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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
OR
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934.
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FOR THE TRANSITION PERIOD FROM TO ______________ TO ______________
COMMISSION FILE NUMBER 000-24653
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NORTHEAST OPTIC NETWORK, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 04-3056279
(State or other jurisdiction (I.R.S. Identification No.)
of
incorporation or organization)
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2200 WEST PARK DRIVE
SUITE 200
WESTBOROUGH, MASSACHUSETTS 01581
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code:
(508) 616-7800
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, Par Value $0.01 Per Share
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of the Form 10-K or any amendment to this
Form 10-K /X/.
At March 1, 2000 the aggregate market value of the voting stock held by
non-affiliates of the registrant was $699,844,299.
At March 1, 2000 there were 16,505,632 shares of the Company's common stock
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from a definitive Proxy
Statement expected to be filed with the Securities and Exchange Commission
within 120 days after the close of the registrant's fiscal year ended
December 31, 1999.
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PART I
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
This report 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. 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 report, particularly under the
heading "Certain Factors that May Affect Future Results", 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.
ITEM 1. BUSINESS
The Company's principal executive offices are located at 2200 West Park
Drive, Suite 200, Westborough, Massachusetts 01581 and its telephone number is
(508) 616-7800.
GENERAL
We own and operate a technologically advanced, high-bandwidth fiber optic
network, consisting of approximately 990 route miles. Our network averages
approximately 65 fibers per mile and therefore includes a total of approximately
65,000 fiber miles. It extends from Portland, Maine to New York City. We
recently signed agreements with Consolidated Edison Communications and Exelon
Corporation which would extend our network into and around New York City,
Philadelphia and Washington, D.C., thereby increasing the reach of our network
by approximately 400 additional route miles, or approximately 9,000 additional
fiber miles.
We have built our network primarily using electric utility rights-of-way,
which we believe provide significant competitive advantages compared to
alternative rights-of-way in our territory, such as railbeds and highways. Most
significantly, our utilization of electric utility rights-of-way allows us to
provide alternative routes to our customers which, when combined with their
existing routes over more conventional rights-of-way, provide more reliable
redundant routes than if our network utilized the same rights-of-way as their
existing capacity because our alternative routes would not share common points
of failure with the other conventional routes. These utility rights-of-way also
enable us to provide direct connections to our customers.
We connect our carrier customers to our network's backbone by building
connections to their facilities. We currently provide our customers with the
following services:
- SONET PRIVATE LINE LIT FIBER SERVICES. Fixed, high-bandwidth amounts of
point-to-point capacity offered across our network at fixed-cost pricing.
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- DARK FIBER LEASES. Fiber strands contained within a fiber optic cable
which has been laid but does not include optical transmission equipment.
- COLLOCATION. Rental space in our carrier class points of presence in which
carrier customers bond electronically and semi-permanently to our network.
We also intend to offer optical wavelength services to our customers
beginning later this year which will provide a customer with the exclusive
long-term use of a portion of the transmission capacity of a fiber optic strand.
OUR ADVANCED FIBER OPTIC NETWORK
We use state-of-the-art technology throughout our fiber optic network. Our
network consists of fiber optic communication paths, which allow for high-speed,
high-quality transmission of voice, data and video communications. Fiber optic
systems use laser-generated light waves to transmit voice, data and video in
digital formats through ultra-thin strands of glass. Fiber optic systems are
generally characterized by large circuit capacity, are resistant to external
signal interference and connect directly to digital switching equipment or
digital microwave systems.
Our network is almost completely optical and incorporates almost exclusively
mid- to late-1990s state-of-the-art fiber optic technology. Because we began
construction of our network in the mid-1990s, our facilities benefit from recent
technological advances such as Lucent's non-zero dispersion shifted Allwave and
Truewave fiber and 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.
Since our inception, we have been committed to utilizing state-of-the-art
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 in the future.
We offer end-to-end fiber optic capacity utilizing bi-directional SONET ring
architecture, which has the ability to route customer traffic in two directions
around a ring design thereby minimizing service interruptions due to fiber cuts.
Our system is continuously monitored 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.
RIGHT-OF-WAY AGREEMENTS
We acquire our rights-of-way principally from electric utilities in the
territory covered by our system. We believe that these rights-of-way are
superior to alternative rights-of-way available in the Northeast and
Mid-Atlantic regions, 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. With other rights-of-way, such as those along highways and railroad
tracks, cable must often be buried in trenches, a process often hampered by
accommodating commuter rush hours, complying with stringent environmental laws,
crossing water, trenching and blasting bedrock. In addition, we believe that
electric utility rights-of-way provide the potential to establish communications
connections to nearly every building, business park and industrial complex in
our service territory.
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CONSOLIDATED EDISON COMMUNICATIONS AGREEMENT AND EXELON CORPORATION
AGREEMENT
In November 1999, we entered into agreements with Consolidated Edison
Communications, Inc., a wholly-owned subsidiary of New York-based Consolidated
Edison, Inc., and Exelon Corporation, a wholly-owned subsidiary of
Philadelphia-based PECO Energy, Inc. Pursuant to these agreements, Exelon and
Consolidated Edison Communications will grant to us rights to operate our system
through significant portions of their coverage areas, including New York and
Philadelphia, and enter into cooperative marketing arrangements with us.
Upon the closings of the transactions under the agreements, we would issue
2,106,625 shares of our common stock to Exelon and 2,448,240 shares of our
common stock to Consolidated Edison Communications in each case subject to
adjustment as set forth in their respective agreements, which would result in
Exelon and Consolidated Edison Communications each owning approximately 10% of
our outstanding common stock. Under the agreements, each of these companies also
would receive the right to nominate one member to our board of directors.
The consummation of the transactions contemplated by these agreements
remains subject to the satisfaction of numerous closing conditions, including
(a) the successful securing of all regulatory approvals by Consolidated Edison
Communications, Exelon Corporation and us, (b) the election of the designees of
Consolidated Edison Communications and Exelon Corporation to the board of
directors, (c) approval by our stockholders of the issuances of the shares to
Consolidated Edison and Exelon under the agreements, and (d) the reorganization
of the Company into a two-tiered corporate structure.
Under these agreements, we would 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 system to their respective local loops, and each would
manage distribution into its respective end-users' locations. The communications
network would operate under our brand and we would jointly develop, operate and
market the combined telecommunications infrastructure that would be created
through the consummation of the two transactions. Consolidated Edison
Communications would install a point of presence for us in Manhattan and provide
high-capacity local transport services to 26 carrier buildings in key areas of
New York. These buildings would include interexchange carrier points of
presence, large internet service provider nodes, collocation "hotels," local
serving offices and other high traffic building sites. Exelon would install a
new point of presence 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 from Philadelphia to Baltimore and Washington, D.C., provide connectivity to
40 carrier sites in metropolitan Philadelphia and to one site in each of
Baltimore and Washington, D.C.
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 Northeast Utilities' rights-of-way 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 certain specified carriers except for certain limited
purposes. After September 2001, Northeast Utilities will be free to use these
fibers to compete with us.
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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, 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 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 6 fibers that have been set aside for
Central Maine Power's use. Central Maine Power may use these fibers for its own
business purposes, but may not lease them to third parties prior to the seventh
anniversary of any given installation date. After such seven-year period, to the
extent that 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 Agreement 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 system
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.
BOSTON AGREEMENTS.
In July 1998, we entered into a fiber optic lease agreement with NEES
Communications, Inc., a subsidiary of New England Electric System, and a fiber
optic use agreement with BecoCom, Inc., a subsidiary of Boston Edison Company.
Pursuant to the terms of these agreements, we acquired the right to use certain
fibers, to be constructed and maintained by NEES Communications and BecoCom,
respectively, on a route running from Hudson, New Hampshire to Boston,
Massachusetts terminating at our point of presence and carrier centers targeted
by us.
We currently use these fibers and, under the terms of these agreements, we
are required to pay a monthly fee, and have agreed to share a portion of the
revenue generated from the use of these fibers (in excess of a base revenue
amount specified in each agreement). Both the NEES Com agreement and the BecoCom
agreement have an initial term of 20 years, with the potential to negotiate for
up to two additional, consecutive five-year extensions.
OTHER AGREEMENTS.
In July 1998, we entered into an agreement with Qwest Communications
Corporation in which Qwest agreed to grant us an indefeasible right-of-use in
certain fibers along a route segment to be constructed between Boston and New
York City. In consideration of such grant, we agreed to pay to
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Qwest a fee in a series of installments. Although the Qwest agreement permits us
to grant capacity in lit fiber to third parties, we may not grant indefeasible
rights-of-use in dark fiber to third parties for five years following the
availability date of the Boston-New York segment. The term of the Qwest
agreement is for approximately 20 years, but may be terminated at any time upon
the occurrence of certain uncured defaults by us or the loss of certain
underlying rights held by Qwest or other parties upon whom Qwest depends for its
rights in the fiber.
We also have a number of agreements with Bell Atlantic to use certain
rights-of-way along pole lines and within ducts in various areas throughout the
Northeast to supplement our primary means of procuring rights-of-way.
PAYMENTS UNDER RIGHT-OF-WAY AGREEMENTS
The aggregate amount accrued by us under our agreements that provide for our
rights-of-way used in our system was $785,535, $1,084,325 and $886,322 for the
years ended December 31, 1997, 1998 and 1999, respectively.
NEON SERVICES
We offer lit fiber leases, dark fiber leases and collocation and maintenance
services to our customers.
LIT FIBER LEASES. Pursuant to our lit fiber leases with our customers, we
provide a specific amount of capacity between any two or more points on our
system as specified by the carrier. Lit services involve the installation of
optronic terminals by us, to the carrier's specifications, that light the fiber
and transmit/receive capacity on the network. Our lit fiber lease agreements
generally have an initial term of approximately one to five years and provide
that our lit fiber customers will make monthly payments throughout the life of
the lease. We anticipate that as our business matures, a majority of our
revenues will be derived from lit fiber leases.
DARK FIBER LEASES. The leasing of dark fiber allows a carrier to
interconnect any two or more specific points on our system. Dark fiber leases
require a carrier to install its own optronic equipment and permits a carrier to
use as much or as little capacity as it desires and to customize its capacity
with feature-rich technology and its network protocols that differentiate that
carrier's product offerings from others. As a result, the carrier can deploy the
dark fiber for whatever purpose it chooses while we remain invisible to the
carrier's end-user. While a substantial portion of our revenues are derived from
dark fiber arrangements, we intend to direct the focus of our marketing efforts
away from dark fiber and into the lit fiber services area.
COLLOCATION SERVICES. We provide collocation space to our customers who
have a need for a carrier class operating environment for their communications
and networking equipment. We have invested substantial resources into our
collocation facilities and provide our customers with the power, back-up
generator, HVAC, security and dry fire suppression systems which our customers
demand.
OTHER SERVICES. Other service revenues consist of non-recurring design,
engineering, construction services and collocation services. Revenues for these
non-recurring services are non refundable, represent the culmination of a
separate earnings process and are recognized as services are performed.
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CUSTOMERS
We are targeting voice and data communications companies as customers. Our
system enables these companies to link geographically separated central offices
and points of presence with primary or redundant connections in their networks.
Our facilities also enable carriers to connect their networks directly into the
premises of their end-users.
To date, we have entered into contracts with 33 customers. In addition to
carrier customers such as MCI WorldCom/UUNet, Sprint, Bell Atlantic, GTE and
AT&T, we derive a substantial portion of our revenue from Internet
infrastructure companies such as Level 3 Communications, Williams Communications
and Global Crossing.
The terms of our customer contracts generally are approximately 20 years
for dark fiber and one to five years for lit fiber, with monthly payments. The
monthly lease rates cover dark fiber and/or lit fiber leased from us. In
addition, the contracts typically provide for outage related credits, a
predetermined reduction or offset against the customer's lease rate when a
customer's leased facility is non-operational or does not meet the customer's
operating parameters, and also typically require us to maintain adequate
insurance coverages, including product liability coverage. Customers from whom
we derive greater than 10% of our revenue include Sprint, CTC and Network Plus.
Our targeted customer base includes the following:
INCUMBENT LOCAL EXCHANGE CARRIERS & INDEPENDENT TELCOS. Incumbent local
exchange carriers typically require some interstate paths for internal
communications, signal control and operator services. Incumbent local
exchange carriers also require intrastate capacity to connect central
offices to one another and to connect central offices to points of presence
and customer premises.
FACILITIES-BASED INTEREXCHANGE CARRIERS. Interexchange Carriers
typically require (a) regional short-haul connectivity from their national
backbone facilities to originate and terminate traffic deeper into the
customer base; (b) redundant routing to ensure reliability in their
networks; and (c) additional capacity for their customers as minutes-of-use
and IP bandwidth requirements increase.
COMPETITIVE LOCAL EXCHANGE CARRIERS. Competitive Local Exchange
Carriers typically require interconnection between their local networks and
extensions further into the community. Internet service providers. Internet
service providers typically require distribution channels to Interexchange
Carriers and LEC switches and interconnection to Internet service providers
switches.
CABLE TELEVISION COMPANIES. Cable companies typically require fiber
optic capacity to upgrade their systems to higher speed bandwidths, which
allow them to increase the number of channels available, add interactive
programming and Internet and data transfer capabilities and to consolidate
head-end facilities.
WIRELESS COMMUNICATION COMPANIES. Wireless companies typically require
land-based back-hauling of traffic from towers to their switches and also
capacity between their switches with Interexchange Carriers, points of
presence, and Incumbent Local Exchange Carriers central offices. Microwave
carriers typically require fiber optic capacity to replace microwave service
as their primary source of communications capacity.
SUPPLY RELATIONSHIPS
We have entered into agreements and arrangements for the supply of equipment
and services relating to the construction of our system. 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
network multiplexers and network services from Northern Telecom Ltd., Sycamore
Networks and Cerant and
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cable from Fitel/Lucent Technologies, Inc., Corning and FOCAS, Inc. The cable
purchased from Fitel and FOCAS includes Lucent's patented TrueWave and AllWave
fibers, which we believe contains certain 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 system. However, 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 system could disrupt our operations and, if such
disruption continued for an extended period of time, it could have a material
adverse effect on our business, financial condition and results of operations.
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.
We are currently aware of communications carriers that own or lease fiber
optic networks in New England (such as AT&T, MCI/WorldCom, Sprint and Bell
Atlantic) and of other carriers that own or lease fiber optic networks in New
England (such as Broadwing, Qwest Communications International, Metromedia Fiber
Network, Level 3 Communications and RCN) that employ advanced technology
comparable to that of our system.
In the cities connected by our system, we also face significant competition
from the incumbent local exchange carriers, which currently dominate their
respective local markets. In addition, we face competition from competitive
local exchange carriers 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 place that have been or could be further upgraded to fiber optic cable. To
the extent that local cable television companies decide to equip their networks
with fiber optic cable, they are our potential direct competitors.
We also face potential competition from the utilities which have granted us
rights-of-way in certain portions of our system, which use may include
competition with us. 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 do not 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 unregulated provision of fiber capacity, we are
subject to common carrier regulation to the extent that our Connecticut and New
York subsidiaries provide telecommunications services. 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.
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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 incumbent local 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 the company. 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 that provide
telecommunications services 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 intend to 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 our lit
fiber is provided on a private carrier basis. 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
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. In addition, the FCC has been petitioned
by certain railroad, power and telecommunications associations, none of which
are affiliated with us, to clarify the regulatory status of fiber capacity
providers. To date, the FCC has not indicated an intention to rule on this
remand.
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. Neither one
is currently offering common carrier services.
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;
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- pay into federal funds for Universal Service, Telecommunications Relay
Services and the North American Numbering Administration;
- limit our use of Customer Proprietary Network Information to provisioning
of the services in connection with which the Customer Proprietary Network
was obtained; and
- 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.
Notably, however, similarly situated competitors would be subject to
comparable regulatory obligations.
If we were deemed a provider of telecommunications services in our provision
of leased dark fiber capacity, then our revenues from such leases to end users
would become subject to contributions to the FCC's Universal Service Fund, a
fund that was established to ensure the availability of affordable basic
telecommunications services. As a general matter, revenues received from other
telecommunications carriers are not subject to contribution to the Universal
Service Fund. However, our revenues from telecommunications carriers who
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. Because internet service providers are deemed end users for Universal
Service purposes, our revenues received pursuant to lit fiber leases to these
entities would be subject to contributions to the FCC's Universal Service Fund.
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. However, the majority of our current revenue
does not qualify as "end-user" revenue.
Federal telecommunications law may also affect our business by virtue of the
inter-relationships that exist among us and incumbent local exchange carriers
and interexchange carriers. For example, the FCC issued an order requiring,
among other things, that common line access fees charged to interexchange
carriers, 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 interexchange carriers, likely eliminating one of the principal
disincentives for use of incumbent local exchange carrier facilities by
interexchange carriers, which could have a material adverse effect on the use of
our fiber optic telecommunications networks by interexchange carriers.
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 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.
9
<PAGE>
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 would not be available to us an
unregulated lessor of fiber. 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, such as
the City of Boston and the City of New York, typically retain the ability to
license public rights-of-way, subject to the limitation that local governments
may not prohibit persons from providing telecommunications services. Local
authorities affect the timing and costs associated with our use of public
rights-of-way. These regulations may have an adverse effect on our business.
HISTORY OF OUR COMPANY
We were incorporated in 1989 in Massachusetts under the name
"FiveCom, Inc." to develop fiber-optic networks in secondary and tertiary
markets in the Northeast. Prior to 1994, we were the managing general partner of
a venture which built a competitive access provider network in Springfield,
Massachusetts and also built several small private networks in eastern
Massachusetts. In February 1994, as FiveCom we sold our interest in the
Springfield network to Brooks Fiber. Following this sale, we expanded our
business strategy to include intra-Local Access Transport Area and long distance
facilities using electric utility rights-of-way and changed our focus to target
carrier customers rather than end-users.
Commencing in September 1994, we entered into agreements with Northeast
Utilities, pursuant to which we obtained rights-of-way in the service
territories of Northeast Utilities and its subsidiaries. In 1996, we raised
approximately $16.7 million from private placements of equity securities to
MaineCom Services, a wholly-owned subsidiary of Central Maine Power and Mode 1
Communications, Inc., a subsidiary of Northeast Utilities. In January 1997, we
entered into an Agreement with Central Maine Power, under which we obtained
rights-of-way in Central Maine Power's service territory, and raised an
additional $2.6 million from Central Maine Power and other investors in a
private equity financing. In 1998 we were reincorporated in Delaware under the
name "NorthEast Optic Network, Inc."
EMPLOYEES
At March 1, 2000, we employed 64 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 a portion of the engineering,
routine maintenance, construction supervision activities and network
surveillance associated with the construction of our fiber optic system. We have
also contracted to various third party contractors the construction of some
parts of our fiber optic system.
10
<PAGE>
ITEM 2. PROPERTIES.
The NEON system and its component assets are the principal properties
currently owned by the Company or with respect to which the Company has an IRU.
The Company owns substantially all of the communications equipment currently
utilized in its business and holds certain ownership interests in the cable
comprising the NEON system. The Company's installed fiber optic cable is laid
along the various rights-of-way held by the Company. See Item 1.--"Right-of-Way
Agreements." Other fixed assets are located at various leased locations in
geographic areas served by the Company.
The Company's executive, administrative and sales offices are located at its
principal office in Westborough, Massachusetts. The Company leases this space
(approximately 31,000 square feet) pursuant to a six-year lease that commenced
in May 1999.
ITEM 3. LEGAL PROCEEDINGS.
The Company is not involved in any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1999.
EXECUTIVE OFFICERS OF THE REGISTRANT
The following are the names, ages, positions and a brief description of the
business experience during at least the last five years of the executive
officers of the Company, all of whom serve until they resign or are removed from
such offices by the Board of Directors of the Company.
Vincent C. Bisceglia, 45, Chairman of the Board of Directors and Chief
Executive Officer. Mr. Bisceglia joined the Company in November 1998 in his
current position. Prior to joining the Company, from December 1997 until
November 1998, Mr. Bisceglia was self-employed as a consultant. From
February 1994 to December 1997 Mr. Bisceglia served as President and Chief
Executive Officer and a director of Technology Service Group, Inc. ("TSG"), a
manufacturer of advanced technology pay telephones. Prior to 1994, he served TSG
as a consultant and in various management positions. From 1982 to 1986,
Mr. Bisceglia was Executive Vice President 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, 52, President, Vice Chairman of the Board of Directors
and a Director. Mr. Colantonio is the founder of the Company, has been a
director of the Company since 1989 and Vice Chairman since November 1998. Prior
to founding the Company, from 1987 to 1991 Mr. Colantonio was president of
International Communications Services Corp., a provider of network services to
New England Telephone Company, AT&T and others. He served as President of
Ireland-based Murray International from 1986 to 1987, providing network services
to SNET, LiTel, MCI, Sprint and others. From 1983 to 1986, Mr. Colantonio served
as Director of Marketing for Tele-Engineering Corp., an advanced WAN/LAN
developer and video switch and ad-insertion manufacturer, securing contracts
with, among others, USAF Logistic Command, U.S. Navy Underwater Signal Command
and NASA.
William F. Fennell, 55, Vice President, Finance, Chief Financial Officer and
Treasurer. Mr. Fennell joined the Company in August 1996 and became its Chief
Financial Officer and Treasurer in May 1997. From October 1986 to January 1997,
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.
11
<PAGE>
Michael A. Musen, 51, Vice President, Operations. Mr. Musen has served as an
officer of the Company since 1992 and became Vice President, Operations in 1996.
Prior to joining the Company, Mr. Musen was Vice President of International
Communications Services Corp. from 1988 to 1992.
Roger M. Barzun, 58, Secretary and General Counsel. Mr. Barzun joined the
Company in December 1998 and became Secretary and General Counsel in February
1999. From 1995 to present, Mr. Barzun was self-employed as an attorney.
Ronald B. Steele, 48, Vice President, Engineering. Mr. Steele joined the
Company in May 1998 as its Chief Technology Officer and became its Vice
President, Engineering in May 1999. From June 1995 to May 1998 he was
self-employed as a consultant in the telecommunications industry. From
January 1993 to June 1995, Mr. Steele, served as a Director of Engineering for
SNET.
There are no family relationships among any of the executive officers of the
Company.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's stock is listed and traded on the Nasdaq National Market under
the symbol NOPT and began trading after the Company's initial public offering on
July 31, 1998. The following table sets forth for the periods indicated the high
and low bid prices for the Company's common stock as reported by for the periods
indicated.
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1998
Third Quarter (beginning July 31, 1998).................. $ 10.125 $ 5.50
Fourth Quarter........................................... 12.00 4.75
1999
First Quarter............................................ 17.75 8.75
Second Quarter........................................... 20.25 13.50
Third Quarter............................................ 45.125 14.00
Fourth Quarter........................................... 79.00 30.625
2000
First Quarter (through March 1, 2000).................... $159.00 $57.75
</TABLE>
The stock price ranges reflect inter-dealer prices without retail mark-up,
mark-down or commission and may not necessarily represent actual transactions.
On March 1, 2000, the last reported sale price for our common stock was
$126.50 per share. As of March 1, 2000, there were approximately 88 holders of
record of our common stock and approximately 1,721 beneficial holders.
DIVIDEND POLICY
The Company intends to retain future earnings, if any, to finance the
development and expansion of its business and, therefore, does not anticipate
paying any cash dividends on its common stock in the foreseeable future. The
payment of dividends is within the discretion of the Company's Board of
Directors and will be dependent upon, among other factors, the Company's results
of operations, financial condition and capital requirements, restrictions
imposed by the Company's financing arrangements and legal requirements.
The terms of the Company's 12 3/4% Senior Notes Due 2008 restrict the
Company's ability to pay cash dividends on its Common Stock.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL AND OPERATING DATA
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
We have summarized below our historical consolidated financial data at
December 31, 1999 and for each of the years in the five-year period ended
December 31, 1999, which derived from our consolidated financial statements and
which have been audited by Arthur Andersen LLP, independent auditors. You should
refer to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and our consolidated financial statements and the Notes
thereto included elsewhere in this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998(1) 1999
--------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues...................... $ 42,598 $ 13,773 $ 394,704 $ 863,672 $ 5,665,276
Operating expenses............ 487,159 1,185,595 2,693,037 9,175,280 19,895,829
Loss from operations.......... (444,561) (1,171,822) (2,298,333) (8,311,608) (14,230,553)
--------- ----------- ----------- ------------ ------------
Interest income (expense),
net......................... (42,401) 125,838 (2,893) (4,464,583) (13,299,215)
Minority interest(2).......... -- 353,222 1,080,200 1,108,933 --
Provision for (benefit from)
income taxes................ -- 16,000 (261,000) (315,000) --
--------- ----------- ----------- ------------ ------------
Loss before extraordinary
item........................ (486,962) (708,762) (960,026) (11,352,258) (27,529,768)
Extraordinary item(3)......... (1,363,155)
Net loss...................... (486,962) (708,762) (960,026) (12,715,413) (27,529,768)
Basic and diluted loss per
share before extraordinary
item........................ (1.71) (2.49) (3.37) (1.70) (1.70)
Basic and diluted loss per
share....................... (1.71) (2.49) (3.37) (1.90) (1.70)
Basic and diluted weighted
average shares
outstanding................. 284,578 284,735 284,828 6,675,717 16,172,026
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------
<S> <C>
BALANCE SHEET DATA:
Working capital............................................. $ 67,969,107
Total assets(4)............................................. 280,633,376
Note payable to related party............................... 4,682,858
Long-term debt, including current maturities................ 180,000,000
Total liabilities........................................... 213,166,586
Stockholders' equity........................................ 67,466,790
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Cash provided by (used in)
operating activities....... $ (413,196) $ (315,762) $ (813,704) $ 2,954,322 $(17,970,325)
Cash used in investing
activities................. (4,619,702) (6,738,898) (8,798,251) (93,772,328) (68,323,061)
Cash provided by financing
activities................. 4,943,300 11,918,703 5,845,482 147,457,346 33,323,983
Net increase (decrease) in
cash and cash
equivalents................ (89,598) 4,864,043 (3,766,473) 56,639,340 (52,969,403)
EBITDA(5).................... (420,386) 794,432 665,271 (6,767,536) (8,080,833)
Capital expenditures......... 4,596,901 6,711,082 5,609,459 38,947,267 48,583,642
Ratio of deficiency to fixed
charges(6)................. (2.54)x (4.5)x (10.11)x (.45)x (.23)x
</TABLE>
- - ------------------------
(1) If our reorganization into a Delaware corporation had occurred on
January 1, 1998, the 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 $0.79, respectively.
(2) Minority interest consisted of the interests of members other than Central
Maine Power in FiveCom LLC, NECOM LLC and FiveCom of Maine LLC. See Item 7.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Reorganization." 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 the Public Offerings.
(4) In connection with our reorganization in 1998, we recorded an intangible
asset of $47,871,068 to reflect our acquisition of Northeast Utilities'
minority interest in a subsidiary, NECOM LLC, in accordance with AICPA
Accounting Interpretation 39 to APB Opinion No. 16, Business Combination
(AIN-39).
(5) EBITDA is defined as net loss before interest income (expense), net; loan
commitment fees; provision for (benefit from) income taxes; and depreciation
and amortization and is presented because it is commonly used by certain
investors and analysts to analyze and compare a company's operating
performance and to determine a company's ability to incur and service debt.
EBITDA should not be considered in isolation from, or 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.
(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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with Item 6.
"Selected Financial Data" and the Consolidated Financial Statements and the
Notes thereto included elsewhere in this Report.
14
<PAGE>
RESULTS OF OPERATIONS
OVERVIEW
We generate revenue primarily through the leasing of capacity on our
network. The services we provide 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. We also lease space at our facilities
(collocation services). Other service revenue includes 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 generally recognized as services are performed.
REORGANIZATION
We were incorporated in Massachusetts in July 1989 under the name
"FiveCom, Inc." In May 1996, FiveCom LLC, an operating subsidiary majority-owned
by us, 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 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, organized FiveCom of Maine LLC in Massachusetts, with MaineCom owning
66.67%,and FiveCom LLC owning 33.33%, of the membership interests in FiveCom of
Maine LLC.
