research firm specializing in energy
markets from 1990 to 1998. Mr. Simon serves as a
director at the request of the management of
Northeast Utilities.
</TABLE>
For information relating to shares of common stock owned by each of the
directors, see the section of this proxy statement/prospectus entitled "Security
Ownership of Certain Beneficial Owners and Management" beginning on page 17.
BOARD AND COMMITTEE MEETINGS
The board of directors met seven times during 1999. Each director attended
at least 75% of the aggregate number of board and committee meetings held during
1998 that he or she was eligible to attend as a director and committee member,
except that Ms. Courage was unable to attend one of the two compensation
committee meetings and one of the two audit committee meetings held during 1999.
The board of directors has a standing executive committee, audit committee and
compensation committee.
The executive committee may exercise all of the powers of the board of
directors in the management of our business affairs when the board of directors
is not in session, except those powers that may only be exercised by the board
of directors. The executive committee met four times in 1999. The current
members of the Executive Committee are Mr. Bisceglia (Chairman), Ms. Courage,
Mr. Forsgren and Mr. McClain.
The audit committee of the board of directors is responsible for reviewing
financial reports, accounting procedures and controls the scope and results of
the annual audit of our financial statements. The audit committee met twice
during 1999. The current members of the audit committee are Mr. McClain
(Chairman), Mr. Simon and Ms. Courage.
The compensation committee of the board of directors is responsible for
reviewing compensation issues and making decisions concerning the compensation
(including stock option grants) of executive officers. The compensation
committee met twice during 1999. The current members of the compensation
committee are Ms. Courage (Chairperson), Mr. Forsgren and Mr. McClain.
DIRECTORS' COMPENSATION
On September 25, 1998, the board of directors adopted a board compensation
plan which provides for the payment to directors who are not employees of
$20,000 per year for service as a director, payable quarterly in arrears; $500
per board meeting attended; $250 per committee meeting attended; $300 per
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<PAGE>
telephonic board meeting attended; and $150 per telephonic committee meeting
attended. All directors are reimbursed their expenses of attending Board and
committee meetings.
The board compensation plan also provides that each current non-employee
director is automatically granted an option to purchase at the market price on
the date of grant one-tenth of one percent (0.1%) of the number of shares of
common stock outstanding on a fully diluted basis at the first meeting of
directors following each annual meeting of stockholders. When the plan was
adopted, an initial option to purchase 16,241 shares of our common stock
exercisable at $12.00 per share was granted to each non-employee director at the
time. A new non-employee director is granted an option to purchase one-tenth of
one percent (0.1%) of the number of shares of our common stock issued and
outstanding exercisable at the then current market price per share. Each option
granted under the plan vests in four equal installments, on the date of grant
and on the first three anniversaries of the date of grant.
On May 26, 1999, the date of the first meeting of directors after the 1999
annual meeting of stockholders, each of Mr. Forsgren, Mr. McClain, Mr. Simon and
Ms. Courage was granted an option to purchase 18,682 shares of Common Stock.
Mr. Adelberg, as a director newly elected immediately after the 1999 annual
meeting of stockholders to replace a director who resigned, was granted an
option to purchase 16,083 shares. All of the options were granted at an exercise
price of $15.25 per share and vest as described above.
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 1, 2000 with
respect to the beneficial ownership of shares of our common stock by each person
known to us to own beneficially more than 5% of the outstanding shares of our
common stock; the directors and director nominees; our chief executive officer
and the other executive officers listed in the summary compensation table below;
and the directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF COMMON STOCK
BENEFICIALLY OWNED
--------------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENTAGE
------------------------ --------- ----------
<S> <C> <C>
CMP Group, Inc. (1)......................................... 4,680,801 28.1%
41 Anthony Avenue
Augusta, Maine 04330
Northeast Utilities (2)..................................... 4,774,038 28.7
107 Selden Street
Berlin, Connecticut 06037
Vincent C. Bisceglia (3).................................... 74,607 *
Victor Colantonio (4)....................................... 215,029 1.3
William F. Fennell (5)...................................... 21,604 *
Michael A. Musen (6)........................................ 31,501 *
Katherine Dietze Courage (7)................................ 17,462 *
Arthur W. Adelberg (8)...................................... 8,542 *
F. Michael McClain (9)...................................... 17,462 *
Gary D. Simon (10).......................................... 5,462 *
John H. Forsgren (11)....................................... 5,462 *
All directors and officers as a group (11 persons) (12)..... 401,527 2.4
</TABLE>
------------------------------
* Represents less than 1% of the outstanding shares of common stock.
(1) All 4,680,801 shares of common stock are held by New England Business Trust.
New England Business Trust is owned by New England Investment Corp., a
wholly-owned subsidiary of Mainecom Services which is a wholly-owned
subsidiary of CMP Group, Inc. The trustees of New England Business Trust are
New England Investment Corp. and Joseph D. Fay. Joseph D. Fay is General
Counsel, Secretary and Clerk of Mainecom Services and a director of New
England Investment Corp. The address of New England Business Trust is
110 The Great Road, Bedford, Massachusetts 01730. Mr. McClain, one of our
directors, is Vice President, corporate development of CMP Group, Inc.
Mr. Adelberg, one of our directors, is Executive Vice President and Chief
Financial Officer of CMP Group, Inc. each of Mr. Adelberg and Mr. McClain
disclaim beneficial ownership of the shares held by CMP Group, Inc., except
to the extent of his pecuniary interest, if any.
(2) All shares beneficially owned by Northeast Utilities are held by Mode 1
Communications, Inc., a wholly-owned subsidiary of Northeast Utilities
Enterprises, Inc., which is in turn, a wholly-owned subsidiary of Northeast
Utilities. Mr. Forsgren, one of our directors, is the Executive Vice
President and Chief Financial Officer of Northeast Utilities and certain of
its affiliates. Mr. Simon, one of our directors, is the Senior Vice
President, strategy and development for Northeast Utilities Service Company,
a subsidiary of Northeast Utilities. each of Messrs. Forsgren and Simon
disclaims beneficial ownership of the shares held by Mode 1 except to the
extent of his pecuniary interest, if any.
(3) Includes 58,180 shares issuable pursuant to options.
(4) Includes 213,729 shares issuable pursuant to options and 300 shares held of
record by Mr. Colantonio's minor child, as to which shares Mr. Colantonio
disclaims beneficial ownership except as to the extent of his pecuniary
interest, if any.
(5) Represents 21,204 shares issuable pursuant to options and 400 shares held of
record by Mr. Fennell's minor children, as to which shares Mr. Fennell
disclaims beneficial ownership except to the extent of his pecuniary
interest, if any.
(6) Includes 300 shares held of record by Mr. Musen's minor child as to which
shares Mr. Musen disclaims beneficial ownership except to the extent of his
pecuniary interest, if any.
(7) Represents 17,462 shares issuable pursuant to options.
(8) Includes 8,042 shares issuable pursuant to options.
(9) Represents 17,462 shares issuable pursuant to options.
(10) Represents 5,462 shares issuable pursuant to options.
(11) Represents 5,462 shares issuable pursuant to options.
(12) Includes 347,003 shares issuable pursuant to options.
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<PAGE>
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table sets forth the compensation for the fiscal years ended
December 31, 1997, 1998 and 1999 for our chief executive officer and our three
most highly compensated executive officers (other than the chief executive
officer) whose total annual salary and bonus exceeded $100,000 in 1999. We refer
to the chief executive officer and these other executive officers as the "named
executive officers".
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SHARES
------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION(1)
--------------------------- -------- -------- -------- ------------ ---------------
<S> <C> <C> <C> <C> <C>
Vincent C. Bisceglia................... 1999 $211,746 $ -- 299,628 $4,124
Chairman of the Board and 1998 25,845 -- 350,000 --
Chief Executive Officer 1997 -- -- -- --
Victor Colantonio...................... 1999 203,325 -- -- 4,994
Vice Chairman of the Board 1998 174,556 500,000 649,628 4,800
and President 1997 150,000 2,885 -- --
William F. Fennell..................... 1999 127,175 -- -- 3,840
Vice President, Finance, 1998 111,436 -- 162,407 3,246
Chief Financial Officer, 1997 91,731 -- -- --
Treasurer and Assistant
Secretary
Michael A. Musen....................... 1999 115,855 -- 60,000 3,557
Vice President, Operations 1998 123,313 -- 40,601 3,592
1997 112,000 2,154 -- --
</TABLE>
------------------------
(1) These amounts represent amounts paid by us on behalf of the named executive
officer as 401(k) contributions and group life insurance premiums.
OPTION GRANTS IN THE LAST FISCAL YEAR
The following table sets forth certain information concerning grants of
stock options made during fiscal 1999 to each of the named executive officers.
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED RATES OF
NUMBER OF PERCENT OF APPRECIATION FOR OPTION
SECURITIES TOTAL OPTIONS EXERCISE TERM(1)
UNDERLYING GRANTED TO PRICE PER EXPIRATION ---------------------------
NAME OPTIONS GRANTED EMPLOYEES SHARE DATE (2) 5% 10%
---- --------------- ------------- --------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Vincent C. Bisceglia (3)....... 299,628 42.1% $12.00 01/01/09 $2,261,213 $5,730,358
Victor Colantonio.............. -- -- -- -- -- --
William F. Fennell............. -- -- -- -- -- --
Michael A. Musen (4)........... 60,000 8.4% $29.38 08/18/09 1,108,427 2,808,971
</TABLE>
------------------------
(1) The amounts shown in these columns represent hypothetical gains that could
be achieved if the options were exercised at the end of the option term.
These gains are based on assumed rates of stock appreciation of 5% and 10%,
compounded annually from the date the option was granted to its expiration
date. The gains shown are net of the option exercise price, but do not
include deductions
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<PAGE>
for taxes or other expenses associated with an exercise. Actual gains, if
any, on a stock option exercise will depend on the future performance of our
common stock, the option holder's continued employment, and the date on
which the option is exercised.
(2) The expiration date of each option is the tenth anniversary of the date on
which the option was granted.
(3) This option becomes exercisable as to 137,221 shares on November 11, 2001
and as to the remaining shares on November 11, 2002.
(4) This option is exercisable in three equal annual installments beginning on
August 18, 2000.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth certain information concerning each exercise
of a stock option during the fiscal year ended December 31, 1999 by each of the
named executive officers. It also includes the number of shares subject to
options and the "value" of unexercised options held by each of the named
executive officers on December 31, 1999. The value of an unexercised option for
purposes of this table is the difference between the fair market value of our
common stock on December 31, 1999 ($62.5625 per share, as quoted on The Nasdaq
National Market) and the option's exercise price, multiplied by the number of
shares underlying the option.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
IN-THE-MONEY OPTIONS
AT FISCAL YEAR END
SHARES ACQUIRED ---------------------------
NAME ON EXERCISE VALUE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- --------------- -------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Vincent C. Bisceglia...... 51,827 $3,149,361 110,580 487,221 $6,245,006 $25,774,405
Victor Colantonio......... 85 4,420 324,729 324,814 16,419,272 16,423,570
William F. Fennell........ 28,500 1,553,330 52,704 81,203 2,664,827 4,105,867
Michael A. Musen.......... -- -- 40,602 60,000 2,052,958 1,991,280
</TABLE>
EMPLOYMENT, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS
Mr. Bisceglia serves as our chief executive officer pursuant to the terms of
an employment agreement dated November 12, 1998 and made effective November 5,
1998. The agreement has an initial term expiring on December 31, 2001 and is
automatically extended for one year periods unless either party gives notice no
later than the immediately preceding July 1 of its desire to terminate the
agreement. The agreement provides for an annual base salary of not less than
$210,000 and for the grant of two options in November 1998 and a third option in
January 1999. The first two options cover 350,000 shares in the aggregate which
become exercisable at $6.0875 per share, as to 162,407 shares on each of
November 11, 1999 and 2000 and as to 25,186 shares on November 11, 2001; the
third option covers 299,628 shares and becomes exercisable at $12.00 per share
as to 137,221 shares on November 11, 2001 and as to 162,407 shares on
November 11, 2002. In addition to being eligible to participate in our executive
and employee plans, Mr. Bisceglia has an opportunity to earn an annual bonus of
up to 35% of his base salary upon achieving certain performance goals. If
Mr. Bisceglia's employment is terminated for any reason other than death, total
disability or cause or if we elect not to renew the agreement after the
occurrence of a change of control, Mr. Bisceglia will be entitled to receive a
lump sum payment in an amount equal to 2.99 times his then-current base salary.
If in the absence of a change of control the agreement is not renewed or
Mr. Bisceglia's employment is terminated for any reason other than death, total
disability or cause or by him within six months of a constructive discharge,
Mr. Bisceglia will be entitled to receive a lump sum payment in an amount equal
to his base salary in effect immediately preceding his termination or
constructive discharge, as the case may be.
20
<PAGE>
Mr. Colantonio serves as our president pursuant to the terms of an
employment agreement dated October 15, 1997, as amended. The agreement has an
initial term of three years and is automatically extended for one-year terms
thereafter unless either party gives written notice no later than the
immediately preceding April 1 of its desire to terminate the agreement. 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, 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 initial public offering of our common stock,
Mr. Colantonio's annual base salary was increased to $200,000, as provided for
in the agreement. We and Mr. Colantonio have decided not to renew
Mr. Colantonio's current agreement, but intend to negotiate a new agreement
commensurate with Mr. Colantonio's position as our vice chairman and president
and which takes into account the fact that we are now publicly traded, among
other matters.
Mr. Fennell serves as our chief financial officer pursuant to the terms of
an employment agreement dated July 1, 1998. The agreement has an initial term
expiring on July 30, 2001. 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 our common stock at $12.00 per share evidenced by a stock option agreement
which provides that the option vests as to 40,602 shares on each of May 20,
1998, August 5, 1999 and August 5, 2000, and as to 40,601 shares on August 5,
2001. Pursuant to the agreement, Mr. Fennell is also entitled to participate in
our executive incentive plan and has an opportunity to earn an annual bonus,
targeted at 25% of his base salary.
Mr. Musen serves as our vice president, operations pursuant to the terms of
an employment agreement dated September 29, 1994. The agreement 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 not less than $112,000. In addition, in June 1998 the board of
directors granted to Mr. Musen an option to purchase 40,601 shares of our common
stock, exercisable in full upon August 5, 1998 with an exercise price per share
of $12.00. Pursuant to the provisions of our amended and restated 1998 stock
incentive plan, under which the foregoing options were granted, all options
become exercisable in full upon a change in control.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1999, Mr. Bisceglia and Mr. Colantonio served on the board of
directors and served as executive officers. No interlocking relationship exists
between any member of our compensation committee and any member of any other
corporation's board of directors or compensation committee.
The current members of our compensation committee are Ms. Courage,
Mr. Forsgren and Mr. McClain. None of our executive officers have served as a
director or member of the compensation committee (or other committee serving an
equivalent function) of any other entity, whose executive officers served as a
director of or member of our compensation committee.
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
The compensation committee seeks to achieve two primary goals in connection
with executive compensation programs and decisions regarding individual
compensation. First, the compensation committee structures executive
compensation programs in a manner that it believes will enable us to attract and
retain key executives. In order to ensure continuity of certain key members of
management, in 1998 the board of directors approved multi-year employment
contracts for our executive officers. Second, executive compensation programs
are intended to provide executives with an equity interest in us so as to link a
portion of their compensation with the performance of our common stock.
The compensation programs for executives established by the compensation
committee consist of a base salary plus an annual cash bonus and/or a
stock-based equity incentive award. In establishing base salaries for executive
officers, the compensation committee monitored salaries at other companies,
particularly those that are in the same industry as we are or related industries
and/or located in the same
21
<PAGE>
general geographic area as we are, considered historic salary levels of the
individual and the nature of the individual's experience and responsibilities
and compared the individual's base salary with those of other executives. To the
extent determined to be appropriate, the compensation committee also considered
our financial performance and the individual's performance.
In establishing bonuses for executive officers, including our chief
executive officer, the compensation committee considered a combination of
individual and corporate performance goals to be achieved during the coming
year.
It is not currently the policy of the compensation committee to grant stock
options to executives annually, and the timing of grants to executives, if any,
will depend upon a number of factors, including new hires of executives, the
executives' current stock and option holdings and such other factors as the
compensation committee deems relevant. When granting stock options, it has
generally been the policy of the compensation committee to fix the exercise
price at 100% of the fair market value of our common stock on the date of grant.
The compensation of our chief executive officer is currently governed by his
employment agreement established in 1998, which is described under the heading
"Employment, Termination and Change-in-Control Arrangements," above.
SECTION 162(m). Section 162(m) of the Code generally disallows a federal
tax deduction to public companies for compensation in excess of $1,000,000 paid
to its chief executive officer and its four other most highly compensated
executive officers. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. The adoption of
the 1998 stock incentive plan was originally approved by our stockholders on
May 26, 1998. In order for the 1998 stock incentive plan, as amended, to comply
with Section 162(m), our stockholders must approve the continuance of and
amendment to the 1998 stock incentive plan. If the stockholders do not vote to
continue the 1998 stock incentive plan, as amended, we will not grant any
further options or make any further awards under the 1998 stock incentive plan.
We review periodically the potential consequences of Section 162(m) on us.
However, there can be no assurances that compensation granted to our executive
officers will be treated as qualifying performance-based compensation under
Section 162(m). Moreover, because our annual bonus awards are not currently
granted in a manner designed to qualify as performance-based compensation under
Section 162(m), it is possible that all or a portion of bonuses paid to our
executive officers will not be deductible for federal income tax purposes.
COMPENSATION COMMITTEE
Katherine D. Courage
John H. Forsgren
F. Michael McClain
CERTAIN TRANSACTIONS
NORTHEAST UTILITIES AGREEMENTS
In 1994 and 1995, we entered into a series of agreements (as subsequently
amended and restated in February 1998) with the three principal operating
subsidiaries of Northeast Utilities concerning the provision of rights-of-way
along electric utility towers and inside urban electric utility ducts. Pursuant
to the agreements with Northeast Utilities, we acquired indefeasible rights of
use in fiber optic filaments placed along Northeast Utilities' rights of way
prior to February 1998 and acquired ownership of fiber optic filaments placed
along Northeast Utilities' rights of way subsequent to February 1998. We and
Northeast Utilities both agreed to use best efforts to complete installation of
the Northeast Utilities system by September 1999. We agreed to pay the cost of
installing the cable and to utilize Northeast Utilities' engineering staff in
carrying out the installation. Under our agreements with Northeast Utilities, we
agreed
22
<PAGE>
to pay to Northeast Utilities mileage-based annual fees and a percentage of the
gross revenues that the company generates on the portion of our system located
on Northeast Utilities' rights-of-way.
A portion of the Northeast Utilities system, comprised of 12 fibers within
the cable, is owned by, and has been set aside for, Northeast Utilities.
Northeast Utilities may lease these fibers to third parties, provided that prior
to September 2001, Northeast Utilities is not permitted to assign any fibers or
resell capacity on its network to specified carriers except for certain limited
purposes. After September 2001, Northeast Utilities will be free to use its
network to compete with us.
Under our agreements with Northeast Utilities, if any proposed segment of
our system's route requires material modifications or unusual expense to make it
available for our fiber, or if Northeast Utilities withdraws any segment from
the route in order to give priority to electrical services, we have the right to
designate additional or alternative route segments, subject to Northeast
Utilities' approval, which will not be withheld unless the additional or
alternative segments would materially adversely affect Northeast Utilities'
ability to provide reliable electric service, cause or create safety problems or
would not be feasible for structural reasons. If Northeast Utilities wants to
create new route segments in order to extend the their system, we have a right
of first refusal on the provision of any such segments. If Northeast Utilities
obtains such segments from third parties, Northeast Utilities has agreed to use
its best efforts to obtain for us the unimpeded use of not less than 12 usable
single mode fibers in such segment on terms no less favorable than those
provided to Northeast Utilities.
The agreements with Northeast Utilities 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 Northeast Utilities gives such a notice and
terminates the agreements, it must either, at its option, pay us an amount equal
to the fair market value of their system less the value of their own network or
allow us to retain the indefeasible rights of use and receive from us an annual
payment equal to 10% of our gross revenue from the Northeast Utilities system,
which payment would be in addition to the other annual payments under the
agreements with Northeast Utilities.
In addition to the foregoing, our agreements with Northeast Utilities may be
terminated by Northeast Utilities if we default in the performance of our
obligations under the agreements, including the failure to obtain and maintain
all necessary government permits, licenses, franchises and approvals, and the
failure to pay amounts due under the agreements, subject in most cases to cure
periods of between 30 and 90 days.
We believe that our agreements with Northeast Utilities are on terms at
least as favorable to us as could have been obtained from unaffiliated third
parties. Northeast Utilities has waived right-of-way fees otherwise payable by
the company through 2004 in return for our agreement to build our system to
certain facilities of Northeast Utilities and to allow them to use 12 fibers on
designated route segments in their service territory.
CENTRAL MAINE POWER COMPANY AGREEMENT
In January 1997, we and Central Maine Power Company entered into an
agreement in which Central Maine Power Company granted us a right of use in
fiber optic filaments within a cable along a certain route in Central Maine
Power Company's service territory. We have the right to install additional cable
in Central Maine Power Company's service territory, subject to the approval of
Central Maine Power Company, which must not be unreasonably withheld. We are
obligated to pay the cost of installing the cable.
In exchange for the rights of use, we agreed to pay to Central Maine Power
Company an annual fee beginning, with regard to any particular route segment, in
the first calendar year following the installation date for such route segment.
Our rights of use do not apply to six fibers that have been set aside for
Central Maine Power Company's use as their network. Central Maine Power Company
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
23
<PAGE>
date. After the seven-year period, to the extent that Central Maine Power
Company has excess capacity on its network, Central Maine Power Company is
required to negotiate in good faith with us to provide such excess capacity
before making it available to third parties. If we do not enter into an
agreement with Central Maine Power Company for such excess capacity, Central
Maine Power Company will be able to use such capacity to compete with us.
Our agreement with Central Maine Power Company has an initial term of
30 years and expires in January 2027. Thereafter, it is renewable at our option
for an additional ten-year term. In the event that we elect to renew the
agreement, we must pay to Central Maine Power Company an annual payment equal to
10% of our gross annual revenue from the Central Maine Power Company system,
which payment would be in addition to the other annual payments under the
agreement with Central Maine Power Company.
In addition to the foregoing, our agreement with Central Maine Power Company
may be terminated by them if we default in our obligations under the agreement
and our default is not cured within a designated cure period.
We believe that our agreement Central Maine Power Company is on terms at
least as favorable to us as could have been obtained from unaffiliated third
parties.