We were reorganized prior to our July 1998 initial public offering of
$180.0 million of 12 3/4% Senior Notes and 4.0 million shares of our common
stock at $12.00 per share. In April 1998, prior to the reorganization, Central
Maine Power exercised its warrants to purchase 5,876 shares of membership
interests in FiveCom LLC for an aggregate exercise price of $58.76 and in
July 1998, (a) each of the minority members in FiveCom LLC (and each of Mode 1
and MaineCom) exchanged their membership interests in FiveCom LLC, NECOM LLC and
FiveCom of Maine LLC, respectively, for shares of our Series B Convertible
Preferred Stock; (b) FiveCom LLC and NECOM LLC were each merged with and into
our wholly-owned subsidiary; (c) FiveCom of Maine LLC was merged into FiveCom of
Maine, Inc., our wholly-owned subsidiary; and (d) we were reincorporated in
Delaware under the name "NorthEast Optic Network, Inc." and our Certificate of
Incorporation was amended and restated. In December 1998 FiveCom of Maine was
merged with and into NorthEast Optic Network, Inc.
The shares of membership interest in FiveCom LLC received by Central Maine
Power upon exercise of its warrant were exchanged for 144,172 shares of our
Series B Convertible Preferred Stock, which shares had an estimated value at the
time of the reorganization of approximately $4.3 million. Mr. Colantonio, our
president, and Mr. Musen, a vice president, exchanged their membership interests
in FiveCom LLC for 17,788 shares and 14,549 shares, respectively, of our
Series B Convertible Preferred Stock, which shares had an estimated aggregate
value at the time of the reorganization of approximately $542,000 and $443,000,
respectively.
Prior to the reorganization, which was completed on July 8, 1998, we held
interests in our majority-owned or controlled subsidiaries, FiveCom LLC, FiveCom
of Maine LLC and NECOM LLC. The interests of the minority owners of these
subsidiaries are reflected on our balance sheet as minority interest in
consolidated subsidiaries. As a result of the reorganization, such minority
owners became stockholders and the value of our stock received by them over the
tangible book value of their minority interests was reflected as goodwill.
15
<PAGE>
Prior to our initial public offering of equity and debt, we were included in
Central Maine Power's consolidated federal income tax return pursuant to the
terms of a tax-sharing arrangement entered into in 1996. The benefit from income
taxes represented refundable income taxes from Central Maine Power as a result
of this tax sharing arrangement. We currently have no net operating loss
carryforwards as a result of this tax sharing arrangement.
RESULTS OF OPERATIONS
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.
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 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.
16
<PAGE>
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.
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 capital investment for the design,
construction and development of our network and the purchase of
telecommunications equipment. Capital expenditures were approximately
$48.6 million, $38.9 million and $5.6 million for the years ending December 31,
1999, 1998 and 1997, respectively. We expect to continue to have substantial
capital requirements in connection with the (i) expansion and improvement of our
existing network, (ii) design, construction and development of new networks,
(iii) connection of additional buildings and customers to our network,
(iv) purchase of additional telecommunication equipment, (v) purchase and
development of our operating support systems, and (vi) additional expenses
required to operate and maintain existing facilities.
17
<PAGE>
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 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)/provided by operating activities was $(813,704),
$2,954,322 and $(17,970,325) for the years ended December 31, 1997, 1998 and
1999, respectively. Net cash (used in) for the year ended December 31, 1999 was
due primarily to the operating loss partially offset by improved working capital
and non-cash items.
Cash flow from financing activities was, $5,845,482, $147,457,346 and
$33,323,983 in the years ended December 31, 1997, 1998 and 1999, respectively.
Cash flow from financing activities in 1999 was generated from the restricted
cash placed in escrow as described above in connection with the initial public
offering of our 12 3/4% Senior Notes Due 2008. In 1998, $19,450,772 of the
proceeds our public offerings in August 1998 were used to repay long-term
construction loans from Central Maine Power and Peoples Heritage Bank, and
$72,887,041 of the proceeds was used to establish an escrow account to secure
the payment of the first seven scheduled interest and principal payments on the
notes, of which the first payment was made on February 15, 1999.
Cash used in investing activities totaled $8,798,251 and $93,772,328 and
$68,323,061 in the years ended December 31, 1997, 1998 and 1999, respectively.
Cash requirements consisted primarily of the cost of construction and deployment
of telecommunications equipment to build our system and purchases of short term
investments.
We anticipate that we will continue to experience negative cash flow as we
expand our system, 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 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, 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 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:
(i) demand for our services or cash flow from operations is less than or more
than expected, (ii) our plans or projections change or prove to be inaccurate
(iii) we make acquisitions or (iv) 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The future financial and operating results of the Company remain difficult
to predict and are subject to various risks and uncertainties described below as
well as elsewhere in this Report.
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<PAGE>
WE HAD SIGNIFICANT NET LOSSES AND OUR OPERATING RESULTS HAVE VARIED AND WILL IN
THE FUTURE CONTINUE TO VARY SIGNIFICANTLY FROM QUARTER TO QUARTER.
Our current business has a very limited history. We have incurred net losses
from 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 the regulatory
environment, cost and timely availability of equipment, and changes in general
and local economic conditions. In addition, the extent of the demand for our
services cannot be estimated with any degree of certainty.
OUR BUSINESS STRATEGY IS DEPENDENT UPON ANTICIPATED CUSTOMER DEMAND FOR OUR
SERVICES, AND OUR FAILURE TO OBTAIN CUSTOMERS FOR OUR FIBER OPTIC CAPACITY AT
PROFITABLE RATES WOULD ADVERSELY AFFECT OUR BUSINESS RESULTS.
Our ability to become profitable is dependent upon our ability to secure a
market for our products and services and obtain service contracts. Many of our
targeted customers may also be our potential competitors. If our services are
not satisfactory or cost competitive, our targeted customers may construct their
own systems, which would reduce their need for our services and create future
sources of competition for us. We have incurred and will continue to incur
significant operating expenses and have made and will continue to make
significant capital investments, in each case based upon certain expectations as
to the anticipated customer demand for our services in each of our markets.
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 greater financial and other resources, 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 facilities-based
communications service providers such as Qwest Communications
International Inc., cable television companies, electric utilities, microwave
carriers, satellite carriers, wireless communication system operators and
end-users with private communications networks. Northeast Utilities and Central
Maine Power each own or have an IRU in certain fibers in the cable that includes
our system, which permit Northeast Utilities and Central Maine Power to compete
directly with us in the future if they are not using these fibers for their own
corporate requirements. Our rights-of-way are nonexclusive 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 MAY NOT 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 some more diversified telecommunications companies, we derive and
expect to continue to derive substantially all of our revenues from the leasing
of fiber optic capacity to our customers, many of whom transmit voice, data or
video information or provide switched voice and data services. Except to the
extent that we provide lit fiber or are authorized to provide common carrier
service through subsidiaries in New York and Connecticut, we are not currently
engaged in the transmission of voice, data or video and do not provide switched
voice and data services, nor do we provide services to end-users. Except to the
extent of we may provide of fiber services to internet service providers, we do
not provide services to end-users. The limited nature of our current services
could limit potential revenues and result in our having lower revenues than
competitors which provide a wider array of services.
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<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
products or emergence of new technologies may reduce the cost or increase the
supply of certain services 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. We anticipate that
prices for our services to carriers specifically, and interstate services in
general, will continue to decline over the next several years due primarily to
price competition as various network providers continue to install networks that
compete with our system. We also believe that there will be technological
advances that will permit substantial increases in the transmission capacity of
both new and existing fiber. Furthermore, we expect that strategic alliances or
similar transactions, such as long distance capacity purchasing alliances among
certain incumbent local exchange carriers, that increase customer purchasing
power will become increasingly more common.
OUR AGREEMENTS WITH CONSOLIDATED EDISON COMMUNICATIONS, INC. AND EXELON
CORPORATION ARE SUBJECT TO NUMEROUS CONDITIONS OVER WHICH WE HAVE NO CONTROL,
AND ONE OR BOTH OF THESE TRANSACTIONS MAY NOT BE CONSUMMATED.
In November 1999, we entered into agreements with each of Consolidated
Edison Communications, Inc. and Exelon Corporation. The Consolidated Edison
Communications, Inc. agreement would expand our system in New York City. The
Exelon Corporation transaction would expand our system between New York City and
Philadelphia and in metropolitan Philadelphia. Our agreements with each of these
third parties contain numerous conditions which must be satisfied before a
closing may occur, including without limitation, the successful acquisition of
certain municipal and federal regulatory approvals. We do not have any control
over the satisfaction of several of these contingencies, any one of which could
result in the failure of one or both of these transactions to close. In
particular, Consolidated Edison Communications has encountered unanticipated
delays in obtaining an approval from the New York City Franchise and Concessions
Review Committee which must be obtained prior to closing our transaction with
Consolidated Edison Communications. In the event that one or both of these
significant transactions is not consummated, our anticipated revenues for the
foreseeable future could be materially adversely affected, which we believe
would harm our business reputation and adversely affect our stock price.
THE EXPENDITURES NECESSARY TO SUFFICIENTLY EXPAND OUR FIBER OPTIC SYSTEM AND
DEVELOP OUR SERVICES IN ORDER TO SATISFY THE DEMANDS OF OUR EVOLVING CUSTOMER
BASE MAY SURPASS OUR AVAILABLE CASH, AND WE MAY BE UNABLE TO OBTAIN ADDITIONAL
CAPITAL TO MEET THESE EXPENSES ON A TIMELY BASIS AND ON ACCEPTABLE TERMS.
We believe that we will require significant additional cash 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. To date, we have expended
substantial amounts on construction of our system 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
20
<PAGE>
increase our service territory. We cannot assure you that additional financing
will be available to us or, if available, that we can obtain it on a timely
basis and on acceptable terms.
THE SUCCESSFUL, TIMELY AND COST-EFFECTIVE EXPANSION OF OUR FIBER OPTIC SYSTEM IS
CRUCIAL TO OUR ABILITY TO BECOME PROFITABLE, AND IS DEPENDENT UPON NUMEROUS
FACTORS BEYOND OUR CONTROL.
Our ability to achieve our strategic objectives will depend in large part
upon the successful, timely and cost-effective completion of the first phase of
our fiber optic system. The major factors that could affect our success include:
- our ability to obtain adequate rights-of-way on acceptable terms in and
between major cities in the Northeast not covered by utility rights-of-way
currently available to us;
- our ability to obtain required governmental permits and certifications
where necessary; and
- delays or disruptions resulting from physical damage, power loss,
defective equipment or the failure of third-party suppliers or contractors
to meet their obligations in a timely and cost-effective manner.
Any one of these factors, over which we have little control, could
significantly influence our ability to complete our system and execute our
business plan.
BECAUSE SIGNIFICANT PORTIONS OF OUR FIBER OPTIC SYSTEM ARE BEING CONSTRUCTED BY
INDEPENDENT THIRD PARTY CONSTRUCTORS AND CONTRACTORS AND NOT BY OUR EMPLOYEES,
PORTIONS OF OUR SYSTEM MAY NOT BE CONSTRUCTED TO A SUFFICIENT LEVEL OF QUALITY
OR IN A TIMELY FASHION, EITHER OF WHICH WOULD HINDER OUR ABILITY TO
SUCCESSFULLY EXECUTE OUR BUSINESS PLAN.
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 system. We have
also contracted to various third party contractors the construction of some
parts of our fiber optic system. As a result, we may have less control over the
timeliness and quality of the work performed by such parties than if such work
were to be performed by our own employees. In addition, such contractors may
from time to time have access to our proprietary information.
WE OBTAIN SOME OF THE KEY COMPONENTS USED IN OUR FIBER OPTIC SYSTEM 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 are dependent upon a small group of suppliers for a number of components
and parts used in our system. In particular, we purchase cable that includes
fiber optic glass from Lucent Technologies, Inc., Lucent-Fitel and Corning, and
we purchase fiber optic equipment from Nortel, Cerent 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 system could
disrupt our operations.
OUR FIBER OPTIC SYSTEM, WHICH IS OUR SOLE SOURCE OF REVENUE, IS VULNERABLE TO
PHYSICAL DAMAGE, POWER LOSS AND OTHER DISRUPTIONS BEYOND OUR CONTROL, AND THE
OCCURRENCE OF ANY OF THESE FAILURES COULD RESULT IN IMMEDIATE LOSS OF REVENUE
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 competitive reliability, capacity and security via our network. Our
system 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
21
<PAGE>
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 system and injure
our business reputation.
THE CONTRACT RIGHTS UPON WHICH WE RELY TO OPERATE AND MAINTAIN OUR SYSTEM COULD
BE LOST 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
SYSTEM ON THEIR RIGHTS-OF-WAY.
The construction and operation of significant portions our fiber optic
system is dependent upon contract rights known as "indefeasible rights-of-use"
or "IRUs." IRUs have been used extensively in the telecommunications industry,
but they remain a relatively new concept in property law. Although IRUs confer
upon the holder certain indicia of ownership, legal title and the right to
control the relevant rights-of-way or fiber optic filaments, as the case may be,
legal title remains in the hands of the landowner. Therefore, while IRUs might
be construed as conferring a significant equitable right in the right-of-way or
the fiber optic filaments, as the case may be, the legal status of IRUs remains
uncertain, and there can be no assurance that a trustee in bankruptcy would not
void an IRU in the event of the bankruptcy of the grantor of such IRU. If we
were to lose an IRU in a key portion of our system, 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 system 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 SYSTEM FROM SUCH
PROPERTY, EITHER OF WHICH OUTCOME WOULD SIGNIFICANTLY HARM OUR BUSINESS AND
OUR RESULTS OF OPERATIONS.
Our indefeasible rights-of-use are derived from the grantor's interest in
the property on which our system is located. A substantial portion of our
indefeasible rights-of-use have been granted to us by Central Maine Power,
Northeast Utilities and other utility companies. To the extent that a grantor of
an indefeasible right-of-use has a limited easement in such property and does
not hold full legal title, the indefeasible rights-of-use granted to us may be
alleged to be insufficient for our uses. 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 many 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
landowner's 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 there can be no assurance that additional
claims will not be made in the future. If our use of the indefeasible
rights-of-use granted to us in connection with our recent transactions with
Consolidated Edison Communications, Inc. and Exelon Corporation are successfully
challenged, then we will lose our ability to build and operate our system on
those rights-of-way and the value to us of those transactions will be
significantly reduced.
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BECAUSE SIGNIFICANT PORTIONS OF OUR FIBER OPTIC NETWORK ARE CONSTRUCTED UPON
RIGHTS-OF-WAY CONTROLLED BY ELECTRIC UTILITY COMPANIES WHICH PLACE THE
OPERATION OF THEIR ELECTRICAL FACILITIES AHEAD OF OUR OPERATION OF OUR FIBER
OPTIC SYSTEM, WE MAY BE UNABLE TO CONSTRUCT AND OPERATE OUR FIBER OPTIC SYSTEM
IN THE AFFECTED AREAS WITHOUT PERIODIC INTERRUPTIONS AND DELAYS CAUSED BY THE
DAY-TO-DAY OPERATIONS OF THESE UTILITY COMPANIES.
Our right-of-way agreements with Northeast Utilities and Central Maine Power
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 our operation of our system. In addition,
certain of our ongoing operational efforts are constrained by the limited
ability of Northeast Utilities and Central Maine Power 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.
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 conditions and results of operations.
REGULATORY STATUS. 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 that provide telecommunications services 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. Although our
subsidiaries in New York and Connecticut are authorized to offer
telecommunications services on a common carrier basis, we do not believe that
our provision of dark or lit fiber capacity in fact constitutes
telecommunications service or common carriage as defined by the Federal
Communications Commission or the provisions of the Communications Act of 1934,
as amended. We believe that our provision of lit fiber capacity constitutes a
private carriage. However, we cannot predict the future regulatory status of our
business.
It is conceivable, for instance, that the FCC would subject both our sale of
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 what basis the FCC has for its authority to regulate dark fiber
service. To date, the FCC has not indicated an intention to rule on this remand.
If we were to be deemed a common carrier or provider of telecommunications
services in our provision of leased dark fiber capacity, then our revenues from
such leases to end-users would become subject to contributions to the FCC's
Universal Service Fund, a fund that was established to ensure the availability
of affordable basic telecommunications services. As a general matter, revenues
received from other telecommunications carriers are not subject to contribution
to the Universal Service Fund. However, our revenues from telecommunications
carriers who 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
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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. Because internet service providers are deemed end users for Universal
Service purposes, any revenues received pursuant to lit fiber leases to these
entities would be subject to contributions to the FCC's Universal Service Fund.
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. However, the majority of our current revenue
does not qualify as "end-user" revenue. If deemed a common carrier or provider
of telecommunications services, we would also be required to comply with a
number of regulatory requirements, including, but not limited to tariff filing
requirements, reporting requirements, special assessments, and access charges.
Compliance with these regulatory requirements may impose substantial
administrative burdens. Notably, however, similarly situated competitors would
be subject to comparable regulatory obligations.
In addition, the FCC has recognized a class of private, non-common carriers
whose practice it is to make individualized decisions on the terms upon which to
provide communications services and with whom to deal. These "private" carriers
are subject to FCC jurisdiction, but are not extensively regulated. We believe
that our lit fiber is provided on this basis, thereby exposing us to certain
regulatory requirements, including universal service contributions.
LOCAL COMPETITION. The FCC has responsibility under the local competition
provisions of the Communications Act of 1934, as amended, to determine what
elements of an incumbent local exchange carrier's network must be provided to
competitors on an unbundled basis. In a recent decision, the FCC determined that
dark fiber is a network element that must be provided to competitors. This could
decrease the demand for our fiber.
INDUSTRY RELATIONSHIPS. We have dealings with incumbent local exchange
carriers, competitive local exchange carriers and interexchange carriers, all of
which are subject to varying degrees of regulation. 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, although to date they have not provided such service.
Therefore, these subsidiaries are subject to the obligations that applicable law
places on all similarly certificated common carriers including 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.
MUNICIPAL REGULATION OF OUR ACCESS TO PUBLIC RIGHTS-OF-WAY IS SUBJECT TO CHANGE
AND COULD IMPOSE ADMINISTRATIVE BURDENS THAT IMPACT OUR BUSINESS.
In addition to federal and state laws, local governments exercise legal
authority that may impact our business. For example, local governments such as
the City of Boston and the City of New York, typically retain the ability to
license public rights-of-way, subject to the limitation that local
24
<PAGE>
governments may not prohibit the provision of telecommunications services. Local
authorities affect the timing and costs associated with our use of public
rights-of-way. For example, the closing of our November 1999 agreement with
Consolidated Edison Communications, Inc. is contingent upon the approval of the
City of New York with respect to a city franchise. Consolidated Edison
Communications has encountered unanticipated delays in obtaining this approval
from the New York City Franchise and Concessions Review Committee which must be
obtained prior to closing our agreement with Consolidated Edison Communications.
In the event that this transaction or our contemplated transaction with Exelon
is not consummated, our anticipated revenues for the foreseeable future would be
significantly reduced, which we believe would harm our business reputation and
adversely affect our stock price.
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
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
system 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 cost of constructing our system.
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 OUR COMPANY 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 certain indebtedness, pay dividends and make
certain other restricted payments, create liens, issue and sell capital stock or
subsidiaries, guarantee certain indebtedness, sell assets or consolidate, merge
or transfer all or substantially all of our assets. These limitations could
prevent us from exploiting corporate opportunities as they arise, which could be
detrimental to the interests of our stockholders.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The Company is exposed to market risk related to changes in interest rates,
but does not believe that this exposure is material. The Company does not use
derivative financial instruments for speculative or trading purposes.
INTEREST RATE SENSITIVITY
The Company maintains a short-term investment portfolio consisting mainly of
corporate debt securities and U.S. government agency discount notes with an
average maturity of less than six months. These held-to-maturity securities are
subject to interest rate risk and will fall in value if market interest rates
increase. If market interest rates were to increase immediately and uniformly by
10% from levels that existed at December 31, 1999, the fair value of the
portfolio would decline by an immaterial amount. Since the Company has the
ability to hold its fixed income investments until maturity, the Company would
not expect its operating results or cash flows to be materially effected.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS.................... F-1
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1998 AND
1999...................................................... F-2
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1998 AND 1999.......................... F-3
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE
YEARS ENDED
DECEMBER 31, 1997, 1998 AND 1999.......................... F-4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1998 AND 1999.......................... F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.................. F-6
</TABLE>
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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
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<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents................................. $ 57,737,792 $ 4,768,389
Short-term restricted investments (Note 7(a))............. 23,149,975 22,518,611
Short-term investments.................................... 48,581,949 66,803,311
Accounts receivable, net of allowance of approximately
$224,000 and $117,000 in 1998 and 1999, respectively.... 111,915 1,858,201
Refundable taxes from related party....................... 755,838 --
Prepaid expenses and other current assets................. 506,947 494,323
------------ ------------
Total current assets.................................. 130,844,416 96,442,835
------------ ------------
Property and Equipment, net................................. 52,922,677 94,924,843
------------ ------------
Restricted Investments (Note 7(a)).......................... 51,371,859 31,693,543
Intangible Assets, net (Note 6)............................. 56,773,282 57,572,155
------------ ------------
$291,912,234 $280,633,376
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term obligations............... $ 127,619 $ --
Accounts payable.......................................... 322,285 3,783,354
Accounts payable--Communications network.................. 2,647,719 9,438,350
Accrued expenses.......................................... 13,526,702 13,348,296
Accrued right-of-way fees, related party.................. 1,084,325 886,322
Current portion of deferred revenue....................... 140,232 58,380
------------ ------------
Total current liabilities............................. 17,848,882 27,514,702
------------ ------------
Deferred Revenue, net of Current Portion.................... 1,028,668 969,026
------------ ------------
Long-term Accounts Payable--Communications Network.......... -- 4,682,858
------------ ------------
Long-term Obligations, less current maturities.............. 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........... 160,663 163,935
Warrants.................................................... 8,595 --
Additional paid-in capital.................................. 108,105,684 110,072,881
Accumulated deficit......................................... (15,240,258) (42,770,026)
------------ ------------
Total stockholders' equity.................................. 93,034,684 67,466,790
------------ ------------
$291,912,234 $280,633,376
============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
28
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
Revenues:
Network Service.................................. $ 347,718 $ 820,059 $ 3,152,348
Other service.................................... 46,986 43,613 2,512,928
----------- ------------ ------------
Total revenues................................. 394,704 863,672 5,665,276
----------- ------------ ------------
Expenses:
Cost of revenues (includes right-of-way fees of
approximately $108,000, $591,000 and $589,000
in 1997, 1998 and 1999, respectively, paid to
related parties)............................... 1,137,943 2,176,266 6,365,758
Selling, general and administrative.............. 1,002,232 5,200,720 7,380,351
Depreciation and amortization.................... 552,862 1,798,294 6,149,720
----------- ------------ ------------
Total expenses................................. 2,693,037 9,175,280 19,895,829
----------- ------------ ------------
Loss from operations........................... (2,298,333) (8,311,608) (14,230,553)
----------- ------------ ------------
Other Income (Expense):
Interest income and other, net................... 138,918 4,179,880 7,712,259
Interest expense................................. (141,811) (8,644,463) (21,011,474)
----------- ------------ ------------
Total other expense............................ (2,893) (4,464,583) (13,299,215)
----------- ------------ ------------
Loss before minority interest in subsidiaries'
earnings and benefit from income taxes....... (2,301,226) (12,776,191) (27,529,768)
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)
----------- ------------ ------------
Extraordinary Item (Note 1)........................ -- (1,363,155) --
----------- ------------ ------------
Net Loss........................................... $ (960,026) $(12,715,413) $(27,529,768)
=========== ============ ============
Basic and Diluted Loss per Share Before
Extraordinary Item............................... $ (3.37) $ (1.70) $ (1.70)
=========== ============ ============
Basic and Diluted Loss per Share................... $ (3.37) $ (1.90) $ (1.70)
=========== ============ ============
Basic and Diluted Weighted Average Shares
Outstanding...................................... 284,828 6,675,717 16,172,026
=========== ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
29
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE SERIES B CONVERTIBLE
PREFERRED STOCK PREFERRED STOCK COMMON STOCK
--------------------- ---------------------- ----------------------
NUMBER OF $0.01 PAR NUMBER OF $0.01 PAR NUMBER OF $0.01 PAR
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 $ --
======== ======= ========== ======== ========== ======== =======
<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
============ ============ ============
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
30
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------------
1997 1998 1999
----------- ------------ -------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net loss.................................................. $ (960,026) $(12,715,413) $ (27,529,768)
Adjustments to reconcile net loss to net cash provided by
(used in) 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
Depreciation and amortization........................... 552,862 1,798,294 6,149,720
Changes in assets and liabilities--
Accounts receivable................................... (908,851) 922,476 (1,746,286)
Refundable taxes from related party................... (368,734) (387,104) 755,838
Prepaid expenses and other current assets............. (8,719) (493,375) 12,624
Accounts payable...................................... (21,219) 27,527 3,461,069
Accrued expenses...................................... 974,371 13,253,999 (376,409)
Deferred revenue...................................... 919,170 24,730 (141,494)
Deferred tax liability................................ 61,000 (61,000) --
----------- ------------ -------------
Net cash (used in) provided by operating
activities........................................ (813,704) 2,954,322 (17,970,325)
----------- ------------ -------------
Cash Flows from Investing Activities:
Purchases of short-term investments....................... -- (48,581,949) (140,221,362)
Sales of short-term investments........................... -- -- 122,000,000
Proceeds from sale of property and equipment.............. -- 9,500 --
Purchases of property and equipment....................... (5,609,459) (38,947,267) (48,583,642)
Increase in intangible assets............................. (3,188,792) (6,252,612) (1,518,057)
----------- ------------ -------------
Net cash used in investing activities............... (8,798,251) (93,772,328) (68,323,061)
----------- ------------ -------------
Cash Flows from Financing Activities:
Increase in accounts payable--Network..................... 716,985 1,448,426 11,473,489
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)
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
Proceeds from issuance of ownership interest.............. 1,750,088 -- --
Proceeds from exercise of common stock options and
warrants................................................ -- 32,128 1,668,433
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
----------- ------------ -------------
Net (Decrease) Increase in Cash and Cash Equivalents........ (3,766,473) 56,639,340 (52,969,403)
Cash and Cash Equivalents, beginning of year................ 4,864,925 1,098,452 57,737,792
----------- ------------ -------------
Cash and Cash Equivalents, end of year...................... $ 1,098,452 $ 57,737,792 $ 4,768,389
=========== ============ =============
Supplemental Disclosure of Cash Flow information:
Cash paid during the year for--
Interest................................................ $ 165,446 $ 660,300 $ 23,594,000
=========== ============ =============
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.
31
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(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 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 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
32
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(1) OPERATIONS AND REORGANIZATION (CONTINUED)
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 of 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 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.
As the agreements are implemented, CEC and Exelon will obtain 10.75% and 9.25%,
respectively of the fully diluted common stock of the Company at the closing and
each will nominate one member to the Company's Board of Directors. The Company
expects that these agreements, which are subject to customary closing
conditions, will become effective in the second quarter of fiscal 2000. 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
$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.
To date, 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 systems and could
have a material adverse effect on the Company.
33
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(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) 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.
(C) 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.
(D) 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(g)). The Company
also leases space at its facilities (collocation services). Other service
revenues includes these collocation service revenues as well as revenues from
nonrecurring design, engineering and construction services. Revenues for these
nonrecurring services are generally recognized as services are performed.
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.
(E) 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
34
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
(F) 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 December 31, 1999, all
of the Company's short-term investments are classified as 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,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Cash and cash equivalents--
Cash............................................. $ 3,238 $ 169,167
Money markets.................................... 2,981,789 4,599,222
Commercial paper................................. 54,752,765 --
----------- -----------
Total cash and cash equivalents................ $57,737,792 $ 4,768,389
=========== ===========
Short-term investments--
U.S. treasury notes.............................. $48,581,949 $43,230,651
Commercial paper................................. -- 23,572,660
----------- -----------
Total short-term investments................... $48,581,949 $66,803,311
=========== ===========
</TABLE>
(G) 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, the Company has prepaid lease payments totaling
approximately, $1,169,000 and $1,027,000, respectively.
(H) 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>
35
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) 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 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.