JULY 1998 REORGANIZATION
We were incorporated in Massachusetts in July 1989 under the name
"FiveCom, Inc." In May 1996, FiveCom LLC, an operating subsidiary a majority of
whose stock was owned by the company, was organized in Massachusetts. Also in
May 1996, FiveCom LLC and Mode 1 Communications, Inc., a subsidiary of Northeast
Utilities, organized NECOM LLC in Massachusetts, with FiveCom LLC owning
approximately 60%, and Mode 1 Communications owning approximately 40% of the
membership interests in NECOM LLC. In December 1996, FiveCom LLC and MaineCom
Services, a wholly-owned subsidiary of Central Maine Power Company, organized
FiveCom of Maine LLC in Massachusetts, with MaineCom Services 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
initial public offering of ourcommon stock, our major stockholders decided to
reorganize the company. In April 1998, prior to the reorganization described
below, Central Maine Power Company exercised its warrants to purchase 5,876
shares of membership interests in FiveCom LLC for a total exercise price of
$58.76. In July 1998, the company entered into a Restructuring and Contribution
Agreement with, among others, Central Maine Power Company, MaineCom Services, an
affiliate of Central Maine Power Company, and Mode 1 Communications, Inc., an
affiliate of Northeast Utilities, relating to the reorganization described
below, pursuant to which:
- each of the minority members in FiveCom LLC, as well as Mode 1
Communications, Inc. and MaineCom Services, exchanged their membership
interests in FiveCom LLC, NECOM LLC and FiveCom of Maine LLC,
respectively, for shares of our Series B convertible preferred stock;
- FiveCom LLC and NECOM LLC were each merged with and into a wholly-owned
subsidiary of our company;
- FiveCom of Maine LLC was merged into FiveCom of Maine, Inc., a
wholly-owned subsidiary of our company; and
- our company was reincorporated in Delaware under the name "NorthEast Optic
Network, Inc." and our Certificate of Incorporation was amended and
restated.
The foregoing actions constituted a reorganization of the company. The
shares of membership interest in FiveCom LLC received by Central Maine Power
Company upon exercise of its warrant were exchanged for 144,172 shares of our
Series B convertible preferred stock, and those shares had an estimated value at
the time of the reorganization of approximately $4.3 million. Mr. Colantonio and
Mr. Musen exchanged their membership interests in FiveCom LLC for 17,788 shares
and 14,549 shares, respectively, of our Series B convertible preferred stock,
and those shares had an estimated value at the
24
<PAGE>
time of the reorganization of approximately $542,000 and $443,000, respectively.
We believe 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.
CMP GROUP, INC., MAINECOM SERVICES, NEW ENGLAND BUSINESS TRUST AND NORTHEAST
UTILITIES AGREEMENT
In March 2000, we entered into a memorandum of understanding with CMP
Group, Inc., MaineCom Services, New England Business Trust and Northeast
Utilities. Under the memorandum of understanding, we agreed to file a
registration statement to register certain shares of common stock held by New
England Business Trust in response to the exercise of a demand registration
request by New England Business Trust under a 1995 agreement. New England
Business Trust also agreed to reimburse us for some of the expenses that we
incur in connection with this offering, which amount shall not exceed $575,000.
Pursuant to the 1995 agreement, we agreed to indemnify New England Business
Trust against certain liabilities, including liabilities under the Securities
Act. On May 19, 2000, New England Business Trust completed the sale of 1,500,000
shares of our common stock pursuant to this registration statement.
Under the memorandum of understanding, Northeast Utilities and New England
Business Trust also agreed to amend the existing stockholders agreement between
them to provide that each of them may sell shares of our common stock pursuant
to Rule 144 of the Securities Act without regard to the right of first offer
provision contained in the stockholders agreement between them and that each of
them would agree to vote for two directors nominated to our board of directors
by the other. See "Principal Stockholders Agreement" below. Northeast Utilities
and New England Business Trust also agreed that in the event Northeast Utilities
holds less than 2,086,732 shares, New England Business Trust would only be
obligated to vote for one director nominated by Northeast Utilities and that the
voting obligation would be eliminated if Northeast Utilities holds less than
772,917 shares. Likewise, in the event that New England Business Trust holds
less than 2,701,629 shares, Northeast Utilities would only be obligated to vote
for one director nominated by New England Business Trust and the voting
obligation would be eliminated if New England Business Trust holds less than
1,000,672 shares.
New England Business Trust, Northeast Utilities and we also agreed under the
memorandum of understanding to use commercially reasonable efforts to cause the
form of stockholders agreement which is to be executed in connection with the
closing of the Consolidated Edison Communications and Exelon Corporation
agreements to be amended to add New England Business Trust as a party and to
provide for amendments similar to those to be made to the existing stockholders
agreement between New England Business Trust and Northeast Utilities, which are
described above.
In addition, New England Business Trust and Northeast Utilities agreed under
the memorandum of understanding to vote in favor of the issuance of shares to
Consolidated Edison Communications and Exelon Corporation in connection with our
agreements with each of them.
REGISTRATION RIGHTS
In November 1995, we entered into a stock subscription agreement with
Mainecom Services pursuant to which MaineCom Services purchased shares of our
Series B convertible preferred stock. Pursuant to the terms of the agreement,
MaineCom Services has the right to have the shares of our common stock that were
issued upon conversion of its shares of our Series B convertible preferred stock
included in any registration statement we file relating to any public offering
of our common stock, except to the extent the number of such shares may be
limited by the managing underwriter of the offering. In addition, MaineCom
Services may request that we register all or part of the those shares at any
time at least 180 days after the effective date of a registered underwritten
offering of our Common Stock, provided that the anticipated aggregate net
offering price for such securities is at least $10,000,000. MaineCom Services
through its affiliate, New England Business Trust, made such a demand by a
letter addressed to us and dated January 28, 2000. In response to that request,
we filed the registration statement referenced above under the heading "CMP
Group, Inc., MaineCom Services, New England Business Trust and Northeast
Utilities Agreement" relating to 3,450,000 shares of our common stock held by
New England Business Trust.
25
<PAGE>
PRINCIPAL STOCKHOLDERS AGREEMENT
Central Maine Power Company and Northeast Utilities have entered into a
Principal Stockholders Agreement dated May 28, 1998, whereby each of them agreed
that, following the completion of our initial public offering, neither of them
will permit or cause our company to 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 seek bankruptcy protection or certain other
protection from creditors, without the consent of both parties. In addition,
they granted each other rights of first offer in connection with any proposed
sale of our common stock held by them and the option to purchase the shares of
common stock held by one of them if the other seeks bankruptcy protection or
similar relief. This agreement will remain in effect for so long as Northeast
Utilities owns at least 10% of our outstanding common stock, on a fully diluted
basis, and the aggregate shares of our common stock owned by Northeast Utilities
and Central Maine Power Company is at least 33 1/3% of our outstanding common
stock, on a fully diluted basis.
OTHER TRANSACTIONS
Ms. Courage, one of our directors, is managing director at Credit Suisse
First Boston Corporation, which acts on a regular basis as our financial advisor
and provided fairness opinions in connection with the agreements we entered into
with Consolidated Edison Communications and Exelon Corporation.
During the years ended December 31, 1997, 1998 and 1999, we reimbursed
Central Maine Power Company and/or MaineCom Services for personnel and
construction costs related to our activities. T he amount paid to Central Maine
Power Company totaled $725,000, $1.2 million and $241,000 for the years ended
December 31, 1997, 1998 and 1999, respectively. Of those amounts, $29,779 and
$151,933 was included in accounts payable at December 31, 1997 and 1998
respectively.
We paid Northeast Utilities $946,000 in 1997, $1,907,000 in 1998 and
$1,159,000 in 1999 for materials, labor and other contractor charges related to
the construction of the NEON system. Approximately $494,500, $359,300 and
$486,000 was included in accounts payable at December 31, 1997, 1998 and 1999,
respectively.
For a description of employment agreements between us and our named
executive officers, see "Compensation of Executive Officers--Employment,
Termination and Change-in-Control Arrangements," above. For a description of
stock options granted to certain directors, see "Annual Meeting of Stockholders
of NorthEast Optic Network--Proposal 1--Election of Directors--Directors'
Compensation," above.
26
<PAGE>
STOCK PERFORMANCE GRAPH
The following graph compares the cumulative total stockholder return on the
Common Stock between July 31, 1998 (the date our common stock commenced public
trading) and December 31, 1999 with the cumulative total return of the Nasdaq
(U.S.) Index and the Nasdaq Telephone Communications Index, over the same
period. This graph assumes the investment of $100 on July 31, 1998 in our common
stock, the Nasdaq U.S. Index and the Nasdaq Telecommunications Index, and
assumes any dividends are reinvested.
COMPARISON OF CUMULATIVE TOTAL RETURN AMONG
NORTHEAST OPTIC NETWORK, INC.
THE NASDAQ U.S. INDEX
THE NASDAQ TELECOMMUNICATIONS INDEX
EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
<S> <C> <C> <C>
7/98 12/98 12/99
NORTHEAST OPTIC NETWORK, INC. 100.00 86.46 521.36
NASDAQ STOCK MARKET (U.S.) 100.00 118.64 219.57
NASDAQ TELECOMMUNICATIONS INDEX 100.00 117.60 204.80
</TABLE>
<TABLE>
<CAPTION>
CUMULATIVE TOTAL
RETURN
------------------------------
7/98 12/98 12/99
-------- -------- --------
<S> <C> <C> <C>
NORTHEAST OPTIC NETWORK, INC................................ 100.00 86.46 521.36
NASDAQ STOCK MARKET (U.S.).................................. 100.00 118.64 219.57
NASDAQ TELECOMMUNICATIONS INDEX............................. 100.00 117.60 204.80
</TABLE>
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely on our review of copies of reports filed by our directors and
executive officers and persons beneficially owning more than 10% of our common
stock pursuant to Section 16(a) of the Securities Exchange Act of 1934 or
written representations from certain of those persons, we believe that all
filings required to be made by those persons under Section 16(a) were timely
made.
27
<PAGE>
PROPOSAL 2--APPROVAL OF THE CONTINUANCE OF AND AMENDMENT TO THE AMENDED AND
RESTATED 1998 STOCK INCENTIVE PLAN
A proposal will be presented at the Annual Meeting that the stockholders
approve the continuation of the amended and restated 1998 stock incentive plan
and an amendment to this plan to increase the maximum number of shares issuable
under the plan from 2,436,105 shares to 4,936,105 shares of our common stock.
This amendment was approved by the executive committee of our Board of Directors
on March 10, 2000. We are asking you to approve this amendment both as a
stockholder of NorthEast Optic Network and as a prospective stockholder of NEON
Communications, which will assume the plan upon the closing of the
reorganization, in order to meet the stockholder approval requirements of each
of the following:
- the terms of the plan itself;
- The Nasdaq Stock Market;
- Section 422 of the Internal Revenue Code of 1986, which requires
stockholder approval of any plan under which incentive stock options are
issued; and
- Section 162(m) of the Internal Revenue Code so that we may comply with an
exemption from the deduction limitations of Section 162(m) for so-called
"performance-based compensation." See the section of this proxy
statement/prospectus entitled "Report of the Compensation Committee on
Executive Compensation--Section 162(m)" beginning on page 21. The
executive officers and directors of the company are eligible to receive
options under the plan and will, therefore, benefit from such approval.
The plan provides for the grant of incentive stock options intended to
qualify under Section 422 of the Internal Revenue Code, non-statutory 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. These
grants will be referred to generally as awards.
Stock 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 Internal Revenue 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 option
holders holding more than 10% of the voting power of the company or any of our
subsidiaries). Options granted under the plan typically will vest over time,
subject to acceleration upon a change in control of the company, as that concept
is defined in the plan.
Restricted stock awards entitle recipients to acquire shares of common
stock, subject to the right of the company to repurchase all or part of the
shares from the recipient in the event that the conditions specified in the
award are not satisfied prior to the end of the restriction period established
for the award. Under the plan, the board has the right to grant other awards
based upon the common stock having the terms and conditions that the board
determines, including the grant of shares based upon certain conditions, the
grant of securities convertible into common stock and the grant of stock
appreciation rights.
Our officers, employees, directors, consultants and advisors of the company
and those of our subsidiaries are eligible to be granted awards under the plan.
At April 30, 2000, we had four executive officers, 73 employees and seven
directors (two of whom are also officers and employees). The maximum number of
shares with respect to which awards may be granted to any one employee under the
Plan is 350,000 shares per calendar year.
The plan is administered by the board of directors, which has the authority
to adopt, amend and repeal the administrative rules, guidelines and practices
relating to the plan and to interpret its provisions and has delegated this
authority to the compensation committee. The board of directors has also
delegated
28
<PAGE>
to the compensation committee the authority to grant awards under the plan. No
consideration is payable to the company for the grant of a stock option.
On April 28, 2000, the closing price of our common stock on The Nasdaq
National Market was $56.00 per share.
FEDERAL INCOME TAX INFORMATION. The following is a summary of the United
States federal income tax consequences that generally will arise with respect to
awards granted under the plan and with respect to the sale of common stock
acquired under the plan. The following summary is not intended to be exhaustive,
does not address certain special federal tax provisions, and does not address
state, municipal or foreign tax laws.
INCENTIVE STOCK OPTIONS. In general, a participant will not recognize
taxable income upon the grant or exercise of an incentive stock option. Instead,
a participant will recognize taxable income with respect to an incentive stock
option only upon the sale of common stock acquired through the exercise of the
option ("ISO Stock"). The exercise of an incentive stock option, however, may
subject the participant to the alternative minimum tax.
Generally, the tax consequences of selling ISO Stock will vary with the
length of time that the participant has owned the ISO Stock at the time it is
sold. If the participant sells ISO Stock after having owned it for at least two
years from the date the option was granted (the "Grant Date") and one year from
the date the option was exercised (the "Exercise Date"), then the participant
will recognize long-term capital gain in an amount equal to the excess of the
sale price of the ISO Stock over the exercise price.
If the participant sells ISO Stock for more than the exercise price prior to
having owned it for at least two years from the Grant Date and one year from the
Exercise Date (a "Disqualifying Disposition"), then all or a portion of the gain
recognized by the participant will be ordinary compensation income and the
remaining gain, if any, will be a capital gain. This capital gain will be a
long-term capital gain if the participant has held the ISO Stock for more than
one year prior to the date of sale.
If a participant sells ISO Stock for less than the exercise price, then the
participant will recognize capital loss in an amount equal to the excess of the
exercise price over the sale price of the ISO Stock. This capital loss will be a
long-term capital loss if the participant has held the ISO Stock for more than
one year prior to the date of sale.
NONSTATUTORY STOCK OPTIONS. As in the case of an incentive stock option, a
participant will not recognize taxable income upon the grant of a nonstatutory
stock option. Unlike the case of an incentive stock option, however, a
participant who exercises a nonstatutory stock option generally will recognize
ordinary compensation income in an amount equal to the excess of the fair market
value of the common stock acquired through the exercise of the option ("NSO
Stock") on the Exercise Date over the exercise price.
With respect to any NSO Stock, a participant will have a tax basis equal to
the exercise price plus any income recognized upon the exercise of the option.
Upon selling NSO Stock, a participant generally will recognize capital gain or
loss in an amount equal to the difference between the sale price of the NSO
Stock and the participant's tax basis in the NSO Stock. This capital gain or
loss will be a long-term capital gain or loss if the participant has held the
NSO Stock for more than one year prior to the date of the sale.
RESTRICTED STOCK. A participant will not recognize taxable income upon the
grant of a restricted stock award unless the participant makes an election under
Section 83(b) of the Code (a "Section 83(b) Election"). If the participant makes
a Section 83(b) Election within 30 days of the date of the grant, then the
participant will recognize ordinary compensation income, for the year in which
the award is granted, in an amount equal to the difference between the fair
market value of the common stock at the time the award is granted and the
purchase price paid for the common stock. If a Section 83(b) Election is not
made, then the participant will recognize ordinary compensation income, at the
time that the forfeiture provisions or restrictions on transfer lapse, in an
amount equal to the difference between the fair market value of the common stock
at the time of such lapse and the original purchase price paid for the common
29
<PAGE>
stock. The participant will have a tax basis in the common stock acquired equal
to the sum of the price paid and the amount of ordinary compensation income
recognized.
Upon the disposition of the common stock acquired pursuant to a restricted
stock award, the participant will recognize a capital gain or loss in an amount
equal to the difference between the sale price of the common stock and the
participant's tax basis in the common stock. This capital gain or loss will be a
long-term capital gain or loss if the shares are held for more than one year.
TAX CONSEQUENCES TO THE COMPANY. The grant of an award under the plan will
have no tax consequences to us. Moreover, in general, neither the exercise of an
incentive stock option nor the sale of any common stock acquired under the plan
will have any tax consequences to the company. The company generally will be
entitled to a business-expense deduction, however, with respect to any ordinary
compensation income recognized by a participant under the plan, including in
connection with a restricted stock award or as a result of the exercise of a
nonstatutory stock option or a Disqualifying Disposition. Any such deduction
will be subject to the limitations of Section 162(m) of the Code.
The following awards (all of them stock options) have been made under the
plan to the persons and groups listed below through May 1, 2000.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
SUBJECT TO
NAME OR GROUP TITLE/POSITION OPTION
------------- ------------------------- -------------
<S> <C> <C>
Arthur W. Adelberg................................ Director* 16,083
Vincent C. Bisceglia.............................. Chairman and Chief
Executive Officer* 649,628
Victor Colantonio................................. Vice Chairman and
President* 649,628
Katherine D. Courage.............................. Director* 34,923
William F. Fennell................................ Chief Financial Officer
and Treasurer 162,407
John H. Forsgren.................................. Director* 34,923
F. Michael McClain................................ Director* 34,923
Michael A. Musen.................................. Vice President Operations 100,601
Gary D. Simon..................................... Director* 34,923
All current executive officers as a group
(4 persons)..................................... 1,562,284
All current directors who are not executive
officers
(5 persons)..................................... 155,775
All employees other than executive officers
(59 persons).................................... 579,424
</TABLE>
------------------------
* Nominee for election as a director.
As awards under the amended and restated 1998 stock incentive plan are
discretionary, we cannot determine who will receive the benefits of future
awards under the plan.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE CONTINUANCE OF AND AMENDMENT
TO THE AMENDED AND RESTATED 1998 STOCK INCENTIVE PLAN
30
<PAGE>
PROPOSAL 3--AMENDMENT TO THE CERTIFICATE OF INCORPORATION
THE AMENDMENT. On March 15, 2000, the board of directors adopted, subject
to stockholder approval, an amendment to the first paragraph of Article FOURTH
of our second amended and restated certificate of incorporation to increase the
number of shares of common stock that we are authorized to issue from 30,000,000
shares to 60,000,000 shares. If the amendment is approved by stockholders, it
will become effective upon its filing with the Secretary of State of the State
of Delaware. Pursuant to Delaware law, the board of directors has declared the
amendment to be advisable.
THE ADDITIONAL SHARES. The additional shares of common stock to be
authorized for issuance by the amendment would have rights identical to the
currently outstanding common stock, and the approval of the amendment by
stockholders would not affect the rights of holders of currently outstanding
common stock, except for effects incidental to increasing the number of shares
that the board of directors is authorized to issue, including the dilutive
effects on present stockholders upon issuance of any of the additional shares.
The availability or issuance of additional shares could have the effect of
depressing the market price of the common stock and of making it more difficult
for a third party to acquire, or of discouraging a third party from acquiring, a
majority of our outstanding voting stock.
ISSUANCE OF ADDITIONAL SHARES. As a general matter, the board of directors
may issue any of the additional authorized shares for such corporate purposes as
it considers to be in the best interests of the company without stockholder
approval, unless stockholder approval is required by law or by rules or
regulations applicable to the company. The additional shares available as a
result of the amendment can be used by the board of directors, for example, to
raise capital through equity financing, to purchase assets or capital stock of
another company, or to effect a stock split of the common stock. We have no
current plans to issue or to reserve for issuance any of the additional shares
to be authorized by the amendment.
At March 31, 2000 there were 16,655,581 shares of common stock issued and
outstanding, and 4,936,105, shares reserved for issuance under our amended and
restated 1998 stock incentive plan. In addition, we have agreed to issue
4,554,865 shares in total to Consolidated Edison Communications Corporation and
Exelon Corporation in exchange for cash and certain of their assets.
Accordingly, without including the shares that would be authorized by the
proposed amendment, we currently have a balance of approximately 4,000,000
shares available for issuance and not subject to any reserve.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
THE APPROVAL OF THE AMENDMENT TO THE CERTIFICATE OF INCORPORATION
31
<PAGE>
PROPOSAL 4--APPROVAL OF ISSUANCE OF SHARES TO CONSOLIDATED EDISON
COMMUNICATIONS AND EXELON CORPORATION
We have entered into subscription agreements with Consolidated Edison
Communications and Exelon Corporation pursuant to which we have agreed to issue
an aggregate of 4,554,865 shares of our common stock, subject to adjustment as
set forth in the subscription agreements, to Consolidated Edison Communications
and Exelon Corporation in exchange for their contribution to us of cash and
assets comprised of fiber optic facilities. See the section of this proxy
statement/prospectus entitled "Business--NorthEast Optic Network Consolidated
Edison Communications Agreement and Exelon Corporation Agreement" beginning on
page 51 for a description of our agreements with Consolidated Edison
Communications and Exelon Corporation.
Under the rules of The Nasdaq Stock Market, we are required to seek
stockholder approval for any issuance of shares of our capital stock in a single
transaction or series of related transactions which exceeds 20% of the issued
and outstanding shares of our capital stock. The shares of our common stock to
be issued to Consolidated Edison Communications and Exelon Corporation pursuant
to our agreements with them are equal to, in the aggregate, approximately 25% of
the currently issued and outstanding shares of our capital stock. Therefore, we
are seeking stockholder approval of the issuance of shares of our common stock
to Consolidated Edison Communications and Exelon Corporation. You are being
asked to approve the issuance both as stockholders of NorthEast Optic Network
and as prospective stockholders of NEON Communications after the closing of the
reorganization.
Our board of directors has approved the transactions with Consolidated
Edison Communications and Exelon Corporation, including the issuance of shares
of our common stock to them.
Mode 1 Communications, Inc., a subsidiary of Northeast Utilities, and New
England Business Trust, a subsidiary of CMP Group, Inc., have agreed to vote all
shares of our common stock held by them in favor of the issuances to
Consolidated Edison Communications and Exelon Corporation. As of June 1, 2000,
the record date for determining the stockholders of record who are entitled to
vote on this agreement, Mode 1 Communications, Inc. held 4,774,038 shares, or
28.7% of the total number of shares entitled to vote at the meeting, and New
England Business Trust held 4,567,801 shares, or 27.4% of the total number of
shares entitled to vote at the meeting.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" THE
ISSUANCE OF THE SHARES OF OUR COMMON STOCK TO CONSOLIDATED
EDISON COMMUNICATIONS AND EXELON CORPORATION
32
<PAGE>
THE REORGANIZATION
The board of directors of NorthEast Optic Network has approved a plan of
reorganization under which the business of NorthEast Optic Network will become a
wholly-owned subsidiary of NEON Communications. We have attached the form of
agreement and plan of merger relating to the reorganization as Exhibit A at the
back of this proxy statement/prospectus. We encourage you to read this
agreement, as it is the legal document that governs the reorganization. However,
under Section 251(g) of the Delaware general corporation law, the reorganization
does not require the approval of the stockholders of NorthEast Optic Network.
Therefore, we are not asking you to vote on the reorganization.
REASONS FOR THE REORGANIZATION
The Board of Directors of NorthEast Optic Network believes that the holding
company structure resulting from the reorganization will provide greater
flexibility in terms of operations, expansion, and diversification, especially
given variations in the regulation of telecommunications facilities and services
from state to state. In addition the reorganization into a holding company
structure is also intended to allow Consolidated Edison Communications and
Exelon Corporation to realize certain tax benefits with respect to their
contribution of assets to our business, and is intended to be accomplished
simultaneously with the closing of the transactions with Consolidated Edison
Communications and Exelon Corporation.
ORGANIZATIONAL TRANSACTIONS
At the direction of the board of directors of NorthEast Optic Network, NEON
Communications was incorporated under the laws of the State of Delaware in
November 1999 for the purpose of becoming a holding company by acquiring all of
the outstanding NorthEast Optic Network common stock. NorthEast Optic Network
currently owns 100% of the outstanding capital stock of NEON Communications.
At the direction of the board of directors of NorthEast Optic Network and
NEON Communications, NEON Acquisition, Inc. was incorporated under the laws of
the State of Delaware in November 1999 for the purpose of merging with NorthEast
Optic Network in order to facilitate the reorganization. NEON Communications is
currently the sole stockholder of NEON Acquisition.
TERMS OF THE PLAN OF REORGANIZATION
CONVERSION. At the effective time of the reorganization, the shares of
common stock of NorthEast Optic Network, NEON Acquisition and NEON
Communications will be converted and exchanged as described below:
- Each share of NorthEast Optic Network common stock issued and outstanding
immediately prior to the effective time of the reorganization will, at the
effective time of the reorganization, automatically become and be
converted into the right to receive one share of NEON Communications
common stock.
- Each share of NEON Acquisition common stock issued and outstanding
immediately prior to the effective time of the reorganization will, on and
after the effective time of the reorganization, be converted into one
share of NorthEast Optic Network common stock. As a result, at the
effective time of the reorganization, all of the common stock of NorthEast
Optic Network will be owned by NEON Communications.
- Each share of NEON Communications common stock issued and outstanding
immediately prior to the effective time of the reorganization will, at the
effective time of the reorganization, be canceled.
At the effective time of the reorganization, NorthEast Optic Network
stockholders will become the stockholders of NEON Communications. As
stockholders of NEON Communications, they will have essentially the same rights
to govern NEON Communications' activities as they have with respect to
33
<PAGE>
NorthEast Optic Network; however, as stockholders of NEON Communications, they
will not be entitled to vote on matters requiring the approval of NorthEast
Optic Network stockholders. Stockholders of NEON Communications will be entitled
to vote with respect to matters affecting NEON Communications, which will own
100% of the voting rights in NorthEast Optic Network.
EFFECTIVE TIME OF THE REORGANIZATION. The reorganization will be effective
at the time a certificate of merger is filed in the office of the Secretary of
State of Delaware. The effective time of the reorganization will not occur until
the satisfaction of all of the requirements of law and conditions specified in
the plan of reorganization and in our agreements with Consolidated Edison
Communications and Exelon Corporation. We currently anticipate that the
reorganization will occur shortly following the annual meeting.
INTERESTS OF CERTAIN PERSONS IN THE REORGANIZATION. The plan of
reorganization provides that the directors of NorthEast Optic Network
immediately prior to the effective time of the reorganization will be directors
of NorthEast Optic Network and NEON Communications immediately after the
reorganization. Additionally, the officers and other employees of NorthEast
Optic Network immediately prior to the effective time of the reorganization will
all be employed in substantially the same capacities by NorthEast Optic Network
immediately after the reorganization. As of April 30, 2000, directors and
executive officers of NorthEast Optic Network and their affiliates are the
beneficial owners of 401,527 shares (2.4% of the issued and outstanding shares)
of NorthEast Optic Network common stock.
EMPLOYEE BENEFITS. Upon consummation of the reorganization, NorthEast Optic
Network's amended and restated 1998 stock incentive plan will be assumed by NEON
Communications. All options issued under this plan will be converted into
options to acquire an identical number of shares of NEON Communications common
stock upon identical terms and conditions, and for an identical exercise price.
NEON Communications will assume all of the NorthEast Optic Network's obligations
with respect to the outstanding options.
All other employee benefits and benefit plans of NorthEast Optic Network in
effect immediately prior to the effective time of the reorganization will be
unchanged by the reorganization, except that any plan which refers to NorthEast
Optic Network common stock will, following consummation of the reorganization,
be deemed to refer instead to NEON Communications common stock and will become
the employee benefits and benefit plans solely of NorthEast Optic Network.
CONDITIONS TO THE REORGANIZATION. The obligations of each of the parties to
the plan of reorganization to consummate the reorganization are subject to the
satisfaction on or before the effective time of the reorganization, of the
following conditions:
- approval of the plan of reorganization by a majority of the outstanding
shares of NEON Communications and NEON Acquisition; and
- approval by a majority of the board of directors of NorthEast Optic
Network, NEON Communications and NEON Acquisition.
The directors of NorthEast Optic Network, NEON Acquisition and NEON
Communications have approved the plan of reorganization. NorthEast Optic
Network, as the sole stockholder of NEON Communications, and NEON
Communications, as the sole stockholder of NEON Acquisition, have approved the
plan of reorganization.
TERMINATION OF PLAN OF REORGANIZATION. The plan of reorganization may be
terminated before the effective time of the reorganization if for any reason the
consummation of the reorganization is not advisable in the opinion of the
respective boards of directors of NorthEast Optic Network, NEON Communications
or NEON Acquisition.
34
<PAGE>
EXCHANGE OF SHARE CERTIFICATES
As soon as practicable after consummation of the reorganization, Fleet
National Bank, N.A., the exchange agent for NEON Communications, will mail to
each holder of record of NorthEast Optic Network common stock immediately prior
to the reorganization, a letter of transmittal which is to be used by each such
NorthEast Optic Network stockholder to return to Fleet the stock certificates
representing NorthEast Optic Network common stock owned by him or her. As soon
as practicable after receiving such certificates from a NorthEast Optic Network
stockholder, together with the duly executed letter of transmittal and any other
items specified by the letter of transmittal, Fleet will deliver to that
NorthEast Optic Network stockholder new certificates evidencing the appropriate
number of shares of NEON Communications common stock.
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES UNTIL YOU RECEIVE THE LETTER OF
TRANSMITTAL FORM AND INSTRUCTIONS.
COSTS OF THE REORGANIZATION
The costs of the reorganization to NEON Communications and NorthEast Optic
Network are estimated at approximately $420,000. Pursuant to our agreements with
Consolidated Edison Communications and Exelon Corporation, each of Consolidated
Edison Communications and Exelon Corporation will reimburse us for 50% of the
costs of the reorganization, up to an aggregate reimbursement of $250,000 each,
if the reorganization is consummated. Any costs of the reorganization in excess
of $500,000 will be assumed and paid, to the extent properly allocated, by NEON
Communications and NorthEast Optic Network. In the event the reorganization is
not consummated, such costs as have been incurred, including the cost of
organizing NEON Communications, will be assumed and paid by NorthEast Optic
Network.
STOCKHOLDER APPROVAL AND APPRAISAL RIGHTS
Pursuant to the provisions of Section 251(g) of the Delaware general
corporation law, stockholders of NorthEast Optic Network do not have the right
to vote on the reorganization and will not have appraisal rights with respect to
their shares of NorthEast Optic Network common stock as a result of the
reorganization.
ACCOUNTING TREATMENT
Because the reorganization is a reorganization with no change in ownership
interests, the consolidated financial statements of NEON Communications and the
consolidated financial statements of NorthEast Optic Network will retain the
former bases of accounting of NorthEast Optic Network and will be substantially
identical to NorthEast Optic Network's consolidated financial statements prior
to the reorganization.
MATERIAL FEDERAL INCOME TAX CONSEQUENCES
The following discussion is limited to the material federal income tax
consequences of the proposed reorganization and does not discuss state, local,
or foreign tax consequences or all of the tax consequences that might be
relevant to an individual stockholder of NorthEast Optic Network in light of his
or her particular circumstances.
We believe that the reorganization will qualify for federal income tax
purposes as a tax free transaction under the Internal Revenue Code of 1986, as
amended, which we refer to in this proxy statement/prospectus as the Code. Based
on a private letter ruling received from the Internal Revenue Service, which is
conditioned upon the accuracy of certain assumptions and representations made by
us to the IRS in our request for the private letter ruling, and which is based
on current law and assumes that the
35
<PAGE>
reorganization is consummated as described herein, the reorganization will have
the following tax consequences:
- No gain or loss will be recognized by NEON Communications upon the
issuance of its stock in the reorganization;
- No gain or loss will be recognized by the stockholders of NorthEast Optic
Network as a result of the exchange of their shares of NorthEast Optic
Network common stock for NEON Communications common stock pursuant to the
reorganization;
- The basis of the NEON Communications common stock received by the
stockholders of NorthEast Optic Network pursuant to the reorganization
will be the same as the basis of the shares of NorthEast Optic Network
common stock surrendered in exchange therefor; and
- The holding period of the NEON Communications common stock received by
stockholders of NorthEast Optic Network pursuant to the reorganization
will include the holding period of the NorthEast Optic Network common
stock surrendered in exchange therefor, provided that such NorthEast Optic
Network common stock is held as a capital asset on the date of
consummation of the reorganization.
NORTHEAST OPTIC NETWORK'S STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX
ADVISORS AS TO SPECIFIC TAX CONSEQUENCES TO THEM OF THE REORGANIZATION INCLUDING
TAX RETURN REPORTING REQUIREMENTS AND THE APPLICABILITY AND EFFECT OF FEDERAL,
STATE, LOCAL, FOREIGN, AND OTHER APPLICABLE TAX LAWS.
36
<PAGE>
DESCRIPTION OF NEON COMMUNICATIONS CAPITAL STOCK
NEON Communications is a Delaware corporation. It is authorized by its
certificate of incorporation to issue 30,000,000 shares of $.01 par value common
stock and 5,000,000 shares of $.01 par value preferred stock. If the
stockholders of NorthEast Optic Network approve the amendment to its certificate
of incorporation to increase the number of shares of common stock it is
authorized to issue to from 30,000,000 to 60,000,000, and the amendment is
subsequently filed with the Secretary of State of Delaware, then NEON
Communications will also amend its certificate of incorporation prior to the
reorganization to increase the number of shares of its common stock it is
authorized to issue from 30,000,000 to 60,000,000. Holders of NEON
Communications common stock are entitled to one vote, in person or by proxy, for
each share of stock held of record in the shareholder's name on the books of
NEON Communications as of the record date on any matter submitted to the vote of
the shareholders. Shares of NEON Communications common stock may not be voted
cumulatively in connection with the election of directors.
Each share of NEON Communications stock has the same rights, privileges and
preferences as every other share and will share equally in NEON Communications
net assets upon liquidation or dissolution. NEON Communications stock has no
preemptive, conversion or redemption rights or sinking fund provisions and all
of the issued and outstanding shares of common stock are fully paid and
nonassessable.
NEON Communications shareholders are entitled to dividends when, as and if
declared by NEON Communications' board of directors out of funds legally
available therefor and after satisfaction of the prior rights of holders of
outstanding preferred stock, if any.
The transfer agent and registrar for NEON Communications common stock is
Fleet National Bank.
With respect to the 5,000,000 shares of preferred stock authorized in the
NEON Communications certificate of incorporation, the NEON Communications board
of directors has sole authority to determine the terms of any one or more series
of preferred stock, including voting rights, conversion rates, and liquidation
preferences.
COMPARISON OF CAPITAL STOCK
The certificate of incorporation and by-laws of NEON Communications are
substantially the same as the certificate of incorporation and by-laws of
NorthEast Optic Network. The certificates of incorporation and by-laws of both
companies contain certain provisions relating to the board of directors and
certain business combinations, all of which may be deemed to have
"anti-takeover" effects, including limitations on the call of a special meeting,
elimination of action by written consent of stockholders, removal of directors
only for cause and with the approval of 75% of the outstanding shares,
elimination of cumulative voting and a 75% vote to approve or amend certain
provisions of the certificate of incorporation.
37
<PAGE>
MARKET PRICE OF NORTHEAST OPTIC NETWORK COMMON STOCK
Our common stock began trading on the Nasdaq National Market under the
symbol "NOPT" on July 31, 1998. The following table sets forth the high and low
closing sales prices for our common stock as reported on the Nasdaq National
Market for the periods indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
Third Quarter (beginning July 31, 1998..................... $10.500 $6.000
Fourth Quarter............................................. 11.250 5.250
1999
First Quarter.............................................. 17.625 9.125
Second Quarter............................................. 18.875 13.625
Third Quarter.............................................. 45.000 15.250
Fourth Quarter............................................. 76.500 31.250
2000
First Quarter.............................................. 149.875 61.438
Second Quarter (through June 1, 2000)...................... 80.437 32.125
</TABLE>
On June 1, 2000, the last reported sale price for our common stock was
$34.75 per share. As of June 1, 2000, there were approximately 81 holders of
record of our common stock and approximately 13,000 beneficial holders.
The stock of NEON Communications is not currently publicly traded. Upon
consummation of the reorganization, NEON Communications common stock will trade
on the Nasdaq National Market under the symbol "NOPT" as the successor to
NorthEast Optic Network.
DIVIDENDS
NORTHEAST OPTIC NETWORK
We have never paid or declared any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business. Furthermore, the indenture governing our
$180 million 12 3/4% Senior Notes Due 2008 restricts our ability to pay
dividends on our common stock.
NEON COMMUNICATIONS
NEON Communications has not paid any dividends since the date of its
incorporation. After completion of the reorganization, to the extent that NEON
Communications receives any cash dividends from NorthEast Optic Network, it
presently intends to retain these funds for future growth and expansion.
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<PAGE>
UNAUDITED PRO FORMA CAPITALIZATION
The following table sets forth at March 31, 2000 the unaudited actual
capitalization of NorthEast Optic Network and the proposed capitalization of
NEON Acquisition and NEON Communications immediately prior to completion of the
reorganization, and the pro forma capitalization of NorthEast Optic Network,
NEON Communications and NEON Communications on a consolidated basis to reflect
the completion of the reorganization. The pro forma information does not give
effect to the proposed amendment to increase the number of authorized shares of
common stock of NorthEast Optic Network (actual) and of NEON Communications (pro
forma and pro forma consolidated) to 60,000,000 shares.
<TABLE>
<CAPTION>
AS OF MARCH 31, 2000
-----------------------------------------------------------------------------------------------------
PRO FORMA
NEON NEON PRO FORMA PRO FORMA CONSOLIDATED
NORTHEAST OPTIC ACQUISITION COMMUNICATIONS NORTHEAST OPTIC NEON NEON
NETWORK (a) (b) (c) NETWORK COMMUNICATIONS COMMUNICATIONS
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
--------------- ----------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
12 3/4% Senior Debt... $180,000,000 $ -- $ -- $180,000,000 $ -- $180,000,000
Shareholders Equity
Common Stock.......... $ 166,555 $ 10 $ 10 $ 10 $ 166,555 $ 166,555
Additional Paid-in-
Capital............. 113,055,338 -- -- -- 113,055,338 113,055,338
Accumulated Deficit... (51,044,243) -- -- -- (51,044,243) (51,044,243)
------------ ----- ---------- ------------ ----------- ------------
Total Stockholders'
Equity.............. $62, 177,650 $ 10 $ 10 $ 10 $62,177,650 $ 62,177,650
============ ===== ========== ============ =========== ============
Total
Capitalization........ $242,177,650 $ 10 $ 10 $180,000,010 $62,177,650 $242,177,650
============ ===== ========== ============ =========== ============
Share Data:
Preferred Stock
Authorized........ 2,000,000 -- 2,000,000 -- 2,000,000 2,000,000
Outstanding....... -- -- -- -- -- --
Common Stock
Authorized...... 30,000,000 1,000 30,000,000 1,000 30,000,000 30,000,000
Outstanding....... 16,655,581 1,000 1,000 1,000 16,655,581 16,655,581
============ ===== ========== ============ =========== ============
</TABLE>
------------------------------
(a) Each share of NorthEast Optic Network common stock issued and outstanding
immediately prior to the effective time of the reorganization will, at the
effective time of the reorganization, automatically become and be converted
into the right to receive one share of NEON Communications common stock.
(b) Each share of NEON Acquisition common stock issued and outstanding
immediately prior to the effective time of the reorganization will, on and
after the effective time of the reorganization, be converted into one share
of NorthEast Optic Network common stock. As a result, at the effective time
of the reorganization, all of the common stock of NorthEast Optic Network
will be owned by NEON Communications.
(c) Each share of NEON Communications common stock issued and outstanding
immediately prior to the effective time of the reorganization will, at the
effective time of the reorganization, be canceled.
39
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS TOGETHER WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE NOTES TO OUR CONSOLIDATED FINANCIAL
STATEMENTS INCLUDED ELSEWHERE IN THIS PROXY STATEMENT/PROSPECTUS. THIS PROXY
STATEMENT/PROSPECTUS CONTAINS FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND
UNCERTAINTIES. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS.
OVERVIEW
We own and operate a technologically advanced, high-bandwidth fiber optic
network providing capacity on a wholesale basis to telecommunications service
providers, including local, long distance and wireless telephone companies and
Internet service providers. Our network currently extends from Portland, Maine
to New York City and agreements currently in place would, subject to regulatory
approval, extend our network to Philadelphia, Baltimore and Washington, D.C. and
expand the reach of our network in and around New York City. Our customers can
connect directly to our network at multiple locations in the larger cities we
serve and also in the smaller communities along our network's routes.
To date we have experienced net losses and negative cash flow from operating
activities. From our inception to the present, our principal activities included
building our network, developing our business plans, hiring management and other
key personnel and negotiating and executing customer contracts. In the third
quarter of 1999, we commenced the roll-out of our lit services into New York
City. We expect to continue to generate net losses and negative cash flow as we
expand our operations. Whether or when we will generate positive cash flow from
operating activities will depend on a number of financial, competitive,
regulatory, technical and other factors. See "--Liquidity and Capital
Resources."
Our network service revenues include long-term leases of dark fiber and
shorter-term leases of lit fiber at fixed-cost pricing over multi-year terms. We
also provide collocation services at our facilities. Other service revenues
include nonrecurring design, engineering and construction services. We generally
receive fixed monthly payments from our customers for the leasing of capacity on
our network and recognize revenues ratably over the term of the applicable
customer agreement. Other service revenues are non-refundable and are generally
recognized as services are performed.
In 1999, approximately 44% of our revenues consisted of other service
revenues. We anticipate that as we proceed with the deployment of our network,
the percentage of revenues which we receive from network services will increase
as a percentage of revenues.
Our costs consist primarily of cost of sales, selling, general and
administrative expenses, depreciation and amortization and interest expense.
Cost of sales relates to lease payments for fiber optic facilities, network
surveillance, operations and maintenance costs and property taxes. Selling,
general and administrative expenses relate to expenses in connection with sales
and marketing infrastructure, including personnel, advertising costs and
promotional activities and management and information technology. Depreciation
and amortization expense is associated with the buildout of our network, as well
as goodwill from our reorganization on July 8, 1998. Interest expense relates to
interest on our $180 million 12 3/4% Senior Notes Due 2008.
RESULTS OF OPERATIONS
QUARTER ENDED MARCH 31, 2000 COMPARED TO THE QUARTER ENDED MARCH 31, 1999
Revenues for the three months ended March 31, 2000 were $2,652,706, an
increase of $2,131,750 or 409% compared to $520,956 in the same period in 1999.
Revenues were generated by recurring lease services of $1,663,192 during the
first quarter of 2000 compared to $421,481 during the first quarter of 1999 and
other service revenue of $989,514 during the first quarter of 2000 compared to
$99,475 during the first
40
<PAGE>
quarter of 1999. Other service revenue consists of collocation revenues and
nonrecurring revenues related to design, engineering, and construction.
Cost of sales for the three months ended March 31, 2000 were $2,110,502, an
increase of $1,181,514 or 127% compared to $928,988 in the same period in 1999.
This increase was primarily due to lease payments for fiber optic facilities,
network surveillance cost, operations and maintenance costs and property taxes
resulting from network expansion in our service territory.
Selling, general, and administrative expenses were $2,508,614 for the three
months ended March 31, 2000, an increase of $1,187,478 or 90% compared to
$1,321,373 in the same period in 1999. The increase reflects an investment in
the sales and marketing infrastructure, including personnel, advertising costs
and promotional activities and an increase in management and information
technology.
Depreciation and amortization expense increased 209% to $2,458,941 for the
three months ended March 31, 2000 compared to $794,978 for the three months
ended March 31, 1999. This increase resulted from higher depreciation expense
associated with additional segments of our system being place into service,
completion of points of presence and the amortization of goodwill resulting from
the reorganization on July 8, 1998.
Interest income decreased 31% to $1,535,409 for the three months ended
March 31, 2000 from $2,240,764 for the three months ended March 31, 1999. This
decrease was due primarily to lower cash and investment balances for the
quarter, resulting from capital expenditures necessary to place additional
segments of the NEON system into service.
Interest expense was $5,384,275 for the three months ended March 31, 2000
compared to $4,979,661 for the same period in 1999, an increase of 8%. This
increase relates primarily to interest expense resulting from long-term network
accounts payable, in addition to interest on our $180 million 12 3/4% Senior
Notes Due 2008.
Our net loss for the quarter ended March 31, 2000 was $8,274,217 or a loss
of $.50 per share. This compares to a net loss of $5,263,280 or a loss of $.33
per share in the same period last year. The increase in net loss is primarily
attributable to the factors discussed above.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenues increased by $4,801,604 or 556% to $5,665,276 in the year ended
December 31, 1999 from $863,672 in the year ended December 31, 1998. Revenues in
1999 were generated by recurring lease services of $3,152,348 and other service
revenue of $2,512,928 which consists of collocation revenues and nonrecurring
revenues related to design, engineering, and construction.
Total cost of sales for the year ended December 31, 1999 was $6,365,758, an
increase of 193% over the $2,176,266 recorded in the year ended December 31,
1998. This increase was primarily due to lease payments for fiber optic
facilities, network surveillance cost, operations and maintenance costs and
property taxes resulting from network expansion in our service territory.
Selling, general and administrative expenses increased 42% to $7,380,351 for
the year ended December 31, 1999 from $5,200,720 in the year ended December 31,
1998, reflecting an investment in the sales and marketing infrastructure,
including personnel, advertising costs and promotional activities and an
increase in management and information technology.
Depreciation and amortization expense increased 242% to $6,149,720 for the
year ended December 31, 1999, compared to $1,798,294 for the year ended
December 31, 1998. This increase resulted from higher depreciation expense
associated with additional segments of our system being placed in service and
completion of our points of presence and the amortization of goodwill as a
result of the reorganization on July 8, 1998.
41
<PAGE>
Interest income increased 85% to $7,712,259 for the year ended December 31,
1999 from $4,179,880 for the year ended December 31, 1998. This increase was due
primarily to higher cash and investment balances for the entire year 1999
compared to only five months of interest in 1998 resulting from the timing of
the closing of our equity and debt public offerings in August 1998.
Interest expense increased 143% to $21,011,474 for the year ended
December 31, 1999 from $8,644,463 for the year ended December 31, 1998. The
increase resulted primarily from interest accrued on our $180 million 12 3/4%
Senior Notes Due 2008 for the full year 1999 as compared to only five months in
the year 1998.
For the year ended December 31, 1999, we recorded a net loss of $27,529,768
compared to $11,352,258 before extraordinary item for the year ended
December 31, 1998. The increase in net loss is primarily attributable to the
factors discussed above. The extraordinary item for the year ended December 31,
1998 amounted to $1,363,155, representing the write off of deferred financing
costs associated with two construction loans repaid in the third quarter with
the proceeds from our debt and equity public offerings.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Our December 31, 1998 revenues increased by $468,968, or 119%, to $863,672
in the year ended December 31, 1998 from $394,704 in the year ended
December 31, 1997. Revenues in 1998 were generated by recurring lease services
to existing customers, which came on line primarily during the second half of
1997, and to new customers.