(J) 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 -----------------------------------------------------
YEAR ENDED DECEMBER 31, CUSTOMERS A B C D
- - ----------------------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
1998.................. 3 --% 64% *% 10%
1999.................. 3 -- * -- *
<CAPTION>
PERCENTAGE OF TOTAL ACCOUNTS RECEIVABLE
-----------------------------------------------------
YEAR ENDED DECEMBER 31, E F G H
- - ----------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
1998.................. 16% --% --% --%
1999.................. -- 13 32 11
</TABLE>
The Company recorded revenues greater than 10% of total revenues from the
following customers:
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
SIGNIFICANT --------------------------------------------------------------------
YEAR ENDED DECEMBER 31, CUSTOMERS A B C D E
- - ----------------------- ----------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
1997.................. 2 10% 69% --% --% --%
1998.................. 3 * 50 19 12 *
1999.................. 3 * * 18 * *
<CAPTION>
PERCENTAGE OF TOTAL REVENUES
--------------------------------------
YEAR ENDED DECEMBER 31, F G H
- - ----------------------- -------- -------- --------
<S> <C> <C> <C>
1997.................. --% --% --%
1998.................. -- -- --
1999.................. 16 13 *
</TABLE>
- - ------------------------
* represents less than 10%
(K) 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.
36
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(2) SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(L) 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 net loss is the same as reported net loss
for all periods presented.
(M) 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>
YEARS ENDED DECEMBER 31, 1997 1998 1999
- - ------------------------ --------- --------- ---------
<S> <C> <C> <C>
Convertible preferred stock................. 1,041,058 -- --
Common stock options and warrants........... 11,450 1,712,118 1,896,580
--------- --------- ---------
Total................................... 1,052,508 1,712,118 1,896,580
========= ========= =========
</TABLE>
(N) RECLASSIFICATIONS
Certain prior-period amounts have been reclassified to conform with current
period presentation.
(O) 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.
The SEC issued SAB No. 101, REVENUE RECOGNITION, in December 1999. The
Company is required to adopt this new accounting guidance through a cumulative
charge to retained earnings in accordance with Accounting Principles Board (APB)
Opinion No. 20, ACCOUNTING CHANGES, no later than the first quarter of fiscal
2000. The Company believes that the adoption of the guidance provided in SAB
No. 101 will not have a material impact on future operating results.
37
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(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.
38
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(4) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and consist of the following at
December 31:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Communications network............................. $27,775,788 $48,084,658
Communications network construction-in-progress.... 23,574,533 20,094,360
Machinery and equipment............................ 2,472,259 19,999,571
Leasehold improvements............................. 360,930 9,501,428
Network buildings.................................. -- 1,563,258
Furniture and fixtures............................. 26,758 1,371,019
----------- -----------
54,210,268 100,614,294
Less--Accumulated depreciation and amortization.... 1,287,591 5,689,451
----------- -----------
$52,922,677 $94,924,843
=========== ===========
</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, 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>
Intangible assets consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Goodwill........................................... $47,871,068 $47,871,068
Deferred interest and financing costs.............. 6,266,447 6,848,803
Prepaid right-of-way fees, related party........... 4,072,148 6,099,817
Other.............................................. 23,810 1,029,184
----------- -----------
58,233,473 61,848,872
Less--Accumulated amortization..................... 1,460,191 4,276,717
----------- -----------
$56,773,282 $57,572,155
=========== ===========
</TABLE>
39
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
(7) LONG-TERM OBLIGATIONS AND NOTE PAYABLE TO RELATED PARTY
<TABLE>
<CAPTION>
1998 1999
------------ ------------
<S> <C> <C>
12 3/4% Senior Notes $180,000,000 $180,000,000
ATTI notes payable (related party)............... 127,619 --
------------ ------------
180,127,619 180,000,000
Less--Current portion............................ 127,619 --
------------ ------------
$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 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>
In the event of a change in control, as defined, each holder of the notes
will be entitled to require the Company to purchase all or a portion of such
holder's Senior Notes at a purchase price equal to 101% of the principal amount
thereof, plus accrued and unpaid interest, if any, to the date of purchase. The
Senior Notes are unsecured obligations and rank PARI PASSU in right of payment
with all existing and future indebtedness of the Company that is not by its
terms in right of payment and priority to the Senior Notes and is senior in
right-of-payment to all future subordinated indebtedness of the Company.
In connection with this financing, the Company incurred approximately
$6,300,000 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 bear interest at 13% and are payable in monthly
principal and interest installments ranging
40
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(7) LONG-TERM OBLIGATIONS AND NOTE PAYABLE TO RELATED PARTY (CONTINUED)
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.
(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
41
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(10) STOCK-BASED COMPENSATION (CONTINUED)
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, a total of 376,923 shares were available for grant
under the 1998 Plan.
(B) STOCK OPTION ACTIVITY
Stock option activity under the 1998 Plan for the three years in the period
ended December 31, 1999 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
========= ======
Exercisable, December 31, 1999........................... 584,420 $11.10
========= ======
Exercisable, December 31, 1998........................... 352,134 $11.95
========= ======
</TABLE>
42
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(10) STOCK-BASED COMPENSATION (CONTINUED)
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
-------------------------------------- -----------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AVERAGE WEIGHTED EXERCISABLE WEIGHTED
EXERCISE AS OF REMAINING AVERAGE AS OF AVERAGE
PRICE/RANGE OF DECEMBER 31, CONTRACTUAL EXERCISE DECEMBER 31, EXERCISE
EXERCISE PRICES 1999 LIFE PRICE 1999 PRICE
- - --------------------- ------------- ----------- -------- ------------ --------
<S> <C> <C> <C> <C> <C>
$6.09--$ 9.75 324,675 8.86 $ 6.37 120,117 $ 6.36
$12.00--$12.00 1,175,523 8.56 12.00 437,395 12.00
$15.25--$15.93 251,006 9.45 15.69 20,250 15.29
$16.12--$16.12 28,126 9.14 16.12 2,308 16.12
$29.37--$29.37 81,750 9.63 29.37 4,350 29.37
$33.87--$33.87 35,500 9.81 33.87 -- --
--------- ------ -------
$ 6.09--$33.87 1,896,580 8.81 $12.75 584,420 $11.10
========= ====== =======
</TABLE>
(C) FAIR VALUE OF STOCK OPTIONS
In October 1995, the FASB issued SFAS No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS No. 123 requires the measurement of the fair value of stock
options to be included in the statements of income or disclosed in the notes to
financial statements. The Company has determined that it will continue to
account for stock-based compensation for employees under 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>
1997 1998 1999
-------- --------- --------
<S> <C> <C> <C>
Risk-free interest rate............................ N/A 4.39-5.52% 5.5%
Expected dividend yield............................ N/A None None
Expected lives..................................... N/A 2-5 years 3 years
Volatility......................................... N/A 35.5% 200%
Weighted average fair value of options granted
during the period................................ N/A $4.31 $14.63
</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>
1997 1998 1999
--------- ------------ ------------
<S> <C> <C> <C>
Net loss available to common
stockholders:
As reported.......................... $(960,026) $(12,715,413) $(27,529,768)
========= ============ ============
Pro forma............................ $(960,026) $(13,360,167) $(30,437,989)
========= ============ ============
Basic and diluted net loss per common
share:
As reported.......................... $ (3.37) $ (1.90) $ (1.70)
========= ============ ============
Pro forma............................ $ (3.37) (2.00) $ (1.88)
========= ============ ============
</TABLE>
43
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(10) STOCK-BASED COMPENSATION (CONTINUED)
(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 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.
44
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(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.
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 sheet 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.
45
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(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, 1998 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.
Rent expense charged to operations was approximately $2,077,000 in the year
ended December 31, 1999.
46
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
(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-of-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, the
Company made matching contributions of approximately $27,000 and $46,000,
respectively.
(15) ACCRUED EXPENSES
Accrued expenses at December 31, 1998 and 1999 consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Accrued interest................................... $ 9,244,250 $ 8,606,250
Accrued construction in progress................... 2,051,000 1,106,337
Accrued property and other taxes................... 889,000 1,597,772
Accrued professional fees.......................... 245,000 380,000
Accrued payable to related party................... 346,166 316,535
Accrued payroll and benefits....................... 271,345 521,254
Accrued commissions................................ 100,000 155,117
Accrued other...................................... 379,941 665,031
----------- -----------
</TABLE>
47
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(15) ACCRUED EXPENSES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
$13,526,702 $13,348,296
=========== ===========
</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 other
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.
Financial information for the Company's segments is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------- ----------- -----------
<S> <C> <C> <C>
Revenues
Dark fiber....................................... 347,718 680,859 1,925,196
Lit fiber........................................ -- 139,200 1,227,153
Collocation...................................... -- -- 316,278
Other services(1)................................ 46,986 43,613 2,196,649
----------- ----------- -----------
Total revenues................................... 394,704 863,672 5,665,276
Cost of Revenues....................................... 1,137,943 2,176,266 6,365,758
Selling, general and administrative.................... 1,002,232 5,200,720 7,380,351
Depreciation and amortization.......................... 552,862 1,798,294 6,149,720
----------- ----------- -----------
Operating Loss......................................... (2,298,333) (8,311,608) (14,230,553)
=========== =========== ===========
Net property and equipment............................. 16,534,703 52,922,677 94,924,843
=========== =========== ===========
Capital Expenditures................................... 5,609,459 38,947,267 48,583,642
=========== =========== ===========
</TABLE>
- - ------------------------
(1) Includes NONRECURRING revenues associated with design, engineering and
construction services.
48
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
(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. In
management's opinion, this unaudited information has been prepared on the same
basis as the annual financial statements and includes all adjustments
(consisting only of normal recurring adjustments) necessary for a fair
presentation of the information for the quarters presented, when read in
conjunction with the financial statements and notes thereto included elsewhere
in this document. The operating results for any quarter are not necessarily
indicative of results for any subsequent quarter.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------------------------------------------------
MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1998 1998 1998 1998 1999 1999
--------- ----------- ------------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Network service........... $146,257 $ 179,661 $ 155,766 $ 338,375 $ 421,481 $ 737,461
Other service............. 5,106 2,752 16,395 19,360 99,475 305,384
--------- ----------- ----------- ----------- ----------- -----------
Total revenues.......... 151,363 182,413 172,161 357,735 520,956 1,042,845
--------- ----------- ----------- ----------- ----------- -----------
EXPENSES:
Cost of revenues.......... 247,386 810,892 546,504 571,484 928,988 1,448,543
Selling, general and
administrative.......... 225,122 867,637 2,272,808 1,835,153 1,321,373 2,111,799
Depreciation and
amortization............ 302,013 313,645 491,633 691,003 794,978 1,205,873
--------- ----------- ----------- ----------- ----------- -----------
Total expenses.......... 774,521 1,992,174 3,310,945 3,097,640 3,045,339 4,766,215
--------- ----------- ----------- ----------- ----------- -----------
Loss from operations.... (623,158) (1,809,761) (3,138,784) (2,739,905) (2,524,383) (3,723,370)
--------- ----------- ----------- ----------- ----------- -----------
OTHER INCOME (EXPENSE):
Interest income and other,
net..................... 30,322 56,550 1,615,895 2,477,113 2,240,764 2,001,901
Interest expense.......... (91,816) (365,223) (3,275,400) (4,912,024) (4,979,661) (5,189,609)
--------- ----------- ----------- ----------- ----------- -----------
Total other expense..... (61,494) (308,673) (1,659,505) (2,434,911) (2,738,897) (3,187,708)
--------- ----------- ----------- ----------- ----------- -----------
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)
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)
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)
========= =========== =========== =========== =========== ===========
BASIC AND DILUTED LOSS PER
SHARE..................... $ (1.03) $ (2.91) $ (0.61) $ (0.34) $ (0.33) $ (0.43)
========= =========== =========== =========== =========== ===========
<CAPTION>
QUARTER ENDED
----------------------------
SEPTEMBER 30, DECEMBER 31,
1999 1999
------------- ------------
<S> <C> <C>
REVENUES:
Network service........... $ 1,023,977 $ 972,412
Other service............. 595,440 1,509,646
----------- -----------
Total revenues.......... 1,619,417 2,482,058
----------- -----------
EXPENSES:
Cost of revenues.......... 1,843,655 2,144,572
Selling, general and
administrative.......... 1,614,575 2,332,604
Depreciation and
amortization............ 1,904,083 2,244,786
----------- -----------
Total expenses.......... 5,362,313 6,721,962
----------- -----------
Loss from operations.... (3,742,896) (4,239,904)
----------- -----------
OTHER INCOME (EXPENSE):
Interest income and other,
net..................... 1,816,213 1,653,381
Interest expense.......... (5,356,351) (5,485,853)
----------- -----------
Total other expense..... (3,540,138) (3,832,472)
----------- -----------
Loss before minority
interest in
subsidiaries' earnings
and provision for
income taxes.......... (7,283,034) (8,072,376)
MINORITY INTEREST........... -- --
(BENEFIT FROM) PROVISION FOR
INCOME TAXES.............. -- --
----------- -----------
LOSS BEFORE EXTRAORDINARY
ITEM...................... (7,283,034) (8,072,376)
EXTRAORDINARY ITEM.......... -- --
----------- -----------
NET LOSS.................... $(7,283,034) $(8,072,376)
=========== ===========
BASIC AND DILUTED LOSS PER
SHARE..................... $ (0.45) $ (0.49)
=========== ===========
</TABLE>
49
<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 Form 10-K 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
50
<PAGE>
NORTHEAST OPTIC NETWORK, INC.
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:
1998.......................................... $ -- $224,000 $ -- $224,000
1999.......................................... $224,000 $146,000 $253,000 $117,000
</TABLE>
51
<PAGE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES.
Not applicable.
52
<PAGE>
PART III
ITEM 10. DIRECTORS AND OFFICERS OF THE REGISTRANT.
The information required by this Item regarding the Company's directors is
expected to be included in its Proxy Statement to be filed pursuant to
Schedule 14A in connection with the Company's 2000 Annual Meeting of
Stockholders under the section captioned "Election of Directors" and is
incorporated herein by reference thereto. Information regarding the Company's
executive officers is set forth in Part I, above, under the caption "Executive
Officers of the Registrant" and is incorporated herein by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item regarding the compensation of the
Company's directors and executive officers is expected to be included in its
Proxy Statement to be filed pursuant to Schedule 14A in connection with the
Company's 2000 Annual Meeting of Stockholders under the sections captioned
"Directors' Compensation" and "Executive Compensation" and is incorporated
herein by reference thereto.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item regarding the security ownership of
certain beneficial owners and management is expected to be included in the
Company's Proxy Statement to be filed pursuant to Schedule 14A in connection
with the Company's 2000 Annual Meeting of Stockholders under the section
captioned "Security Ownership of Certain Beneficial Owners and Management" and
is incorporated herein by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item regarding certain relationships and
related transactions is expected to be included in the Company's Proxy Statement
to be filed pursuant to Schedule 14A in connection with the Company's 2000
Annual Meeting of Stockholders under the sections captioned "Certain
Relationships and Related Transactions" and "Compensation Committee Interlocks
and Insider Participation" and is incorporated herein by reference thereto.
53
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of This Report:
1. FINANCIAL STATEMENTS
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1999
Consolidated Statements of Operations for the years ended December 31, 1997,
1998 and 1999
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1997, 1998 and 1999
Consolidated Statements of Cash Flows for the years ended December 31, 1997,
1998 and 1999
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES: SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
3. EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
3.1 Second Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
4.1 Specimen certificate for the Company's Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
4.2 Form of Indenture Agreement (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form
S-1, Registration No. 333-53441.)
4.3 Form of 12 3/4% Senior Notes Due 2008 (incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
4.4 Form of Collateral Pledge and Security Agreement
(incorporated byreference to Exhibit 4.4 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
#10.1 Amended and Restated 1998 Stock Incentive Plan.
10.2 Form of Indemnity Agreement among the Company and the
individual signatories thereto (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1, Registration No. 333-53441.)
10.3 Stock Subscription Agreement dated November 22, 1995, as
amended on April 30, 1996, between the Company and MaineCom
Services (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
10.4 Form of Restructuring and Contribution Agreement dated July
8, 1998 (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
</TABLE>
54
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.5 RESERVED
10.6 RESERVED
10.7 RESERVED
10.8 RESERVED
10.9 RESERVED
10.10 RESERVED
10.11 RESERVED
10.12 Equipment Lease dated August 19, 1994 between the Company
and Applied Telecommunications Technologies, Inc. ("ATTI")
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
10.13 Equipment Lease dated February 15, 1995 between the Company
and ATTI (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
10.14 Equipment Lease dated April 3, 1995 between the Company and
ATTI (incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
+10.15 Master Services Agreement dated January 1, 1994 between the
Company and MCI Telecommunications Corporation ("MCI")
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
+10.16 Fiber Optic Use Agreement dated January 2, 1997 between the
Company and MCI (incorporated by reference to Exhibit 10.16
to the Company's Registration Statement on Form S-1,
Registration No. 333-53441.)
+10.17 Letter Agreement dated March 1, 1996 between the Company and
Brooks Fiber Communications of Massachusetts, Inc.
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
+10.18 Fiber Optic Lease Agreement dated March 31, 1998 between the
Company and Sprint Communications Company L.P. (incorporated
by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
+10.19 Aerial License Agreement dated October 28, 1996 between the
Company and New England Telephone and Telegraph Company and
Western Massachusetts Electric Company (incorporated by
reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
+10.20 Fiber Optic Use Agreement dated September 10, 1997 between
the Company and New England Fiber Communications LLC
(incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
+10.21 Fiber Optic Use Agreement dated November 18, 1997 between
the Company and Teleport Communications Boston (incorporated
by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
10.22 Network Products Purchase Agreement dated March 18, 1998
between the Company and Northern Telecom Inc. (incorporated
by reference to Exhibit 10.22 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
10.23 Support Services Agreement dated as of April 30, 1996
between the Company and MaineCom Services (incorporated by
reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
+10.24 Amended and Restated Agreement for the Provision of Fiber
Optic Facilities and Services dated as of February 27, 1998
and effective as of September 27, 1994 among the Company and
the Northeast Utilities Services Company ("NUSCO"), The
Connecticut Light and Power Company ("CLPC"), Western
Massachusetts Electric Company ("WMEC") and Public Service
Company of New Hampshire ("PSNH") (Phase One) (incorporated
by reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1, Registration No.333-53441.)
10.25 Short Form Agreement for the Provision of Fiber Optic
Facilities and Services entered into on February 27, 1998
among the Company and NUSCO, CLPC, WMEC and PSNH (Phase One)
(incorporated by reference to Exhibit 10.25 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
+10.26 Amended and Restated Agreement for the Provision of Fiber
Optic Facilities and Services dated as of February 27, 1998
among the Company and NUSCO, CLPC, WMEC and PSNH (Phase Two)
(incorporated by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
10.27 Short Form Agreement for the Provision of Fiber Optic
Facilities and Services entered into on February 27, 1998
among the Company and NUSCO, CLPC, WMEC and PSNH (Phase Two)
(incorporated by reference to Exhibit 10.27 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
10.28 Standard Form of Duct Agreement (incorporated by reference
to Exhibit 10.28 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
10.29 Construction Contract dated August 14, 1996 between the
Company and Seaward Corporation (incorporated by reference
to Exhibit 10.29 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
#10.30 Employment Agreement dated October 15, 1997 between the
Company and Victor Colantonio (incorporated by reference to
Exhibit 10.30 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
#10.31 Employment Agreement dated September 29, 1994 between the
Company and Michael A. Musen (incorporated by reference to
Exhibit 10.31 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
10.32 RESERVED
10.33 RESERVED
10.34 RESERVED
10.35 RESERVED
+10.36 Agreement dated January 17, 1997 between the Company and
E/Pro Engineering and Environmental Consulting for the ADSS
Cable Project (incorporated by reference to Exhibit 10.36 to
the Company's Registration Statement on Form S-1,
Registration No. 333-53441.)
</TABLE>
56
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- -----------
<C> <S>
+10.37 Agreement for the Provision of Fiber Optic Facilities and
Services dated January 7, 1997 between Central Maine Power
Company and the Company (incorporated by reference to
Exhibit 10.37 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
#10.38 Employment Agreement dated July 7, 1998 between the Company
and William F. Fennell (incorporated by reference to Exhibit
10.38 to the Company's Registration Statement on Form S-1,
Registration No. 333-53441.)
10.39 RESERVED
+10.40 IRU Agreement dated July 7, 1998 between the Company and
QWEST Communications Corporation (incorporated by reference
to Exhibit 10.40 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
+10.41 Fiber Optic Lease Agreement dated July 2, 1998 between the
Company and NEES Communications, Inc. (incorporated by
reference to Exhibit 10.41 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
+10.42 Fiber Optic Use Agreement dated July 2, 1998 between the
Company and BecoCom (incorporated by reference to Exhibit
10.42 to the Company's Registration Statement on Form S-1,
Registration No. 333-53441.)
#10.43 Employment Agreement dated November 12, 1998 between the
Company and Vincent C. Bisceglia (incorporated by reference
to Exhibit 10.43 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.)
*++10.44 Subscription Agreement among the Company, NEON
Communications, Inc. and Consolidated Edison Communications,
Inc., dated November 23, 1999.
*++10.45 Subscription Agreement among the Company, NEON
Communications, Inc. and Exelon Corporation, dated November
23, 1999.
*12.1 Schedule of Earnings to Fixed Charges.
*21.1 List of Subsidiaries of the Company.
*23.1 Consent of Independent Accountants
*27 Financial Data Schedule (EDGAR filing only.)
</TABLE>
- - ------------------------
* Filed herewith.
# Management contract or compensatory plan or arrangement.
+ Confidential treatment granted as to certain portions.
++ Confidential treatment requested as to certain portions.
(b) No Current Reports on Form 8-K were filed during the last quarter period
covered by this Report.
57
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on this 30th day of
March, 2000.
<TABLE>
<S> <C> <C>
NORTHEAST OPTIC NETWORK, INC.
(Registrant)
By: /s/ VINCENT C. BISCEGLIA
-----------------------------------------
Vincent C. Bisceglia
CHAIRMAN & CHIEF EXECUTIVE OFFICER
</TABLE>
POWER OF ATTORNEY
Know All Men by These Presents, that each individual whose signature appears
below constitutes and appoints each of Vincent C. Bisceglia, Victor Colantonio
and William F. Fennell jointly and severally his true and lawful
attorneys-in-fact and agent with full powers of substitution for him and in his
name, place and stead in any and all capacities to sign on his behalf,
individually and in each capacity stated below and to file any and all
amendments to this Annual Report on Form 10-K with the Securities and Exchange
Commission, granting unto said attorneys-in-fact and agents and each of them
full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises as fully as he
might or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, or any of them, or their substitute or substitutes
may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Chairman of the Board of
/s/ VINCENT C. BISCEGLIA Directors & Chief
------------------------------------------- Executive Officer March 30, 2000
Vincent C. Bisceglia (Principal Executive
Officer)
Chief Financial Officer &
/s/ WILLIAM F. FENNELL Treasurer (principal
------------------------------------------- financial and accounting March 30, 2000
William F. Fennell officer)
/s/ VICTOR COLANTONIO
------------------------------------------- Vice Chairman of the Board March 30, 2000
Victor Colantonio of Directors & President
------------------------------------------- Director March 30, 2000
Katherine D. Courage
/s/ JOHN H. FORSGREN
------------------------------------------- Director March 30, 2000
John H. Forsgren
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ ARTHUR W. ADELBERG
------------------------------------------- Director March 30, 2000
Arthur W. Adelberg
/s/ F. MICHAEL M. MCCLAIN
------------------------------------------- Director March 30, 2000
F. Michael M. McClain
/s/ GARY D. SIMON
------------------------------------------- Director March 30, 2000
Gary D. Simon
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - --------------------- -----------
<C> <S>
3.1 Second Amended and Restated Certificate of Incorporation of
the Company (incorporated by reference to Exhibit 3.2 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
3.2 Amended and Restated Bylaws of the Company (incorporated by
reference to Exhibit 3.4 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
4.1 Specimen certificate for the Company's Common Stock
(incorporated by reference to Exhibit 4.1 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
4.2 Form of Indenture Agreement (incorporated by reference to
Exhibit 4.2 to the Company's Registration Statement on Form
S-1, Registration No. 333-53441.)
4.3 Form of 12 3/4% Senior Notes Due 2008 (incorporated by
reference to Exhibit 4.3 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
4.4 Form of Collateral Pledge and Security Agreement
(incorporated byreference to Exhibit 4.4 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
#10.1 Amended and Restated 1998 Stock Incentive Plan.
10.2 Form of Indemnity Agreement among the Company and the
individual signatories thereto (incorporated by reference to
Exhibit 10.2 to the Company's Registration Statement on Form
S-1, Registration No. 333-53441.)
10.3 Stock Subscription Agreement dated November 22, 1995, as
amended on April 30, 1996, between the Company and MaineCom
Services (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
10.4 Form of Restructuring and Contribution Agreement dated July
8, 1998 (incorporated by reference to Exhibit 10.4 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
10.5 RESERVED
10.6 RESERVED
10.7 RESERVED
10.8 RESERVED
10.9 RESERVED
10.10 RESERVED
10.11 RESERVED
10.12 Equipment Lease dated August 19, 1994 between the Company
and Applied Telecommunications Technologies, Inc. ("ATTI")
(incorporated by reference to Exhibit 10.12 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
10.13 Equipment Lease dated February 15, 1995 between the Company
and ATTI (incorporated by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
10.14 Equipment Lease dated April 3, 1995 between the Company and
ATTI (incorporated by reference to Exhibit 10.14 to the
Company's Registration Statement on Form S-1, Registration
No. 333-53441.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - --------------------- -----------
<C> <S>
+10.15 Master Services Agreement dated January 1, 1994 between the
Company and MCI Telecommunications Corporation ("MCI")
(incorporated by reference to Exhibit 10.15 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
+10.16 Fiber Optic Use Agreement dated January 2, 1997 between the
Company and MCI (incorporated by reference to Exhibit 10.16
to the Company's Registration Statement on Form S-1,
Registration No. 333-53441.)
+10.17 Letter Agreement dated March 1, 1996 between the Company and
Brooks Fiber Communications of Massachusetts, Inc.
(incorporated by reference to Exhibit 10.17 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
+10.18 Fiber Optic Lease Agreement dated March 31, 1998 between the
Company and Sprint Communications Company L.P. (incorporated
by reference to Exhibit 10.18 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
+10.19 Aerial License Agreement dated October 28, 1996 between the
Company and New England Telephone and Telegraph Company and
Western Massachusetts Electric Company (incorporated by
reference to Exhibit 10.19 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
+10.20 Fiber Optic Use Agreement dated September 10, 1997 between
the Company and New England Fiber Communications LLC
(incorporated by reference to Exhibit 10.20 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
+10.21 Fiber Optic Use Agreement dated November 18, 1997 between
the Company and Teleport Communications Boston (incorporated
by reference to Exhibit 10.21 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
10.22 Network Products Purchase Agreement dated March 18, 1998
between the Company and Northern Telecom Inc. (incorporated
by reference to Exhibit 10.22 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
10.23 Support Services Agreement dated as of April 30, 1996
between the Company and MaineCom Services (incorporated by
reference to Exhibit 10.23 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
+10.24 Amended and Restated Agreement for the Provision of Fiber
Optic Facilities and Services dated as of February 27, 1998
and effective as of September 27, 1994 among the Company and
the Northeast Utilities Services Company ("NUSCO"), The
Connecticut Light and Power Company ("CLPC"), Western
Massachusetts Electric Company ("WMEC") and Public Service
Company of New Hampshire ("PSNH") (Phase One) (incorporated
by reference to Exhibit 10.24 to the Company's Registration
Statement on Form S-1, Registration No.333-53441.)
10.25 Short Form Agreement for the Provision of Fiber Optic
Facilities and Services entered into on February 27, 1998
among the Company and NUSCO, CLPC, WMEC and PSNH (Phase One)
(incorporated by reference to Exhibit 10.25 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
+10.26 Amended and Restated Agreement for the Provision of Fiber
Optic Facilities and Services dated as of February 27, 1998
among the Company and NUSCO, CLPC, WMEC and PSNH (Phase Two)
(incorporated by reference to Exhibit 10.26 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - --------------------- -----------
<C> <S>
10.27 Short Form Agreement for the Provision of Fiber Optic
Facilities and Services entered into on February 27, 1998
among the Company and NUSCO, CLPC, WMEC and PSNH (Phase Two)
(incorporated by reference to Exhibit 10.27 to the Company's
Registration Statement on Form S-1, Registration No.