Total cost of sales for the year ended December 31, 1998 were $2,176,266, an
increase of 91% over the $1,137,943 recorded in the year ended December 31,
1997. The increase was primarily due to rights-of-way fees and property taxes
resulting from network expansion in our service territory.
Selling, general and administrative expenses increased to $5,200,720 for the
year ended December 31, 1998 from $1,002,232 in the year ended December 31,
1997, reflecting an increase in personnel, a one time bonus payment, and the
cost of developing management, sales and infrastructure resources.
Depreciation and amortization expense was $1,798,294 for the year ended
December 31, 1998, compared to $552,862 for the year ended December 31, 1997.
The increase resulted from higher depreciation expense, due to the placement of
additional portions of our system into service and the amortization of goodwill
as a result of our reorganization on July 8, 1998.
Interest income increased to $4,179,880 for the year ended December 31, 1998
from $138,918 for the year ended December 31, 1997. The increase was due
primarily to higher cash and investment balances resulting from our equity and
debt public offerings.
Interest expense increased to $8,644,463 for the year ended December 31,
1998 from $141,811 for the year ended December 31, 1997. The increase resulted
primarily from interest accrued on the 12 3/4% Senior Notes Due 2008.
Minority interest for the year ended December 31, 1998 amounted to
$1,108,933 compared to $1,080,200 in 1997. The increase is due to an increase in
the proportionate share of the net losses of our subsidiaries. The elimination
of the minority interest in the third quarter of 1998 was in connection with the
reorganization.
Benefit from income taxes increased slightly in the year ended December 31,
1998 to $315,000 from $261,000 for the comparable period of 1997. The benefit is
related to refundable income taxes resulting from our tax sharing arrangement
with Central Maine Power, which terminated upon the closing of the public
offerings on August 5, 1998.
42
<PAGE>
For the year ended December 31, 1998, we recorded a net loss before
extraordinary item of $11,352,258, compared to $960,026 for the year ended
December 31, 1997. The increase in net loss before extraordinary item is
primarily attributable to the factors discussed above.
The extraordinary item for the year ended December 31, 1998 amounted to
$1,363,155, representing the write off of deferred financing costs associated
with two construction loans repaid in the third quarter with the proceeds from
our public offerings.
A net loss after extraordinary item recorded for the year ended
December 31, 1998, amounted to $12,715,413, compared to $960,026 for the year
ended December 31, 1997. The increase in net loss after extraordinary item is
primarily attributable to the factors discussed above.
LIQUIDITY AND CAPITAL RESOURCES
Our operations have required substantial investment for the design,
construction and development of our network and the purchase of
telecommunication equipment. Capital expenditures were approximately $13,600,000
and $14,800,000 for the three months ended March 31, 2000 and 1999,
respectively. We expect to require substantial capital in connection with the
following:
- expansion and improvement of our network;
- connection of additional buildings and customers to our network;
- purchase of additional telecommunications equipment;
- purchase and development of our operating support systems; and
- operation and maintenance of existing facilities.
We have funded a substantial portion of these expenditures through our
completed public offerings on August 5, 1998, resulting in net proceeds to us of
approximately $218 million (after deducting expenses and before deducting
$72.0 million in escrowed funds to cover the first seven semi-annual interest
payments on our $180 million 12 3/4% Senior Notes due 2008).
The substantial capital investment required to build our network has
resulted in negative cash flow after investing activities over the last three
years. This negative cash flow after investing activities is a result of the
requirement to build a substantial portion of our network before connecting
revenue-generating customers. We expect to continue to produce negative cash
flow after investing activities for the current year due to the continuous
expansion and development of our network. Our ability to continue this expansion
will be limited by our current capital resources until sufficient cash flow
after investing activities is generated unless we seek and obtain additional
capital.
Net cash used in operating activities was $6,770,312 and $6,561,738 for the
three months ended March 31, 2000 and 1999 respectively. Net cash used by
operating activities for the three months ended March 31, 2000 was due primarily
to our operating loss partially offset by improved working capital and non-cash
items.
Net cash provided by (used in) investing activities was $1,184,556 and
($21,771,729) for the three months ended March 31, 2000 and 1999 respectively.
Cash provided by investing activities for the three months ended March 31, 200
was due primarily to proceeds from sales of the investments coming to maturity
during the first quarter of 2000, offset by the cost of construction and
deployment of telecommunications equipment to build our network and the
purchases of short-term investments.
Cash flow from financing activities was $7,482,417 and $13,869,236 for the
three months ended March 31, 2000 and 1999 respectively. Cash flow from
financing activities during the three months ended March 31, 2000 was generated
from the restricted cash placed in escrow in connection with the proceeds
43
<PAGE>
from the sale of our 12 3/4% Senior Notes Due 2008 and payments made on
long-term construction accounts payable during the quarter.
We anticipate that we will continue to experience negative cash flow as we
expand our network, construct additional networks, deploy telecommunications
electronic equipment and market our services to an expanding customer base. Cash
provided by operations will not be sufficient to fund the expansion and
development of our system in the Northeast and its planned expansion to the
Mid-Atlantic region. As a result, we intend to use our cash on hand and the
remaining net proceeds of the 1998 public offerings, and we may attempt to raise
additional financing through some combination of commercial bank borrowings,
leasing, vendor financing, strategic alliances and the sale of equity and/or
debt securities.
Our capital requirements may vary based upon the timing and the success of
implementation of our business plan and as a result of regulatory, technological
and competitive developments or if:
- demand for our services or cash flow from operations is less than or more
than expected;
- our plans or projections change or prove to be inaccurate;
- we make acquisitions; or
- we accelerate deployment of our network or otherwise alter the schedule or
targets of our business plan implementation.
The expectations of required future capital expenditures are based on our
current estimates.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS
No. 133, as amended by SFAS No. 137, is effective for all fiscal quarters of
fiscal years beginning after June 15, 2000. This new standard is not anticipated
to have a significant impact on our consolidated financial statements based on
the current structure and operations.
The Securities and Exchange Commission issued SAB No. 101, REVENUE
RECOGNITION, in December 1999. We are required to adopt this new accounting
guidance, as amended by SAB No. 101A, through a cumulative charge to retained
earnings in accordance with Accounting Principles Board (APB) Opinion No. 20,
ACCOUNTING CHANGES, no later than the second quarter of fiscal 2000. We are
currently evaluating the effects that this guidance is expected to have on our
financial statements.
In March 2000, the FASB issued Interpretation No. 44, ACCOUNTING FOR CERTAIN
TRANSACTIONS INVOLVING STOCK COMPENSATION--AN INTERPRETATION OF APB OPINION
NO. 25. The interpretation clarifies the application of APB Opinion No. 25 in
certain situations, as defined. The interpretation is effective July 1, 2000,
but covers certain events occurring during the period after December 15, 1998
but before the effective date. To the extent that events covered by this
interpretation occur during the period after December 15, 1998 but before the
effective date, the effects of applying this interpretation would be recognized
on a prospective basis from the effective date. Accordingly, upon initial
application of the final interpretation, (i) no adjustments would be made to the
financial statements for periods before the effective date and (ii) no expense
would be recognized for any additional compensation cost measured that is
attributable to periods before the effective date. We expect that the adoption
of this interpretation would not have any effect on the accompanying financial
statements.
44
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
We are exposed to market risk related to changes in interest rates, but do
not believe that this exposure is material. We do not use derivative financial
instruments for speculative or trading purposes.
We maintain 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 market interest rates increase.
If market interest rates were to increase immediately and uniformly by 10% from
levels that existed at March 31, 2000, the fair value of the portfolio would
decline by an immaterial amount. Since we have the ability to hold our fixed
income investments until maturity, we would not expect our operating results or
cash flows to be materially affected.
45
<PAGE>
BUSINESS
NEON COMMUNICATIONS
NEON Communications was incorporated in November 1999 as a wholly-owned
subsidiary of NorthEast Optic Network. It has not engaged in any business since
its incorporation. After the reorganization, NEON Communications will become a
holding company whose principal asset will be all of the outstanding shares of
the capital stock of NorthEast Optic Network. The business of NorthEast Optic
Network, as currently conducted and as we intend to conduct it after the
reorganization, is described below.
NORTHEAST OPTIC NETWORK
GENERAL
We own and operate a technologically advanced, high-bandwidth fiber optic
network. We lease wholesale services to local telephone companies, long distance
companies, Internet service providers and wireless telephone companies. Our
network connects the principal markets in our region, which currently extends
from Portland, Maine to New York City and as of March 31, 2000 extended for more
than 1,100 route miles and approximately 65,000 fiber miles. Under our
agreements with Consolidated Edison Communications and Exelon Corporation, we
expect, subject to regulatory approval, to extend our network to Philadelphia,
Baltimore and Washington, D.C. and expand the reach of our network in and around
New York City. We believe our network is an attractive resource to our customers
because it enables them to extend their existing networks quickly and reliably.
We currently provide our customers with the following services:
- LIT FIBER SERVICES. Fixed, high-bandwidth amounts of point-to-point
capacity offered across our network at fixed-cost pricing;
- DARK FIBER LEASES. Fiber strands contained within a fiber optic cable
which has been laid but which does not include optical transmission
equipment;
- COLLOCATION. Rental space in specially designed, protected and configured
facilities we build along our network's path where customers connect to
our network and house their optronic equipment; and
- ANCILLARY NETWORK SERVICES. Ancillary services include nonrecurring
engineering, design and construction of network segments connecting our
customers to our network.
We also intend to offer optical wavelength services to our customers later
this year, which will multiply the effective capacity of our fibers and enable
us to offer customers a cost-effective alternative to leasing an entire strand
of dark fiber.
OUR ADVANCED FIBER OPTIC NETWORK
The following table lists, as of May 19, 2000:
- the length of our network in the states we serve, under the heading "Route
Miles;"
- the length of our network multiplied by the average number of fibers in
the route, under the heading "Fiber Miles;"
- the estimated number of facilities of potential wholesale customers within
one mile of our existing network (based on U.S. government statistics),
under the heading "Number of Points of Presence Passed;" and
46
<PAGE>
- the largest metropolitan areas our network serves, under the heading
"Major Service Areas."
<TABLE>
<CAPTION>
NUMBER OF POINTS
STATE ROUTE MILES FIBER MILES OF PRESENCE PASSED MAJOR SERVICE AREAS
----- ----------- ----------- ------------------ -------------------
<S> <C> <C> <C> <C>
Connecticut........................... 349 21,334 58 Hartford
Stamford
New London
New Haven
Bridgeport
Greenwich
Maine................................. 81 4,831 8 Portland
Massachusetts......................... 307 13,559 112 Springfield
Boston
Amherst
Framingham
Lawrence
Cambridge
Lowell
New Hampshire......................... 258 15,722 34 Nashua
Manchester
Dover
Portsmouth
Keene
New York.............................. 80 9,290 95 White Plains
New York City
Rhode Island.......................... 65 764 16 Providence
Green Hill
Pawtucket
Total............................. 1,140 65,500 323
===== ====== ===
</TABLE>
We use leading edge technology throughout our fiber optic network. Our
network consists of fiber optic cable paths, which permit high-speed,
high-quality transmission of voice, data and video communications. Fiber optic
networks use laser-generated light waves to transmit voice, data and video in
digital form by way of ultra-thin filaments of glass. Fiber optic networks are
generally characterized by large bandwidth capacity, are resistant to external
signal interference and connect directly to digital switching equipment or
digital microwave systems.
Unlike older network infrastructures, which utilize a combination of older,
copper-cable-based transmission technologies, early-stage fiber optic hardware
and more modern equipment, our network is almost completely optical and
incorporates advanced fiber optic technology. Because we began construction of
our network in the mid-1990s, our facilities benefit from technological advances
not previously available, such as Lucent's AllWave-TM- and TrueWave-TM- fiber,
and we believe we are well-positioned to support future advances in optronics
and compression technology as they become available, which will allow us to
offer more bandwidth carrying capacity at decreasing incremental costs.
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Since our inception, we have been committed to utilizing advanced fiber
optic technologies throughout our network. While the potential capacity and
performance of these technologies may sometimes surpass our customers' current
needs, we believe that the additional expense which we have incurred and will
continue to incur through our deployment of these technologies will provide us
with a competitive advantage over time and minimize the need for costly
infrastructure updates.
We use the latest Lucent fiber and Nortel DWDM optronics to ensure the
highest capacity transmission and data integrity level. The advanced technical
operating characteristics of our network enable us to provide highly reliable
services to our customers at a lower cost by permitting higher capacity
transmission over longer distances between regeneration and amplifier facilities
than can be provided by less advanced systems.
We offer fiber optic capacity utilizing bi-directional SONET ring
architecture, which has the ability to route customer traffic in two directions
around a ring design. This architecture protects against service interruptions
due to fiber cuts and other network failures. In addition, we intend to
implement Internet protocol technology in 2001 to further increase the effective
capacity of our network and orient it toward the growing demand for
Internet-based data transmission services. We continuously monitor our network
to maintain quality control on a 24-hour basis and to alert us of any
degradation of signal or loss of fiber capacity, and to pinpoint the location of
such difficulty and enable us to repair or replace impaired fiber quickly.
While we currently offer only dark fiber and lit fiber leases, our use of
Lucent's AllWave-TM- and TrueWave-TM- fiber technology will support our
anticipated introduction of optical wave services. Our optical wave services
will allow customers to enter into exclusive long-term leases for a portion of
the capacity of a fiber rather than an entire fiber. Customers leasing optical
wave services will be able to acquire dedicated, unprotected capacity at a
substantial savings over conventional dark fiber leases.
SERVICES
We currently provide the following services:
- LIT FIBER SERVICES. We provide fixed, high-bandwidth amounts of
point-to-point capacity across our network at fixed-cost pricing over
multi-year terms. These lit services are the focus of our service strategy
because we are able to earn more revenue per fiber through the provision
of lit fiber services than we can with any of our other service offerings.
We offer our customers a self-healing ring architecture which enables us
to offer and guarantee very high levels of protected service reliability.
This synchronous optical network, or SONET, technology is not offered with
any of our other services. Our lit fiber lease agreements generally have
an initial term of one to five years and provide for fixed monthly
payments throughout the term of the lease;
- DARK FIBER LEASES. We lease rights for dark fiber and related services to
some of our facilities-based customers that are able to furnish the
optronic equipment needed to utilize dark fiber. Dark fiber consists of
fiber strands contained within a fiber optic cable which has been laid but
does not include optical transmission equipment. Our dark fiber lease
agreements generally have terms of 10 to 20 years and provide for fixed
monthly payments throughout the term of the lease;
- COLLOCATION. We have constructed, and continue to construct, specially
designed, configured and equipped facilities adjacent to our network
through which carriers are able to connect to our optical network. Our
collocation customers collocate with us, or rent space, in our facilities
and thereby bond themselves electronically to our network. We have
invested substantial resources into our collocation facilities to insure
that they provide the carrier-class operating environment that our
customers require, including appropriate power supplies, back-up
generators, heating, ventilation and air conditioning systems and security
and dry fire suppression systems designed to operate without damaging the
optronic equipment which they protect; and
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<PAGE>
- ANCILLARY NETWORK SERVICES. In additional to the core services described
above, we provide ancillary services such as nonrecurring engineering,
design and construction of network segments connecting our customers to
our network.
Our lit and dark fiber contracts typically provide for outage related
credits, a pre-determined reduction or offset against the customer's lease rate
when a customer's leased facility is non-operational or does not meet the
customer's operating parameters, and also typically require us to maintain
adequate insurance coverages, including product liability coverage.
OPTICAL WAVELENGTH SERVICES. We also intend to offer optical wavelength
services to our customers beginning later this year. These services will
leverage our technologically-advanced network, including DWDM technology, to
provide a customer with the exclusive long-term use of a portion of the
transmission capacity of a fiber optic strand rather than the entire fiber
strand. While we expect that a portion of our established dark fiber customers
will lease capacity from us in this manner, we anticipate that our new services
will generate new customers as well.
SALES AND MARKETING
Our sales and marketing strategy includes positioning ourself as the
wholesale carrier of choice, emphasizing our capacity, reliability, rapid
deployment, customer service, access and cost advantages that will allow us to
lease our fiber optic infrastructure at competitive prices. Our sales and
marketing activities were conducted through a dedicated sales force which
numbered 16 sales persons as of April 30, 2000.
CUSTOMERS
As of April 30, 2000, we had 33 customers. Our customers include, among
others, long distance companies such as AT&T Local, MCI WorldCom and Sprint, and
competitive local telephone companies such as RCN, CTC Communications and
Network Plus. We derived more than 10% of our revenue in 1999 from each of
Sprint, CTC Communications and Network Plus.
Our targeted carrier customer base includes the following classes of
carriers:
- INCUMBENT LOCAL TELEPHONE COMPANIES. Incumbent local telephone companies
typically require some interstate paths for internal communications,
signal control and operator services. Incumbent local telephone companies
also require intrastate capacity to connect central offices to one
another. We expect incumbent telephone companies to require significant
long-haul capacity as they become eligible to offer long distance services
to customers in their region.
- LONG DISTANCE COMPANIES. Long distance companies typically require
regional short-haul connectivity from their national backbone facilities
to originate and terminate traffic deeper into the customer base,
redundant routing to ensure reliability in their networks and additional
capacity.
- COMPETITIVE LOCAL TELEPHONE COMPANIES. Competitive local telephone
companies typically require long distance services and interconnection
among their local networks. In addition, competitive local telephone
companies focused on providing data services through digital subscriber
line, or DSL, technology typically require high-speed fiber connections
from incumbent telephone company central offices to their own facilities
and from there to the Internet backbone.
- INTERNET SERVICE PROVIDERS. Internet service providers typically require
connections from their facilities to the facilities of long distance
companies and local telephone companies and interconnection to other
Internet service providers.
- WIRELESS COMMUNICATION COMPANIES. Wireless companies typically require
land-based back-hauling of traffic from towers to their switches and also
capacity between their switches and the facilities of local and long
distance telephone companies.
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<PAGE>
SUPPLY RELATIONSHIPS
We have entered into agreements and arrangements for the supply of equipment
and services relating to the construction of our network. In choosing our
suppliers, we use such criteria as the quality and performance of the product
for the intended purpose, pricing, and the ability of the supplier to meet our
delivery schedule and technical support requirements. We purchase optronic
equipment from Nortel Networks, Cerent Corporation and Sycamore Networks,
network services from Nortel Networks, and cable from Lucent-Fitel and Corning.
The cable purchased from Lucent-Fitel includes Lucent's TrueWave-TM- and
AllWave-TM- fibers, which we believe have favorable performance characteristics
that reduce our investment in signal enhancing network equipment. We believe
that there are alternative suppliers or alternative components for all of the
components contained in our network. Any delay or extended interruption in the
supply of any of the key components, changes in the pricing arrangements with
our suppliers or delay in transitioning a replacement supplier's product into
our network could disrupt our operation.
RIGHT-OF-WAY AGREEMENTS
We acquire our rights-of-way principally from electric utilities in the
territory covered by our network. We believe that these rights-of-way are
superior to alternative rights-of-way because electric utility rights-of-way
provide near-ubiquitous urban and intercity coverage at lower cost and because
the frequent need to depart from or work around gaps in other rights-of-way
often entail significant expenditures and a lengthy and expensive
community-by-community approval process. Furthermore, installing cable in
electric utility rights-of-way is often safer, easier and faster because the
cable is placed in existing underground conduits and ducts, or installed on
existing towers and poles.
NORTHEAST UTILITIES AGREEMENTS
In 1994 and 1995, we entered into a series of agreements with the three
principal operating subsidiaries of Northeast Utilities concerning the provision
of rights-of-way along electric utility towers and inside urban electric utility
ducts. Pursuant to these agreements, we have acquired indefeasible rights-of-use
in fiber optic filaments along a designated route in Northeast Utilities'
service territory and pay to Northeast Utilities mileage-based annual fees and a
percentage of the gross revenues that we generate on the portion of our network
located on Northeast Utilities' rights-of-way.
A portion of the system, comprised of 12 fibers within the cable, is owned
by and has been set aside for Northeast Utilities' use. Northeast Utilities may
lease these fibers to third parties, provided that, prior to September 2001,
Northeast Utilities is not permitted to assign any fibers or resell capacity on
these 12 fibers to specified carriers except for limited purposes. After
September 2001, Northeast Utilities will be free to use these fibers to compete
with us.
Our agreements with Northeast Utilities 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 Northeast Utilities gives such a notice and
terminates the agreements, it must either, at its option, pay to us an amount
equal to the fair market value of the system built on Northeast Utilities'
rights-of-way less the 12 fibers set aside for Northeast Utilities' use, or
allow us to retain our indefeasible rights-of-way and receive from us an annual
payment equal to 10% of our gross revenue from the fiber optic system on
Northeast Utilities' rights-of-way, which payment would be in addition to the
other annual payments under our agreements with Northeast Utilities.
CENTRAL MAINE POWER COMPANY AGREEMENT
In January 1997, we entered into an agreement with Central Maine Power, an
affiliate of the selling stockholder, in which Central Maine Power granted to us
a right-of-use in fiber optic filaments within a cable along a designated route
in Central Maine Power's service territory. In exchange for the
50
<PAGE>
rights-of-use, we agreed to pay to Central Maine Power an annual fee beginning,
with regard to any particular route segment, in the first calendar year
following the installation date for such route segment.
Our rights-of-use do not apply to six fibers that have been set aside for
Central Maine Power's use. Central Maine Power may use these fibers for its own
business purpose, 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 Central Maine Power has excess capacity on these six fibers, Central
Maine Power is required to negotiate in good faith with us to provide such
excess capacity to us before making it available to third parties. If we do not
enter into an agreement with Central Maine Power with respect to such excess
capacity, Central Maine Power will be able to use such capacity to compete with
us.
Our agreement with Central Maine Power has an initial term of 30 years and
expires in January 2027. Thereafter it is renewable at our option for an
additional ten-year term. In the event that we elect to renew our agreement with
Central Maine Power, we must pay to Central Maine Power an annual payment equal
to 10% of our gross annual revenue from our fiber optic network constructed
along Central Maine Power's rights-of-way, which payment would be in addition to
the other annual payments under our agreement with Central Maine Power.
PAYMENTS UNDER RIGHT-OF-WAY AGREEMENTS
The aggregate amounts accrued by us under our agreements that provide for
the rights-of-way used in our network were $785,535, $1,084,325 and $886,322 for
the years ended December 31, 1997, 1998 and 1999, respectively.
CONSOLIDATED EDISON COMMUNICATIONS AGREEMENT AND EXELON CORPORATION AGREEMENT
In November 1999, we entered into agreements with the communications
subsidiaries of Consolidated Edison, Inc., and PECO Energy, Inc. Under these
agreements, Exelon Corporation, PECO's communications subsidiary, and
Consolidated Edison Communications have agreed to provide us with fiber optic
filaments and interconnections which, once received, will enable us to operate
our network through significant portions of their coverage areas, including New
York and Philadelphia, and enter into cooperative marketing arrangements with
us.
Under the agreements, we have agreed to provide network transport and
carrier services among the service areas of Consolidated Edison Communications
and Exelon Corporation, provided that each of these companies would provide
connectivity from our network to their respective local loops, and each would
manage distribution into its respective end-users' locations. The communications
network would operate under our brand name and we would jointly develop, operate
and market the combined telecommunications infrastructure that would be created
through the consummation of the two transactions.
For an initial period of seven years, the agreements provide us with the
exclusive right and obligation to provide communications services to
Consolidated Edison Communications and Exelon Corporation and their certificated
carrier customers to any point covered by our network, so long as we are able to
provide such services in a timely manner and at market competitive prices.
Consolidated Edison Communications and Exelon Corporation have reciprocal
exclusive rights and obligations under the agreements to provide communications
services to us and our customers to any point covered by their networks, subject
to the same timing and pricing conditions.
Consolidated Edison Communications has agreed to provide a connection
facility for us in Manhattan and provide connectivity to 26 carrier buildings in
key areas of Manhattan. These buildings include major long distance company
facilities, large collocation facilities, local serving offices and other
high-traffic building sites. Exelon Corporation has agreed to provide a new
facility for our use in Philadelphia, convey a right-of-use to approximately
4,000 fiber miles in a corridor from New York City to Philadelphia and
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<PAGE>
from Philadelphia to Baltimore and Washington, D.C., and provide connectivity to
40 carrier sites in metropolitan Philadelphia and to one site in each of
Baltimore and Washington, D.C.
Under the agreements, we have agreed to issue 2,448,240 shares of our common
stock to Consolidated Edison Communications and 2,106,625 shares of our common
stock to Exelon Corporation, which would result in Consolidated Edison
Communications and Exelon Corporation owning approximately 10.75% and 9.25% of
our outstanding common stock, respectively. Under the agreements, each of these
companies also would receive the right to nominate one member to our board of
directors.
These agreements remain subject to regulatory and municipal approval and
other conditions beyond our control, and are terminable if the closing has not
occurred by September 7, 2000. Prior to closing, we intend to obtain shareholder
approval of the transactions. Our two largest shareholders, Northeast Utilities
and an affiliate of CMP Group, Inc., have agreed to vote to approve these
transactions.
COMPETITION
The telecommunications industry is highly competitive, and we face
substantial competition. Many of our existing and potential competitors have
financial, management and other resources that are substantially greater than
ours, as well as other competitive advantages, including established reputations
in the communications market. New competitors may enter the market because of
increased consolidation and strategic alliances resulting from the
Telecommunications Act, as well as technological advances and further
deregulation. We have only recently begun to offer some of our services and, as
a result, we may have fewer and less well-established customer relationships
than some of our competitors.
Communications carriers that own or lease fiber optic networks in New
England include AT&T, MCI WorldCom, Sprint and Bell Atlantic and other carriers
with networks which employ advanced technology comparable to that of our
network, including Broadwing, Qwest Communications International, Metromedia
Fiber Network, Level 3 Communications, NEXTLINK Communications and RCN. A
significant portion of our revenues are derived from our customer relationships
with these competitors.
In the cities connected by our network, we also face significant competition
from the incumbent local telephone companies, which currently dominate their
respective local markets. In addition, we face competition from competitive
local telephone companies and wireless competitors in the cities in which we
plan to build our 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 us in the market for leasing fiber capacity. Some local cable
television companies have extensive coaxial cable networks in places 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 our potential direct competitors. We also face potential
competition from the utilities which have granted us rights-of-way in certain
portions of our network. See "--Right-of-Way Agreements."
GOVERNMENTAL REGULATION
While we believe that we are not directly subject to common carrier
regulation (except to the extent we have been certified to provide common
carrier services through our subsidiaries in Connecticut and New York), we are
part of an industry that is highly regulated by federal, state and local
governments whose regulatory actions are often subject to judicial modification.
We believe that our provision of lit fiber is subject to private carrier
regulation. However, in light of the changes that are occurring in the
regulation of telecommunications, we cannot forecast whether or not we will be
subject to additional regulation in the future.
Separate and apart from our provision of fiber capacity, we are subject to
common carrier regulation to the extent that our Connecticut and New York
subsidiaries provide telecommunications services.
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Currently, these subsidiaries are not providing common carrier service. By
virtue of their status as common carriers, these subsidiaries are subject to
certain laws and regulations at the federal, state and local levels.
FEDERAL REGULATION
Federal regulation has the greatest impact on the telecommunications
industry and has undergone major changes in the last four years as the result of
the adoption by Congress of the Telecommunications Act of 1996 on February 8,
1996. The Telecommunications Act is the most comprehensive reform of the
nation's telecommunications laws since the Communications Act of 1934, as
amended, was enacted. The Telecommunications Act imposes a number of access and
interconnection requirements on telecommunications carriers and on all local
exchange providers, including competitive local exchange carriers, with
additional requirements imposed on incumbent local exchange carriers. The
Telecommunications 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.
After lengthy legal proceedings, the FCC adopted revised guidelines
implementing the interconnection and local competition provisions of the
Telecommunications Act. In order to foster competition in the local exchange
market, the FCC required local incumbent exchange carriers to offer unbundled
access to their telecommunications networks to competitive local exchange
carriers at cost-based rates, including access to dark fiber. This could
decrease the demand for fiber provided by us. However, the long and short term
effects of the FCC's guidelines have yet to be ascertained.
Aside from the impact of the Telecommunications Act, we believe that federal
regulation does not affect us directly because we are not currently regulated as
a common carrier under federal law. Federal law imposes certain legal
requirements on common carriers who engage in interstate or foreign
communication by wire or radio. These legal requirements apply to
telecommunications carriers to the extent they engage in the provision of
telecommunications services. Telecommunications carriers and common carriers are
essentially the same. Each provides communications services directly to the
public or to all potential users on a nondiscriminatory basis subject to
standardized rates, terms and conditions. We do not believe that we currently
offer our fiber capacity in this manner, because we enter into individual
agreements on a selective basis with prospective lessees of our fiber
facilities. We therefore do not believe that our provision of dark or lit fiber
capacity constitutes telecommunications service or common carriage as defined by
the FCC or under the common carrier provisions of the Communications Act.
We believe that where we provide lit fiber capacity we do so as a "provider
of telecommunications" or as a "private carrier." Providers of
telecommunications and private carriers are essentially the same. Each makes
individualized decisions as to whom and on what rates, terms and conditions it
provides transmission capacity. Providers of telecommunications and private
carriers are not extensively regulated but are subject to the jurisdiction of
the FCC and to Federal Universal Service Fund obligations. There are no
assurances, however, that the leasing of lit or dark fiber will not be subject
to further regulation under the Communications Act of 1934, as amended.
Accordingly, it is conceivable that the FCC would subject our provision of
both lit and dark fiber capacity to common carrier regulation. In 1994, the U.S.
Court of Appeals for the District of Columbia Circuit remanded to the FCC the
question of the FCC's authority to regulate dark fiber. To date, the FCC has not
indicated an intention to rule on this remand. In addition, the FCC has been
petitioned by certain railroad, power and telecommunications associations, none
of which is affiliated with us, to clarify the regulatory status of fiber
capacity providers.
As indicated above, our two subsidiaries that have authority to provide
telecommunications services on a common carrier basis in New York and
Connecticut are subject to regulation under the Communications Act.
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If, and to the extent that, we were deemed to be a common carrier we would
be required to comply with several regulatory requirements, including but not
limited to the duty to:
- provide such services indiscriminately upon any reasonable request;
- charge rates and adopt practices, classifications and regulations that are
just and reasonable;
- avoid unreasonable discrimination in charges, practices, regulations,
facilities and services;
- pay into federal funds such as those for Telecommunications Relay Services
and for the management of the North American Numbering Plan;
- limit our use of Customer Proprietary Network Information to provisioning
of the services in connection with which the Customer Proprietary Network
was obtained;
- be subject to the complaint process at the FCC; and
- comply with various reporting, regulatory fee payment and other
requirements.
We might also be required to file tariffs setting forth the rates for our
services. These regulatory requirements could impose substantial burdens on us.
As a provider of telecommunications or a private carrier in our provision of
leased lit fiber capacity, our revenues from such leases are subject to
contributions to the FCC's Universal Service Fund, but only insofar as leases to
end-users are concerned. Because Internet service providers are deemed to be
end-users for Universal Service purposes, our revenues received pursuant to
fiber leases to these entities are subject to contributions to the FCC's
Universal Service Fund. If we were deemed to be a provider of telecommunications
or a private carrier with respect to our provision of leased dark fiber
capacity, those revenues would be subject to the same assessments. The
assessment rate is calculated quarterly and was set at 5.8% of gross interstate
end-user revenues for the fourth quarter of 1999. The assessment rate may be
higher in subsequent years. Most of our revenues are from telecommunications
carriers that are not end-users and, as a general matter, revenues received from
telecommunications carriers are not subject to contribution to the Universal
Service Fund. However, our revenues from telecommunications carriers that
themselves are exempt from contributing to the Fund because their contribution
would be less than $10,000 would be subject to such contribution if the carrier
notifies us that it is not contributing directly, in which case the carrier is
considered to be an end-user. In addition, if a carrier purchasing our capacity
uses it for its own purposes, then we would be subject to such contribution for
the revenue generated from that carrier because it too would be considered an
end-user.
Federal telecommunications law may also affect our business by virtue of the
interrelationships that exist among us and incumbent local telephone companies
and long distance companies. For example, the FCC issued an order requiring,
among other things, that common line access fees charged to long distance
telephone companies, 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. Further access charge reform is pending before
the FCC. While it is not possible to predict the precise effect the access
charge changes will have on our business or financial condition, the reforms
will reduce access charges paid by long distance companies, likely eliminating
one of the principal disincentives for use of incumbent local telephone company
facilities by long distance telephone companies, which could have a material
adverse effect on the use of our fiber optic telecommunications networks by long
distance telephone companies.
STATE REGULATION
The Telecommunications 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
54
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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 Telecommunications 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, we do not anticipate that the regulatory requirements to which we
will be subject in Connecticut, Maine, Massachusetts, New Hampshire, New York,
Vermont and Rhode Island will have any material adverse effect on our
operations. In some jurisdictions, our pricing flexibility for intrastate
services may be limited because of regulation, although our 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 us.
We have determined that there are advantages to having certain of our
subsidiaries subject to state regulation in Connecticut and New York. As a
regulated carrier in those two jurisdictions, these subsidiaries have access to
poles and rights-of-way for our fiber lines that otherwise would not be
available to us. Our two subsidiaries have obtained authority to provide
telecommunications services in these two states. 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 GOVERNMENT REGULATION
In addition to federal and state laws, local governments exercise legal
authority that may impact our business. For example, local governments 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 our use of public rights-of-way. These regulations may have an
adverse effect on our business.
EMPLOYEES
As of April 30, 2000, we employed 73 people. Our employees are not
represented by any labor union and we consider our relationship with employees
to be satisfactory. We have contracted to third parties substantially all of the
engineering, routine maintenance, construction supervision activities and
network surveillance associated with the construction of our fiber optic
network. We have also contracted to various third party contractors the
construction of some parts of our fiber optic network.
PROPERTIES
The NEON system and its component assets are the principal properties
currently owned by us or with respect to which we have an IRU. We own
substantially all of the communications equipment currently utilized in our
business and hold certain ownership interests in the cable comprising the NEON
system. Our installed fiber optic cable is laid along the various rights-of-way
held by us. See "Business--Right-of-Way Agreements." Other fixed assets are
located at various leased locations in geographic areas we serve.
Our executive, administrative and sales offices are located at our principal
office in Westborough, Massachusetts. We lease this space (approximately 15,000
square feet) pursuant to a six-year lease that commenced in May 1999.
LEGAL PROCEEDINGS
We are not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table sets forth our executive officers and directors and
their ages as of April 1, 2000:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- --------------------------------------------------------
<S> <C> <C>
Vincent C. Bisceglia........ 45 Chairman of the Board of Directors and Chief Executive
Officer
Victor Colantonio........... 52 Vice Chairman of the Board of Directors and President
William F. Fennell.......... 55 Chief Financial Officer, Treasurer and Vice President,
Finance
Michael A. Musen............ 51 Vice President, Operations
Arthur W. Adelberg.......... 48 Director
Katherine Dietze Courage.... 41 Director (1)(2)
John H. Forsgren............ 53 Director (1)
F. Michael McClain.......... 50 Director (1)(2)
Gary D. Simon............... 51 Director (2)
</TABLE>
------------------------
(1) Member of the compensation committee.
(2) Member of the audit committee.
VINCENT C. BISCEGLIA, our chairman and chief executive officer, has served
in his current position since November 1998. From December 1997 to
November 1998 Mr. Bisceglia served as an independent consultant. From
February 1994 to December 1997 Mr. Bisceglia served as president and chief
executive officer and a director of Technology Service Group, Inc., a
manufacturer of advanced technology pay telephones. Prior to 1994, he served
Technology Service Group, Inc. in various management positions. From 1982 to
1986, Mr. Bisceglia was executive vice president and chief operating officer of
Transaction Management, Inc., a manufacturer of point-of-sale systems, and from
1978 to 1982, he held senior marketing positions with National Semiconductor-DTS
and Siemens-Nixdorf Computer Corporation.
VICTOR COLANTONIO, our founder, vice chairman of the board of directors and
president, has been a member of our board of directors since 1989. From 1987 to
1991 Mr. Colantonio was president of International Communications Services Corp.
He served as president of Ireland-based Murray International from 1986 to 1987,
where he sold network services. 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. Mr. Colantonio and the Company
have decided not to renew Mr. Colantonio's current employment agreement, but
intend to negotiate a new agreement commensurate with Mr. Colantonio's position
as Vice Chairman and President and which takes into account the fact that the
Company is now publicly traded, among other matters.
WILLIAM F. FENNELL joined us in August 1996 and became our chief financial
officer and treasurer in May 1997 and our vice president finance in May 1998.
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.
MICHAEL A. MUSEN has served as one of our officers since 1992, and became
vice president, operations in 1996.
ARTHUR W. ADELBERG has served as one of our directors since May 1999.
Mr. Adelberg has served as executive vice president and chief financial officer
of CMP Group, Inc. since December 1999. From
56
<PAGE>
September 1998 through November 1999, Mr. Adelberg served as executive vice
president of CMP Group, Inc. and from March 1994 through August 1998 served as
vice president law and power supply of Central Maine Power Company and served in
a number of senior management roles at Central Maine Power Company from 1985
through March 1994. Mr. Adelberg is a member of the Executive Committee of the
New England Power Pool.
KATHERINE DIETZE COURAGE has served as a member of our board of directors
since August 1998. Ms. Courage has served since 1996 as a managing director in
the Global Media and Telecommunications Group in the Investment Banking
Department of Credit Suisse First Boston, one of the underwriters of this
offering and our initial public offering. Prior to joining Credit Suisse First
Boston 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.
JOHN H. FORSGREN has served as a member of our board of directors since
May 1998. Mr. Forsgren has served as executive vice president and chief
financial officer of Northeast Utilities and certain of its affiliates since
February 1996. From September 1996 to the present, he has served as a director
of Connecticut Yankee Atomic Power Company. From January 1990 to July 1994, he
served as senior vice president-chief financial officer of Euro Disney (a
division of the Walt Disney Company), and from December 1994 to January 1996, he
was a managing director of Chase Manhattan Bank.
F. MICHAEL MCCLAIN has served as a member of our board of directors since
May 1998. Mr. McClain has served as vice president, corporate development of CMP
Group, Inc. since September 1998. He held the same position at Central Maine
Power Company from February 1998 to August 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 member of our board of directors 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.
The foregoing executive officers and directors will become the executive
officers and directors of NEON Communications after the reorganization.
57
<PAGE>
PROPOSAL 5--RATIFICATION OF THE SELECTION OF INDEPENDENT PUBLIC ACCOUNTANTS
The board of directors has selected the firm of Arthur Andersen LLP as our
independent public accountants for the current fiscal year. Arthur Andersen LLP
served as our independent public accountants for the year ended December 31,
1999. Although stockholder approval of the board of directors' selection of
Arthur Andersen LLP is not required by law, the board of directors believes that
it is advisable to give stockholders an opportunity to ratify this selection. If
this proposal is not approved, the board of directors may reconsider its
selection.
A representative of Arthur Andersen LLP is expected to be present at the
meeting and will have an opportunity to make a statement if he or she desires to
do so and will also be available to respond to appropriate questions from
stockholders.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS A VOTE "FOR"
RATIFICATION OF THE SELECTION OF ARTHUR ANDERSEN LLP
AS OUR INDEPENDENT PUBLIC ACCOUNTANTS.
58
<PAGE>
LEGAL OPINION
The validity of the shares of common stock issued in the reorganization will
be passed upon for NEON Communications, Inc. by Hale and Dorr LLP, Boston,
Massachusetts.
EXPERTS
The consolidated financial statements of NorthEast Optic Network, Inc. and
its subsidiaries as of December 31, 1999 and 1998, and for each of the years in
the three-year period ended December 31, 1999, included in this document and in
the registration statement to the extent and for the periods indicated in their
reports have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in giving
said report
WHERE YOU CAN FIND MORE INFORMATION
We file reports, proxy statements and other information with the Securities
and Exchange Commission. Copies of the reports, proxy statements and other
information filed by either company may be inspected and copied at the public
reference facilities maintained by the Securities and Exchange Commission:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
</TABLE>
Copies of these materials can also be obtained by mail at prescribed rates
from the Public Reference section of the Securities and Exchange Commission, 450
Fifth Street, N.W., Washington, D.C. 20549 or by calling the Securities and
Exchange Commission at 1-800-SEC-0330. The Securities and Exchange Commission
maintains a website that contains reports, proxy statements and other
information regarding each of us. The address of this website is
http://www.sec.gov.
NEON Communications has filed a registration statement under the Securities
Act with the Securities and Exchange Commission with respect to the shares of
common stock of NEON Communications to be issued to NorthEast Optic Network
stockholders in the reorganization. This document constitutes the prospectus of
NEON Communications filed as part of the registration statement. This document
does not contain all of the information set forth in the registration statement
because some parts of the registration statement are omitted as provided by the
rules and regulations of the Securities and Exchange Commission. You may inspect
and copy the registration statement at any of the addresses listed above.
THIS DOCUMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO PURCHASE, THE COMMON STOCK OF NEON COMMUNICATIONS OR THE SOLICITATION
OF A PROXY, IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM OR FROM WHOM IT IS
UNLAWFUL TO MAKE THE OFFER, SOLICITATION OF AN OFFER OR PROXY SOLICITATION IN
THAT JURISDICTION. NEITHER THE DELIVERY OF THIS DOCUMENT NOR ANY DISTRIBUTION OF
SECURITIES MEANS, UNDER ANY CIRCUMSTANCES, THAT THERE HAS BEEN NO CHANGE IN THE
INFORMATION SET FORTH IN THIS DOCUMENT OR IN THE AFFAIRS OF NEON COMMUNICATIONS
SINCE THE DATE OF THIS DOCUMENT.
59
<PAGE>
OTHER MATTERS
OTHER BUSINESS
The board of directors knows of no other business which will be presented
for consideration at the meeting other than the proposals described above.
However, if any other business should come before the meeting, it is the
intention of the persons named in the enclosed proxy to vote or otherwise act in
accordance with their best judgment on such matters.
SOLICITATION OF PROXIES
We will bear the costs of soliciting proxies. In addition to solicitations
by mail, our directors, officers and regular employees may solicit proxies by
telephone, telegraph, facsimile and personal interviews, but will receive no
additional compensation for doing so. We will also request brokerage houses,
custodians, nominees and fiduciaries to forward copies of the proxy material to
those persons for whom they hold shares and request instructions for voting the
proxies. We will reimburse those brokerage houses and other persons for their
reasonable expenses in this connection.
STOCKHOLDER PROPOSALS FOR THE 2000 ANNUAL MEETING
Any proposal that a stockholder intends to present at the 2001 annual
meeting of stockholders must be submitted to the secretary of the company no
later than February 26, 2001 in order to be considered for inclusion in the
proxy statement relating to that meeting. Written notice of proposals of
stockholders submitted outside the processes of Rule 14a-8 under the Securities
Exchange Act of 1934 for consideration at the 2001 annual meeting must be
received on or before May 11, 2001 in order to be considered timely for purposes
of Rule 14a-4 under the Exchange Act.
Pursuant to our by-laws, the company must be given advance notice of
stockholder nominations for election to the board of directors and of other
matters which stockholders wish to present for action at an annual meeting of
stockholders (other than stockholder matters included in the proxy statement.)
The required notice must be made in writing; delivered to or mailed and received
by the company secretary at our principal offices, and, if relating to a
nomination of directors, by first class United States mail, postage prepaid; and
received not less than 60 days or more than 90 days prior to the annual meeting;
provided, however, that if less than 70 days' notice or prior public disclosure
of the date of the meeting is given to stockholders, the notice must be mailed
or delivered not later than the close of business on the 10th day following the
date on which the notice of the date of the meeting was mailed or such public
disclosure was made, whichever occurs first.
By order of the board of directors,
Roger M. Barzun,
SECRETARY
June 22, 2000
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. YOUR PROMPT RESPONSE
WILL GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK PERSONALLY
EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.
60
<PAGE>
FINANCIAL INFORMATION
The following financial information represents historical financial
information of NorthEast Optic Network. If the reorganization is completed, this
financial information will represent the historical financial information of
NEON Communications on a consolidated basis.
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1998 and 1999
and
March 31, 2000 (unaudited)................................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1997, 1998
and 1999 and for the three months ended March 31, 1999 and
2000 (Unaudited).......................................... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1997,
1998 and 1999 and for the three months ended March 31,
2000 (Unaudited).......................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1997, 1998
and 1999 and for the three months ended March 31, 1999 and
2000 (Unaudited).......................................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To NorthEast Optic Network, Inc.:
We have audited the accompanying consolidated balance sheets of NorthEast
Optic Network, Inc. (a Delaware corporation) and subsidiaries as of
December 31, 1998 and 1999 and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three years in
the period ended December 31, 1999. 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 auditing standards generally
accepted in the United States. 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, 1998 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1999 in conformity with accounting principles
generally accepted in the United States.