333-53441.)
10.28 Standard Form of Duct Agreement (incorporated by reference
to Exhibit 10.28 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
10.29 Construction Contract dated August 14, 1996 between the
Company and Seaward Corporation (incorporated by reference
to Exhibit 10.29 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
#10.30 Employment Agreement dated October 15, 1997 between the
Company and Victor Colantonio (incorporated by reference to
Exhibit 10.30 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
#10.31 Employment Agreement dated September 29, 1994 between the
Company and Michael A. Musen (incorporated by reference to
Exhibit 10.31 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
10.32 RESERVED
10.33 RESERVED
10.34 RESERVED
10.35 RESERVED
+10.36 Agreement dated January 17, 1997 between the Company and
E/Pro Engineering and Environmental Consulting for the ADSS
Cable Project (incorporated by reference to Exhibit 10.36 to
the Company's Registration Statement on Form S-1,
Registration No. 333-53441.)
+10.37 Agreement for the Provision of Fiber Optic Facilities and
Services dated January 7, 1997 between Central Maine Power
Company and the Company (incorporated by reference to
Exhibit 10.37 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
#10.38 Employment Agreement dated July 7, 1998 between the Company
and William F. Fennell (incorporated by reference to Exhibit
10.38 to the Company's Registration Statement on Form S-1,
Registration No. 333-53441.)
10.39 RESERVED
+10.40 IRU Agreement dated July 7, 1998 between the Company and
QWEST Communications Corporation (incorporated by reference
to Exhibit 10.40 to the Company's Registration Statement on
Form S-1, Registration No. 333-53441.)
+10.41 Fiber Optic Lease Agreement dated July 2, 1998 between the
Company and NEES Communications, Inc. (incorporated by
reference to Exhibit 10.41 to the Company's Registration
Statement on Form S-1, Registration No. 333-53441.)
+10.42 Fiber Optic Use Agreement dated July 2, 1998 between the
Company and BecoCom (incorporated by reference to Exhibit
10.42 to the Company's Registration Statement on Form S-1,
Registration No. 333-53441.)
#10.43 Employment Agreement dated November 12, 1998 between the
Company and Vincent C. Bisceglia (incorporated by reference
to Exhibit 10.43 to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1998.)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- - --------------------- -----------
<C> <S>
*++10.44 Subscription Agreement among the Company, NEON
Communications, Inc. and Consolidated Edison Communications,
Inc., dated November 23, 1999.
*++10.45 Subscription Agreement among the Company, NEON
Communications, Inc. and Exelon Corporation, dated November
23, 1999.
*12.1 Schedule of Earnings to Fixed Charges.
*21.1 List of Subsidiaries of the Company.
*23.1 Consent of Independent Accountants
*27 Financial Data Schedule (EDGAR filing only.)
</TABLE>
- - ------------------------
* Filed herewith.
# Management contract or compensatory plan or arrangement.
+ Confidential treatment granted as to certain portions.
++ Confidential treatment requested as to certain portions.
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. NEON Securities Corp. (Massachusetts)
2. NEON Acquisition, Inc. (Delaware)
3. NEON Communications, Inc. (Delaware)
4. NorthEast Optic Network of Connecticut, Inc. (Delaware)
5. NorthEast Optic Network of New York, Inc. (Delaware)
<PAGE>
Exhibit 10.44
SUBSCRIPTION AGREEMENT
among
NORTHEAST OPTIC NETWORK, INC.,
NEON COMMUNICATIONS, INC.
and
CONSOLIDATED EDISON COMMUNICATIONS, INC.
DATED AS OF NOVEMBER 23, 1999
<PAGE>
TABLE OF CONTENTS
1. Definitions; Accounting Terms..........................................2
1.01. Definitions......................................................2
1.02. Accounting Terms.................................................6
2. Delivery of the CEC NEON Shares; Time and Place of Closing;
Consideration for CEC NEON Shares......................................6
2.01. Delivery of the CEC NEON Shares..................................6
2.02. Time and Place of Closing........................................7
2.03. Restrictions on CEC NEON Shares..................................7
2.04. Consideration for the CEC NEON Shares............................9
2.05. Certain Rights to Acquire Additional Shares......................9
3. Representations and Warranties of the NEON Entities...................10
3.01. Organization and Qualification..................................10
3.02. Authority Relative to This Agreement............................10
3.03. Consents and Approvals; No Violation............................10
3.04. NEON SEC Documents..............................................11
3.05. Legal Proceedings...............................................11
3.06. Capital Stock Documents.........................................11
3.07. Shareholders Agreement; Corporate Governance Documents..........11
3.08. Other Contracts.................................................12
3.09. CEC NEON Shares.................................................12
3.10. No Property or Business Activity other than for the
Reorganization..................................................12
4. Representations and Warranties of CEC.................................12
4.01. Organization and Qualification..................................12
4.02. Authority Relative to this Agreement............................13
i
<PAGE>
4.03. Consents and Approvals..........................................13
4.04. Acquisition of Shares Solely for Investment.....................13
5. Covenants of the NEON Entities........................................14
5.01. Conduct of Business between the Date of the Agreement
and the Closing Date............................................14
5.02. Deliver CEC NEON Shares at Closing..............................14
5.03. Directors' and Officers' Insurance..............................14
5.04. Redemptions of NEON Common Stock................................14
5.05. Right of First Refusal..........................................14
5.06. [Intentionally Omitted].........................................15
5.07. Pre-Closing Disclosure of Material Events.......................16
5.08. Nasdaq Listing..................................................16
5.09. Tax Reporting...................................................16
5.10. Prohibited Actions Pending the Closing..........................16
5.11. Additional Actions Pending the Closing..........................17
5.12. Completion of the Reorganization................................17
5.13. Survival of Certain Covenants...................................17
6. Reimbursement of Reorganization Costs.................................17
7. Covenants of CEC and NEON.............................................18
7.01. Consents and Approvals..........................................18
7.02. Further Assurances..............................................18
7.03. Public Statements...............................................18
7.04. [Intentionally Omitted].........................................18
7.05. Agreement Regarding Private Letter Ruling.......................19
8. Conditions Precedent to Closing.......................................19
ii
<PAGE>
8.01. Conditions Precedent to CEC Obligations......................19
8.02. Conditions Precedent to the NEON Entities' Obligations.......20
9. Indemnification and Third Party Claims................................22
9.01. Indemnification..............................................22
9.02. Third Party Claims Procedures................................23
9.03. Other Remedies...............................................24
9.04. Limitation of Liability......................................24
10. Alternative Transaction Structure.....................................24
10.01. Failure to Obtain Private Letter Ruling......................24
10.02. References to NEON Entities..................................26
11. Termination...........................................................26
11.01. Mutual Termination...........................................26
11.02. Termination Date.............................................26
12. Miscellaneous Provisions..............................................26
12.01. Expenses.....................................................26
12.02. Amendment and Modification; Extension; Waiver................27
12.03. Notices......................................................27
12.04. Assignment; No Third Party Beneficiaries.....................28
iii
<PAGE>
12.05. Governing Law................................................28
12.06. Counterparts.................................................28
12.07. Interpretation...............................................28
12.08. Jurisdiction and Enforcement.................................29
12.09. Entire Agreement.............................................29
12.10. Severability.................................................30
12.11. Conflicts....................................................30
12.12. Guaranty of CEC's Obligations................................30
12.13. Force Majeure................................................31
iv
<PAGE>
EXHIBITS
Exhibit 1.01(a) Form of System Agreement
Exhibit 1.01(b) Form of Registration Rights Agreement
Exhibit 8.01(d)(i) Form of NEON Opinion of Counsel
Exhibit 8.01(d)(iv) Form of Stockholders' Agreement
Exhibit 8.02(d)(i) Form of CEC Opinion of Counsel
Exhibit 10.01 Form of Escrow Agreement
Exhibit A Form of Agreement and Plan of Merger
v
<PAGE>
PREAMBLE
SUBSCRIPTION AGREEMENT (including the Exhibits hereto, the "Agreement"),
dated as of November 23, 1999, between NEON COMMUNICATIONS, INC., a Delaware
corporation ("NEON"), NORTHEAST OPTIC NETWORK, INC., a Delaware corporation and
the sole stockholder of NEON ("Old NEON," and together with NEON, the "NEON
Entities") and CONSOLIDATED EDISON COMMUNICATIONS, INC., a New York corporation
and a wholly-owned subsidiary of Consolidated Edison, Inc. ("CEC").
WHEREAS the potential efficiencies and economies of scale, increased
aggregate market and expanded geographic coverage makes a business arrangement
integrating their separate systems attractive to the NEON Entities and CEC;
WHEREAS NEON desires to issue and CEC desires to acquire the CEC NEON
Shares (as defined below) on the terms and conditions set forth in this
Agreement;
WHEREAS, in connection with the transactions contemplated by this
Agreement, Old NEON has created NEON (a wholly-owned first-level subsidiary of
Old NEON) and NEON has created NEON Acquisition, Inc. ("NEON Acquisition"), a
Delaware corporation (a wholly-owned first-level subsidiary of NEON as well as a
wholly-owned second-level subsidiary of Old NEON);
WHEREAS, NEON was incorporated on November 22, 1999 and neither NEON nor
NEON Acquisition owns any assets (other than, in the case of NEON, its ownership
of NEON Acquisition) or has engaged in any business operations prior to the date
of this Agreement nor, prior to the Closing Date, will either engage in any
business operations other than as contemplated by this Agreement;
WHEREAS in connection with the transactions contemplated by this
Agreement, and for good business reasons, immediately prior to the consummation
of the transactions contemplated by this Agreement, NEON's wholly owned
subsidiary NEON Acquisition will have merged with and into NEON's sole
stockholder, Old NEON, pursuant to Section 251(g) of the Delaware General
Corporation Law, and the terms and conditions of an Agreement and Plan of Merger
by and among NEON, NEON Acquisition and Old NEON dated as of the Closing Date
(substantially in the form attached hereto as Exhibit A) with Old NEON being the
surviving entity and a wholly-owned subsidiary of NEON (the "Reorganization");
WHEREAS (i) CEC will make the CEC Cash Contributions (as defined below)
and NEON will issue the CEC NEON Shares (as defined below) (collectively, the
"CEC Contribution Transactions") and (ii) Exelon Corporation, a Pennsylvania
corporation ("Exelon") will make in-kind capital contributions and contributions
of cash or cash-equivalent property to NEON to defray capital expenses pursuant
to the terms of a System Agreement to be entered into among NEON, Old NEON and
Exelon, and NEON will issue to Exelon certain shares of NEON Common Stock
pursuant to a Subscription Agreement to be entered into among NEON, Old NEON and
Exelon (such transactions together with the CEC Contribution Transactions, the
"Contribution Transactions");
<PAGE>
WHEREAS for federal income tax purposes it is intended that the
Reorganization and the Contribution Transactions (as defined below) qualify as
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"); and
WHEREAS the NEON Entities and CEC desire to establish certain other rights
and duties with respect to one another on the terms and conditions hereinafter
set forth.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements hereinafter set forth, and intending to be legally
bound hereby, the NEON Entities and CEC agree as follows:
1. Definitions; Accounting Terms.
1.01. Definitions. As used in this Agreement, the following terms have the
following meanings:
"Affiliate" shall have the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended.
"Agreement" shall have the meaning set forth in the Preamble.
"Alternative Investment Bank" shall have the meaning set forth in Section
10.01(f).
2
<PAGE>
"Business Day" means any day other than Saturday, Sunday and any day which
is a legal holiday or a day on which banking institutions in New York are
authorized or required by law or other action of a Governmental Authority to
close.
"CEC Cash Contributions" means the contributions of cash or
cash-equivalent property made by CEC to NEON to defray capital expenses as
required by the CEC System Agreement.
"CEC Contribution Transactions" means collectively the CEC Cash
Contributions, the CEC In-Kind Capital Contributions and the issuance by NEON of
the CEC NEON Shares.
"CEC NEON Shares" shall mean 2,448,240 shares of NEON Common Stock, which
is equal to 1.25 x 10.75% x number of shares outstanding on a fully-diluted
basis on the date of this Agreement (which does not include shares authorized
but unissued under NEON's option plans on such date). The percentage of shares
of NEON Common Stock and the absolute number of shares of NEON Common Stock to
which CEC shall be entitled shall not be affected by the public trading price
for NEON Common Stock.
"CEC Opinion of Counsel" means the opinion of the General Counsel of
Consolidated Edison, Inc., dated as of the Closing Date, substantially in the
form set forth in Exhibit 8.03(d).
"CEC Required Regulatory Approvals" means (1) receipt from the New York
State Public Service Commission (the "PSC") of a Certificate of Public
Convenience and Necessity authorizing CEC to operate a facilities-based
wholesale carrier; (2) final approval by the PSC of the petition under Sections
70 and 119a of the New York State Public Service Law related to the License and
Operating Agreement, made as of June 14, 1999 (the "L&O Agreement"), by and
between CEC and the Consolidated Edison Company of New York, Inc.; (3) final
approval by the PSC of the petition under Section 100 of the New York State
Public Service Law relating to the purchase of the CEC NEON Shares; (4) receipt
from the City of New York of a broadband telecom-munications franchise and
receipt by CEC and any of its affiliates of all final approvals required by the
City of New York to authorize the transactions contemplated by the Subscription
Agreement, the Related Agreements and the L&O Agreement; (5) the filing and
waiting period requirements relating to the HSR Act; and (6) receipt of final
consents of approvals from all other Governmental Authorities that are required
as a prerequisite to the consummation of transactions contemplated by this
Agreement, the Related Agreements and the L&O Agreement; provided, however, that
none of (1) through (5) above shall impose conditions or obligations on CEC
which make the transactions contemplated by this Agreement and the Related
Agreements commercially impracticable.
3
<PAGE>
"CECD" means CEC Delaware, Inc., a Delaware corporation.
"Closing"-- See Section 2.02.
"Closing Date"-- See Section 2.02.
"Code"-- See Preamble.
"Confidentiality Agreements" means (i) that certain Nondisclosure
Agreement dated as of September 8, 1998 by and between Old NEON and Exelon, as
amended to date, (ii) that certain Confidentiality and Nondisclosure Agreement
dated as of January 12, 1999 by and between PECO Energy Company (doing business
as Exelon Communications), Consolidated Edison Company of New York, Inc. and
Consolidated Edison Communications, Inc. and (iii) that certain Letter Agreement
dated as of July 30, 1998 by and between Old NEON, Consolidated Edison Company
of New York, Inc. and Consolidated Edison Communications, Inc.
"Default Investment Bank" shall have the meaning set forth in Section
10.01(f).
4
<PAGE>
"Escrow Agent" means State Street Bank & Trust Company.
"Escrow Agreement" means the Escrow Agreement to be entered into among
NEON, CECD and the Escrow Agent as of the Closing Date in the event that the
Reorganization is abandoned pursuant to Section 10 of this Agreement,
substantially in the form attached as Exhibit 10.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC thereunder.
"Exelon Capital Partners" means Exelon Capital Partners, Inc., a Delaware
corporation.
"Final Termination Date" shall have the meaning set forth in Section
11.02.
"Force Majeure" shall have the meaning set forth in Section 12.13.
"GAAP" - See Section 1.02.
"Governmental Authority" means any court, administrative or regulatory
agency or commission or other governmental entity or instrumentality, domestic,
foreign or supranational or any department thereof. In addition, for purposes of
this Agreement, the Nasdaq Stock Market shall be deemed a "Governmental
Authority."
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Indemnifiable Loss" - See Section 9.01(a).
"Indemnified Party" or "Indemnified Parties"-- See Section 9.01(a).
"Indemnifying Party" - See Section 9.01(a).
"NEON" -- See Preamble.
"NEON Common Stock" means the Common Stock, $.01 par value per share, of
NEON.
"NEON Entities" - NorthEast Optic Network, Inc. and NEON Communications,
Inc., together.
"Old NEON" - See Preamble.
"NEON Opinion of Counsel" shall mean the opinion of Hale and Dorr LLP,
counsel to NEON, dated as of the Closing Date, substantially in the form set
forth in Exhibit 8.01(d)(i).
4
<PAGE>
[Confidential materials omitted and filed separately with the Securities
Exchange Commission. Asterisks denote omissions.]
"NEON Required Regulatory Approvals" means the filing and waiting period
requirements relating to the HSR Act, the approval of an Additional Shares
Listing Application for the CEC NEON Shares to be filed with Nasdaq and the
declaration of effectiveness by the SEC of a Registration Statement on Form S-4
relating to the Reorganization; provided, however, that such SEC approval shall
not be applicable in the event that the transactions contemplated herein are
consummated in the manner set forth in Section 10 ("Alternative Transaction
Structure").
"NEON SEC Documents" means all reports, forms, statements and other
documents filed by Old NEON with the Securities and Exchange Commission since
July 1, 1998, and publicly available on or prior to the date of this Agreement.
"Parent" means Consolidated Edison, Inc.
"Person" means any individual, partnership, limited liability company,
joint venture, corporation, trust, unincorporated organization, any other entity
or Governmental Authority.
"POP" or "Point of Presence" means the location where CEC shall provide
NEON approximately [ ** ] square feet of rentable built-out telecommunication
space wherein NEON shall place its inter-party telecommunications equipment and
ancillary equipment and wherein NEON may allow its customers to place
telecommunications equipment and ancillary equipment.
"Pre-closing Acquisition Transaction" shall have the meaning set forth in
Section 2.05(a).
5
<PAGE>
"Principal Shareholders Agreement" means that certain FiveCom, Inc.
Principal Shareholders Agreement, dated as of May 28, 1998, by and among Old
NEON, Northeast Utilities and Central Maine Power Company.
"Private Letter Ruling" shall have the meaning set forth in Section 7.05.
"Registration Rights Agreement" means the Registration Rights Agreement to
be entered into among NEON, Exelon (or Exelon Capital Partners in the event that
the Reorganization is not consummated prior to Closing) and CEC (or CECD in the
event that the Reorganization is not consummated prior to Closing) as of the
Closing Date, substantially in the form attached as Exhibit 1.01(b).
"Reimbursable Expenses" has the meaning set forth in Section 6.01.
"Reimbursement Agreement" means that certain letter agreement, dated as of
September 30, 1999, relating to the reimbursement of the NEON Entities by Exelon
and CEC of certain costs in connection with the Reorganization.
7 "Related Agreements" means the System Agreement, the Reimbursement
Agreement, the Stockholders' Agreement, the Registration Rights Agreement and,
if the Reorganization is abandoned pursuant to Section 10 of this Agreement, the
Escrow Agreement.
"Reorganization"-- See Preamble.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder.
"Stockholders' Agreement" means that certain Stockholders' Agreement dated
as of the date hereof by and among NEON, Mode 1 Communications, Inc., Northeast
Utilities, Exelon (or Exelon Capital Partners in the event that the
Reorganization is not consummated prior to Closing) and CEC (or CECD in the
event that the Reorganization is not consummated prior to Closing) relating to,
among other things, the nomination and election of a CEC designee and an Exelon
designee to the Board of Directors of NEON, substantially in the form attached
as Exhibit 8.01(d)(iv).
"System Agreement" means the System Agreement to be entered into between
NEON and CEC as of the Closing Date, substantially in the form attached as
Exhibit 1.01(a).
1.02. Accounting Terms. The accounting terms used in this Agreement
and the Related Agreements shall, unless otherwise specifically provided, have
the meanings customarily given them in accordance with United States generally
accepted accounting principles ("GAAP") and all financial computations hereunder
or under this or those agreements shall, unless otherwise specifically provided,
be computed in accordance with GAAP consistently applied.
2. Delivery of the CEC NEON Shares; Time and Place of Closing;
Consideration for CEC NEON Shares
2.01. Delivery of the CEC NEON Shares. Upon the terms and subject to
the satisfaction of the conditions set forth in this Agreement, at the Closing
NEON will deliver the CEC NEON Shares to CEC, which CEC NEON Shares shall be
subject to certain restrictions in the manner set forth in Section 2.03 of this
Agreement in order to secure the obligations of CEC for property transfers and
covenants which are consideration therefor.
2.02. Time and Place of Closing. The Closing shall take place on
such date as the parties may agree, which date shall be as soon as practicable
and no later than three Business Days following the date on which all the
conditions set forth in Section 8 have been satisfied or waived, at the offices
of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts or at such other
place or time as the parties may agree. The date and time at which the Closing
actually occurs is referred to as the "Closing Date".
2.03. Restrictions on CEC NEON Shares.
(a) Immediately upon the completion of each of the following
events (in no particular order, except as explicitly set forth below), CEC shall
cease to be "restricted" (as defined in (c) below) in its rights to the
ownership of the CEC NEON Shares in the percentages set forth below:
6
<PAGE>
[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
Time of Removal of Restrictions of Shares: Percentage of Shares:
- - --------------------------------------------------------------------------------------------------------------------
<S> <C>
1. At Closing [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
2. Upon the later of (i) the date on which CEC grants an IRU in the
NEON Fibers to NEON, pursuant to Section 1.1.1 of the System
Agreement, and (ii) the Acceptance Date, as defined in Section
1.3.3 of the System Agreement. [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
3. Upon the completed transfer to NEON of interconnection of the
Carrier POPs and/or LSOs with CEC's Network, pursuant to
Subsection 2.03(b) hereof and Article II of and Section 3.3.5 of
the System Agreement. [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
4. Annually on each of the first four anniversaries of the Closing,
provided that all CEC Cash Contributions have been made for the
immediately preceding 12-month period, to be distributed 25% per
year for so long as CEC remains in compliance with Section 3.3 [ ** ]% aggregate
of the System Agreement. ([ ** ]% per annum)
- - --------------------------------------------------------------------------------------------------------------------
5. Upon the completion of the events identified in items 2, 3 and 4
above by CEC. [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
Total: [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) (1) Notwithstanding any provision to the contrary in this
Agreement or in the System Agreement, despite its reasonable best efforts CEC
has not completed the full performance requirement set forth in line item 3 of
the table in Section 2.03(a), but has (i) completed the interconnection
requirements for all Priority A sites in Appendix 7.18(ii) and (ii) at least
[** ]% of the aggregate interconnection requirements for the Priority A sites
and Priority B sites in Appendix 7.18(ii), then the proportion of shares (of
that full [ ** ]% of shares allocated to such performance in line item 3 of
the table in Section 2.03(a)) that corresponds to the proportion of such
performance CEC has completed shall cease to be restricted.
7
<PAGE>
(2) Provided that CEC has complied with Subsection 2.03(b)(1) above,
then solely for purposes of line item 5 of the table in Section 2.03(a), CEC
shall be considered to have completed the transfers pursuant to line item 3 of
such table.
(c) The CEC NEON Shares may not be sold, pledged, hypothecated
or otherwise transferred by CEC (except to an Affiliate) until such shares are
no longer restricted in accordance with the provisions of this Section 2.03. In
addition, if by the fifth anniversary of the Final Termination Date, any CEC
NEON Shares remain restricted, CEC (or any Affiliate to whom such shares have
been transferred) shall forfeit all of its rights to such shares, and shall
promptly surrender to NEON a certificate or certificates representing such
shares. The term "restrictions" as used in this Agreement in reference to the
CEC NEON Shares shall refer to the restrictions set forth in this Section
2.03(c). "Restricted" shares are shares that continue to be subject to such
restrictions. CEC will be entitled to vote all CEC NEON Shares and will be
entitled to all dividends payable with respect thereto irrespective of whether
such shares are restricted or unrestricted (or whether such shares are held in
the name of the Escrow Agent if the Reorganization is abandoned pursuant to
Section 10 of this Agreement); provided, however, that in-kind dividends
declared with respect to restricted CEC NEON Shares shall remain "restricted"
until such CEC NEON Shares become unrestricted.
(d) Notwithstanding the foregoing, except as provided in
Section 10.01(f) of this Agreement, and except for transfers to Affiliates, CEC
and its Affiliates shall not sell, pledge, hypothecate or otherwise transfer any
CEC NEON Shares prior to the first anniversary of the Closing Date.
(e) Subject to the provisions of Section 10 of this Agreement,
each certificate representing the CEC NEON Shares shall bear a restrictive
legend in substantially the following form, provided that, after the first
anniversary of the Closing Date, CEC shall be entitled to have such legend
removed from the certificate or certificates representing any shares which are
no longer restricted in accordance with the provisions of this Section 2.03:
"The shares represented by this Certificate are subject to certain
restrictions on transfer and a right of forfeiture in favor of the
Company as set forth in a Subscription Agreement, dated as of
November 23, 1999, by and between the Company, its Affiliate and the
holder of this Certificate, a copy of which is available from the
Company or the holder of this Certificate upon request."
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[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
(f) The percentage of shares of NEON Common Stock and the absolute number of
shares of NEON Common Stock to which CEC shall be entitled pursuant to this
Section 2.03 shall not be affected by the public trading price for NEON Common
Stock.
2.04. Consideration for the CEC NEON Shares. In consideration of the
issuance of the CEC NEON Shares to CEC (or to the Escrow Agent for the benefit
of CEC and the release of such shares to CEC by the Escrow Agent in accordance
with the Escrow Agreement in the event that the Reorganization is abandoned
pursuant to Section 10 of this Agreement), at the Closing, CEC shall execute and
deliver the System Agreement, pursuant to which CEC shall make all CEC In-Kind
Capital Contributions and CEC Cash Contributions as contemplated therein, in
addition to the other covenants of CEC set forth in this Agreement and in the
Related Agreements.
2.05. Certain Rights to Acquire Additional Shares.
(a) If either of the NEON Entities engages in a sale or
exchange of its capital stock in connection with a merger or acquisition
transaction (a "Pre-closing Acquisition Transaction"), which is consummated
between the date hereof and the earlier of the Closing Date and the Final
Termination Date, then CEC, on the Closing Date, may, at its option, purchase
up to a number of shares of NEON Common Stock which is equal to the product of
[ ** ]% [ ** ] the total number of shares of NEON Common Stock (on a fully-
diluted basis) sold in connection with such transaction. The purchase price per
share of such shares shall be equal to the average closing price of the NEON
Common Stock on the Nasdaq National Market for the 20 trading day period
preceding the public announcement of such Pre-closing Acquisition Transaction
(or, in the event that such Pre-Closing Acquisition Transaction is not
publically announced, the closing date of such transaction).
(b) For the first [ ** ] or fewer options which Old NEON
grants under its option plans to purchase shares of its Common Stock between the
date of this Agreement and the Closing Date, then CEC, on the Closing Date, may,
at its election, purchase up to a number of shares of NEON Common Stock which is
equal to the product of [ ** ]% [ ** ] the number of shares subject to all such
options. The per share price of shares purchased by CEC pursuant to the
preceding sentence shall be the weighted average of the exercise prices per
share for such options. If the Company grants more than [ ** ] options to
purchase shares of its Common Stock under its option plans between the date of
this Agreement and the Closing Date, then, in addition to the shares of Common
Stock which CEC is entitled to purchase on the Closing Date pursuant to the
first sentence of this Subsection 2.05(b), the number of CEC NEON Shares shall
be increased at no cost to CEC by a number of shares which is equal to the
product of [ ** ]% [ ** ] the number of shares subject to such options in excess
of [ ** ].
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3. Representations and Warranties of the NEON Entities. As of the date of
this Agreement and the Closing Date, the NEON Entities, jointly and severally,
make the representations and warranties to CEC set forth below.
3.01. Organization and Qualification. Each of the NEON Entities is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as is now being conducted. Each of the NEON Entities is duly qualified or
licensed and in good standing to do business in each jurisdiction where the
conduct of its business or the ownership, leasing or operation of its respective
properties require such qualification or licensing, except where the failure to
be so qualified or licensed and in good standing, individually or in the
aggregate, would not have a material adverse effect on the business of such NEON
Entity.