Boston, Massachusetts
January 18, 2000
F-2
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1998 1999 2000
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................. $ 57,737,792 $ 4,768,389 $ 6,665,050
Short-term restricted investments (Note 7(a))......... 23,149,975 22,518,611 20,344,602
Short-term investments................................ 48,581,949 66,803,311 52,032,524
Accounts receivable, net of allowance of approximately
$224,000 and $117,000 in 1998 and 1999 and $194,000
at March 31, 2000, respectively..................... 111,915 1,858,201 1,817,299
Refundable taxes from related party................... 755,838 -- --
Prepaid expenses and other current assets............. 506,947 494,323 653,069
------------ ------------ ------------
Total current assets.............................. 130,844,416 96,442,835 81,512,544
------------ ------------ ------------
Property and Equipment, net............................. 52,922,677 94,924,843 106,420,815
------------ ------------ ------------
Restricted Investments (Note 7(a))...................... 51,371,859 31,693,543 23,029,978
Intangible Assets, net (Note 6)......................... 56,773,282 57,572,155 56,878,402
------------ ------------ ------------
$291,912,234 $280,633,376 $267,841,739
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations........... $ 127,619 $ -- $ --
Accounts payable...................................... 322,285 3,783,354 9,103,730
Accounts payable--Communications network.............. 2,647,719 9,438,350 6,858,436
Accrued expenses...................................... 13,526,702 13,348,296 6,953,407
Accrued right-of-way fees, related party.............. 1,084,325 886,322 797,014
Current portion of deferred revenue................... 140,232 58,380 77,760
------------ ------------ ------------
Total current liabilities......................... 17,848,882 27,514,702 23,790,347
------------ ------------ ------------
Deferred Revenue, net of Current Portion................ 1,028,668 969,026 951,204
------------ ------------ ------------
Long-term Accounts Payable--Communications Network...... -- 4,682,858 922,538
------------ ------------ ------------
Long-term Obligations, less current maturities.......... 180,000,000 180,000,000 180,000,000
------------ ------------ ------------
Commitments and Contingencies (Note 13)
STOCKHOLDERS' EQUITY:
Common stock, $0.01 par value-
Authorized--30,000,000 shares
Issued and outstanding--16,066,333 and 16,393,534
shares at December 31, 1998 and 1999, respectively
and 16,655,581 shares at March 31, 2000............. 160,663 163,935 166,555
Warrants.............................................. 8,595 -- --
Additional paid-in capital............................ 108,105,684 110,072,881 113,055,338
Accumulated deficit................................... (15,240,258) (42,770,026) (51,044,243)
------------ ------------ ------------
Total stockholders' equity........................ 93,034,684 67,466,790 62,177,650
------------ ------------ ------------
$291,912,234 $280,633,376 $267,841,739
============ ============ ============
</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
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------- ---------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Network services................... $ 347,718 $ 820,059 $ 3,152,348 $ 421,481 $ 1,663,192
Other service...................... 46,986 43,613 2,512,928 99,475 989,514
----------- ------------ ------------ ------------ ------------
Total revenues................. 394,704 863,672 5,665,276 520,956 2,652,706
----------- ------------ ------------ ------------ ------------
EXPENSES:
Cost of revenues (includes
right-of-way fees of
approximately $108,000, $591,000,
$589,000, $145,000 and $153,000
in 1997, 1998, 1999, and the
three-months ended March 31, 1999
and 2000, respectively, paid to
related parties)................. 1,137,943 2,176,266 6,365,758 928,988 2,110,502
Selling, general and
administrative................... 1,002,232 5,200,720 7,380,351 1,321,373 2,508,614
Depreciation and amortization...... 552,862 1,798,294 6,149,720 794,978 2,458,941
----------- ------------ ------------ ------------ ------------
Total expenses................. 2,693,037 9,175,280 19,895,829 3,045,339 7,078,057
----------- ------------ ------------ ------------ ------------
Loss from operations........... (2,298,333) (8,311,608) (14,230,553) (2,524,383) (4,425,351)
----------- ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE):
Interest income and other, net..... 138,918 4,179,880 7,712,259 2,240,764 1,535,409
Interest expense................... (141,811) (8,644,463) (21,011,474) (4,979,661) (5,384,275)
----------- ------------ ------------ ------------ ------------
Total other expense............ (2,893) (4,464,583) (13,299,215) (2,738,897) (3,848,866)
----------- ------------ ------------ ------------ ------------
Loss before minority interest
in subsidiaries' earnings and
benefit from income taxes.... (2,301,226) (12,776,191) (27,529,768) (5,263,280) (8,274,217)
Minority Interest.................... 1,080,200 1,108,933 -- -- --
Benefit From Income Taxes............ (261,000) (315,000) -- -- --
----------- ------------ ------------ ------------ ------------
Loss Before Extraordinary Item....... (960,026) (11,352,258) (27,529,768) (5,263,280) (8,274,217)
----------- ------------ ------------ ------------ ------------
Extraordinary Item (Note 1).......... -- (1,363,155) -- -- --
----------- ------------ ------------ ------------ ------------
$ (5,263,280)
Net Loss............................. $ (960,026) $(12,715,413) $(27,529,768) $(8,2
----------- ------------ ------------ ------------ ------------
Basic and Diluted Loss per Share
Before Extraordinary Item.......... $ (3.37) $ (1.70) $ (1.70) $ (0.33) $ (0.50)
----------- ------------ ------------ ------------ ------------
Basic and Diluted Loss per Share..... $ (3.37) $ (1.90) $ (1.70) $ (0.33) $ (0.50)
----------- ------------ ------------ ------------ ------------
Basic and Diluted Weighted Average
Shares Outstanding................. 284,828 6,675,717 16,172,026 16,070,027 16,476,116
=========== ============ ============ ============ ============
</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
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
-------------------- ---------------------- ----------------------
$0.01 $0.01 $0.01
NUMBER OF PAR NUMBER OF PAR NUMBER OF PAR
OF SHARES VALUE SHARES VALUE SHARES VALUE WARRANTS
--------- -------- ----------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996......... 21,180 $ 212 962,734 $ 9,627 284,828 $ 2,848 $ 8,595
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 8,595
Exercise of common stock
options........................ -- -- -- -- 3,600 36 --
Reorganization (Note 1).......... 199,636 1,996 3,470,470 34,705 -- -- --
Conversion of Series A and B
convertible preferred stock.... (277,960) (2,779) (4,433,204) (44,332) 11,777,905 117,779 --
Proceeds from initial public
offering, net of issuance costs
of $4,230,011.................. -- -- -- -- 4,000,000 40,000 --
Net loss..................... -- -- -- -- -- -- --
--------- ------- ----------- -------- ----------- -------- -------
BALANCE, DECEMBER 31, 1998......... -- -- -- -- 16,066,333 160,663 8,595
Exercise of common stock
options........................ -- -- -- -- 163,002 1,630 --
Exercise of warrants............. -- -- -- -- 164,199 1,642 (8,595)
Compensation expense related to
the issuance of stock options
to nonemployees................ -- -- -- -- -- -- --
Net loss..................... -- -- -- -- -- -- --
--------- ------- ----------- -------- ----------- -------- -------
BALANCE, DECEMBER 31, 1999......... -- -- -- -- 16,393,534 163,935 --
Exercise of common stock
options........................ -- -- -- -- 262,047 2,620 --
Net loss......................... -- -- -- -- -- -- --
--------- ------- ----------- -------- ----------- -------- -------
BALANCE, MARCH 31, 2000
(UNAUDITED)...................... $ -- $ -- $ -- $ -- 16,655,581 $166,555 $ --
========= ======= =========== ======== =========== ======== =======
<CAPTION>
ADDITIONAL TOTAL
PAID-IN ACCUMULATED STOCKHOLDERS'
CAPITAL DEFICIT EQUITY
------------- ------------ -------------
<S> <C> <C> <C>
BALANCE, DECEMBER 31, 1996......... $ 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......... 11,817,216 (2,524,845) 9,314,224
Exercise of common stock
options........................ 32,040 -- 32,076
Reorganization (Note 1).......... 52,597,107 -- 52,633,808
Conversion of Series A and B
convertible preferred stock.... (70,668) -- --
Proceeds from initial public
offering, net of issuance costs
of $4,230,011.................. 43,729,989 -- 43,769,989
Net loss..................... -- (12,715,413) (12,715,413)
------------- ------------ ------------
BALANCE, DECEMBER 31, 1998......... 108,105,684 (15,240,258) 93,034,684
Exercise of common stock
options........................ 1,666,116 -- 1,667,746
Exercise of warrants............. 7,640 -- 687
Compensation expense related to
the issuance of stock options
to nonemployees................ 293,441 -- 293,441
Net loss..................... -- (27,529,768) (27,529,768)
------------- ------------ ------------
BALANCE, DECEMBER 31, 1999......... 110,072,881 (42,770,026) 67,466,790
Exercise of common stock
options........................ 2,982,457 -- 2,985,077
Net loss......................... -- (8,274,217) (8,274,217)
------------- ------------ ------------
BALANCE, MARCH 31, 2000
(UNAUDITED)...................... $ 113,055,338 $(51,044,243) $ 62,177,650
============= ============ ============
</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>
THREE-MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................... $ (960,026) $(12,715,413) $ (27,529,768) $ (5,263,280) $ (8,274,217)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities-
Extraordinary item-write-off of deferred
financing costs........................ -- 1,363,155 -- -- --
Minority interest in subsidiaries'
earnings............................... (1,080,200) (1,108,933) -- -- --
Loss on disposal of property and
equipment.............................. -- 6,699 -- -- --
Accretion of long-term obligations....... 26,642 62,165 -- -- --
Compensation expense related to the
issuance of common stock options to
nonemployees........................... -- -- 293,441 -- --
Amortization of deferred financing and
interest costs......................... -- 261,102 1,150,940 156,661 325,071
Depreciation and amortization............ 552,862 1,798,294 6,149,720 794,978 2,458,941
Changes in assets and liabilities-
Accounts receivable.................... (908,851) 922,476 (1,746,286) (76,084) 40,902
Refundable taxes from related party.... (368,734) (387,104) 755,838 755,838 --
Prepaid expenses and other current
assets............................... (8,719) (493,375) 12,624 (446,595) (158,746)
Accounts payable....................... (21,219) 27,527 3,461,069 4,390,694 5,320,376
Accrued expenses....................... 974,371 13,253,999 (376,409) (6,776,248) (6,484,197)
Deferred revenue....................... 919,170 24,730 (141,494) (97,702) 1,558
Deferred tax liability................. 61,000 (61,000) -- -- --
----------- ------------ ------------- ------------ ------------
Net cash (used in) provided by
operating activities............... (813,704) 2,954,322 (17,970,325) (6,561,738) (6,770,312)
----------- ------------ ------------- ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of short-term investments........ -- (48,581,949) (140,221,362) (6,551,118) (53,479,213)
Sales of short-term investments............ -- -- 122,000,000 -- 68,250,000
Proceeds from sale of property and
equipment................................ -- 9,500 -- -- --
Purchases of property and equipment........ (5,609,459) (38,947,267) (48,583,642) (14,837,780) (13,555,938)
Increase in intangible assets.............. (3,188,792) (6,252,612) (1,518,057) (382,831) (30,293)
----------- ------------ ------------- ------------ ------------
Net cash (used in) provided by
investing activities............... (8,798,251) (93,772,328) (68,323,061) (21,771,729) 1,184,556
----------- ------------ ------------- ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in accounts payable--
network.................................. 716,985 1,448,426 11,473,489 2,793,790 (6,340,234)
Proceeds from issuance of long-term
obligations.............................. 1,600,000 180,000,000 -- -- --
Proceeds from note payable to related
party.................................... 2,100,000 15,775,000 -- -- --
Payments on long-term obligations.......... (408,116) (1,991,286) (127,619) (108,394) --
Payments on note payable to related
party.................................... -- (17,875,000) -- -- --
(Increase) decrease in restricted cash and
investments.............................. (819,923) (73,701,911) 20,309,680 11,183,153 10,837,574
Proceeds from issuance of ownership
interest................................. 1,750,088 -- -- -- --
Proceeds from exercise of common stock
options and warrants..................... -- 32,128 1,668,433 687 2,985,077
Increase in minority interest in
subsidiary............................... 106,432 -- -- -- --
Proceeds from initial public offering,
net...................................... -- 43,769,989 -- -- --
Proceeds from sale of preferred stock,
net...................................... 800,016 -- -- -- --
----------- ------------ ------------- ------------ ------------
Net cash provided by financing
activities......................... 5,845,482 147,457,346 33,323,983 13,869,236 7,482,417
----------- ------------ ------------- ------------ ------------
</TABLE>
F-6
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
<TABLE>
<CAPTION>
THREE-MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------------------ ---------------------------
1997 1998 1999 1999 2000
----------- ------------ ------------- ------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net (Decrease) Increase in Cash and Cash
Equivalents................................ (3,766,473) 56,639,340 (52,969,403) (14,464,231) 1,896,661
Cash and Cash Equivalents, beginning of
period..................................... 4,864,925 1,098,452 57,737,792 57,737,792 4,768,389
----------- ------------ ------------- ------------ ------------
Cash and Cash Equivalents, end of period..... $ 1,098,452 $ 57,737,792 $ 4,768,389 $ 43,273,561 $ 6,665,050
=========== ============ ============= ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for-
Interest................................. $ 165,446 $ 660,300 $ 23,594,000 $ 13,058,700 $ 11,077,350
=========== ============ ============= ============ ============
Taxes.................................... $ 45,261 $ 16,875 $ 189,250 $ -- $ --
=========== ============ ============= ============ ============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Goodwill recorded in connection with the
Reorganization........................... $ -- $ 47,871,068 $ -- $ -- $ --
=========== ============ ============= ============ ============
Issuance of warrants in connection with
sale of preferred stock and note payable
to related party......................... $ 532,836 $ -- $ -- $ -- $ --
=========== ============ ============= ============ ============
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 CONSOLIDATED FINANCIAL
STATEMENTS.
F-7
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(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.
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 66.7% and FiveCom LLC
owning 33.3% 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.
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, 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
consolidated 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 interests.
In order to simplify the corporate structure and in contemplation of the
initial public offering, the Company's major stockholders decided to reorganize
the Company (the Reorganization). 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, a wholly owned subsidiary of CMP) 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 as NorthEast
Optic Network, Inc. and the Company's Certificate of Incorporation was amended
and restated. In December 1998, FiveCom of Maine, Inc. was merged with and into
NorthEast Optic Network, Inc.
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, (ii) FiveCom LLC and NECOM LLC were merged with and into
the Company and (iii) 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 and Mode 1 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
F-8
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND REORGANIZATION (CONTINUED)
to the Restructuring and Contribution Agreement, the Company's president and the
Company's vice president of operating vice president of 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 recorded an intangible
asset of $47,871,068 to reflect the Company's exchange of membership interest
(acquisition) related to NU's minority interest in NECOM LLC in accordance with
AICPA Accounting Interpretation 39 to Accounting Principles Board (APB) Opinion
No. 16, Business Combinations (AIN-39). The intangible asset will be amortized
over 30 years, reflecting assignment of value to goodwill and to the
rights-of-ways, which have 30-year terms.
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 (see Note 9(b)) and
sold $180 million of 12 3/4% Senior Notes due in 2008 (the Senior Notes) to the
public in a debt offering (see Note 7(a)). Upon successful completion of the
offerings, the Company retired substantially all of its outstanding notes
payable and recorded an extraordinary charge of $1,363,155 in the consolidated
statement of operations for the year ended December 31, 1998 to write off the
remaining balance of the deferred financing costs related to the notes.
On November 24, 1999, the Company entered into preliminary agreements with
Consolidated Edison Communications, Inc. (CEC) and Exelon. The Company will
provide network transport and carrier services in the service areas of the
Company, CEC and Exelon. At the same time, each of the parties will provide
connectivity from the Company's backbone system to their respective local loops
and each will manage their local distributions into New York, Philadelphia,
Baltimore and Washington, DC. The communications network will operate under the
NEON brand. The term of the CEC agreement is for no less than 25 years and the
term of the Exelon agreement is for 20 years with five-year extension periods.
Under these agreements, we have agreed to issue 2,448,240 shares of our common
stock to Consolidated Edison Communications and 2,106,625 shares of our common
stock to Exelon Corporation, which would result in Consolidated Edison
Communications and Exelon Corporation owning approximately 10.75% and 9.25% of
our outstanding common stock, respectively. Each of these companies also would
receive the right to nominate one member to our board of directors. The Company
expects that a substantial portion of the value of the stock paid to CEC and
Exelon under these agreements will be recorded as an intangible and will result
in significant amortization expense and an increase in the Company's net loss
per share over the terms of the related agreements. CEC and Exelon have also
agreed to contribute to the Company $3,500,000 and $1,950,000, respectively, for
the build-out of local points of presence (POP) and the related optronics. Also,
CEC and Exelon have agreed to pay the Company approximately $7,900,000 and
$6,000,000, respectively, over four years for the cost of POP rental, POP
operating expenses, optronics maintenance and sales and marketing expenses.
These agreements are subject to termination by either party if the respective
closings thereunder have not occurred by September 7, 2000, and are subject to
substantial closing conditions that may not be satisfied by that date. The
Company is seeking an extension of this termination date. The CEC transaction
has encountered regulatory delays, and the Company cannot predict when this
transaction will close.
F-9
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(1) OPERATIONS AND REORGANIZATION (CONTINUED)
As of December 31, 1999, the Company has recorded revenues principally from
contract and other services and has incurred cumulative operating losses of
approximately $43,000,000. The market for fiber optic telecommunications in
which the Company operates is changing rapidly due to technological
advancements, the introduction of new products and services and the increasing
demands placed on equipment in worldwide telecommunications networks. 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 system and could have a material adverse effect on the
Company.
(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) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the results of
operations of NorthEast Optic Network, Inc. and its wholly owned subsidiaries.
All significant intercompany transactions and balances have been eliminated in
consolidation.
(b) UNAUDITED INTERIM FINANCIAL STATEMENTS
The accompanying consolidated financial statements as of March 31, 2000 and
for the three- months ended March 31, 1999 and 2000 are unaudited. These
unaudited financial statements have been prepared on the same basis as the
audited financial statements and include, in the opinion of management, all
adjustments, consisting of normal recurring adjustments, necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented. Results for the three-months ended March 31, 2000
are not necessarily indicative of the results that may be expected for the
entire fiscal year or future periods.
(c) MINORITY INTEREST
Minority interest in consolidated subsidiaries of the Company at
December 31, 1997 and 1998 consists of other members' interests in the LLCs
identified in Note 1. Changes in minority interest reflect other members'
capital adjusted by their portion of the net loss.
(d) MANAGEMENT ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual amounts could differ from those estimates.
F-10
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(e) REVENUE RECOGNITION
The services the Company provides include long-term leases of dark fiber
(fiber optic transmission lines leased without optronics equipment installed by
the Company) and shorter-term leases of lit fiber (fixed amounts of capacity on
fiber optic transmission lines that use optronics equipment) at fixed-cost
pricing over multi-year terms. Revenues on telecommunications network services
are recognized ratably over the term of the applicable lease agreements with
customers, which range from 1 to 20 years. Amounts billed in advance of the
service provided are recorded as deferred revenue (see Note 2(h)). The Company
also leases space at its facilities (collocation services). Other service
revenues include these collocation service revenues as well as revenue from
nonrecurring design, engineering, and construction services. Revenues for these
nonrecurring services are generally recognized as services are performed as the
Company has no further obligations.
The Company has contracts with customers that provide service level
commitments, which may obligate the Company to provide credits against billings
if service is interrupted or does not meet the customer's operating parameters.
These amounts are accounted for in cost of sales. To date, credits issued under
these arrangements have not been material.
(f) INCOME TAXES
Through July 8, 1998, the Company was majority-owned by CMP and under a
tax-sharing agreement was included in the consolidated federal tax return of CMP
(see Notes 3 and 11). Tax provisions through that date were calculated on a
separate return basis. The Company accounts for income taxes under Statement of
Financial Accounting Standards (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.
(g) CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The Company accounts for investments under 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. As of March 31, 2000, all of
the Company's short-term investments are classified as
F-11
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
held-to-maturity and reported at amortized cost, which approximates fair market
value. Cash and cash equivalents and short-term investments consist of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Cash and cash equivalents-
Cash................................................ $ 3,238 $ 169,167 $ 501,280
Money markets....................................... 2,981,789 4,599,222 6,163,770
Commercial paper.................................... 54,752,765 -- --
----------- ----------- -----------
Total cash and cash equivalents................... $57,737,792 $ 4,768,389 $ 6,665,050
=========== =========== ===========
Short-term investments-
U.S. treasury notes................................. $48,581,949 $43,230,651 $31,357,692
Commercial paper.................................... -- 23,572,660 20,674,832
----------- ----------- -----------
Total short-term investments...................... $48,581,949 $66,803,311 $52,032,524
=========== =========== ===========
</TABLE>
(h) DEFERRED REVENUE
Deferred revenue represents prepayments on dark fiber optic cable leases.
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, 1998 and 1999 and March 31, 2000, the Company has prepaid lease
payments totaling approximately, $1,169,000, $1,027,000 and $1,029,000,
respectively.
(i) DEPRECIATION AND AMORTIZATION
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
Leasehold improvements...................................... Life of lease
Network buildings........................................... 15 years
Furniture and fixtures...................................... 7 years
</TABLE>
(j) LONG-LIVED ASSETS
The Company applies SFAS No. 121, ACCOUNTING FOR THE IMPAIRMENT OF
LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF. SFAS No. 121
requires the Company to continually evaluate whether events or circumstances
have occurred that indicate that the estimated remaining useful life of
long-lived assets and certain identifiable intangibles and goodwill may warrant
revision or that the carrying value of these assets may be impaired. To compute
whether assets have been impaired, the estimated gross cash flows for the
estimated remaining useful life of the assets are compared to the carrying
value. To the extent
F-12
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
that the gross cash flows are less than the carrying value, the assets are
written down to the estimated fair value of the asset. The Company does not
believe that its long-lived assets have been impaired.
(k) CONCENTRATIONS OF CREDIT RISK AND SIGNIFICANT CUSTOMERS
Financial instruments that subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents, investments and
accounts receivable. The Company's cash equivalents and investments are invested
in financial instruments with high credit ratings. To control credit risk, the
Company performs regular credit evaluations of its customers' financial
condition and maintains allowances for potential credit losses. Concentration of
credit risk with respect to accounts receivable is limited to customers to whom
the Company makes significant sales.
Significant accounts receivable balances as a percentage of the Company's
total accounts receivable are as follows:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL ACCOUNTS RECEIVABLE
SIGNIFICANT ---------------------------------------------------------------
CUSTOMERS A B C D E F
----------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
December 31,
1998....................... 3 --% 64% *% 10% 16% --%
1999....................... 3 -- * -- * -- 13
March 31, (unaudited)
2000....................... 3 -- 14 -- * -- 18
<CAPTION>
PERCENTAGE OF TOTAL ACCOUNTS RECEIVABLE
-----------------------------------------
G H I J
-------- -------- -------- --------
<S> <C> <C> <C> <C>
December 31,
1998....................... --% --% --% --%
1999....................... 32 11 * *
March 31, (unaudited)
2000....................... * * 15 *
</TABLE>
The Company recorded revenues greater than 10% of total revenues from the
following customers:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
SIGNIFICANT --------------------------------------------------------------------------
CUSTOMERS A B C D E F G
----------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year Ended December 31,
1997....................... 2 10% 69% --% --% --% --% --%
1998....................... 3 * 50 19 12 * -- --
1999....................... 3 * * 18 * * 16 13
Three-Months Ended March 31,
(unaudited)
1999....................... 3 * 21 48 * * 19 *
2000....................... 3 -- * * * * 12 *
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
------------------------------
H I J
-------- -------- --------
<S> <C> <C> <C>
Year Ended December 31,
1997....................... --% --% --%
1998....................... -- -- --
1999....................... * * *
Three-Months Ended March 31,
(unaudited)
1999....................... * * *
2000....................... * 12 12
</TABLE>
------------------------------
* Represents less than 10%
(l) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS,
requires disclosure about fair value of financial instruments. Financial
instruments consist of cash and cash equivalents, investments, accounts
receivable, accounts payable and notes payable. The estimated fair value of
these financial instruments approximates their carrying value.
F-13
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(m) COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, REPORTING COMPREHENSIVE INCOME, requires disclosure of all
components of comprehensive income (loss) on an annual and interim basis.
Comprehensive income (loss) is defined as the change in equity of a business
enterprise during a period from transactions and other events and circumstances
from nonowner sources. Comprehensive loss is the same as reported net loss for
all periods presented.
(n) LOSS PER SHARE
SFAS No. 128, EARNINGS PER SHARE, establishes standards for computing and
presenting earnings per share and applies to entities with publicly held common
stock or potential common stock. In accordance with Securities and Exchange
Commission (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. Basic and diluted loss per share was determined by dividing net loss
by the weighted average common shares outstanding during the period. Common
equivalent shares include convertible preferred stock and common stock options
and warrants to the extent their effect is dilutive, based on the as-converted
and Treasury stock method, respectively. The following potential common shares
were excluded from the calculation of dilutive weighted average shares
outstanding as their effect would be antidilutive:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
--------------------------------- ---------------------
1997 1998 1999 1999 2000
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Convertible preferred stock............. 1,041,058 -- -- -- --
Common stock options and warrants....... 11,450 1,712,118 1,896,580 1,736,494 1,829,408
--------- --------- --------- --------- ---------
Total................................. 1,052,508 1,712,118 1,896,580 1,736,494 1,829,408
========= ========= ========= ========= =========
</TABLE>
(o) RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform with current
period presentation.
(p) NEW ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. SFAS No. 133, as amended by SFAS
No. 137, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000. This new standard is not anticipated to have a significant impact
on the Company's consolidated financial statements based on the current
structure and operations.
F-14
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The SEC issued SAB No. 101, REVENUE RECOGNITION, in December 1999. The
Company is required to adopt this new accounting guidance, as amended by SAB
No. 101A, through a cumulative charge to retained earnings in accordance with
APB Opinion No. 20, ACCOUNTING CHANGES, no later than the first quarter of
fiscal 2000. Management is currently evaluating the effects that this guidance
is expected to have on the Company's financial statements.
(3) RELATED PARTY TRANSACTIONS
Applied Telecommunication Technologies, Inc. (ATTI), a stockholder of the
Company had provided the Company with $1,594,433 of lease financing to date. As
of December 31, 1999, all obligations have been paid in full.
During the years ended December 31, 1997, 1998 and 1999, the Company
reimbursed CMP and/or its subsidiary, MaineCom Services, for costs related to
the activities of the Company. The amount paid to CMP totaled approximately
$725,000, $1,200,000 and $241,000 for the years ended December 31, 1997, 1998
and 1999, 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.
The Company paid approximately $163,000 and $132,000 in right-of-way fees to
CMP for the years ended December 31, 1998 and 1999, respectively.
In addition, CMP included the Company in its consolidated federal income tax
return through July 8, 1998. At December 31, 1998, the amounts due under the
tax-sharing agreement to the Company from CMP are included in refundable taxes
from related party and amounted to approximately $755,800 for current and
deferred income tax benefits related to CMP's utilization of the Company's loss
carryforwards (see Note 11).
The Company paid NU approximately $1,907,000 in 1998 and $1,159,000 in 1999
for materials, labor and other contractor charges. Approximately $359,000 and
$486,000 was included in accounts payable communications network at
December 31, 1998 and 1999, 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 $1,084,000 and $886,000 was
included in accrued right-of-way fees--related party at December 31, 1998 and
1999, respectively.
The Company believes that the right-of-way fees payable under the NU and CMP
agreements are reasonable and are comparable to those which would have been
negotiated on an arm's-length basis with an unaffiliated third party.
The Company has employment contracts with four of its officers. The
contracts are for three-year terms expiring at varying dates through July 2001,
with an annual compensation commitment of $647,000 in the aggregate. In
addition, the Company recorded a one-time bonus for a payment to one individual
totaling $500,000 upon the successful completion of the Company's IPO in 1998.
F-15
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(4) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31,
1998 1999 2000
----------- ------------ ------------
<S> <C> <C> <C>
Communications network.............................. $27,775,788 $ 48,084,658 $ 51,645,652
Communications network construction-in-progress..... 23,574,533 20,094,360 21,572,621
Machinery and equipment............................. 2,472,259 19,999,571 23,190,757
Leasehold improvements.............................. 360,930 9,501,428 14,542,411
Network buildings................................... -- 1,563,258 1,563,258
Furniture and fixtures.............................. 26,758 1,371,019 1,655,533
----------- ------------ ------------
54,210,268 100,614,294 114,170,232
Less--Accumulated depreciation and amortization..... 1,287,591 5,689,451 7,749,417
----------- ------------ ------------
$52,922,677 $ 94,924,843 $106,420,815
=========== ============ ============
</TABLE>
(5) COMMUNICATIONS NETWORK CONSTRUCTION-IN-PROGRESS
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 1998 and 1999, approximately 130 and 400 miles, respectively, were placed
in service. Approximately $142,000, $1,500,000 and $3,095,000 of interest has
been capitalized to communications network construction-in-progress in each of
the three years ended December 31, 1997, 1998, and 1999. Interest capitalized
was calculated using the weighted average borrowing rate in each period and was
8.86%, 12.64% and 12.75%, respectively, in each of the three years ended
December 31, 1997, 1998, and 1999.
(6) INTANGIBLE ASSETS
Intangible assets subject to amortization have been capitalized and are
amortized on the straight-line basis as follows:
<TABLE>
<S> <C>
Goodwill............................. 30 years (estimated useful life)
Deferred interest and financing 2-10 years (term of the debt)
costs..............................
Prepaid right-of-way fees, related 10 years (term of the agreement)
party..............................
</TABLE>
F-16
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(6) INTANGIBLE ASSETS (CONTINUED)
Intangible assets consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- MARCH 31,
1998 1999 2000
----------- ----------- -----------
<S> <C> <C> <C>
Goodwill.............................................. $47,871,068 $47,871,068 $47,871,068
Deferred interest and financing costs................. 6,266,447 6,848,803 6,741,893
Prepaid right-of-way fees, related party.............. 4,072,148 6,099,817 6,099,816
Other................................................. 23,810 1,029,184 1,167,595
----------- ----------- -----------
58,233,473 61,848,872 61,880,372
Less--Accumulated amortization........................ 1,460,191 4,276,717 5,001,970
----------- ----------- -----------
$56,773,282 $57,572,155 $56,878,402
=========== =========== ===========
</TABLE>
(7) LONG-TERM OBLIGATIONS AND NOTE PAYABLE TO RELATED PARTY
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- MARCH 31,
1998 1999 2000
------------ ------------ ------------
<S> <C> <C> <C>
12 3/4% Senior Notes............................... $180,000,000 $180,000,000 $180,000,000
ATTI notes payable (related party)................. 127,619 -- --
------------ ------------ ------------
180,127,619 180,000,000 180,000,000
Less--Current portion.............................. 127,619 -- --
------------ ------------ ------------
$180,000,000 $180,000,000 $180,000,000
============ ============ ============
</TABLE>
(a) 12 3/4% SENIOR NOTES
In August 1998, the Company sold $180,000,000 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 offering of the
Senior Notes, the Company purchased approximately $72,000,000 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 investments in the accompanying consolidated balance
sheets. 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>
REDEMPTION
PERIOD PRICE
------ ----------
<S> <C>
2003........................................................ 106.375%
2004........................................................ 104.250
2005........................................................ 102.125
Thereafter.................................................. 100.000
</TABLE>
F-17
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(7) LONG-TERM OBLIGATIONS AND NOTE PAYABLE TO RELATED PARTY (CONTINUED)
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 subordinate 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
$6,300,000 of issuance costs. These costs have been classified as deferred
financing costs in the accompanying consolidated balance sheet as of
December 31, 1999 and are being amortized, as additional interest expense, over
the term of the Notes.
(b) ATTI NOTES PAYABLE
From August 1994 through October 1995, the Company entered into five notes
payable with ATTI. The notes bore interest at 13% and were 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 3 and 10(d)). All amounts were repaid in
1999.
(8) CMP WARRANT
During October 1997 and in connection with the CMP construction loan
agreement, the Company issued a warrant to purchase 5,876 shares of membership
interest in FiveCom LLC to the CMP at an exercise price of $0.01 per share. The
warrant expires on October 7, 2002. At the time of issuance, the warrant was
recorded as a discount on the loan agreement as deferred financing costs and as
a separate component in the mezzanine to stockholders' equity at $532,836, the
fair market value of the warrant, as calculated using the Black-Scholes option
pricing model. The discount was amortized as interest expense over the term of
the debt. In April 1998, CMP exercised the warrant.
(9) STOCKHOLDERS' EQUITY
(a) PREFERRED STOCK
The Restated Certificate of Incorporation authorizes the issuance of up to
2,000,000 shares of preferred stock, $0.01 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 December 31, 1999, no such shares are issued and outstanding.
F-18
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(9) STOCKHOLDERS' EQUITY (CONTINUED)
(b) INITIAL PUBLIC OFFERING
On August 5, 1998, the Company completed an IPO 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 $43,800,000 and 500,000 shares were
sold for the account of certain stockholders of the Company. Upon the closing of
the IPO, all shares of the Company's Series A and B convertible preferred stock
automatically converted into 11,777,905 shares of the Company's common stock.
(10) STOCK-BASED COMPENSATION
(a) STOCK OPTION PLANS
The Company's 1998 Stock Incentive Plan (the 1998 Plan) was adopted by the
Board of Directors in May 1998. The Plans provide 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). 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 advisers of the Company
and its subsidiaries are eligible to be granted Awards under the 1998 Plan.
As of December 31, 1999 and March 31, 2000, a total of 376,923 and 182,048
shares, respectively, were available for grant under the 1998 Plan.
F-19
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) STOCK-BASED COMPENSATION (CONTINUED)
(b) STOCK OPTION ACTIVITY
Stock option activity under the 1998 Plan for the three years in the period
ended December 31, 1999 and the three-months ended March 31, 2000 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
<S> <C> <C>
Outstanding, December 31, 1996........................... 3,750 $ .10
Canceled............................................... (3,750) .10
--------- ------
Outstanding, December 31, 1997........................... -- --
Granted................................................ 2,190,978 10.98
Exercised.............................................. (3,600) .10
Canceled............................................... (649,628) 12.00
--------- ------
Outstanding, December 31, 1998........................... 1,537,750 10.57
Granted................................................ 710,165 16.67
Exercised.............................................. (162,602) 10.31
Canceled............................................... (188,733) 11.91
--------- ------
Outstanding, December 31, 1999........................... 1,896,580 12.75
Granted................................................ 201,000 83.86
Exercised.............................................. (262,047) 11.40
Canceled............................................... (6,125) 69.45
--------- ------
Outstanding, March 31, 2000 (unaudited).................. 1,829,408 $20.56
========= ======
Exercisable, March 31, 2000 (unaudited).................. 339,050 $11.48
========= ======
Exercisable, December 31, 1999........................... 584,420 $11.10
========= ======
Exercisable, December 31, 1998........................... 352,134 $11.95
========= ======
</TABLE>
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------ ----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
EXERCISABLE AS OF REMAINING AVERAGE AS OF AVERAGE
PRICE/RANGE OF MARCH 31, CONTRACTUAL EXERCISE MARCH 31, EXERCISE
EXERCISE PRICE 2000 LIFE PRICE 2000 PRICE
----------------------- ----------- ----------- -------- ----------- --------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
$ 6.09-$ 9.75 266,264 8.62 $ 6.36 61,707 $ 6.30
$ 12.00-$ 12.00 989,302 8.34 12.00 251,174 12.00
$ 15.25-$ 15.93 246,926 9.20 15.71 16,170 15.30
$ 16.13-$ 16.13 20,841 8.89 16.13 4,674 16.12
$ 29.38-$ 29.38 80,150 9.38 29.38 2,750 29.37
$ 33.88-$ 33.88 28,425 9.56 33.88 2,575 33.87
$ 61.44-$ 61.44 100,000 9.76 61.44 -- --
$ 96.13-$ 96.13 30,000 9.82 96.13 -- --
$111.00-$111.00 67,500 9.92 111.00 -- --
--------- -------
$ 6.09-$111.00 1,829,408 8.73 $ 20.56 339,050 $11.48
========= =======
</TABLE>
F-20
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) STOCK-BASED COMPENSATION (CONTINUED)
(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 operations 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 APB 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:
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTHS ENDED
DECEMBER 31, MARCH 31, 2000
---------------------------------------- -----------------------------
1997 1998 1999 1999 2000
-------- ------------------ -------- -------- ------------------
<S> <C> <C> <C> <C> <C>
Risk-free interest rate..................... N/A 4.39-5.52% 5.5% 5.5% 6.34-6.56%
Expected dividend yield..................... N/A None None None None
Expected lives.............................. N/A 2-5 years 3 years 3 years 3 years
Volatility.................................. N/A 35.5% 200% 200% 200%
Weighted average fair value of options
granted during the period................. N/A $4.31 $14.63 $10.03 $77.33
</TABLE>
Had compensation cost for the Company's stock option plans been determined
consistent with SFAS No. 123, the Company's net loss available to common
stockholders and basic and diluted net loss per common share would have been the
following pro forma amounts:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, THREE-MONTHS ENDED MARCH 31,
--------------------------------------- ----------------------------
1997 1998 1999 1999 2000
--------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C>
Net loss available to common
stockholders:
As reported................ $(960,026) $(12,715,413) $(27,529,768) $(5,263,280) $ (8,274,217)
========= ============ ============ =========== ============
Pro forma.................. $(960,026) $(13,360,167) $(30,437,989) $(5,724,954) $(10,097,890)
========= ============ ============ =========== ============
Basic and diluted net loss
per common share:
As reported................ $ (3.37) $ (1.90) $ (1.70) $ (0.33) $ (0.50)
========= ============ ============ =========== ============
Pro forma.................. $ (3.37) (2.00) $ (1.88) $ (0.36) $ (0.61)
========= ============ ============ =========== ============
</TABLE>
(d) WARRANTS
From August 1994 to October 1995, the Company issued stock purchase warrants
to ATTI (see Note 3) for the purchase of 11,450 shares of the Company's common
stock at an exercise price of $0.06 per share. The warrants expire five years
from the date of grant. At the time of issuance, the Company
F-21
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(10) STOCK-BASED COMPENSATION (CONTINUED)
recorded a charge of $178, representing the fair market value of the warrants as
determined by the Board of Directors. These warrants were exercised in 1999.
During July 1996, the Company issued a warrant to one of its advisers for
the purchase of 2,656 shares of membership interest in FiveCom LLC at an
exercise price of $125.84 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. Upon closing of the IPO, the warrant converted into a warrant to
purchase 162,918 shares of common stock at an exercise price of $2.052 per
share. These warrants were exercised in 1999.
(11) INCOME TAXES
As discussed in Note 3, the Company was included in CMP's consolidated
federal income tax return through July 8, 1998. Under the tax sharing agreement,
the Company recognized a benefit from amounts utilized by CMP from the Company's
net operating losses.
The income tax benefit for the years ended December 31, 1997, 1998 and 1999
consists of the following:
<TABLE>
<CAPTION>
1997 1998 1999
--------- ----------- ------------
<S> <C> <C> <C>
Current--
Federal............................... $(291,000) $ (230,000) $ --
State................................. (31,000) (24,000) --
--------- ----------- ------------
(322,000) (254,000) --
Deferred--
Federal............................... 47,000 (4,063,000) (9,893,000)
State................................. 14,000 (214,000) (399,000)
--------- ----------- ------------
61,000 (4,277,000) (10,292,000)
Less--Valuation allowance............... -- 4,216,000 10,292,000
--------- ----------- ------------
Total............................. $(261,000) $ (315,000) $ --
========= =========== ============
</TABLE>
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. The benefit from income taxes for the year ended December 31, 1998
represents refundable income taxes from CMP as a result of its tax sharing
agreement offset by a provision for net worth taxes.
F-22
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(11) INCOME TAXES (CONTINUED)
The components of the deferred taxes are approximately as follows:
<TABLE>
<CAPTION>
1998 1999
----------- ------------
<S> <C> <C>
Net operating losses.............................. $ 4,324,000 $ 14,259,000
Depreciation...................................... (164,000) (427,000)
Reserves and accruals, not currently deductible... 139,000 676,000
Prepaid expenses.................................. (83,000) --
----------- ------------
4,216,000 14,508,000
Valuation allowance............................... (4,216,000) (14,508,000)
----------- ------------
Deferred tax liability............................ $ -- $ --
=========== ============
</TABLE>
As of December 31, 1999, the Company had federal and state net operating
loss carryforwards for the period subsequent to the reorganization available to
offset future taxable income, if any, of approximately $36,000,000. These
carryforwards expire through 2019 and are subject to the review and possible
adjustment by the Internal Revenue Service. In addition, the occurrence of
certain events, including significant changes in ownership interests, may limit
the amount of net operating loss carryforwards available to be used in any given
year. A full valuation allowance has been recorded in the accompanying
consolidated financial statements to offset this carryforward because its future
realizability is uncertain.
(12) 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. This requirement of
the agreement was extended and the required buildout was completed in the first
quarter of 2000.
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
and allow NU the use of 12 fibers on designated route segments in the NU service
territory. Costs of approximately $6,100,000 associated with the construction of
the 12 fibers are included in prepaid right-of-way fees--related party in the
accompanying consolidated balance sheets and are being recognized as a
cost-of-service ratably 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.
F-23
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(12) NETWORK CONSTRUCTION AND NU AND CMP CONTRACTS (CONTINUED)
The Company's agreement with CMP provides for payments on a per-mile basis.
Such payments are payable annually by January 31 of each year and are recognized
ratably over the 30-year term of the contract. The Company paid approximately
$111,000 and $132,000 in right-of-way payments for the years ended December 31,
1998 and 1999, respectively.
(13) COMMITMENTS AND CONTINGENCIES
(a) LEASE COMMITMENTS
The Company leases certain motor vehicles, equipment and collocation and
office facilities under noncancelable operating leases which expire at various
dates through September 2019. Future minimum lease payments required under these
leases at December 31, 1999 are approximately as follows:
<TABLE>
<S> <C>
Year ending December 31,
2000......................................................... $1,680,000
2001......................................................... 1,704,000
2002......................................................... 1,637,000
2003......................................................... 1,651,000
2004......................................................... 1,647,000
Thereafter................................................... 9,257,000
----------
$17,576,000
==========
</TABLE>
Rent expense charged to operations was approximately $34,000, $163,000 and
$2,877,000 in the years ended December 31, 1997, 1998 and 1999, respectively.
The Company leases fibers from certain electric utility companies on its
segment from Hudson, New Hampshire, to Boston and Cambridge, Massachusetts,
under operating leases that expire through November 2019. Future minimum lease
payments required under these fiber optic leases at December 31, 1999 are
approximately as follows:
<TABLE>
<S> <C>
Year ending December 31,
2000......................................................... $2,457,000
2001......................................................... 2,457,000
2002......................................................... 2,457,000
2003......................................................... 2,457,000
2004......................................................... 2,457,000
Thereafter................................................... 36,790,000
----------
$49,075,000
==========
</TABLE>
In addition, the Company is required to pay to the electric utility
companies a portion of the quarterly gross revenue derived by the Company from
the sale, use or lease of the leased fibers, as defined in the lease agreement.
F-24
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
Rent expense charged to operations was approximately $2,077,000 in the year
ended December 31, 1999.
(b) PURCHASE COMMITMENTS
In December 1998, the Company entered into a three-year agreement with a
vendor to purchase equipment, software and services having a total value of
$20,000,000. Through December 31, 1999, the Company has purchased approximately
$15,000,000 of equipment under this agreement.
(c) QWEST AGREEMENT
In July 1998, the Company entered into an agreement with Qwest
Communications Corporation (Qwest) in which Qwest granted the Company an
indefeasible right-to-use in certain fibers along a route segment to between
Boston and New York City. The term of the agreement is for 20 years, but may be
terminated at any time upon the occurrence of certain incurred 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.
(d) 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 are not expected to have a material effect on operations.
(14) 401(k) PLAN
The Company maintains the NorthEast Optic Network, Inc. 401(k) Plan (the
Plan) under Section 401(k) of the IRC covering all eligible employees. Under the
Plan, a participant may elect to defer receipt of a stated percentage of his or
her compensation, subject to limitation under the IRC, which would otherwise be
payable to the participant for any plan year. The Company matches participant
contributions equal to 60% of employee contributions up to a maximum of 5% of an
employee's salary. There were no matching contributions made during the year
ended December 31, 1997. During the years ended December 31, 1998 and 1999 and
the three-months ended March 31, 1999 and 2000 (unaudited), the Company made
matching contributions of approximately $27,000, $46,000, $7,000, and $20,000,
respectively.
F-25
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(15) ACCRUED EXPENSES
Accrued expenses consist of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------- MARCH 31,
1998 1999 2000
------------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
Accrued interest..................................................... $ 9,244,250 $ 8,606,250 $ 2,868,750
Accrued construction in progress..................................... 2,051,000 1,106,337 632,616
Accrued property and other taxes..................................... 889,000 1,597,772 1,627,131
Accrued professional fees............................................ 245,000 380,000 417,501
Accrued payable to related party..................................... 346,166 316,535 358,940
Accrued payroll and benefits......................................... 271,345 521,254 413,328
Accrued commissions.................................................. 100,000 155,117 167,783
Accrued other........................................................ 379,941 665,031 467,358
------------- ------------- ------------
$ 13,526,702 $ 13,348,296 $ 6,953,407
============= ============= ============
</TABLE>
(16) SEGMENT DISCLOSURE
SFAS No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED
INFORMATION requires certain financial and supplementary information to be
disclosed on an annual and interim basis for each reportable operating segment
of an enterprise. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision-maker, or decision-making group, in
deciding how to allocate resources and in assessing performance. The Company's
chief operating decision-maker is the Chief Executive Officer of the Company.
The Company analyzes segment reporting based on dark fiber, lit fiber,
collocation and other services. Dark fiber, lit fiber, collocation and ancillary
network services are reported as revenue only. Cost of revenues, and property
and equipment is primarily the operating costs and the communications network
and equipment that supports each segment, which is not allocated between the
segments for management reporting, or accordingly segment reporting purposes.
Similarly, selling, general and administrative expenses are not allocated to the
segments for management or segment reporting purposes.
Management utilizes several measurements to evaluate its operations and
allocate resources. However, the principal measurements are consistent with the
Company's financial statements. The accounting policies of the segments are the
same as those described in Note 2.
F-26
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(16) SEGMENT DISCLOSURE (CONTINUED)
Financial information for the Company's segments is as follows:
<TABLE>
<CAPTION>
YEARS ENDED THREE-MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
1997 1998 1999 1999 2000
------------- ------------- -------------- ------------- --------------
Revenues:
Dark fiber....................... $ 347,718 $ 680,859 $ 1,925,196 $ 386,681 $ 663,304
Lit fiber........................ -- 139,200 1,227,153 34,800 999,888
Collocation...................... -- -- 316,278 -- 273,768
Ancillary network services(1).... 46,986 43,613 2,196,649 99,475 715,746
------------- ------------- -------------- ------------- --------------
Total revenues................. 394,704 863,672 5,665,276 520,956 2,652,706
Cost of Revenues................... 1,137,943 2,176,266 6,365,758 928,988 2,110,502
Selling, General and
Administrative................... 1,002,232 5,200,720 7,380,351 1,321,373 2,508,614
Depreciation and Amortization...... 552,862 1,798,294 6,149,720 794,978 2,458,941
------------- ------------- -------------- ------------- --------------
Operating Loss..................... $ (2,298,333) $ (8,311,608) $ (14,230,553) $ (2,524,383) $ (4,425,351)
============= ============= ============== ============= ==============
Net Property and Equipment......... $ 16,534,703 $ 52,922,677 $ 94,924,843 $ 67,364,457 $ 106,420,815
============= ============= ============== ============= ==============
Capital Expenditures............... $ 5,609,459 $ 38,947,267 $ 48,583,642 $ 14,837,780 $ 13,555,938
============= ============= ============== ============= ==============
</TABLE>
------------------------
(1) Includes nonrecurring revenues associated with design, engineering and
construction services.