3.02. Authority Relative to This Agreement. Each of the NEON
Entities has all necessary corporate power and authority to execute and deliver
this Agreement and, as applicable, the Related Agreements and to consummate the
transactions contemplated by this Agreement and such Related Agreements. The
execution and delivery by each of the NEON Entities of this Agreement and the
applicable Related Agreements and the consummation by each of the NEON Entities
of the transactions contemplated by this Agreement and such Related Agreements
have been duly and validly authorized by the Board of Directors of each of the
NEON Entities or by a committee thereof to whom such authority has been
delegated and no other corporate proceedings on the part of either of the NEON
Entities are necessary to authorize this Agreement or the Related Agreements or
the consummation of the transactions contemplated by this Agreement or the
Related Agreements. This Agreement and the Related Agreements have been duly and
validly executed and delivered by the NEON Entities and, assuming that this
Agreement and the Related Agreements constitute valid and binding agreements of
each other party hereto and thereto, constitute valid and binding agreements of
the NEON Entities, enforceable against each of the NEON Entities in accordance
with their respective terms, except as set forth in the NEON Opinion of Counsel.
3.03. Consents and Approvals; No Violation.
(a) Other than the NEON Required Regulatory Approvals and
requisite board and stockholder approvals, no material declaration, filing or
registration with, or notice to, or authorization, consent or approval of any
Governmental Authority or any consent from a third party, including any bank,
alliance partner, lender, investor or other Person, is necessary for the
consummation by the NEON Entities, or either of them, of the transactions
contemplated by this Agreement or the Related Agreements.
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(b) Neither the execution and delivery of this Agreement or
the Related Agreements by each of the NEON Entities, as applicable, nor the sale
by NEON of the CEC NEON Shares pursuant to this Agreement will (i) conflict with
or result in any breach of any provision of the respective Certificate of
Incorporation or By-laws of either of the NEON Entities, (ii) result in a
default (or give rise to any right of termination, cancellation or acceleration)
or constitute an event which, with or without the giving of notice, lapse of
time, or both, would constitute a default under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, agreement, lease or
other instrument or obligation to which either of the NEON Entities is a party
or by which either of the NEON Entities or any of its respective properties is
or may be bound or (iii) except for the NEON Required Regulatory Approvals,
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to either of the NEON Entities or any of their respective properties.
(c) To the knowledge of the NEON Entities, there is no reason
that Old NEON should fail to obtain the NEON Required Regulatory Approvals on or
before the Closing Date.
3.04. NEON SEC Documents. The capitalization of Old NEON, as well as
its quarterly and annual balance sheets, statements of income and statements of
cash flows, are disclosed in all material respects in the NEON SEC Documents in
conformity with applicable SEC rules and regulations. The filed NEON SEC
Documents, at the time filed with the SEC, conformed in all material respects to
the then applicable requirements of the Securities Act and the Exchange Act.
3.05. Legal Proceedings. Except as set forth in the NEON SEC
Documents, there are no claims, actions, proceedings or investigations pending
or, to the knowledge of each of the NEON Entities, threatened against or
relating to either of the NEON Entities which would, individually or in the
aggregate, be reasonably expected to create a material adverse effect on the
business, operations or prospects of NEON or Old NEON.
3.06. Capital Stock Documents. Old NEON has provided copies of or
disclosed in this Agreement all material contracts contemplated by the issuance
or commitment to issue any capital stock of the NEON Entities or warrants for
any capital stock of the NEON Entities. Such contractual documentation is true,
complete and correct in all material respects and has not been amended or
supplemented in any way. Each such contract has either been fully performed in
all material respects or remains in full force and effect, as the case may be
except for those that have been terminated in accordance with their terms.
3.07. Shareholders Agreement; Corporate Governance Documents. Old
NEON has provided to CEC a copy of the Principal Shareholders Agreement. To the
knowledge of the NEON Entities, this copy is true, complete and correct and have
not been amended or supplemented in any way and remains in full force and
effect. Old
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NEON has provided to CEC copies of the Certificate of Incorporation and by-laws
of each of the NEON Entities. Each such copy is true, complete and correct and
each such document has not been amended or supplemented and remains in full
force and effect.
3.08. Other Contracts. Except as prohibited by applicable
nondisclosure obligations, Old NEON has provided to CEC copies of (i) all
material contracts for sale or lease by either or both of the NEON Entities of
services or products; (ii) all material vendor contracts for sale or lease to
either or both of the NEON Entities of services of products; (iii) all material
contracts for maintenance, repair and/or operations; (iv) all material
right-of-way, conduit or similar leases for use by either or both of the NEON
Entities to deploy their respective network; and (v) all material employee
contracts with either or both of the NEON Entities or any subsidiary of either
of them, whether such subsidiary is direct or indirect or wholly or majority
owned. Each such copy is true, complete and correct in all material respects and
each such contract has not been amended or supplemented and remains in full
force and effect. To the extent that either or both of the NEON Entities is
prohibited from providing copies of certain material contracts as a result of
contractual nondisclosure obligations, such NEON Entity shall use commercially
reasonable efforts to obtain consent to release such documents to CEC and, upon
the receipt of such consent, shall promptly release copies of such documents to
CEC.
3.09. CEC NEON Shares. The CEC NEON Shares, when issued and
delivered to CEC and no longer restricted in accordance with this Agreement (or
when issued and delivered to the Escrow Agent and when released to CEC in the
event that the Reorganization is abandoned pursuant to Section 10 of this
Agreement), will be duly and validly issued, fully paid and nonassessable, and
free and clear of any preemptive rights, liens and encumbrances. Assuming the
accuracy of the representations made by CEC set forth in Section 4.04 below, the
issuance and sale of the CEC NEON Shares and any other shares of Common Stock
issued to CEC pursuant to this Agreement constitute transactions exempt from
registration under the Securities Act in reliance on the exemption therefrom
provided under Section 4(2) of the Securities Act.
3.10. No Property or Business Activity other than for the
Reorganization. NEON was incorporated on November 22, 1999, and, prior to the
Reorganization, neither NEON nor NEON Acquisition has owned any assets (other
than, in the case of NEON, its ownership of NEON Acquisition) or has engaged in
any business operations other than in connection with the Reorganization.
4. Representations and Warranties of CEC. As of the date of this Agreement
and the Closing Date, CEC makes the representations and warranties to the NEON
Entities as set forth in each Section of this Section 4.
4.01. Organization and Qualification. It is a corporation duly
organized, validly existing and in good standing under the laws of the State of
New York and has
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<PAGE>
all requisite corporate power and authority to own, lease and operate its
properties and to carry on its business as is now being conducted. It is a
wholly-owned subsidiary of Parent.
4.02. Authority Relative to this Agreement. It has all necessary
power and authority to execute and deliver this Agreement and the Related
Agreements and, subject to the CEC Required Regulatory Approvals, to consummate
the transactions contemplated hereby and thereby. Its execution and delivery of
this Agreement and the Related Agreements and its consummation of the
transactions contemplated hereby and thereby have been duly and validly
authorized by the Board of Directors of CEC or by a committee thereof to which
such authority has been delegated and no other proceedings on its part are
necessary to authorize this Agreement or the Related Agreements or the
consummation of the transactions contemplated hereby or thereby. It has duly and
validly executed and delivered this Agreement and the Related Agreements and,
assuming that this Agreement and the Related Agreements constitute valid and
binding agreements of each other party thereto, then this Agreement and the
Related Agreements constitute valid and binding agreements, enforceable against
it in accordance with their respective terms, except as set forth in the CEC
Opinion of Counsel.
4.03. Consents and Approvals.
(a) Other than the CEC Required Regulatory Approvals, no
material declaration, filing or registration with, or notice to, or
authorization, consent or approval of any Governmental Authority is necessary to
be made or obtained by CEC for its consummation of the transactions contemplated
by this Agreement or the Related Agreements.
(b) Neither its execution and delivery of this Agreement or
the Related Agreements nor its exchange of the CEC NEON Shares pursuant to this
Agreement will (i) conflict with or result in any breach of any provision of its
Certificate of Incorporation or By-laws, (ii) result in a default (or give rise
to any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation or by which it or any of its
properties is or may be bound or (iii) except for the CEC Required Regulatory
Approvals, violate any order, writ, injunction, decree, statute, rule or
regulation applicable to it or its properties.
(c) To the knowledge of CEC, there is no reason that CEC
should fail to obtain the CEC Required Regulatory Approvals.
4.04. Acquisition of Shares Solely for Investment. CEC is acquiring
the CEC NEON Shares and all other shares of Common Stock issuable to CEC
pursuant to this Agreement for its own account for investment only, and not with
a view to, or for sale in connection with, any distribution of such shares in
violation of the Securities Act or any rule or regulation under the Securities
Act.
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[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
5. Covenants of the NEON Entities
5.01. Conduct of Business between the Date of the Agreement and the
Closing Date. From the date of this Agreement through and including the Closing
Date, each of the NEON Entities agrees to operate their respective business and
conduct their respective operations in the ordinary course consistent with their
past practice.
5.02. Deliver CEC NEON Shares at Closing. At the Closing and upon
the terms and subject to the satisfaction of the conditions in this Agreement,
NEON agrees to deliver the CEC NEON Shares to CEC (or to the Escrow Agent in the
event that the Reorganization is abandoned pursuant to Section 10 of this
Agreement).
5.03. Directors' and Officers' Insurance. Each of the NEON Entities
agrees to provide directors' and officers' liability insurance coverage for any
CEC-appointed director who is on the Board of Directors of NEON. The NEON
Entities agree that this liability insurance coverage shall be for a minimum of
$10 million and shall apply to specified claims as listed in such coverage
documents, preliminary copies of which shall be delivered by the NEON Entities
to CEC prior to the Closing against any such person in respect of his or her
service on the NEON Board of Directors including any claim(s) made following the
final date of service for such person on the NEON Board of Directors. The NEON
Entities shall not take any action that would void or cancel such liability
insurance coverage at any time during the tenure of any director designated by
CEC and for a period of seven years thereafter without the prior written consent
of such director. Any CEC-appointed director shall be a third party beneficiary
for the purpose of this Section 5.03.
5.04. Redemptions of NEON Common Stock. Each of the NEON Entities
agrees that it will not individually or in conjunction with the other NEON
Entity, engage in redemptions of NEON's Common Stock that would increase CEC's
percentage ownership of NEON Common Stock above [ ** ]% (or [ ** ]%, if and when
CEC elects to reduce its percentage ownership to such percentage) without CEC's
prior written consent.
5.05. Right of First Refusal.
(a) From and after the Closing Date, each of the NEON Entities
shall not sell or agree to sell any shares of its capital stock in connection
with any private placement of debt or equity securities (not including a private
placement pursuant to Rule 144A under the Securities Act) which is intended
solely to finance operations of the NEON Entities (a "Money Raising
Transaction"), unless in each such case the NEON Entities shall have first
complied with this Section.
(b) Each of the NEON Entities shall deliver to CEC a written
notice of any proposed Money Raising Transaction which shall (i) identify and
describe the price and other terms upon which the securities (the "Offered
Securities") are to be
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<PAGE>
offered, (ii) identify the persons or entities to which the Offered Securities
are to be sold and (iii) offer to sell to CEC such portion of the Offered
Securities as the aggregate number of shares of capital stock then held by CEC
bears to the total number of shares of NEON Common Stock then currently
outstanding on a fully-diluted basis (excluding shares authorized but unissued
under employee stock plans of Old NEON) (the "Written Offer"). CEC shall have
the right for a period of 20 days following delivery of the Written Offer (the
"Acceptance Period") to notify the applicable NEON Entity of its intent to
purchase, at the price and upon the other terms specified in the Written Offer,
some or all of the number of the Offered Securities which it is entitled to
purchase under this Section 5.05(b).
(c) To accept a Written Offer, in whole or in part, CEC must
deliver a written notice to the applicable NEON Entity prior to the expiration
of the Acceptance Period, which notice shall set forth the amount of Offered
Securities that CEC elects to purchase (an "Acceptance Notice"). In the event
that the applicable NEON Entity does not receive an Acceptance Notice from CEC
prior to the expiration of the Acceptance Period, such NEON Entity may, at its
option, consummate the Money Raising Transaction on substantially the terms set
forth in the Written Offer without further obligation to CEC under this Section
5.05.
(d) CEC's right to participate in a Money Raising Transaction
pursuant to this Section shall not apply to transactions which are not intended
solely to raise cash ("Excluded Transactions"). Excluded Transactions shall
include, without limitation, transactions involving the creation of strategic
business relationships, transactions under stock incentive plans of either of
the NEON Entities and transactions in which either of the NEON Entities'
securities are to be issued in consideration of services or other non-cash
consideration.
(e) The provisions of this Section 5.05 shall terminate in
their entirety upon the earlier of (a) the sale of all or substantially all of
the assets or outstanding capital stock of NEON, or a merger involving NEON
wherein the stockholders of NEON immediately prior to such merger no longer hold
at least 50% of the outstanding capital stock of NEON after such merger, and
(b) the date on which CEC shall hold less than one half of the percentage of the
outstanding shares of the NEON Common Stock (and all other classes of NEON's
capital stock carrying voting rights) beneficially owned by Exelon or CEC (or
their respective Affiliates), whichever is lower, on the Closing Date.
5.06. [Intentionally Omitted]
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5.07. Pre-Closing Disclosure of Material Events. In the event that
either or both of the NEON Entities intend to become a party to a transaction
involving a merger, acquisition or disposition of assets and/or stock (an "M&A
Transaction") prior to Closing, the NEON Entities shall provide CEC with prior
notice of such transaction, although such NEON Entity or Entities shall not be
required to obtain CEC's approval prior to engaging in any M&A Transaction. In
the event that either or both of the NEON Entities enter into an M&A Transaction
in which such NEON Entity or Entities are not surviving entities, such NEON
Entity or Entities shall obtain from the entity surviving such transaction a
written agreement obligating such entity to assume the obligations of such NEON
Entity or Entities under this Agreement and the Related Agreements, which
agreement shall be executed and delivered to CEC concurrently with the closing
of such M&A Transaction.
5.08. Nasdaq Listing. The NEON Entities shall use their best efforts
to list, subject to notice of issuance, the CEC NEON Shares on the Nasdaq Stock
Market.
5.09. Tax Reporting. The NEON Entities shall, in a manner consistent
with applicable law, (i) report all contributions of property by CEC to NEON
pursuant to the System Agreement as transfers to a controlled corporation
qualifying for treatment under Section 351 of the Internal Revenue Code of 1986,
as amended (the "Code"), and (ii) determine the tax basis in the assets so
contributed by CEC to NEON in accordance with the provisions of the Code and
treasury regulations as applicable to an exchange to which Section 351 of the
Code applies.
5.10. Prohibited Actions Pending the Closing. Unless otherwise
provided for herein or approved by CEC in writing, from the date hereof until
the Closing Date, neither of the NEON Entities shall:
(a) amend or otherwise change its Certificate of Incorporation
or By-laws, except as contemplated by this Agreement;
(b) cease to be engaged in the businesses in which it is
presently engaged or enter into any material new line of business not
contemplated by their respective business plans previously provided to CEC and
not related to the provision of telecommunications services;
(c) take any action prior to the Closing Date which would
result in any of the conditions set forth in Article VIII not being satisfied on
the Closing Date;
(d) assume, guarantee or otherwise become responsible for the
obligations of any other party, or agree to do so, except in connection with
indebtedness permitted by clause (a) above or otherwise consistent with past
practice; or
(e) sell or agree to sell any shares of its capital stock in
connection with any Money Raising Transaction.
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[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
5.11. Additional Actions Pending the Closing. For a period ending on
the earlier of 120 days following the date of this Agreement or the Closing
Date, neither of the NEON Entities shall take any of the following actions
without the prior written consent of CEC, which consent shall not be
unreasonably withheld or delayed:
(a) authorize or incur any additional debt for money borrowed,
or incur additional debt other than (i) intercompany loans or (ii) trade debt or
borrowing consistent with past practice under existing credit arrangements;
(b) except in connection with indebtedness permitted pursuant
to clause (a) above, and except for purchase money security interests granted in
the ordinary course of business, mortgage, pledge or subject to lien or other
encumbrance any of its properties or agree to do so; or
(c) except as contemplated by Section 5.07 above, enter into
or agree to enter into any material agreement, contract or commitment other than
employment, equipment purchase, sales, service, construction, fiber optic
facilities and services or license agreements entered into in the ordinary
course of business.
5.12. Completion of the Reorganization. Old NEON shall use its best
efforts to complete the Reorganization immediately prior to the Closing.
5.13. Survival of Certain Covenants. The Covenants of the NEON
Entities set forth in Sections 5.03, 5.04, 5.05, 5.06 and 5.09 shall survive the
Closing.
6. Reimbursement of Reorganization Costs. In further consideration of the
transactions contemplated by this Agreement and the Related Agreements, CEC
agrees to reimburse Old NEON for [ ** ]% of all reasonable legal, accounting and
other fees and disbursements incurred by the NEON Entities relating to the
Reorganization (the "Reimbursable Expenses") that are actually incurred by the
NEON Entities from and after April 1, 1999 until the Closing Date, except to the
extent that such Reimbursable Expenses have been paid by CEC prior to the
execution of this Agreement, and in any event regardless of whether the
Reorganization is abandoned pursuant to Section 10 of this Agreement. The
obligation of CEC to pay such Reimbursable Expenses, while based on actual costs
incurred by the NEON Entities, shall not exceed $[ ** ], without the prior
written consent of CEC. The Reimbursable Expenses have been estimated, for
budgetary purposes and not in limitation of the reimbursement obligations set
forth in this Section 6, to be $[ ** ] in the aggregate, as follows:
(a) Costs incurred from April 1, 1999 to the execution of
this Agreement, approximately $[ ** ], consisting of $[ ** ] of legal fees and
$[ ** ] in auditor/accounting fees; and
(b) Costs incurred from the execution of this Agreement
through the Closing Date, approximately $[ ** ], consisting of printing costs
(including
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[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
the registration statement on Form S-4) of $[ ** ], legal fees of $[ ** ],
auditor/accounting fees of $[ ** ], travel and entertainment expenses for a
public information road show in Boston, New York, Philadelphia and elsewhere of
$[ ** ], filing and other costs relating to Nasdaq of $[ ** ] and SEC filing
expenses of $[ ** ].
Upon receipt from either of the NEON Entities of written evidence of the
payment of Reimbursable Expenses, CEC shall reimburse Old NEON in full within 30
days of receipt of such evidence, subject to the aggregate limitation set forth
above. This Section 6 shall supersede all prior agreements between CEC and the
NEON Entities with respect to the subject matter hereof and neither of the NEON
Entities shall be entitled to any duplicate recovery in respect of any of the
foregoing expenses.
7. Covenants of CEC and NEON.
7.01. Consents and Approvals. CEC and the NEON Entities agree to
cooperate and assist one another in obtaining all required consents and
approvals of any Governmental Authority necessary to consummate the transactions
contemplated by this Agreement and the Related Agreements. Such consents and
approvals include but are not necessarily limited to the NEON Required
Regulatory Approvals and the CEC Required Regulatory Approvals. The cooperation
required under this Section shall be at the expense of the party required to
obtain such consent or approval as a condition to the Closing.
7.02. Further Assurances. Subject to the terms and conditions of
this Agreement, each of the parties will use its best efforts to take, or cause
to be taken, all action, and to do, or cause to be done, as soon as possible,
all things necessary, proper or advisable under applicable laws and regulations
to consummate the transactions contemplated by this Agreement and the Related
Agreements, including using its best efforts to ensure satisfaction of the
conditions precedent to each party's obligations under this Agreement (except as
set forth in the definition of "CEC Required Regulatory Approvals" in Section
1.01).
7.03. Public Statements. The parties shall consult with each other
prior to issuing any public announcement, statement or other disclosure with
respect to this Agreement, the Related Agreements or the transactions
contemplated hereby or thereby and shall not issue any such public announcement,
statement or other public disclosure prior to such consultation, except as may
be required by law or based upon advice of counsel. Neither of the NEON Entities
shall use CEC's name, logo trademark or service mark in any public advertisement
without CEC's prior written approval, which approval shall not be unreasonably
withheld or delayed.
7.04. [Intentionally Omitted]
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7.05. Agreement Regarding Private Letter Ruling. The NEON Entities
and CEC agree to cooperate and assist one another in obtaining a private letter
ruling, addressed to each of them, from the Internal Revenue Service to the
effect that (i) the Reorganization and the Contribution Transactions qualify as
exchanges under Section 351 of the Code as to each of CEC and the stockholders
of Old NEON and/or (ii) the Reorganization will qualify as a tax-free
transaction under Section 368(a)(2)(E) of the Code (the "Private Letter
Ruling").
8. Conditions Precedent to Closing
8.01. Conditions Precedent to CEC Obligations.
The obligation of CEC to consummate the transactions
contemplated by this Agreement are subject to the fulfillment (or waiver) on or
prior to the Closing Date of each of the following conditions:
(a) the representations and warranties of the NEON Entities
shall be true and correct on the Closing Date as if made at and as of such date;
(b) the NEON Entities shall have performed the covenants and
agreements contained in this Agreement and in each of the Related Agreements
which are required to be performed by each of them on or prior to the Closing
Date;
(c) the NEON Entities shall have executed and delivered
certified copies of (i) resolutions of their respective Board of Directors (and,
if necessary, the stockholders) authorizing the transactions contemplated by
this Agreement and the Related Agreements, (ii) their respective Certificates of
Incorporation and By-laws and (iii) such other supporting documents and
certificates as CEC may reasonably request;
(d) CEC shall have received
(i) the NEON Opinion of Counsel,
(ii) a certificate of an authorized officer of NEON,
dated as of the Closing Date, to the effect that, to the best of such officer's
knowledge, the conditions imposed on NEON by paragraphs (a), (b) and (c) above
have been satisfied,
(iii) a certificate of an authorized officer of Old
NEON, dated as of the Closing Date, to the effect that, to the best of such
officer's knowledge, the conditions imposed on Old NEON by paragraphs (a), (b)
and (c) above have been satisfied, and
(iv) a copy of each of the Related Agreements executed
by each of the parties thereto, which condition may not be waived prior to the
date that is one Business Day prior to the Final Termination Date;
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(e) no preliminary or permanent injunction or other order or
decree by any Federal or state court of competent jurisdiction and no statute or
regulation enacted by any Governmental Authority prohibiting the consummation of
the exchange of the CEC NEON Shares or any of the other transactions
contemplated by this Agreement or any of the Related Agreements shall be in
effect;
(f) subject to the provisions of Section 8.03 of this
Agreement, the NEON Required Regulatory Approvals and the CEC Required
Regulatory Approvals shall have been obtained and all conditions to their
effectiveness prescribed therein or otherwise by law, regulation or order shall
have been satisfied; provided, however, that if the CEC Required Regulatory
Approvals and/or the NEON Required Regulatory Approvals are available only on
terms that materially adversely change the economic benefit to CEC of the
contemplated transaction, then such CEC Required Regulatory Approvals and/or
NEON Required Regulatory Approvals shall be deemed not to have been obtained and
the condition set forth in this subsection shall be deemed to be unsatisfied,
whereupon CEC may elect to terminate this Agreement and provide prompt written
notice of such termination to the NEON Entities;
(g) subject to the provisions of Section 10 of this Agreement,
the Reorganization, as described in the Preamble, shall have been completed
immediately prior to the Closing;
(h) the Board of Directors of NEON shall have taken all action
necessary to elect CEC's designee to the Board of Directors of NEON, effective
as of the consummation of the transactions contemplated by this Agreement; and
(i) the CEC NEON Shares shall have been approved as additional
shares of NEON Common Stock for listing upon notice of issuance on the Nasdaq
Stock Market.
8.02. Conditions Precedent to the NEON Entities' Obligations.
The obligation of the NEON Entities to consummate the
transactions contemplated by this Agreement are subject to the fulfillment (or
waiver) on or prior to the Closing Date of each of the following conditions:
(a) the representations and warranties of CEC shall be true
and correct on the Closing Date as if made at and as of such date;
(b) CEC shall have performed the covenants and agreements
contained in this Agreement and in each of the Related Agreements which are
required to be performed by it on or prior to the Closing Date;
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[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
(c) CEC shall have executed and delivered certified copies of
(i) resolutions of the Board of Directors (and, if necessary, the stockholders)
of CEC authorizing the transactions contemplated by this Agreement and the
Related Agreements, (ii) its Certificate of Incorporation and By-laws and (iii)
such other supporting documents and certificates as the NEON Entities may
reasonably request;
(d) NEON shall have received
(i) the CEC Opinion of Counsel,
(ii) a certificate from an authorized officer of CEC,
dated as of the Closing Date, to the effect that to the best of such officer's
knowledge the conditions imposed on such party by paragraphs (a), (b) and (c)
above have been satisfied,
(iii) all requisite stockholder approvals relating to
the contemplated transaction, including without limitation approval of any
applicable registration statement,
(iv) subject to the provisions of Section 10 of this
Agreement, a one-time cash payment from CEC in the amount of $[ ** ], and
(e) no preliminary or permanent injunction or other order or
decree by any Federal or state court of competent jurisdiction and no statute or
regulation enacted by any Governmental Authority prohibiting the consummation of
the exchange of the CEC NEON Shares or any of the other transactions
contemplated by this Agreement or any of the Related Agreements shall be in
effect;
(f) subject to the provisions of Section 8.03 of this
Agreement, the NEON Required Regulatory Approvals and the CEC Required
Regulatory Approvals shall have been obtained and all conditions to their
effectiveness prescribed therein or otherwise by law, regulation or order shall
have been satisfied; provided, however, that if the CEC Required Regulatory
Approvals and/or the NEON Required Regulatory Approvals are available only on
terms that materially adversely change the economic benefit to the NEON Entities
of the contemplated transaction, then such CEC Required Regulatory Approvals
and/or NEON Required Regulatory Approvals shall be deemed not to have been
obtained and the condition set forth in this subsection shall be deemed to be
unsatisfied, whereupon Old NEON may elect to terminate this Agreement and
provide prompt written notice of such termination to CEC; and
(g) subject to the provisions of Section 10 of this Agreement,
the Reorganization, as described in the Preamble, shall have been completed
immediately prior to the Closing.
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9. Indemnification and Third Party Claims
9.01. Indemnification.
(a) Each party will indemnify and hold harmless the other
party and its Affiliates and their respective directors, officers, employees and
agents (including such other party, individually, an "Indemnified Party" and
collectively, the "Indemnified Parties") from and against any and all claims,
demands or suits by any person, and all losses, liabilities, damages,
obligations, payments, costs, taxes and expenses (including reasonable legal
fees and expenses and including costs and expenses incurred in connection with
investigations and settlement proceedings) (each, an "Indemnifiable Loss"), as
incurred, asserted against or suffered by any Indemnified Parties relating to,
resulting from or arising out of:
(i) any breach by a party of any covenant or agreement
of that party contained in this Agreement or the representations and warranties
of that party; or
(ii) any breach by a party of any Related Agreement to
which it is a party.
If the amount of any Indemnifiable Loss, at any time
subsequent to the making of any indemnity payment in respect thereof, is reduced
by recovery, settlement or otherwise under or pursuant to any insurance
coverage, or pursuant to any claim, recovery, settlement or payment by or
against any other person, the amount of such reduction, less any costs, expenses
or premiums incurred in connection therewith, will promptly be repaid by the
Indemnified Party to the party required to provide indemnification hereunder
(the "Indemnifying Party") with respect to such Indemnifiable Loss.
(b) To the fullest extent permitted by law, no Indemnifying
Party shall be liable to any Indemnified Party for any claims, demands or suits
for consequential, incidental, special, exemplary, punitive, indirect or
multiple damages connected with or resulting from any breach of this Agreement
or any of the Related Agreements (other than breach of this Section 9), or any
actions undertaken in connection with or applicable hereto or thereto.
(c) Other than as set forth in Section 9.03, the rights and
remedies of each party under this Section 9 are, as between and among the
parties, exclusive and in lieu of any and all other rights and remedies which
that party may have under this Agreement and the Related Agreements or otherwise
for monetary relief with respect to (i) any breach of, or failure to perform,
any covenant or agreement set forth in this Agreement or the Related Agreements
by any party or (ii) any breach of any representation or warranty by any party.
Each party agrees that the previous sentence shall not limit or otherwise affect
any non-monetary right or remedy which any party may have under this Agreement
or the Related Agreements or otherwise
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limit or affect any party's right to seek equitable relief, including the remedy
of specific performance.
(d) The parties agree that, notwithstanding Section 9.01(c),
each party shall retain, subject to the other provisions of this Agreement all
remedies at law or in equity with respect to fraud or willful or intentional
breaches of this Agreement or the Related Agreements.
(e) CEC (on the one hand) and the NEON Entities, jointly and
severally (on the other hand), shall indemnify and hold harmless the other party
and its Affiliates from and against any and all claims of brokerage fees,
commissions or finder's fees in connection with the transactions contemplated by
this Agreement or the Related Agreements by reason of any action taken by the
other party.
9.02. Third Party Claims Procedures.
(a) If any Indemnified Party receives notice of the assertion
of any claim or of the commencement of any claim, action, or proceeding made or
brought by any person who is not a party or an Affiliate of a party (a "Third
Party Claim") with respect to which indemnification is to be sought from an
Indemnifying Party, the Indemnified Party will give such Indemnifying Party
reasonably prompt written notice thereof, but in any event not later than 10
Business Days after the Indemnified Party's receipt of notice of such Third
Party Claim; provided, however, that a failure to give timely notice will not
affect the rights or obligations of any Indemnified Party except if, and only to
the extent that, as a result of such failure, the Indemnifying Party was
materially prejudiced. Such notice shall describe the nature of the Third Party
Claim in reasonable detail and will indicate the estimated amount, if
practicable of the Indemnifiable Loss that has been or may be sustained by the
Indemnified Party.
(b) If a Third Party Claim is made against an Indemnified
Party, the Indemnifying Party will be entitled to participate in the defense
thereof and, if it so chooses, to assume the defense thereof with counsel
selected by the Indemnifying Party; provided, however, that such counsel is not
reasonably objected to by the Indemnified Party; and provided further that the
Indemnifying Party first admits in writing its liability to the Indemnified
Party with respect to all material elements of such claim. Should the
Indemnifying Party so elect to assume the defense of a Third Party Claim, the
Indemnifying Party will not be liable to the Indemnified Party for any legal
expenses subsequently incurred by the Indemnified Party in connection with the
defense thereof. If the Indemnifying Party elects to assume the defense of a
Third Party Claim, the Indemnified Party will (i) cooperate in all reasonable
respects with the Indemnifying Party in connection with such defense, (ii) not
admit any liability with respect to, or settle, compromise or discharge, any
Third Party Claim without the Indemnifying Party's prior written consent and
(iii) agree to any settlement, compromise or discharge of a Third Party Claim
which the Indemnifying Party may recommend and which by its terms obligates the
Indemnifying Party to pay the full
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[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
amount of the liability in connection with such Third Party Claim and releases
the Indemnified Party completely in connection with such Third Party Claim. In
the event the Indemnifying Party shall assume the defense of any Third Party
Claim, the Indemnified Party shall be entitled to participate in (but not
control) such defense with its own counsel at its own expense. If the
Indemnifying Party does not assume the defense of any such Third Party Claim,
the Indemnified Party may defend the same in such manner as it may deem
appropriate, including settling such claim or litigation after giving notice to
the Indemnifying Party of the terms of the proposed settlement and the
Indemnifying Party will promptly reimburse the Indemnified Party upon written
request. Anything contained in this Agreement to the contrary notwithstanding,
no Indemnifying Party shall be entitled to assume the defense of any Third Party
Claim if such Third Party Claim seeks an order, injunction or other equitable
relief or relief for other than monetary damages against the Indemnified Party
which, if successful, would materially adversely affect the business of the
Indemnified Party.
9.03. Other Remedies. In the event that CEC fails to make any
In-Kind Contribution as required by the System Agreement, CEC agrees to
reimburse NEON for any penalties paid to NEON's customers as a direct result of
such failure; provided, however, CEC shall only be required to reimburse NEON
for such penalties incurred by NEON after the expiration of eight months after
CEC obtains all CEC Required Regulatory Approvals or September 1, 2000,
whichever is later, and no such penalties incurred prior to such date.
Notwithstanding the preceding sentence, CEC shall not be obligated to reimburse
NEON if, and only to the extent that, it becomes impossible for CEC to so
perform as a result of a Force Majeure (as defined in the System Agreement).
9.04. Limitation of Liability. Under no circumstance shall the
aggregate of (1) CEC's liability to NEON in connection with the transactions
contemplated by this Agreement, the System Agreement and all of the Related
Agreements and (2) Parent's liability under Section 12.12 of this Agreement and
Section 7.17 of the System Agreement exceed $[ ** ].
10. Alternative Transaction Structure.
10.01. Failure to Obtain Private Letter Ruling. In the event that
the Internal Revenue Service clearly indicates orally or in writing to both
parties either that it is unwilling to render all or any part of the Private
Letter Ruling or that it believes that the Reorganization and the Contribution
Transaction will not qualify as exchanges under Section 351 of the Code as to
either CEC or the stockholders of Old NEON or that the Reorganization will not
qualify as a tax-free transaction under Section 368(a)(2)(E) of the Code, or at
the mutual election of CEC and NEON, then:
(a) NEON shall not be required to effect the Reorganization;
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(b) NEON shall not be required to perform the covenants set
forth in Section 5.09;
(c) CEC shall not be required to make the cash payment to NEON
pursuant to Section 8.02(d)(iv);
(d) CEC and Old NEON shall be obligated to consummate the
transactions contemplated by this Agreement, provided that all conditions
precedent to such parties obligations (except those set forth in Sections
8.01(g) and 8.02(g)) have been satisfied;
(e) in lieu of the provisions relating to the restrictions on
the NEON Shares set forth in Section 2.03 of this Agreement, at the Closing,
NEON shall deliver the CEC NEON Shares to the Escrow Agent for the benefit of
CEC, the parties will enter into the Escrow Agreement at the Closing, and, no
later than three days following the completion of the events set forth in
Section 2.03(a) (in no particular order, except as explicitly set forth
therein), NEON shall cause the Escrow Agent to release to CEC the respective
percentages of CEC NEON Shares set forth in Section 2.03(a);
(f) Notwithstanding the provisions of Section 2.05 of this
Agreement, prior to the first anniversary of the Closing Date, CEC shall be
entitled to sell a number of CEC NEON Shares having a value equal to the tax
obligations payable by it prior to the first anniversary of the Closing Date as
a result of the transactions contemplated by this Agreement and the Related
Agreements, up to the number of CEC NEON Shares then released to CEC under the
terms of this Agreement and the Escrow Agreement (the "Tax Shares"). Credit
Suisse First Boston, or such other investment bank of national standing as NEON
may elect (in either case, the "Default Investment Bank"), shall act as the
broker for any such sale of Tax Shares; provided, however, that CEC shall have
the right to select another investment bank of national standing (an
"Alternative Investment Bank") to effect the sale of Tax Shares, if (i) the
aggregate fees and commissions imposed by the Alternative Investment Bank are
materially less than the fees quoted by the Default Investment Bank, and (ii)
the Default Investment Bank has been offered the opportunity to meet such level
of fees and commissions quoted by such Alternative Investment Bank but is
unwilling to meet such terms. Any such sale or sales of Tax Shares shall be made
in a manner that will, in the reasonable judgment of NEON, avoid disruption of
the market for NEON Common Stock. On each occasion that CEC desires to sell any
Tax Shares pursuant to this Section 10.01(e), it shall give written notice to
NEON of its desire to do so, which written notice shall set forth, in reasonable
detail, the calculation of the taxes due, the number of Tax Shares, the date
that such taxes are due, and the proposed method of disposition of the Tax
Shares. CEC shall not sell any Tax Shares until it has received NEON's written
consent to such sale, which consent shall not be unreasonably withheld,
conditioned or delayed. If requested by CEC, NEON shall promptly file and have
declared effective a Registration Statement on Form S-3 (if NEON is then
eligible to use such form)
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covering the resale of the Tax Shares. Such registration shall be subject to the
terms and conditions of the Registration Rights Agreement, provided however that
such registration shall not count as a demand registration under Section 2.1(a)
of the Registration Rights Agreement; and
(g) In lieu of the restrictive legend provided in Section
2.03, each certificate representing the CEC NEON Shares shall bear a restrictive
legend in substantially the following form, provided that, after the first
anniversary of the Closing Date, CEC shall be entitled to have such legend
removed from the certificate or certificates representing any shares which have
been released by the Escrow Agent consistent with the terms of the Escrow
Agreement:
"The shares represented by this Certificate are subject to certain
restrictions in favor of the Company as set forth in a Subscription
Agreement, dated as of November 23, 1999, by and between the
Company, its Affiliate and CEC Delaware, Inc., and in an Escrow
Agreement, dated as of _________________, by and among the Company
and Consolidated Edison Communications, Inc. and State Street Bank
and Trust Company."
10.02. References to NEON Entities. In the event that the
Reorganization is abandoned pursuant to this Section 10, then references herein
and in the Related Agreements to the NEON Entities or any entities affiliated
with NEON shall refer to Old NEON only, as the context requires.
11. Termination
11.01. Mutual Termination. This Agreement may be terminated at any
time prior to the Closing by an instrument in writing signed on behalf of each
of the parties.
11.02. Termination Date. This Agreement may be terminated by any
party if the Closing shall not have occurred on or before the six-month
anniversary of the date on which the request for the Private Letter Ruling is
filed with the IRS (the "Final Termination Date"); provided, however, that the
right to terminate this Agreement pursuant to this Section 11.02 shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Closing to
occur on or before such date.
12. Miscellaneous Provisions
12.01. Expenses. Except to the extent specifically provided herein
and in the Reimbursement Agreement, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
borne by the party
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incurring such costs and expenses, whether or not the transactions contemplated
hereby are consummated.
12.02. Amendment and Modification; Extension; Waiver. This Agreement
may be amended, modified or supplemented only by an instrument in writing signed
on behalf of each of the parties. Either party may (i) extend the time for the
performance of any of the obligations or other acts of the other party, (ii)
waive any inaccuracies in the representations and warranties of the other party
contained in this Agreement or (iii) waive compliance by the other party with
any of the agreements or conditions contained in this Agreement. Any agreement
on the part of a party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed by such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
12.03. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (as of the time of delivery or, in the
case of a telecopied communication, of confirmation and accompanied by another
manner of giving notice provided in this Section) if delivered personally,
telecopied (which is confirmed) or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
if to NEON or Old NEON, to:
NorthEast Optic Network, Inc.
2200 West Park Drive
Westborough, MA 01581
Attention: President
Facsimile Number: (508) 616-7895
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Alexander A. Bernhard, Esq.
Facsimile Number: (617) 526-5000
if to CEC or CECD, to:
Consolidated Edison Communications, Inc.
132 West 31st Street 13th Floor
New York, NY 10001
Attention: President
Facsimile Number: (212) 324-5050
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CEC Delaware, Inc.
c/o Corporation Trust Company
1209 Orange Street, Corporate Trust Center
Wilmington, DE 19801
Facsimile: (302) 655-5049
with a copy to:
Consolidated Edison, Inc.
4 Irving Place, Room 1800
New York, NY 10003
Attention: Senior Vice President and General Counsel
Facsimile Number: (212) 674-7329
12.04. Assignment; No Third Party Beneficiaries.
(a) Neither Party shall assign its rights or obligations under
this Agreement to any third person or entity (except an Affiliate of such Party)
without the prior written approval of the other Party, which approval shall not
be unreasonably withheld or delayed; provided, however, that CEC may assign its
right to receive the CEC NEON Shares (but not including any other right or
obligation of CEC hereunder or under any of the Related Agreements, except to
the extent expressly provided herein or therein) to CECD, a wholly-owned
subsidiary of CEC, or any other Affiliate. Subject to the foregoing, this
Agreement and the Related Agreements and all of the provisions hereof shall be
binding upon and inure to the benefit of CEC and the NEON Entities and their
respective successors and assigns.
(b) Nothing in this agreement is intended to confer upon any
other person except the parties any rights or remedies hereunder or shall create
any third party beneficiary rights in any person, except as explicitly
contemplated in Section 5.03.
12.05. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law).
12.06. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.07. Interpretation. When a reference is made in this Agreement to
a Section, Subsection, Exhibit, Schedule or Appendix, such reference shall be to
a Section or Subsection of, or Exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever
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the words "include", "includes" or "including" are used in this Agreement, they
shall be deemed to be followed by the words "without limitation" or equivalent
words. The words "hereof", "herein" and "hereunder" and words of similar import
when used in this Agreement shall refer to this Agreement as a whole and not to
any particular provision of this Agreement. All terms defined in this Agreement
shall have the defined meanings when used in the Related Agreements and any
certificate or other document made or delivered pursuant hereto or thereto
unless otherwise defined therein. The definitions contained in this Agreement
are applicable to the singular as well as the plural forms of such terms and to
the masculine as well as to the feminine and neuter genders of such term. Any
agreement, instrument, statute, regulation, rule or order defined or referred to
herein or in any agreement or instrument that is referred to herein means such
agreement, instrument, statute, regulation, rule or order as from time to time
amended, modified or supplemented, including (in the case of agreements or
instruments) by waiver or consent and (in the case of statutes, regulations,
rules or orders) by succession of comparable successor statutes, regulations,
rules or orders and references to all attachments thereto and instruments
incorporated therein. References to a person are also to its permitted
successors and assigns.
12.08. Jurisdiction and Enforcement. Each of the parties irrevocably
submits to the exclusive jurisdiction of (i) the Supreme Court of the State of
New York and (ii) the United States District Court for the Southern District of
New York, for the purposes of any suit, action or other proceeding arising out
of this Agreement or any transaction contemplated hereby. Each of the parties
agreed to commence any action, suit or proceeding relating hereto either in the
United States District Court of Delaware or, if such suit, action or proceeding
may not be brought in such court for jurisdictional reasons, in the Supreme
Court of Delaware. Each of the parties further agrees that service of process,
summons, notice or document by hand delivery or U.S. registered mail at the
address specified for such party in Section 12.03 (or such other address
specified by such party from time to time pursuant to Section 12.03) shall be
effective service of process for any action, suit or proceeding brought against
such party in any such court. Each of the parties irrevocably and
unconditionally waives any objection to the laying of venue of any action, suit
or proceeding arising out of this Agreement or the transactions contemplated
hereby in (i) the Supreme Court of Delaware, or (ii) the United States District
Court of Delaware, and hereby further irrevocably and unconditionally waives and
agrees not to plead or claim in any such court that any such action, suit or
proceeding brought in any such court has been brought in an inconvenient forum.
12.09. Entire Agreement. This Agreement and the Related Agreements
including the Exhibits, Schedules, Appendices, documents, certificates and
instruments referred to herein or therein and other contracts, agreements and
instruments contemplated hereby or thereby, together with the Confidentiality
Agreements, embody the entire agreement and understanding of the parties in
respect of the transactions contemplated by this Agreement. There are no
restrictions, promises, representations, warranties, covenants or undertakings
other than those expressly set
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forth or referred to herein or therein. This Agreement and the Related
Agreements supersede all prior agreements and understandings between or among
the parties or any of the parties with respect to the transactions contemplated
hereby and thereby, other than the Confidentiality Agreements which remain in
effect according to the terms and conditions set forth therein.
12.10. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
12.11. Conflicts. Except as expressly otherwise provided herein or
therein, in the event of any conflict or inconsistency between the terms of this
Agreement and the terms of any Related Agreement, the terms of this Agreement
shall prevail.
12.12. Guaranty of CEC's Obligations. Parent unconditionally
guaranties the due and prompt payment, but not the performance, of all of CEC's
obligations set forth in this Agreement. The parties agree that Parent does not
guaranty the performance of CEC's obligations set forth in this Agreement,
including, without limitation, the performance of any actions requiring any
Governmental Authority consent or approvals. This guaranty is an irrevocable
guaranty of payment (and not just of collection) and shall continue in effect
notwithstanding any extension or modification of the terms of this Agreement,
any assumption of any such guarantied obligation by any other party or any other
act or event which might otherwise operate as a legal or equitable discharge of
Parent under this Section 12.12. This guaranty is in no way conditioned upon any
requirement that either or both of the NEON Entities first attempt to collect or
enforce any guarantied obligation from or against CEC, provided however, that
such NEON Entity or Entities has first requested payment, has not refused
payment, and has not received payment with 30 days from CEC. So long as any
obligation of CEC to either or both of the NEON Entities remains unpaid or
undischarged, Parent hereby waives (but only with respect to such NEON Entity or
Entities and not as to any other parties) all rights to subrogation arising out
of any payment by Parent under this Section 12.12. Parent hereby waives all
special suretyship defenses, and protest, notice of protest, demand for
performance, diligence, notice of any other action at any time taken or omitted
to be taken by either or both of the NEON Entities or CEC and, generally, all
demands and notices of every kind in connection with this Section 12.12. If any
of the waivers set forth in this Section 12.12 is determined to be contrary to
any applicable law or public policy, such waivers shall be effective only to the
extent permitted by law. This guaranty is subject to the limitations of
liability set forth in Section 9.04 of this Agreement.
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12.13. Force Majeure. The pre-closing and post-closing obligations
of the Parties under this Agreement are subject to, and neither party shall be
in default under this Agreement due to, any Force Majeure. For purposes of this
Agreement, "Force Majeure" means any failure or delay in performance which, by
exercise of due foresight by the party affected could not reasonably have been
expected to avoid and, which by exercise of due diligence, such party shall be
unable to overcome during the period while such party shall continue to exercise
due diligence, and that is caused by strike or other labor problems; accidents;
acts of God; fire; flood; adverse weather conditions; material or facility
shortages or unavailability not resulting from such party's failure to timely
place orders therefor; lack of transportation; the imposition of any
governmental codes, ordinances, laws, rules, regulations or restrictions after
the date of this Agreement (but not related to the obtaining or maintaining of
the Required Rights (as defined in the System Agreement)); condemnation or the
exercise of rights of eminent domain; or war, acts of war (whether declared or
undeclared), terrorism or civil disorder. Neither party shall, however, be
relieved of liability for failure of performance due to a claimed Force Majeure
hereunder if such failure is due to causes arising out of its own gross
negligence or to removable or remediable causes that it fails to remove or
remedy with reasonable dispatch. Any party affected by an event of Force Majeure
shall promptly notify the other party of any occurrence or condition which in
the affected party's reasonable opinion warrants an extension of time for the
performance of any obligation under this Agreement. Such notice must be
submitted in writing to the other party within five days or such sooner date as
is practicable after the delay is know to the affected party, or shall, in the
exercise of reasonable diligence, become known. Such notice shall specify in
detail the anticipated length of the delay, the cause of the delay, and a
timetable by which any remedial measures shall be implemented. Failure to
provide such notice within such period shall constitute a waiver of any claim of
Force Majeure.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective duly authorized officers as of the date first above written.
Consolidated Edison Communications, Inc. NorthEast Optic Network, Inc.
By: By: /s/ Vincent C. Bisceglia
----------------------------------- -------------------------------
Name: Name: Vincent C. Bisceglia
---------------------------------
Title: Title: Chairman & CEO
--------------------------------
NEON Communications, Inc.
By: /s/ Vincent C. Bisceglia
-----------------------------------
Name: Vincent C. Bisceglia
Title: Chairman & CEO
In accordance with and subject to the terms of Section 12.12 of this Agreement,
the obligations of Consolidated Edison Communications, Inc. are hereby
irrevocably guarantied in full.
Consolidated Edison, Inc.
By:
-----------------------------------
Name:
---------------------------------
Title:
--------------------------------
COUNTY OF ___________________ )
) ss.
STATE OF _____________________ )
Before me, the undersigned Notary Public, in and for said County and
State, personally appeared the above-named ________________________, known to me
to be the _______________ of NorthEast Optic Network, Inc., who, being duly
sworn, acknowledged that he/she did sign the above instrument and that the same
is her free act and deed.
WITNESS my hand and official seal this 23rd day of November, 1999.
Notary Public
32
<PAGE>
My Commission Expires:__________________
COUNTY OF ___________________ )
) ss.
STATE OF _____________________ )
Before me, the undersigned Notary Public, in and for said County and
State, personally appeared the above-named ________________________, known to me
to be the _______________ of NEON Communications, Inc., who, being duly sworn,
acknowledged that he/she did sign the above instrument and that the same is her
free act and deed.
WITNESS my hand and official seal this 23rd day of November, 1999.
Notary Public
My Commission Expires:__________________
COUNTY OF ___________________ )
) ss.
STATE OF _____________________ )
Before me, the undersigned Notary Public, in and for said County and
State, personally appeared the above-named __________________, known to me to be
the _______________ of Consolidated Edison Communications, Inc., who, being duly
sworn, acknowledged that he/she did sign the above instrument and that the same
is her free act and deed.
WITNESS my hand and official seal this 23rd day of November, 1999.
Notary Public
My Commission Expires:__________________
COUNTY OF ___________________ )
) ss.
STATE OF _____________________ )
Before me, the undersigned Notary Public, in and for said County and
State, personally appeared the above-named __________________, known to me to be
the _______________ of Consolidated Edison, Inc., who, being duly sworn,
acknowledged that he/she did sign the above instrument and that the same is her
free act and deed.
WITNESS my hand and official seal this 23rd day of November, 1999.
Notary Public
33
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My Commission Expires:__________________
34
<PAGE>
Exhibit 10.45
Execution Copy
SUBSCRIPTION AGREEMENT
among
NORTHEAST OPTIC NETWORK, INC.,
NEON COMMUNICATIONS, INC.
and
EXELON CORPORATION
DATED AS OF NOVEMBER 23, 1999
<PAGE>
TABLE OF CONTENTS
1. Definitions; Accounting Terms..............................................2
1.01. Definitions.......................................................2
1.02. Accounting Terms..................................................6
2. Delivery of the Exelon NEON Shares; Time and Place of Closing;
Consideration for Exelon NEON Shares.......................................6
2.01. Delivery of the Exelon NEON Shares................................6
2.02. Time and Place of Closing.........................................6
2.03. Restrictions on Exelon NEON Shares................................7
2.04. Consideration for the Exelon NEON Shares..........................8
2.05. Certain Rights to Acquire Additional Shares.......................8
3. Representations and Warranties of the NEON Entities........................9
3.01. Organization and Qualification....................................9
3.02. Authority Relative to This Agreement..............................9
3.03. Consents and Approvals; No Violation.............................11
3.04. NEON SEC Documents...............................................11
3.05. Legal Proceedings................................................12
3.06. Capital Stock Documents..........................................12
3.07. Shareholders Agreement; Corporate Governance Documents...........12
3.08. Other Contracts..................................................12
3.09. Exelon NEON Shares...............................................12
3.10. No Property or Business Activity other than for the
Reorganization...................................................13
4. Representations and Warranties of Exelon..................................13
4.01. Organization and Qualification...................................13
4.02. Authority Relative to this Agreement.............................13
i
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4.03. Consents and Approvals...........................................13
4.04. Acquisition of Shares Solely for Investment......................14
5. Covenants of the NEON Entities............................................14
5.01. Conduct of Business between the Date of the Agreement and the
Closing Date.....................................................14
5.02. Deliver Exelon NEON Shares at Closing............................14
5.03. Directors' and Officers' Insurance...............................14
5.04. [Intentionally Omitted]..........................................15
5.05. Right of First Refusal...........................................15
5.06. [Intentionally Omitted]..........................................17
5.07. Pre-Closing Disclosure of Material Events........................17
5.08. Nasdaq Listing...................................................17
5.09. Tax Reporting....................................................17
5.10. Prohibited Actions Pending the Closing...........................17
5.11. Additional Actions Pending the Closing...........................19
5.12. Completion of the Reorganization.................................19
5.13. Survival of Certain Covenants....................................19
6. Reimbursement of Reorganization Costs.....................................21
7. Covenants of Exelon and NEON..............................................21
7.01. Consents and Approvals...........................................21
7.02. Further Assurances...............................................22
7.03. Public Statements................................................22
7.04. [Intentionally Omitted]..........................................22
7.05. Agreement Regarding Private Letter Ruling........................22
8. Conditions Precedent to Closing...........................................22
ii
<PAGE>
8.01. Conditions Precedent to Exelon Obligations.......................22
8.02. Conditions Precedent to the NEON Entities' Obligations...........24
9. Indemnification and Third Party Claims....................................25
9.01. Indemnification..................................................25
9.02. Third Party Claims Procedures....................................26
9.03. Other Remedies...................................................27
9.04. Limitation of Liability..........................................28
10. Alternative Transaction Structure.........................................28
10.01. Failure to Obtain Private Letter Ruling..........................28
10.02. References to NEON Entities......................................29
11. Termination...............................................................30
11.01. Mutual Termination...............................................30
11.02. Termination Date.................................................30
12. Miscellaneous Provisions..................................................30
12.01. Expenses.........................................................30
12.02. Amendment and Modification; Extension; Waiver....................30
12.03. Notices..........................................................30
12.04. Assignment; No Third Party Beneficiaries.........................31
12.05. Governing Law....................................................32
12.06. Counterparts.....................................................32
12.07. Interpretation...................................................32
12.08. Jurisdiction and Enforcement.....................................33
12.09. Entire Agreement.................................................33
12.10. Severability.....................................................33
12.11. Conflicts........................................................34
iii
<PAGE>
12.12. Guaranty of Exelon's Obligations.................................34
12.13. Force Majeure....................................................34
EXHIBITS
Exhibit 1.01(a) Form of System Agreement
Exhibit 1.01(b) Form of Registration Rights Agreement
Exhibit 8.01(d)(i) Form of NEON Opinion of Counsel
Exhibit 8.01(d)(iv) Form of Stockholders' Agreement
Exhibit 8.02(d)(i) Form of Exelon Opinion of Counsel
Exhibit 10.01 Form of Escrow Agreement
Exhibit A Form of Agreement and Plan of Merger
iv
<PAGE>
PREAMBLE
SUBSCRIPTION AGREEMENT (including the Exhibits hereto, the "Agreement"),
dated as of November 23, 1999, between NEON COMMUNICATIONS, INC., a Delaware
corporation ("NEON"), NORTHEAST OPTIC NETWORK, INC., a Delaware corporation and
the sole stockholder of NEON ("Old NEON," and together with NEON, the "NEON
Entities") and EXELON CORPORATION, a Pennsylvania corporation and a wholly-owned
subsidiary of PECO Energy Company ("Exelon").
WHEREAS the potential efficiencies and economies of scale, increased
aggregate market and expanded geographic coverage makes a business arrangement
integrating their separate systems attractive to the NEON Entities and Exelon;
WHEREAS NEON desires to issue and Exelon desires to acquire the Exelon
NEON Shares (as defined below) on the terms and conditions set forth in this
Agreement;
WHEREAS, in connection with the transactions contemplated by this
Agreement, Old NEON has created NEON (a wholly-owned first-level subsidiary of
Old NEON) and NEON has created NEON Acquisition, Inc. ("NEON Acquisition"), a
Delaware corporation (a wholly-owned first-level subsidiary of NEON as well as a
wholly-owned second-level subsidiary of Old NEON);
WHEREAS, NEON was incorporated on November 22, 1999 and neither NEON nor
NEON Acquisition owns any assets (other than, in the case of NEON, its ownership
of NEON Acquisition) or has engaged in any business operations prior to the date
of this Agreement nor, prior to the Closing Date, will either engage in any
business operations other than as contemplated by this Agreement;
WHEREAS in connection with the transactions contemplated by this
Agreement, and for good business reasons, immediately prior to the consummation
of the transactions contemplated by this Agreement, NEON's wholly owned
subsidiary NEON Acquisition will have merged with and into NEON's sole
stockholder, Old NEON, pursuant to Section 251(g) of the Delaware General
Corporation Law, and the terms and conditions of an Agreement and Plan of Merger
by and among NEON, NEON Acquisition and Old NEON dated as of the Closing Date
(substantially in the form attached hereto as Exhibit A) with Old NEON being the
surviving entity and a wholly-owned subsidiary of NEON (the "Reorganization");
WHEREAS (i) Exelon will make the Exelon Cash Contributions (as defined
below) and the Exelon In-Kind Capital Contributions (as defined below) and NEON
will issue the Exelon NEON Shares (as defined below) (collectively, the "Exelon
Contribution Transactions") and (ii) Consolidated Edison Communications, Inc., a
New York corporation ("CEC") will make contributions of cash or cash-equivalent
property to NEON to defray capital expenses pursuant to the terms of a System
Agreement to be
1
<PAGE>
entered into among NEON, Old NEON and CEC, and NEON will issue to CEC certain
shares of NEON Common Stock pursuant to a Subscription Agreement to be entered
into among NEON, Old NEON and CEC (such transactions together with the Exelon
Contribution Transactions, the "Contribution Transactions");
WHEREAS for federal income tax purposes it is intended that the
Reorganization and the Contribution Transactions (as defined below) qualify as
exchanges under Section 351 of the Internal Revenue Code of 1986, as amended
(the "Code"); and
WHEREAS the NEON Entities and Exelon desire to establish certain other
rights and duties with respect to one another on the terms and conditions
hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements hereinafter set forth, and intending to be legally
bound hereby, the NEON Entities and Exelon agree as follows:
1. Definitions; Accounting Terms.
1.01. Definitions. As used in this Agreement, the following terms
have the following meanings:
"Affiliate" shall have the meaning set forth in Rule 12b-2 of the General
Rules and Regulations under the Securities Exchange Act of 1934, as amended.