(17) 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, 1998 and 1999 and
for the three months ended March 31, 2000. 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-27
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(INCLUDING DATA APPLICABLE TO UNAUDITED PERIODS)
(17) SELECTED QUARTERLY OPERATING RESULTS (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30, SEPTEMBER 30,
1998 1998 1998 1998 1999 1999 1999
---------- ------------ ------------- ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Network service............... $ 146,257 $ 179,661 $ 155,766 $ 338,375 $ 421,481 $ 737,461 $ 1,023,977
Other service................. 5,106 2,752 16,395 19,360 99,475 305,384 595,440
---------- ------------ ----------- ---------- ------------ ------------ -----------
Total revenues.............. 151,363 182,413 172,161 357,735 520,956 1,042,845 1,619,417
---------- ------------ ----------- ---------- ------------ ------------ -----------
Expenses:
Cost of revenues.............. 247,386 810,892 546,504 571,484 928,988 1,448,543 1,843,655
Selling, general and
administrative.............. 225,122 867,637 2,272,808 1,835,153 1,321,373 2,111,799 1,614,575
Depreciation and
amortization................ 302,013 313,645 491,633 691,003 794,978 1,205,873 1,904,083
---------- ------------ ----------- ---------- ------------ ------------ -----------
Total expenses.............. 774,521 1,992,174 3,310,945 3,097,640 3,045,339 4,766,215 5,362,313
---------- ------------ ----------- ---------- ------------ ------------ -----------
Loss from operations........ (623,158) (1,809,761) (3,138,784) (2,739,905) (2,524,383) (3,723,370) (3,742,896)
---------- ------------ ----------- ---------- ------------ ------------ -----------
Other Income (Expense):
Interest income and other,
net....................... 30,322 56,550 1,615,895 2,477,113 2,240,764 2,001,901 1,816,213
Interest expense............ (91,816) (365,223) (3,275,400) (4,912,024) (4,979,661) (5,189,609) (5,356,351)
---------- ------------ ----------- ---------- ------------ ------------ -----------
Total other expense......... (61,494) (308,673) (1,659,505) (2,434,911) (2,738,897) (3,187,708) (3,540,138)
---------- ------------ ----------- ---------- ------------ ------------ -----------
Loss before minority
interest in subsidiaries'
earnings and provision for
income taxes.............. (684,652) (2,118,434) (4,798,289) (5,174,816) (5,263,280) (6,911,078) (7,283,034)
Minority Interest............... 314,498 794,435 -- -- -- -- --
(Benefit from) Provision for
Income Taxes.................. (77,000) (487,480) -- 249,480 -- -- --
---------- ------------ ----------- ---------- ------------ ------------ -----------
Loss before Extraordinary
Item.......................... (293,154) (836,519) (4,798,289) (5,424,296) (5,263,280) (6,911,078) (7,283,034)
Extraordinary Item.............. -- -- (1,335,004) (28,151) -- -- --
---------- ------------ ----------- ---------- ------------ ------------ -----------
Net Loss........................ $ (293,154) $ (836,519) $(6,133,293) $(5,452,447) $ (5,263,280) $ (6,911,078) $(7,283,034)
========== ============ =========== ========== ============ ============ ===========
Basic and Diluted Loss per
Share......................... $ (1.03) $ (2.91) $ (0.61) $ (0.34) $ (0.33) $ (0.43) $ (0.45)
========== ============ =========== ========== ============ ============ ===========
<CAPTION>
DECEMBER 31, MARCH 31,
1999 2000
------------ ------------
<S> <C> <C>
Revenues:
Network service............... $ 972,412 $ 1,663,192
Other service................. 1,509,646 989,514
---------- ------------
Total revenues.............. 2,482,058 2,652,706
---------- ------------
Expenses:
Cost of revenues.............. 2,144,572 2,110,502
Selling, general and
administrative.............. 2,332,604 2,508,614
Depreciation and
amortization................ 2,244,786 2,458,941
---------- ------------
Total expenses.............. 6,721,962 7,078,057
---------- ------------
Loss from operations........ (4,239,904) (4,425,351)
---------- ------------
Other Income (Expense):
Interest income and other,
net....................... 1,653,381 1,535,409
Interest expense............ (5,485,853) (5,384,275)
---------- ------------
Total other expense......... (3,832,472) (3,848,866)
---------- ------------
Loss before minority
interest in subsidiaries'
earnings and provision for
income taxes.............. (8,072,376) (8,274,217)
Minority Interest............... -- --
(Benefit from) Provision for
Income Taxes.................. -- --
---------- ------------
Loss before Extraordinary
Item.......................... (8,072,376) (8,274,217)
Extraordinary Item.............. -- --
---------- ------------
Net Loss........................ $(8,072,376) $ (8,274,217)
========== ============
Basic and Diluted Loss per
Share......................... $ (0.49) $ (0.50)
========== ============
</TABLE>
F-28
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To Northeast Optic Network, Inc.:
We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in this Registration Statement on
Form S-4 and have issued our report thereon dated January 18, 2000. Our audit
was made for the purpose of forming an opinion on those statements taken as a
whole. The schedule listed in Item 14(a)(2) is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
Boston, Massachusetts
January 18, 2000
F-29
<PAGE>
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT
BEGINNING OF BALANCE AT
ITEM PERIOD ADDITIONS DEDUCTIONS END OF PERIOD
---- ------------ --------- ---------- -------------
<S> <C> <C> <C> <C>
Allowance for Doubtful Accounts:
Year ended December 31,
1998.......................................... $ -- $224,000 $ -- $224,000
1999.......................................... $224,000 $146,000 $253,000 $117,000
Three months ended March 31, 2000............... $117,000 $ 84,000 $ 7,000 $194,000
</TABLE>
F-30
<PAGE>
EXHIBIT A
FORM OF AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER, dated this day of , 2000, pursuant to
Section 251(g) of the General Corporation Law of Delaware, among NorthEast Optic
Network, Inc., a Delaware corporation (the "Surviving Company"), NEON
Communications, Inc., a Delaware corporation ("Communications"), and NEON
Acquisition, Inc., a Delaware corporation (the "Transitory Subsidiary").
WITNESSETH:
WHEREAS, the Surviving Company is a corporation duly organized and existing
under the laws of the State of Delaware and is authorized to issue 30,000,000
shares of Common Stock, $.01 par value per share, and 2,000,000 shares of
undesignated preferred stock, $.01 par value per share, of which
shares and no shares, respectively, are issued and outstanding as of the date
hereof;
WHEREAS, Communications is a corporation duly organized and existing under
the laws of the State of Delaware and is authorized to issue 30,000,000 shares
of Common Stock, $.01 par value per share, and 2,000,000 shares of undesignated
preferred stock, $.01 par value per share, of which 1,000 shares and no shares,
respectively, are issued and outstanding as of the date hereof;
WHEREAS, the Transitory Subsidiary is a corporation duly organized and
existing under the laws of the State of Delaware and is authorized to issue
1,000 shares of Common Stock, $.01 par value per share, of which 1,000 shares
are issued and outstanding as of the date hereof;
WHEREAS, all of the outstanding capital stock of Communications is held by
the Surviving Company and all of the outstanding capital stock of the Transitory
Subsidiary is held by Communications;
WHEREAS, the Transitory Subsidiary desires to merge with and into the
Surviving Company, and the Surviving Company desires that the Transitory
Subsidiary be merged with and into it, with the result that the Surviving
Company would be a wholly-owned subsidiary of Communications, and the current
stockholders of the Surviving Company would become stockholders of
Communications;
WHEREAS, the Boards of Directors of the Surviving Company, Communications
and the Transitory Subsidiary have adopted a resolution approving this Agreement
and Plan of Merger; and
WHEREAS, the Merger (as defined below) is being made in connection with the
execution of that certain Subscription Agreement and System Agreement by and
between the Surviving Company, Communications and Exelon Corporation ("Exelon"),
and that certain Subscription Agreement and System Agreement by and between the
Surviving Company, Communications and Consolidated Edison Communications, Inc.
("CEC"), of even date herewith, pursuant to which (among other things) Exelon
and CEC agree to make certain contributions of assets to Communications in
exchange for shares of Communications (the "Asset Contributions").
WHEREAS, the transactions contemplated by this Agreement and Plan of Merger,
together with the Asset Contributions, are intended to qualify as a tax-free
transaction under Section 351 of the Internal Revenue Code of 1986, as amended
(the "CODE"), and also as a tax-free merger transaction pursuant to
Section 368(a) of the Code (regardless of the Asset Contributions).
NOW THEREFORE, in consideration of the foregoing premises and the
undertakings herein contained and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
1. MERGER. The Transitory Subsidiary shall be merged into the Surviving
Company pursuant to Section 251(g) of the General Corporation Law of Delaware.
The Surviving Company shall survive the merger herein contemplated and shall
continue to be governed by the laws of the State of Delaware. The
A-1
<PAGE>
separate corporate existence of the Transitory Subsidiary shall cease forthwith
upon the Effective Time (as defined below). The merger of the Transitory
Subsidiary into the Surviving Company shall herein be referred to as the
"Merger." The Merger shall have the effects set forth in Section 259 of the
General Corporation Law of Delaware.
2. EFFECTIVE TIME. The Merger shall be effective upon the filing of this
Agreement and Plan of Merger or a Certificate of Merger with the Secretary of
State of the State of Delaware, which filing shall be made as soon as
practicable after execution of this Agreement and Plan of Merger. The time of
such effectiveness shall herein be referred to as the "Effective Time."
3. COMMON STOCK OF COMMUNICATIONS. At the Effective Time, by virtue of the
Merger and without any action on the part of the holder thereof, each share of
Common Stock of Communications issued and outstanding immediately prior thereto
shall be canceled and shall cease to exist without payment of any consideration
therefor.
4. COMMON STOCK, OPTIONS AND WARRANTS OF THE SURVIVING COMPANY. At the
Effective Time, by virtue of the Merger and without any action on the part of
the holder thereof, (i) each share of Common Stock of the Surviving Company
issued and outstanding immediately prior thereto shall be changed and converted
into and represent the right to receive one fully paid and non-assessable share
of the Common Stock, par value $.01 per share, of Communications and (ii) each
unexercised option, warrant or other right to purchase a share of the Common
Stock of the Surviving Company, whether or not exercisable, shall be assumed by
Communications and shall be deemed to constitute an option, warrant or other
right, as the case may be, to acquire, on the same terms and conditions as were
applicable under such option, warrant or other right immediately prior to the
Effective Time, one share of the Common Stock, par value $.01 per share, of
Communications. The exercise price per share of each such option, warrant or
other right, term, exercisability, vesting schedule, if applicable, status as an
"incentive stock option" under Section 422 of the Code, if applicable, and all
of the other terms of such option or warrant shall remain unchanged.
Communications shall take all corporate action necessary to reserve for issuance
a sufficient number of shares of its Common Stock for delivery upon exercise of
the options, warrants or other rights assumed pursuant to this Section 4.
Communications shall assume the Surviving Company's Amended and Restated 1998
Stock Incentive Plan, as if the same had been adopted by Communications, and the
options of the Surviving Company assumed by Communications pursuant to this
Section 4 shall remain subject to such Plan in all respects.
5. COMMON STOCK OF THE TRANSITORY SUBSIDIARY. At the Effective Time, by
virtue of the Merger and without any action on the part of the holders thereof,
each share of Common Stock of the Transitory Subsidiary issued and outstanding
immediately prior thereto shall cease to exist and shall be changed and
converted into one fully paid and non-assessable share of the Common Stock, par
value $.01 per share, of the Surviving Company.
6. STOCK CERTIFICATES. At and after the Effective Time, all of the
outstanding certificates which prior to that time represented shares of the
Common Stock of the Surviving Company shall be deemed for all purposes to
evidence ownership of and to represent the shares of Communications into which
the shares of the Surviving Company represented by such certificates have been
converted as herein provided. At and after the Effective Time, all of the
outstanding certificates which prior to that time represented shares of the
Common Stock of the Transitory Subsidiary shall be deemed for all purposes to
evidence ownership of and to represent the shares of the Surviving Company into
which the shares of the Transitory Subsidiary represented by such certificates
have been converted as herein provided. The registered owners on the books and
records of Communications and Surviving Company or their respective transfer
agents of any such outstanding stock certificates shall, until such certificate
shall have been surrendered for transfer or conversion or otherwise accounted
for to Communications or the Surviving Company, as the case may be, or their
respective transfer agents, have and be entitled to exercise any voting and
other rights with respect
A-2
<PAGE>
to and to receive any dividend and other distributions upon the shares of
Communications or the Surviving Company evidenced by such outstanding
certificates as above provided.
7. CERTIFICATE OF INCORPORATION AND BY-LAWS.
(a) The Certificate of Incorporation of the Surviving Company in effect on
the Effective Time shall be amended in accordance with Section 251(g) as
follows:
(i) Article FIRST of the Certificate of Incorporation of the Surviving
Company shall be amended to read in its entirety as follows:
"FIRST: The name of the Corporation is "NEON Optica, Inc."
(ii) Article FOURTH of the Certificate of Incorporation of the Surviving
Company shall be amended to read in its entirety as follows:
"FOURTH: The total number of shares of stock which the Corporation
shall have authority to issue is 1,000 shares of Common Stock, $.01
par value per share."
(iii) Article TENTH of the Certificate of Incorporation of the Surviving
Company shall be amended, pursuant to the requirements of
Section 251(g), to read in its entirety as follows:
"TENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute and this Certificate of
Incorporation, and all rights conferred upon stockholders herein are granted
subject to this reservation; provided however, that any act or transaction by or
involving the Corporation that requires for its adoption under the General
Corporation Law of Delaware or its Certificate of Incorporation the approval of
the stockholders of the Surviving Company, shall, pursuant to Section 251(g) of
the General Corporation Law of Delaware, require, in addition, the approval of
the stockholders of NEON Communications, Inc., a Delaware corporation which is a
"holding company" with respect to the Corporation (as such term is defined in
Section 251(g) of the General Corporation Law of Delaware), or any successor by
merger, by the same vote as is required by the General Corporation Law of
Delaware or this Certificate of Incorporation.
(b) The By-Laws of the Surviving Company in effect on the Effective Time
shall continue to be the By-Laws of the Surviving Company until amended
in accordance with the provisions thereof and applicable law.
(c) The Certificate of Incorporation and the By-Laws of Communications in
effect on the Effective Time shall continue to be the Certificate of
Incorporation and By-Laws of Communications until amended in accordance
with the provisions thereof and applicable law.
8. DIRECTORS AND OFFICERS. The members of the Board of Directors of the
Surviving Company immediately prior to the Effective Time shall become the
members of the Board of Directors of Communications at the Effective Time. The
officers of the Surviving Company immediately prior to the Effective Time shall
become the officers of Communications at the Effective Time and shall hold the
same offices in Communications as they did in the Surviving Company until the
expiration of their respective terms of office and until their successors have
been elected and qualified. The members of the Board of Directors of the
Transitory Subsidiary immediately prior to the Effective Time shall become the
members of the Board of Directors of the Surviving Company at the Effective
Time. The officers of the Transitory Subsidiary immediately prior to the
Effective Time shall become the officers of the Surviving Company at the
Effective Time and shall hold the same offices in the Surviving Company as they
did in the Transitory Subsidiary until the expiration of their respective terms
of office and until their successors have been elected and qualified.
A-3
<PAGE>
9. ABANDONMENT. At any time prior to the Effective Time, this Agreement
and Plan of Merger may be terminated and the Merger may be abandoned by the
Board of Directors of the Surviving Company, Communications and the Transitory
Subsidiary or any of them.
10. AMENDMENT. This Agreement and Plan of Merger may be amended by the
Boards of Directors of the Surviving Company, Communications and the Transitory
Subsidiary at any time prior to the Effective Time.
11. GOVERNING LAW. This Agreement and Plan of Merger and the legal
relations among the parties shall be governed by and construed in accordance
with the laws of the State of Delaware.
12. COUNTERPARTS. In order to facilitate the filing and recording of this
Agreement and Plan of Merger, the same may be executed in any number of
counterparts, each of which shall be deemed to be an original.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK]
A-4
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement and
Plan of Merger to be executed and attested on its behalf by its officers
thereunto duly authorized, as of the date first above written.
<TABLE>
<S> <C> <C>
NORTHEAST OPTIC NETWORK, INC.
By:
-----------------------------------------
President
ATTEST:
------------------------------
Secretary
NEON COMMUNICATIONS, INC.
By:
-----------------------------------------
President
ATTEST:
------------------------------
Secretary
NEON ACQUISITION, INC.
By:
-----------------------------------------
President
ATTEST:
------------------------------
Secretary
</TABLE>
A-5
<PAGE>
I, , Secretary of NorthEast Optic Network, Inc., a corporation
organized and existing under the laws of the State of Delaware, hereby certify
that the Agreement and Plan of Merger to which this certificate is attached, was
adopted by the Board of Directors of NorthEast Optic Network, Inc. pursuant to
Section 251(g) of the General Corporation Law of Delaware; and that the
conditions specified in the first sentence of Section 251(g) of the General
Corporation Law of Delaware have been satisfied.
WITNESS my hand on this day of , 2000.
--------------------------------------
Secretary
I, , Secretary of NEON Communications, Inc., a corporation
organized and existing under the laws of the State of Delaware, hereby certify
that the Agreement and Plan of Merger to which this certificate is attached, was
adopted by the Board of Directors of NorthEast Optic Network, Inc. pursuant to
Section 251(g) of the General Corporation Law of Delaware; and that the
conditions specified in the first sentence of Section 251(g) of the General
Corporation Law of Delaware have been satisfied.
WITNESS my hand on this day of , 2000.
--------------------------------------
Secretary
I, , Secretary of NEON Acquisition, Inc., a corporation
organized and existing under the laws of the State of Delaware, hereby certify
that the Agreement and Plan of Merger to which this certificate is attached, was
adopted by the Board of Directors of NorthEast Optic Network, Inc. pursuant to
Section 251(g) of the General Corporation Law of Delaware; and that the
conditions specified in the first sentence of Section 251(g) of the General
Corporation Law of Delaware have been satisfied.
WITNESS my hand on this day of , 2000.
--------------------------------------
Secretary
A-6
<PAGE>
APPENDIX 1
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.
(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 4,936,105 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,
1
<PAGE>
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 350,000 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 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 an
Option granted under the Plan shall be paid for as follows:
(i) in cash or by check, payable to the order of the Company;
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(ii) 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;
(iii) (1) 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, (2) by
delivery of a promissory note of the Participant to the Company on
terms determined by the Board, or (3) by payment of such other lawful
consideration as the Board may determine; or
(iv) 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.
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.
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(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.
(i) Change in Control. A "Change of Control of the Company" (as defined
in Section 9) shall have the effects set forth in Section 9.
(ii) 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 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 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
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"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:
(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).
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<PAGE>
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 completion 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 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 MAY 18, 1998
APPROVED BY THE STOCKHOLDERS ON MAY 26, 1998
AMENDED AND RESTATED BY THE BOARD OF DIRECTORS ON JULY 28, 1998
APPROVED BY THE STOCKHOLDERS ON JULY 28, 1998
AMENDED BY THE BOARD OF DIRECTORS ON NOVEMBER 5, 1998
AMENDED BY THE BOARD OF DIRECTORS ON MARCH 10, 2000
Note: The Fair Market Value on date of grant is the closing price as reported on
the Nasdaq National Market on that date. This is not in the plan but the custom
and practice of the Compensation Committee
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APPENDIX 2
PROXY
NORTHEAST OPTIC NETWORK, INC.
ANNUAL MEETING OF STOCKHOLDERS
July 26, 2000
The undersigned, having received a Notice of the Annual Meeting of Stockholders
of NorthEast Optic Network, Inc. (the "Company") to be held on Wednesday, July
26, 2000 (the "Annual Meeting") and the Board of Directors' Proxy Statement
therefor, and revoking all prior proxies, hereby appoint(s) Vincent C.
Bisceglia, Victor Colantonio and William F. Fennell and each of them (with full
power of substitution), as proxies of the undersigned to attend the Annual
Meeting and any adjourned sessions thereof, and there to vote and act upon the
following matters in respect of all shares of Common Stock of the Company which
the undersigned would be entitled to vote or act upon, with all powers the
undersigned would possess if personally present.
Attendance of the undersigned at the Annual Meeting or at any adjourned session
thereof will not be deemed to revoke this proxy unless the undersigned shall
affirmatively indicate thereat the intention of the undersigned to vote said
shares in person. If the undersigned hold(s) any of the shares of the Company in
a fiduciary, custodial or joint capacity or capacities, this proxy is signed by
the undersigned in every such capacity as well as individually.
SEE REVERSE SIDE CONTINUED AND TO BE SIGNED ON REVERSE SIDE SEE REVERSE SIDE
/X/ Please mark your votes as in this example.
The shares represented by this proxy will be voted as directed by the
undersigned. If no direction is given with respect to any election to office or
proposal specified below, this proxy will be voted FOR such election to office
or proposal. None of the matters to be voted on is conditioned on, or related
to, the approval of any other matter. All matters are proposed by the Company.
1. To elect seven directors:
Nominees: Vincent C. Bisceglia, Victor Colantonio, Katherine Dietze Courage,
John H. Forsgren, Arthur W. Adelberg, F. Michael McClain,
Gary D. Simon.
FOR ALL WITHHELD FROM
NOMINEES / / / / ALL NOMINEES
[ ] -------------------------------------------------------------------------
INSTRUCTION: To withhold authority for any individual nominee,
write the nominee's name in the space provided above.
<TABLE>
<S> <C> <C> <C> <C>
2. To approve (i) the continuance of the Company's Amended and FOR AGAINST ABSTAIN
Restated 1998 Stock Incentive Plan, as amended to date, and / / / / / /
(ii) the amendment of the Company's Amended and Restated 1998
Stock Incentive Plan,as amended to date.
3. To approve the adoption of an amendment to the Company's FOR AGAINST ABSTAIN
Second Amended and Restated Certificate of Incorporation / / / / / /
in order to increase the shares of Common Stock authorized
for issuance from 30,000,000 shares to 60,000,000 shares.
<PAGE>
4. To approve the issuance of shares of the Company's Common Stock FOR AGAINST ABSTAIN
to Consolidated Edison Communications, Inc. and Exelon / / / / / /
Corporation in exchange for their contribution to the Company of
cash and assets consisting of fiber optic facilities.
5. To ratify the selection of Arthur Andersen LLP as the FOR AGAINST ABSTAIN
Company's independent public accountants for the current / / / / / /
fiscal year.
</TABLE>
In their discretion, the named Proxies are authorized to vote upon such other
matters as may properly come before the Annual Meeting, or any adjournment
thereof.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY.
NOTE: Please sign name(s) exactly as appearing hereon. When signing as attorney,
executor, administrator or other fiduciary, please give your full title as such.
Joint owners should each sign personally. If a corporation, sign in full
corporate name, by authorized officer. If a partnership, please sign in
partnership name, by authorized person.
Signature:
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Date:
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Signature:
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Date:
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