"Agreement" shall have the meaning set forth in the Preamble.
"Alternative Investment Bank" shall have the meaning set forth in Section
10.01(f).
"Business Day" means any day other than Saturday, Sunday and any day which
is a legal holiday or a day on which banking institutions in New York are
authorized or required by law or other action of a Governmental Authority to
close.
"CECD" means CEC Delaware, Inc., a Delaware corporation.
"Closing"-- See Section 2.02.
"Closing Date"-- See Section 2.02.
"Code"-- See Preamble.
"Confidentiality Agreements" means (i) that certain Nondisclosure
Agreement dated as of September 8, 1998 by and between Old NEON and Exelon, as
amended to date, (ii) that certain Confidentiality and Nondisclosure Agreement
dated as of January
2
<PAGE>
12, 1999 by and between PECO Energy Company (doing business as Exelon
Communications), Consolidated Edison Company of New York, Inc. and Consolidated
Edison Communications, Inc. and (iii) that certain Letter Agreement dated as of
July 30, 1998 by and between Old NEON, Consolidated Edison Company of New York,
Inc. and Consolidated Edison Communications, Inc.
"Default Investment Bank" shall have the meaning set forth in Section
10.01(f).
"Escrow Agent" means State Street Bank & Trust Company.
"Escrow Agreement" means the Escrow Agreement to be entered into among
NEON, Exelon Capital Partners and the Escrow Agent as of the Closing Date in the
event that the Reorganization is abandoned pursuant to Section 10 of this
Agreement, substantially in the form attached as Exhibit 10.01.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations of the SEC thereunder.
"Exelon Capital Partners" means Exelon Capital Partners, Inc., a Delaware
corporation.
"Exelon Cash Contributions" means the contributions of cash or
cash-equivalent property to be made by Exelon to NEON to defray capital expenses
as required by the Exelon System Agreement.
"Exelon Contribution Transactions" means collectively the Exelon Cash
Contributions, the Exelon In-Kind Capital Contributions and the issuance by NEON
of the Exelon NEON Shares.
"Exelon In-Kind Capital Contributions" means any in-kind contributions of
property (other than cash or cash-equivalents) to be made by Exelon to NEON as
contemplated by the Exelon System Agreement.
"Exelon NEON Shares" shall mean 2,106,625 shares of NEON Common Stock,
which is equal to 1.25 x 9.25% x number of shares outstanding on a fully-diluted
basis on the date of this Agreement (which does not include shares authorized
but unissued under NEON's option plans on such date). The percentage of shares
of NEON Common Stock and the absolute number of shares of NEON Common Stock to
which Exelon shall be entitled shall not be affected by the public trading price
for NEON Common Stock.
"Exelon Opinion of Counsel" means the opinion of Dilworth Paxson LLP,
counsel to Exelon, dated as of the Closing Date, substantially in the form set
forth in Exhibit 8.03(d).
3
<PAGE>
"Exelon Required Regulatory Approvals" means the filing and waiting period
requirements relating to the HSR Act and any other consents or approvals
necessary to grant the rights under the System Agreement in the NEON Fibers (as
defined in the System Agreement).
"Final Termination Date" shall have the meaning set forth in Section
11.02.
"Force Majeure" shall have the meaning set forth in Section 12.13.
"GAAP" - See Section 1.02.
"Governmental Authority" means any court, administrative or regulatory
agency or commission or other governmental entity or instrumentality, domestic,
foreign or supranational or any department thereof. In addition, for purposes of
this Agreement, the Nasdaq Stock Market shall be deemed a "Governmental
Authority."
"HSR Act" means the Hart-Scott-Rodino Antitrust Improvements Act of 1976,
as amended.
"Indemnifiable Loss" - See Section 9.01(a).
"Indemnified Party" or "Indemnified Parties"-- See Section 9.01(a).
"Indemnifying Party" - See Section 9.01(a).
"NEON" -- See Preamble.
"NEON Common Stock" means the Common Stock, $.01 par value per share, of
NEON.
"NEON Entities" - NorthEast Optic Network, Inc. and NEON Communications,
Inc., together.
"Old NEON" - See Preamble.
"NEON Opinion of Counsel" shall mean the opinion of Hale and Dorr LLP,
counsel to NEON, dated as of the Closing Date, substantially in the form set
forth in Exhibit 8.01(d)(i).
"NEON Required Regulatory Approvals" means the filing and waiting period
requirements relating to the HSR Act, the approval of an Additional Shares
Listing Application for the Exelon NEON Shares to be filed with Nasdaq and the
declaration of effectiveness by the SEC of a Registration Statement on Form S-4
relating to the Reorganization; provided, however, that such SEC approval shall
not be applicable in
4
<PAGE>
[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
the event that the transactions contemplated herein are consummated in the
manner set forth in Section 10 ("Alternative Transaction Structure").
"NEON SEC Documents" means all reports, forms, statements and other
documents filed by Old NEON with the Securities and Exchange Commission since
July 1, 1998, and publicly available on or prior to the date of this Agreement.
"Parent" means PECO Energy Company.
"Person" means any individual, partnership, limited liability company,
joint venture, corporation, trust, unincorporated organization, any other entity
or Governmental Authority.
"POP" or "Point of Presence" means the location where Exelon shall provide
NEON approximately [ ** ] square feet of rentable built-out telecommunication
space wherein NEON shall place its inter-party telecommunications equipment and
ancillary equipment and wherein NEON may allow its customers to place
telecommunications equipment and ancillary equipment.
"Pre-closing Acquisition Transaction" shall have the meaning set forth in
Section 2.05(a).
"Principal Shareholders Agreement" means that certain FiveCom, Inc.
Principal Shareholders Agreement, dated as of May 28, 1998, by and among Old
NEON, Northeast Utilities and Central Maine Power Company.
"Private Letter Ruling" shall have the meaning set forth in Section 7.05.
"Registration Rights Agreement" means the Registration Rights Agreement to
be entered into among NEON, Exelon (or Exelon Capital Partners in the event that
the Reorganization is not consummated prior to Closing) and CEC (or CECD in the
event that the Reorganization is not consummated prior to Closing) as of the
Closing Date, substantially in the form attached as Exhibit 1.01(b).
"Reimbursable Expenses" has the meaning set forth in Section 6.01.
"Reimbursement Agreement" means that certain letter agreement, dated as of
September 30, 1999, relating to the reimbursement of the NEON Entities by Exelon
and CEC of certain costs in connection with the Reorganization.
"Related Agreements" means the System Agreement, the Reimbursement
Agreement, the Stockholders' Agreement, the Registration Rights Agreement and,
if the Reorganization is abandoned pursuant to Section 10 of this Agreement, the
Escrow Agreement.
5
<PAGE>
"Reorganization"-- See Preamble.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended, and the
rules and regulations of the SEC thereunder.
"Stockholders' Agreement" means that certain Stockholders' Agreement dated
as of the date hereof by and among NEON, Mode 1 Communications, Inc., Northeast
Utilities, Exelon (or Exelon Capital Partners in the event that the
Reorganization is not consummated prior to Closing) and CEC (or CECD in the
event that the Reorganization is not consummated prior to Closing) relating to,
among other things, the nomination and election of a CEC designee and an Exelon
designee to the Board of Directors of NEON, substantially in the form attached
as Exhibit 8.01(d)(iv).
"System Agreement" means the System Agreement to be entered into between
NEON and Exelon as of the Closing Date, substantially in the form attached as
Exhibit 1.01(a).
1.02. Accounting Terms. The accounting terms used in this Agreement
and the Related Agreements shall, unless otherwise specifically provided, have
the meanings customarily given them in accordance with United States generally
accepted accounting principles ("GAAP") and all financial computations hereunder
or under this or those agreements shall, unless otherwise specifically provided,
be computed in accordance with GAAP consistently applied.
2. Delivery of the Exelon NEON Shares; Time and Place of Closing;
Consideration for Exelon NEON Shares
2.01. Delivery of the Exelon NEON Shares. Upon the terms and subject
to the satisfaction of the conditions set forth in this Agreement, at the
Closing NEON will deliver the Exelon NEON Shares to Exelon, which Exelon NEON
Shares shall be subject to certain restrictions in the manner set forth in
Section 2.03 of this Agreement in order to secure the obligations of Exelon for
property transfers and covenants which are consideration therefor.
2.02. Time and Place of Closing. The Closing shall take place on
such date as the parties may agree, which date shall be as soon as practicable
and no later than three Business Days following the date on which all the
conditions set forth in Section 8 have been satisfied or waived, at the offices
of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts or at such other
place or time as the parties may agree. The date and time at which the Closing
actually occurs is referred to as the "Closing Date".
6
<PAGE>
[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
2.03. Restrictions on Exelon NEON Shares.
(a) Immediately upon the completion of each of the following
events (in no particular order, except as explicitly set forth below), Exelon
shall cease to be "restricted" (as defined in (b) below) in its rights to the
ownership of the Exelon NEON Shares in the percentages set forth below:
<TABLE>
<CAPTION>
- - --------------------------------------------------------------------------------------------------------------------
Time of Removal of Restrictions of Shares: Percentage of Shares:
- - --------------------------------------------------------------------------------------------------------------------
<S> <C>
1. At Closing [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
2. Upon the later of (i) the date on which Exelon grants an IRU in
the NEON Fibers to NEON, pursuant to Section 1.1.1 of the System
Agreement, and (ii) the Acceptance Date, as defined in Section
1.3.3 of the System Agreement. [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
3. Upon the completed transfer to NEON of interconnection of the
Carrier POPs and/or LSOs with Exelon's Network, pursuant to
Article II of and Section 3.3.5 of the System Agreement. [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
4. Annually on each of the first four anniversaries of the Closing,
provided that all Exelon Cash Contributions have been made for
the immediately preceding 12-month period, to be distributed 25%
per year for so long as Exelon remains in compliance with [[ ** ]% aggregate
Section 3.3 of the System Agreement. [ ** ]% per annum)
- - --------------------------------------------------------------------------------------------------------------------
5. Upon the completion of the events identified in items 2, 3 and 4
above by Exelon. [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
Total: [ ** ]%
- - --------------------------------------------------------------------------------------------------------------------
</TABLE>
(b) [Intentionally Omitted]
(c) The Exelon NEON Shares may not be sold, pledged,
hypothecated or otherwise transferred by Exelon (except to an Affiliate) until
such shares are no longer restricted in accordance with the provisions of this
Section 2.03. In addition, if by the fifth anniversary of the Final Termination
Date, any Exelon NEON Shares remain restricted, Exelon (or any Affiliate to whom
such shares have been transferred) shall forfeit all of its rights to such
shares, and shall promptly surrender to NEON a certificate or certificates
representing such shares. The term "restrictions" as used in this Agreement in
reference to the Exelon NEON Shares shall refer to the restrictions set forth in
this Section 2.03(c). "Restricted" shares are shares that continue to be subject
to such restrictions. Exelon will be entitled to vote all Exelon NEON Shares and
will be entitled to all dividends payable with respect thereto irrespective of
whether such shares are restricted or unrestricted (or whether such shares are
held in the name of the Escrow Agent if the Reorganization is abandoned pursuant
to Section 10 of this Agreement); provided, however, that in-kind dividends
declared with respect
7
<PAGE>
to restricted Exelon NEON Shares shall remain "restricted" until such Exelon
NEON Shares become unrestricted.
(d) Notwithstanding the foregoing, except as provided in
Section 10.01(f) of this Agreement, and except for transfers to Affiliates,
Exelon and its Affiliates shall not sell, pledge, hypothecate or otherwise
transfer any Exelon NEON Shares prior to the first anniversary of the Closing
Date.
(e) Subject to the provisions of Section 10 of this Agreement,
each certificate representing the Exelon NEON Shares shall bear a restrictive
legend in substantially the following form, provided that, after the first
anniversary of the Closing Date, Exelon shall be entitled to have such legend
removed from the certificate or certificates representing any shares which are
no longer restricted in accordance with the provisions of this Section 2.03:
"The shares represented by this Certificate are subject to certain
restrictions on transfer and a right of forfeiture in favor of the
Company as set forth in a Subscription Agreement, dated as of
November 23, 1999, by and between the Company, its Affiliate and the
holder of this Certificate, a copy of which is available from the
Company or the holder of this Certificate upon request."
(f) The percentage of shares of NEON Common Stock and the
absolute number of shares of NEON Common Stock to which Exelon shall be entitled
pursuant to this Section 2.03 shall not be affected by the public trading price
for NEON Common Stock.
2.04. Consideration for the Exelon NEON Shares. In consideration of
the issuance of the Exelon NEON Shares to Exelon (or to the Escrow Agent for the
benefit of Exelon and the release of such shares to Exelon by the Escrow Agent
in accordance with the Escrow Agreement in the event that the Reorganization is
abandoned pursuant to Section 10 of this Agreement), at the Closing, Exelon
shall execute and deliver the System Agreement, pursuant to which Exelon shall
make all Exelon In-Kind Capital Contributions and Exelon Cash Contributions as
contemplated therein, in addition to the other covenants of Exelon set forth in
this Agreement and in the Related Agreements.
2.05. Certain Rights to Acquire Additional Shares.
(a) If either of the NEON Entities engages in a sale or
exchange of its capital stock in connection with a merger or acquisition
transaction (a "Pre-closing Acquisition Transaction"), which is consummated
between the date hereof and the earlier of the Closing Date and the Final
Termination Date, then Exelon, on the Closing Date, may, at its option, purchase
up to a number of shares of NEON Common Stock
8
<PAGE>
[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
which is equal to the product of [ ** ]% [ ** ] the total number of shares of
NEON Common Stock (on a fully-diluted basis) sold in connection with such
transaction. The purchase price per share of such shares shall be equal to the
average closing price of the NEON Common Stock on the Nasdaq National Market for
the 20 trading day period preceding the public announcement of such Pre-closing
Acquisition Transaction (or, in the event that such Pre-Closing Acquisition
Transaction is not publically announced, the closing date of such transaction).
(b) For the first [ ** ] or fewer options which Old NEON
grants under its option plans to purchase shares of its Common Stock between the
date of this Agreement and the Closing Date, then Exelon, on the Closing Date,
may, at its election, purchase up to a number of shares of NEON Common Stock
which is equal to the product of [ ** ]% [ ** ] the number of shares subject to
all such options. The per share price of shares purchased by Exelon pursuant to
the preceding sentence shall be the weighted average of the exercise prices per
share for such options. If the Company grants more than [ ** ] options to
purchase shares of its Common Stock under its option plans between the date of
this Agreement and the Closing Date, then, in addition to the shares of Common
Stock which Exelon is entitled to purchase on the Closing Date pursuant to the
first sentence of this Subsection 2.05(b), the number of Exelon NEON Shares
shall be increased at no cost to Exelon by a number of shares which is equal to
the product of [ ** ]% [ ** ] the number of shares subject to such options in
excess of [ ** ].
3. Representations and Warranties of the NEON Entities. As of the date of
this Agreement and the Closing Date, the NEON Entities, jointly and severally,
make the representations and warranties to Exelon set forth below.
3.01. Organization and Qualification. Each of the NEON Entities is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware and has all requisite corporate power and
authority to own, lease and operate its properties and to carry on its business
as is now being conducted. Each of the NEON Entities is duly qualified or
licensed and in good standing to do business in each jurisdiction where the
conduct of its business or the ownership, leasing or operation of its respective
properties require such qualification or licensing, except where the failure to
be so qualified or licensed and in good standing, individually or in the
aggregate, would not have a material adverse effect on the business of such NEON
Entity.
3.02. Authority Relative to This Agreement. Each of the NEON
Entities has all necessary corporate power and authority to execute and deliver
this Agreement and, as applicable, the Related Agreements and to consummate the
transactions contemplated by this Agreement and such Related Agreements. The
execution and delivery by each of the NEON Entities of this Agreement and the
applicable Related Agreements and the consummation by each of the NEON Entities
of the transactions contemplated by this Agreement and such Related Agreements
have been duly and validly authorized by the Board of Directors of each of the
NEON
9
<PAGE>
Entities or by a committee thereof to whom such authority has been delegated and
no other corporate proceedings on the part of either of the NEON Entities are
necessary to authorize this Agreement or the Related Agreements or the
consummation of the transactions contemplated by this Agreement or the Related
Agreements. This Agreement and the Related Agreements have been duly and validly
executed and delivered by the NEON Entities and, assuming that this Agreement
and the Related Agreements constitute valid and binding agreements of each other
party hereto and thereto, constitute valid and binding agreements of the NEON
Entities, enforceable against each of the NEON Entities in accordance with their
respective terms, except as set forth in the NEON Opinion of Counsel.
3.03. Consents and Approvals; No Violation.
(a) Other than the NEON Required Regulatory Approvals and
requisite board and stockholder approvals, no material declaration, filing or
registration with, or notice to, or authorization, consent or approval of any
Governmental Authority or any consent from a third party, including any bank,
alliance partner, lender, investor or other Person, is necessary for the
consummation by the NEON Entities, or either of them, of the transactions
contemplated by this Agreement or the Related Agreements.
(b) Neither the execution and delivery of this Agreement or
the Related Agreements by each of the NEON Entities, as applicable, nor the sale
by NEON of the Exelon NEON Shares pursuant to this Agreement will (i) conflict
with or result in any breach of any provision of the respective Certificate of
Incorporation or By-laws of either of the NEON Entities, (ii) result in a
default (or give rise to any right of termination, cancellation or acceleration)
or constitute an event which, with or without the giving of notice, lapse of
time, or both, would constitute a default under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, license, agreement, lease or
other instrument or obligation to which either of the NEON Entities is a party
or by which either of the NEON Entities or any of its respective properties is
or may be bound or (iii) except for the NEON Required Regulatory Approvals,
violate any order, writ, injunction, decree, statute, rule or regulation
applicable to either of the NEON Entities or any of their respective properties.
(c) To the knowledge of the NEON Entities, there is no reason
that Old NEON should fail to obtain the NEON Required Regulatory Approvals on or
before the Closing Date.
3.04. NEON SEC Documents. The capitalization of Old NEON, as well as
its quarterly and annual balance sheets, statements of income and statements of
cash flows, are disclosed in all material respects in the NEON SEC Documents in
conformity with applicable SEC rules and regulations. The filed NEON SEC
Documents, at the time filed with the SEC, conformed in all material respects to
the then applicable requirements of the Securities Act and the Exchange Act.
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3.05. Legal Proceedings. Except as set forth in the NEON SEC
Documents, there are no claims, actions, proceedings or investigations pending
or, to the knowledge of each of the NEON Entities, threatened against or
relating to either of the NEON Entities which would, individually or in the
aggregate, be reasonably expected to create a material adverse effect on the
business, operations or prospects of NEON or Old NEON.
3.06. Capital Stock Documents. Old NEON has provided copies of or
disclosed in this Agreement all material contracts contemplated by the issuance
or commitment to issue any capital stock of the NEON Entities or warrants for
any capital stock of the NEON Entities. Such contractual documentation is true,
complete and correct in all material respects and has not been amended or
supplemented in any way. Each such contract has either been fully performed in
all material respects or remains in full force and effect, as the case may be
except for those that have been terminated in accordance with their terms.
3.07. Shareholders Agreement; Corporate Governance Documents. Old
NEON has provided to Exelon a copy of the Principal Shareholders Agreement. To
the knowledge of the NEON Entities, this copy is true, complete and correct and
have not been amended or supplemented in any way and remains in full force and
effect. Old NEON has provided to Exelon copies of the Certificate of
Incorporation and by-laws of each of the NEON Entities. Each such copy is true,
complete and correct and each such document has not been amended or supplemented
and remains in full force and effect.
3.08. Other Contracts. Except as prohibited by applicable
nondisclosure obligations, Old NEON has provided to Exelon copies of (i) all
material contracts for sale or lease by either or both of the NEON Entities of
services or products; (ii) all material vendor contracts for sale or lease to
either or both of the NEON Entities of services of products; (iii) all material
contracts for maintenance, repair and/or operations; (iv) all material
right-of-way, conduit or similar leases for use by either or both of the NEON
Entities to deploy their respective network; and (v) all material employee
contracts with either or both of the NEON Entities or any subsidiary of either
of them, whether such subsidiary is direct or indirect or wholly or majority
owned. Each such copy is true, complete and correct in all material respects and
each such contract has not been amended or supplemented and remains in full
force and effect. To the extent that either or both of the NEON Entities is
prohibited from providing copies of certain material contracts as a result of
contractual nondisclosure obligations, such NEON Entity shall use commercially
reasonable efforts to obtain consent to release such documents to Exelon and,
upon the receipt of such consent, shall promptly release copies of such
documents to Exelon.
3.09. Exelon NEON Shares. The Exelon NEON Shares, when issued and
delivered to Exelon and no longer restricted in accordance with this Agreement
(or
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when issued and delivered to the Escrow Agent and when released to Exelon in the
event that the Reorganization is abandoned pursuant to Section 10 of this
Agreement), will be duly and validly issued, fully paid and nonassessable, and
free and clear of any preemptive rights, liens and encumbrances. Assuming the
accuracy of the representations made by Exelon set forth in Section 4.04 below,
the issuance and sale of the Exelon NEON Shares and any other shares of Common
Stock issued to Exelon pursuant to this Agreement constitute transactions exempt
from registration under the Securities Act in reliance on the exemption
therefrom provided under Section 4(2) of the Securities Act.
3.10. No Property or Business Activity other than for the
Reorganization. NEON was incorporated on November 22, 1999, and, prior to the
Reorganization, neither NEON nor NEON Acquisition has owned any assets (other
than, in the case of NEON, its ownership of NEON Acquisition) or has engaged in
any business operations other than in connection with the Reorganization.
4. Representations and Warranties of Exelon. As of the date of this
Agreement and the Closing Date, Exelon makes the representations and warranties
to the NEON Entities as set forth in each Section of this Section 4.
4.01. Organization and Qualification. It is a corporation duly
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all requisite corporate power and authority
to own, lease and operate its properties and to carry on its business as is now
being conducted. It is a wholly-owned subsidiary of Parent.
4.02. Authority Relative to this Agreement. It has all necessary
power and authority to execute and deliver this Agreement and the Related
Agreements and, subject to the Exelon Required Regulatory Approvals, to
consummate the transactions contemplated hereby and thereby. Its execution and
delivery of this Agreement and the Related Agreements and its consummation of
the transactions contemplated hereby and thereby have been duly and validly
authorized by the Board of Directors of Exelon or by a committee thereof to
which such authority has been delegated and no other proceedings on its part are
necessary to authorize this Agreement or the Related Agreements or the
consummation of the transactions contemplated hereby or thereby. It has duly and
validly executed and delivered this Agreement and the Related Agreements and,
assuming that this Agreement and the Related Agreements constitute valid and
binding agreements of each other party thereto, then this Agreement and the
Related Agreements constitute valid and binding agreements, enforceable against
it in accordance with their respective terms, except as set forth in the Exelon
Opinion of Counsel.
4.03. Consents and Approvals.
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(a) Other than the Exelon Required Regulatory Approvals, no
material declaration, filing or registration with, or notice to, or
authorization, consent or approval of any Governmental Authority is necessary to
be made or obtained by Exelon for its consummation of the transactions
contemplated by this Agreement or the Related Agreements.
(b) Neither its execution and delivery of this Agreement or
the Related Agreements nor its exchange of the Exelon NEON Shares pursuant to
this Agreement will (i) conflict with or result in any breach of any provision
of its Articles of Incorporation or By-laws, (ii) result in a default (or give
rise to any right of termination, cancellation or acceleration) under any of the
terms, conditions or provisions of any note, bond, mortgage, indenture, license,
agreement, lease or other instrument or obligation or by which it or any of its
properties is or may be bound or (iii) except for the Exelon Required Regulatory
Approvals, violate any order, writ, injunction, decree, statute, rule or
regulation applicable to it or its properties.
(c) To the knowledge of Exelon, there is no reason that Exelon
should fail to obtain the Exelon Required Regulatory Approvals.
4.04. Acquisition of Shares Solely for Investment. Exelon is
acquiring the Exelon NEON Shares and all other shares of Common Stock issuable
to Exelon pursuant to this Agreement for its own account for investment only,
and not with a view to, or for sale in connection with, any distribution of such
shares in violation of the Securities Act or any rule or regulation under the
Securities Act.
5. Covenants of the NEON Entities
5.01. Conduct of Business between the Date of the Agreement and the
Closing Date. From the date of this Agreement through and including the Closing
Date, each of the NEON Entities agrees to operate their respective business and
conduct their respective operations in the ordinary course consistent with their
past practice.
5.02. Deliver Exelon NEON Shares at Closing. At the Closing and upon
the terms and subject to the satisfaction of the conditions in this Agreement,
NEON agrees to deliver the Exelon NEON Shares to Exelon (or to the Escrow Agent
in the event that the Reorganization is abandoned pursuant to Section 10 of this
Agreement).
5.03. Directors' and Officers' Insurance. Each of the NEON Entities
agrees to provide directors' and officers' liability insurance coverage for any
Exelon-appointed director who is on the Board of Directors of NEON. The NEON
Entities agree that this liability insurance coverage shall be for a minimum of
$10 million and shall apply to specified claims as listed in such coverage
documents, preliminary copies of which shall be delivered by the NEON Entities
to Exelon prior to the Closing against any such person in respect of his or her
service on the NEON Board of Directors
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including any claim(s) made following the final date of service for such person
on the NEON Board of Directors. The NEON Entities shall not take any action that
would void or cancel such liability insurance coverage at any time during the
tenure of any director designated by Exelon and for a period of seven years
thereafter without the prior written consent of such director. Any
Exelon-appointed director shall be a third party beneficiary for the purpose of
this Section 5.03.
5.04. [Intentionally Omitted]
5.05. Right of First Refusal.
(a) From and after the Closing Date, each of the NEON Entities
shall not sell or agree to sell any shares of its capital stock in connection
with any private placement of debt or equity securities (not including a private
placement pursuant to Rule 144A under the Securities Act) which is intended
solely to finance operations of the NEON Entities (a "Money Raising
Transaction"), unless in each such case the NEON Entities shall have first
complied with this Section.
(b) Each of the NEON Entities shall deliver to Exelon a
written notice of any proposed Money Raising Transaction which shall (i)
identify and describe the price and other terms upon which the securities (the
"Offered Securities") are to be offered, (ii) identify the persons or entities
to which the Offered Securities are to be sold and (iii) offer to sell to Exelon
such portion of the Offered Securities as the aggregate number of shares of
capital stock then held by Exelon bears to the total number of shares of NEON
Common Stock then currently outstanding on a fully-diluted basis (excluding
shares authorized but unissued under employee stock plans of Old NEON) (the
"Written Offer"). Exelon shall have the right for a period of 20 days following
delivery of the Written Offer (the "Acceptance Period") to notify the applicable
NEON Entity of its intent to purchase, at the price and upon the other terms
specified in the Written Offer, some or all of the number of the Offered
Securities which it is entitled to purchase under this Section 5.05(b).
(c) To accept a Written Offer, in whole or in part, Exelon
must deliver a written notice to the applicable NEON Entity prior to the
expiration of the Acceptance Period, which notice shall set forth the amount of
Offered Securities that Exelon elects to purchase (an "Acceptance Notice"). In
the event that the applicable NEON Entity does not receive an Acceptance Notice
from Exelon prior to the expiration of the Acceptance Period, such NEON Entity
may, at its option, consummate the Money Raising Transaction on substantially
the terms set forth in the Written Offer without further obligation to Exelon
under this Section 5.05.
(d) Exelon's right to participate in a Money Raising
Transaction pursuant to this Section shall not apply to transactions which are
not intended solely to raise cash ("Excluded Transactions"). Excluded
Transactions shall include, without limitation, transactions involving the
creation of strategic business relationships,
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transactions under stock incentive plans of either of the NEON Entities and
transactions in which either of the NEON Entities' securities are to be issued
in consideration of services or other non-cash consideration.
(e) The provisions of this Section 5.05 shall terminate in
their entirety upon the earlier of (a) the sale of all or substantially all of
the assets or outstanding capital stock of NEON, or a merger involving NEON
wherein the stockholders of NEON immediately prior to such merger no longer hold
at least 50% of the outstanding capital stock of NEON after such merger, and
(b) the date on which Exelon shall hold less than one half of the percentage of
the outstanding shares of the NEON Common Stock (and all other classes of NEON's
capital stock carrying voting rights) beneficially owned by Exelon or CEC (or
their respective Affiliates), whichever is lower, on the Closing Date.
5.06. [Intentionally Omitted]
5.07. Pre-Closing Disclosure of Material Events. In the event that
either or both of the NEON Entities intend to become a party to a transaction
involving a merger, acquisition or disposition of assets and/or stock (an "M&A
Transaction") prior to Closing, the NEON Entities shall provide Exelon with
prior notice of such transaction, although such NEON Entity or Entities shall
not be required to obtain Exelon's approval prior to engaging in any M&A
Transaction. In the event that either or both of the NEON Entities enter into an
M&A Transaction in which such NEON Entity or Entities are not surviving
entities, such NEON Entity or Entities shall obtain from the entity surviving
such transaction a written agreement obligating such entity to assume the
obligations of such NEON Entity or Entities under this Agreement and the Related
Agreements, which agreement shall be executed and delivered to Exelon
concurrently with the closing of such M&A Transaction.
5.08. Nasdaq Listing. The NEON Entities shall use their best efforts
to list, subject to notice of issuance, the Exelon NEON Shares on the Nasdaq
Stock Market.
5.09. Tax Reporting. The NEON Entities shall, in a manner consistent
with applicable law, (i) report all contributions of property by Exelon to NEON
pursuant to the System Agreement as transfers to a controlled corporation
qualifying for treatment under Section 351 of the Internal Revenue Code of 1986,
as amended (the "Code"), and (ii) determine the tax basis in the assets so
contributed by Exelon to NEON in accordance with the provisions of the Code and
treasury regulations as applicable to an exchange to which Section 351 of the
Code applies.
5.10. Prohibited Actions Pending the Closing. Unless otherwise
provided for herein or approved by Exelon in writing, from the date hereof until
the Closing Date, neither of the NEON Entities shall:
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(a) amend or otherwise change its Certificate of Incorporation
or By-laws, except as contemplated by this Agreement;
(b) cease to be engaged in the businesses in which it is
presently engaged or enter into any material new line of business not
contemplated by their respective business plans previously provided to Exelon
and not related to the provision of telecommunications services;
(c) take any action prior to the Closing Date which would
result in any of the conditions set forth in Article VIII not being satisfied on
the Closing Date;
(d) assume, guarantee or otherwise become responsible for the
obligations of any other party, or agree to do so, except in connection with
indebtedness permitted by clause (a) above or otherwise consistent with past
practice; or
(e) sell or agree to sell any shares of its capital stock in
connection with any Money Raising Transaction.
5.11. Additional Actions Pending the Closing. For a period ending on
the earlier of 120 days following the date of this Agreement or the Closing
Date, neither of the NEON Entities shall take any of the following actions
without the prior written consent of Exelon, which consent shall not be
unreasonably withheld or delayed:
(a) authorize or incur any additional debt for money borrowed,
or incur additional debt other than (i) intercompany loans or (ii) trade debt or
borrowing consistent with past practice under existing credit arrangements;
(b) except in connection with indebtedness permitted pursuant
to clause (a) above, and except for purchase money security interests granted in
the ordinary course of business, mortgage, pledge or subject to lien or other
encumbrance any of its properties or agree to do so; or
(c) except as contemplated by Section 5.07 above, enter into
or agree to enter into any material agreement, contract or commitment other than
employment, equipment purchase, sales, service, construction, fiber optic
facilities and services or license agreements entered into in the ordinary
course of business.
5.12. Completion of the Reorganization. Old NEON shall use its best
efforts to complete the Reorganization immediately prior to the Closing.
5.13. Survival of Certain Covenants. The Covenants of the NEON
Entities set forth in Sections 5.03, 5.05, 5.06 and 5.09 shall survive the
Closing.
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[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
6. Reimbursement of Reorganization Costs. In further consideration of the
transactions contemplated by this Agreement and the Related Agreements, Exelon
agrees to reimburse Old NEON for [ ** ]% of all reasonable legal, accounting and
other fees and disbursements incurred by the NEON Entities relating to the
Reorganization (the "Reimbursable Expenses") that are actually incurred by the
NEON Entities from and after April 1, 1999 until the Closing Date, except to the
extent that such Reimbursable Expenses have been paid by Exelon prior to the
execution of this Agreement, and in any event regardless of whether the
Reorganization is abandoned pursuant to Section 10 of this Agreement. The
obligation of Exelon to pay such Reimbursable Expenses, while based on actual
costs incurred by the NEON Entities, shall not exceed $ [ ** ], without the
prior written consent of Exelon. The Reimbursable Expenses have been estimated,
for budgetary purposes and not in limitation of the reimbursement obligations
set forth in this Section 6, to be $ [ ** ] in the aggregate, as follows:
(a) Costs incurred from April 1, 1999 to the execution of this
Agreement, approximately $ [ ** ], consisting of $ [ ** ] of legal fees and
$ [ ** ] in auditor/accounting fees; and
(b) Costs incurred from the execution of this Agreement
through the Closing Date, approximately $ [ ** ], consisting of printing costs
(including the registration statement on Form S-4) of $ [ ** ], legal fees of $
[ ** ], auditor/accounting fees of $ [ ** ], travel and entertainment expenses
for a public information road show in Boston, New York, Philadelphia and
elsewhere of $ [ ** ], filing and other costs relating to Nasdaq of $ [ ** ] and
SEC filing expenses of $ [ ** ].
Upon receipt from either of the NEON Entities of written evidence of the
payment of Reimbursable Expenses, Exelon shall reimburse Old NEON in full within
30 days of receipt of such evidence, subject to the aggregate limitation set
forth above. This Section 6 shall supersede all prior agreements between Exelon
and the NEON Entities with respect to the subject matter hereof and neither of
the NEON Entities shall be entitled to any duplicate recovery in respect of any
of the foregoing expenses.
7. Covenants of Exelon and NEON.
7.01. Consents and Approvals. Exelon and the NEON Entities agree to
cooperate and assist one another in obtaining all required consents and
approvals of any Governmental Authority necessary to consummate the transactions
contemplated by this Agreement and the Related Agreements. Such consents and
approvals include but are not necessarily limited to the NEON Required
Regulatory Approvals and the Exelon Required Regulatory Approvals. The
cooperation required under this Section shall be at the expense of the party
required to obtain such consent or approval as a condition to the Closing.
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7.02. Further Assurances. Subject to the terms and conditions of
this Agreement, each of the parties will use its best efforts to take, or cause
to be taken, all action, and to do, or cause to be done, as soon as possible,
all things necessary, proper or advisable under applicable laws and regulations
to consummate the transactions contemplated by this Agreement and the Related
Agreements, including using its best efforts to ensure satisfaction of the
conditions precedent to each party's obligations under this Agreement.
7.03. Public Statements. The parties shall consult with each other
prior to issuing any public announcement, statement or other disclosure with
respect to this Agreement, the Related Agreements or the transactions
contemplated hereby or thereby and shall not issue any such public announcement,
statement or other public disclosure prior to such consultation, except as may
be required by law or based upon advice of counsel. Neither of the NEON Entities
shall use Exelon's name, logo trademark or service mark in any public
advertisement without Exelon's prior written approval, which approval shall not
be unreasonably withheld or delayed.
7.04. [Intentionally Omitted]
7.05. Agreement Regarding Private Letter Ruling. The NEON Entities
and Exelon agree to cooperate and assist one another in obtaining a private
letter ruling, addressed to each of them, from the Internal Revenue Service to
the effect that (i) the Reorganization and the Contribution Transactions qualify
as exchanges under Section 351 of the Code as to each of Exelon and the
stockholders of Old NEON and/or (ii) the Reorganization will qualify as a
tax-free transaction under Section 368(a)(2)(E) of the Code (the "Private Letter
Ruling").
8. Conditions Precedent to Closing.
8.01. Conditions Precedent to Exelon Obligations.
The obligation of Exelon to consummate the transactions
contemplated by this Agreement are subject to the fulfillment (or waiver) on or
prior to the Closing Date of each of the following conditions:
(a) the representations and warranties of the NEON Entities
shall be true and correct on the Closing Date as if made at and as of such date;
(b) the NEON Entities shall have performed the covenants and
agreements contained in this Agreement and in each of the Related Agreements
which are required to be performed by each of them on or prior to the Closing
Date;
(c) the NEON Entities shall have executed and delivered
certified copies of (i) resolutions of their respective Board of Directors (and,
if necessary, the stockholders) authorizing the transactions contemplated by
this
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Agreement and the Related Agreements, (ii) their respective Certificates of
Incorporation and By-laws and (iii) such other supporting documents and
certificates as Exelon may reasonably request;
(d) Exelon shall have received
(i) the NEON Opinion of Counsel,
(ii) a certificate of an authorized officer of NEON,
dated as of the Closing Date, to the effect that, to the best of such officer's
knowledge, the conditions imposed on NEON by paragraphs (a), (b) and (c) above
have been satisfied,
(iii) a certificate of an authorized officer of Old
NEON, dated as of the Closing Date, to the effect that, to the best of such
officer's knowledge, the conditions imposed on Old NEON by paragraphs (a), (b)
and (c) above have been satisfied, and
(iv) a copy of each of the Related Agreements executed
by each of the parties thereto, which condition may not be waived prior to the
date that is one Business Day prior to the Final Termination Date;
(e) no preliminary or permanent injunction or other order or
decree by any Federal or state court of competent jurisdiction and no statute or
regulation enacted by any Governmental Authority prohibiting the consummation of
the exchange of the Exelon NEON Shares or any of the other transactions
contemplated by this Agreement or any of the Related Agreements shall be in
effect;
(f) subject to the provisions of Section 8.03 of this
Agreement, the NEON Required Regulatory Approvals and the Exelon Required
Regulatory Approvals shall have been obtained and all conditions to their
effectiveness prescribed therein or otherwise by law, regulation or order shall
have been satisfied; provided, however, that if the Exelon Required Regulatory
Approvals and/or the NEON Required Regulatory Approvals are available only on
terms that materially adversely change the economic benefit to Exelon of the
contemplated transaction, then such Exelon Required Regulatory Approvals and/or
NEON Required Regulatory Approvals shall be deemed not to have been obtained and
the condition set forth in this subsection shall be deemed to be unsatisfied,
whereupon Exelon may elect to terminate this Agreement and provide prompt
written notice of such termination to the NEON Entities;
(g) subject to the provisions of Section 10 of this Agreement,
the Reorganization, as described in the Preamble, shall have been completed
immediately prior to the Closing;
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[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
(h) the Board of Directors of NEON shall have taken all action
necessary to elect Exelon's designee to the Board of Directors of NEON,
effective as of the consummation of the transactions contemplated by this
Agreement; and
(i) the Exelon NEON Shares shall have been approved as
additional shares of NEON Common Stock for listing upon notice of issuance on
the Nasdaq Stock Market.
8.02. Conditions Precedent to the NEON Entities' Obligations.
The obligation of the NEON Entities to consummate the
transactions contemplated by this Agreement are subject to the fulfillment (or
waiver) on or prior to the Closing Date of each of the following conditions:
(a) the representations and warranties of Exelon shall be true
and correct on the Closing Date as if made at and as of such date;
(b) Exelon shall have performed the covenants and agreements
contained in this Agreement and in each of the Related Agreements which are
required to be performed by it on or prior to the Closing Date;
(c) Exelon shall have executed and delivered certified copies
of (i) resolutions of the Board of Directors (and, if necessary, the
stockholders) of Exelon authorizing the transactions contemplated by this
Agreement and the Related Agreements, (ii) its Articles of Incorporation and
By-laws and (iii) such other supporting documents and certificates as the NEON
Entities may reasonably request;
(d) NEON shall have received
(i) the Exelon Opinion of Counsel,
(ii) a certificate from an authorized officer of Exelon,
dated as of the Closing Date, to the effect that to the best of such officer's
knowledge the conditions imposed on such party by paragraphs (a), (b) and (c)
above have been satisfied,
(iii) all requisite stockholder approvals relating to
the contemplated transaction, including without limitation approval of any
applicable registration statement,
(iv) subject to the provisions of Section 10 of this
Agreement, a one-time cash payment from Exelon in the amount of $ [ ** ], and
(e) no preliminary or permanent injunction or other order or
decree by any Federal or state court of competent jurisdiction and no statute or
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regulation enacted by any Governmental Authority prohibiting the consummation of
the exchange of the Exelon NEON Shares or any of the other transactions
contemplated by this Agreement or any of the Related Agreements shall be in
effect;
(f) subject to the provisions of Section 8.03 of this
Agreement, the NEON Required Regulatory Approvals and the Exelon Required
Regulatory Approvals shall have been obtained and all conditions to their
effectiveness prescribed therein or otherwise by law, regulation or order shall
have been satisfied; provided, however, that if the Exelon Required Regulatory
Approvals and/or the NEON Required Regulatory Approvals are available only on
terms that materially adversely change the economic benefit to the NEON Entities
of the contemplated transaction, then such Exelon Required Regulatory Approvals
and/or NEON Required Regulatory Approvals shall be deemed not to have been
obtained and the condition set forth in this subsection shall be deemed to be
unsatisfied, whereupon Old NEON may elect to terminate this Agreement and
provide prompt written notice of such termination to Exelon; and
(g) subject to the provisions of Section 10 of this Agreement,
the Reorganization, as described in the Preamble, shall have been completed
immediately prior to the Closing.
9. Indemnification and Third Party Claims
9.01. Indemnification.
(a) Each party will indemnify and hold harmless the other
party and its Affiliates and their respective directors, officers, employees and
agents (including such other party, individually, an "Indemnified Party" and
collectively, the "Indemnified Parties") from and against any and all claims,
demands or suits by any person, and all losses, liabilities, damages,
obligations, payments, costs, taxes and expenses (including reasonable legal
fees and expenses and including costs and expenses incurred in connection with
investigations and settlement proceedings) (each, an "Indemnifiable Loss"), as
incurred, asserted against or suffered by any Indemnified Parties relating to,
resulting from or arising out of:
(i) any breach by a party of any covenant or agreement
of that party contained in this Agreement or the representations and warranties
of that party; or
(ii) any breach by a party of any Related Agreement to
which it is a party.
If the amount of any Indemnifiable Loss, at any time
subsequent to the making of any indemnity payment in respect thereof, is reduced
by recovery, settlement or otherwise under or pursuant to any insurance
coverage, or pursuant to
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any claim, recovery, settlement or payment by or against any other person, the
amount of such reduction, less any costs, expenses or premiums incurred in
connection therewith, will promptly be repaid by the Indemnified Party to the
party required to provide indemnification hereunder (the "Indemnifying Party")
with respect to such Indemnifiable Loss.
(b) To the fullest extent permitted by law, no Indemnifying
Party shall be liable to any Indemnified Party for any claims, demands or suits
for consequential, incidental, special, exemplary, punitive, indirect or
multiple damages connected with or resulting from any breach of this Agreement
or any of the Related Agreements (other than breach of this Section 9), or any
actions undertaken in connection with or applicable hereto or thereto.
(c) Other than as set forth in Section 9.03, the rights and
remedies of each party under this Section 9 are, as between and among the
parties, exclusive and in lieu of any and all other rights and remedies which
that party may have under this Agreement and the Related Agreements or otherwise
for monetary relief with respect to (i) any breach of, or failure to perform,
any covenant or agreement set forth in this Agreement or the Related Agreements
by any party or (ii) any breach of any representation or warranty by any party.
Each party agrees that the previous sentence shall not limit or otherwise affect
any non-monetary right or remedy which any party may have under this Agreement
or the Related Agreements or otherwise limit or affect any party's right to seek
equitable relief, including the remedy of specific performance.
(d) The parties agree that, notwithstanding Section 9.01(c),
each party shall retain, subject to the other provisions of this Agreement all
remedies at law or in equity with respect to fraud or willful or intentional
breaches of this Agreement or the Related Agreements.
(e) Exelon (on the one hand) and the NEON Entities, jointly
and severally (on the other hand), shall indemnify and hold harmless the other
party and its Affiliates from and against any and all claims of brokerage fees,
commissions or finder's fees in connection with the transactions contemplated by
this Agreement or the Related Agreements by reason of any action taken by the
other party.
9.02. Third Party Claims Procedures.
(a) If any Indemnified Party receives notice of the assertion
of any claim or of the commencement of any claim, action, or proceeding made or
brought by any person who is not a party or an Affiliate of a party (a "Third
Party Claim") with respect to which indemnification is to be sought from an
Indemnifying Party, the Indemnified Party will give such Indemnifying Party
reasonably prompt written notice thereof, but in any event not later than 10
Business Days after the Indemnified Party's receipt of notice of such Third
Party Claim; provided, however, that a failure to give
22
<PAGE>
timely notice will not affect the rights or obligations of any Indemnified Party
except if, and only to the extent that, as a result of such failure, the
Indemnifying Party was materially prejudiced. Such notice shall describe the
nature of the Third Party Claim in reasonable detail and will indicate the
estimated amount, if practicable of the Indemnifiable Loss that has been or may
be sustained by the Indemnified Party.
(b) If a Third Party Claim is made against an Indemnified
Party, the Indemnifying Party will be entitled to participate in the defense
thereof and, if it so chooses, to assume the defense thereof with counsel
selected by the Indemnifying Party; provided, however, that such counsel is not
reasonably objected to by the Indemnified Party; and provided further that the
Indemnifying Party first admits in writing its liability to the Indemnified
Party with respect to all material elements of such claim. Should the
Indemnifying Party so elect to assume the defense of a Third Party Claim, the
Indemnifying Party will not be liable to the Indemnified Party for any legal
expenses subsequently incurred by the Indemnified Party in connection with the
defense thereof. If the Indemnifying Party elects to assume the defense of a
Third Party Claim, the Indemnified Party will (i) cooperate in all reasonable
respects with the Indemnifying Party in connection with such defense, (ii) not
admit any liability with respect to, or settle, compromise or discharge, any
Third Party Claim without the Indemnifying Party's prior written consent and
(iii) agree to any settlement, compromise or discharge of a Third Party Claim
which the Indemnifying Party may recommend and which by its terms obligates the
Indemnifying Party to pay the full amount of the liability in connection with
such Third Party Claim and releases the Indemnified Party completely in
connection with such Third Party Claim. In the event the Indemnifying Party
shall assume the defense of any Third Party Claim, the Indemnified Party shall
be entitled to participate in (but not control) such defense with its own
counsel at its own expense. If the Indemnifying Party does not assume the
defense of any such Third Party Claim, the Indemnified Party may defend the same
in such manner as it may deem appropriate, including settling such claim or
litigation after giving notice to the Indemnifying Party of the terms of the
proposed settlement and the Indemnifying Party will promptly reimburse the
Indemnified Party upon written request. Anything contained in this Agreement to
the contrary notwithstanding, no Indemnifying Party shall be entitled to assume
the defense of any Third Party Claim if such Third Party Claim seeks an order,
injunction or other equitable relief or relief for other than monetary damages
against the Indemnified Party which, if successful, would materially adversely
affect the business of the Indemnified Party.
9.03. Other Remedies. In the event that Exelon fails to make any
In-Kind Contribution as required by the System Agreement, Exelon agrees to
reimburse NEON for any penalties paid to NEON's customers as a direct result of
such failure; provided, however, Exelon shall only be required to reimburse NEON
for such penalties incurred by NEON after the expiration of eight months after
Exelon obtains all Exelon Required Regulatory Approvals or September 1, 2000,
whichever is later, and -no such penalties incurred
23
<PAGE>
[Confidential materials omitted and filed separately with the Securities and
Exchange Commission. Asterisks denote omissions.]
prior to such date. Notwithstanding the preceding sentence, Exelon shall not be
obligated to reimburse NEON if, and only to the extent that, it becomes
impossible for Exelon to so perform as a result of a Force Majeure (as defined
in the System Agreement). 9.04. Limitation of Liability. Under no circumstance
shall the aggregate of (1) Exelon's liability to NEON in connection with the
transactions contemplated by this Agreement, the System Agreement and all of the
Related Agreements, and (2) Parent's liability under Section 12.12 of this
Agreement and Section 7.17 of the System Agreement, exceed $ [ ** ].
10. Alternative Transaction Structure.
10.01. Failure to Obtain Private Letter Ruling. In the event that the
Internal Revenue Service clearly indicates orally or in writing to both parties
either that it is unwilling to render all or any part of the Private Letter
Ruling or that it believes that the Reorganization and the Contribution
Transaction will not qualify as exchanges under Section 351 of the Code as to
either Exelon or the stockholders of Old NEON or that the Reorganization will
not qualify as a tax-free transaction under Section 368(a)(2)(E) of the Code, or
at the mutual election of Exelon and NEON, then :
(a) NEON shall not be required to effect the Reorganization;
(b) NEON shall not be required to perform the covenants set
forth in Section 5.09;
(c) Exelon shall not be required to make the cash payment to
NEON pursuant to Section 8.02(d)(iv);
(d) Exelon and Old NEON shall be obligated to consummate the
transactions contemplated by this Agreement, provided that all conditions
precedent to such parties obligations (except those set forth in Sections
8.01(g) and 8.02(g)) have been satisfied;
(e) in lieu of the provisions relating to the restrictions on
the NEON Shares set forth in Section 2.03 of this Agreement, at the Closing,
NEON shall deliver the Exelon NEON Shares to the Escrow Agent for the benefit of
Exelon, the parties will enter into the Escrow Agreement at the Closing, and, no
later than three days following the completion of the events set forth in
Section 2.03(a) (in no particular order, except as explicitly set forth
therein), NEON shall cause the Escrow Agent to release to Exelon the respective
percentages of Exelon NEON Shares set forth in Section 2.03(a);
24
<PAGE>
(f) Notwithstanding the provisions of Section 2.05 of this
Agreement, prior to the first anniversary of the Closing Date, Exelon shall be
entitled to sell a number of Exelon NEON Shares having a value equal to the tax
obligations payable by it prior to the first anniversary of the Closing Date as
a result of the transactions contemplated by this Agreement and the Related
Agreements, up to the number of Exelon NEON Shares then released to Exelon under
the terms of this Agreement and the Escrow Agreement (the "Tax Shares"). Credit
Suisse First Boston, or such other investment bank of national standing as NEON
may elect (in either case, the "Default Investment Bank"), shall act as the
broker for any such sale of Tax Shares; provided, however, that Exelon shall
have the right to select another investment bank of national standing (an
"Alternative Investment Bank") to effect the sale of Tax Shares, if (i) the
aggregate fees and commissions imposed by the Alternative Investment Bank are
materially less than the fees quoted by the Default Investment Bank, and (ii)
the Default Investment Bank has been offered the opportunity to meet such level
of fees and commissions quoted by such Alternative Investment Bank but is
unwilling to meet such terms. Any such sale or sales of Tax Shares shall be made
in a manner that will, in the reasonable judgment of NEON, avoid disruption of
the market for NEON Common Stock. On each occasion that Exelon desires to sell
any Tax Shares pursuant to this Section 10.01(e), it shall give written notice
to NEON of its desire to do so, which written notice shall set forth, in
reasonable detail, the calculation of the taxes due, the number of Tax Shares,
the date that such taxes are due, and the proposed method of disposition of the
Tax Shares. Exelon shall not sell any Tax Shares until it has received NEON's
written consent to such sale, which consent shall not be unreasonably withheld,
conditioned or delayed. If requested by Exelon, NEON shall promptly file and
have declared effective a Registration Statement on Form S-3 (if NEON is then
eligible to use such form) covering the resale of the Tax Shares. Such
registration shall be subject to the terms and conditions of the Registration
Rights Agreement, provided however that such registration shall not count as a
demand registration under Section 2.1(a) of the Registration Rights Agreement;
and
(g) In lieu of the restrictive legend provided in Section
2.03, each certificate representing the Exelon NEON Shares shall bear a
restrictive legend in substantially the following form, provided that, after the
first anniversary of the Closing Date, Exelon shall be entitled to have such
legend removed from the certificate or certificates representing any shares
which have been released by the Escrow Agent consistent with the terms of the
Escrow Agreement:
"The shares represented by this Certificate are subject to certain
restrictions in favor of the Company as set forth in a Subscription
Agreement, dated as of November 23, 1999, by and between the
Company, its Affiliate and Exelon Capital Partners, Inc., and in an
Escrow Agreement, dated as of _________________, by and among the
Company and Exelon Corporation and State Street Bank and Trust
Company."
10.02. References to NEON Entities. In the event that the
Reorganization
25
<PAGE>
is abandoned pursuant to this Section 10, then references herein and in the
Related Agreements to the NEON Entities or any entities affiliated with NEON
shall refer to Old NEON only, as the context requires.
11. Termination
11.01. Mutual Termination. This Agreement may be terminated at any
time prior to the Closing by an instrument in writing signed on behalf of each
of the parties.
11.02. Termination Date. This Agreement may be terminated by any
party if the Closing shall not have occurred on or before the six-month
anniversary of the date on which the request for the Private Letter Ruling is
filed with the IRS (the "Final Termination Date"); provided, however, that the
right to terminate this Agreement pursuant to this Section 11.02 shall not be
available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of, or resulted in, the failure of the Closing to
occur on or before such date.
12. Miscellaneous Provisions
12.01. Expenses. Except to the extent specifically provided herein
and in the Reimbursement Agreement, all costs and expenses incurred in
connection with this Agreement and the transactions contemplated hereby shall be
borne by the party incurring such costs and expenses, whether or not the
transactions contemplated hereby are consummated.
12.02. Amendment and Modification; Extension; Waiver. This Agreement
may be amended, modified or supplemented only by an instrument in writing signed
on behalf of each of the parties. Either party may (i) extend the time for the
performance of any of the obligations or other acts of the other party, (ii)
waive any inaccuracies in the representations and warranties of the other party
contained in this Agreement or (iii) waive compliance by the other party with
any of the agreements or conditions contained in this Agreement. Any agreement
on the part of a party to any such extension or waiver shall be valid only if
set forth in an instrument in writing signed by such party. The failure of any
party to this Agreement to assert any of its rights under this Agreement or
otherwise shall not constitute a waiver of such rights.
12.03. Notices. All notices and other communications hereunder shall
be in writing and shall be deemed given (as of the time of delivery or, in the
case of a telecopied communication, of confirmation and accompanied by another
manner of giving notice provided in this Section) if delivered personally,
telecopied (which is confirmed) or sent by overnight courier (providing proof of
delivery) to the parties at the following addresses (or at such other address
for a party as shall be specified by like notice):
26
<PAGE>
if to NEON or Old NEON, to:
NorthEast Optic Network, Inc.
2200 West Park Drive
Westborough, MA 01581
Attention: President
Facsimile Number: (508) 616-7895
with a copy to:
Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attention: Alexander A. Bernhard, Esq.
Facsimile Number: (617) 526-5000
if to Exelon or Exelon Capital Partners, to:
Exelon Corporation
2301 Market Street
Philadelphia, PA 19101
Attention: President
Facsimile: (215) 841-6374
Exelon Capital Partners, Inc.
c/o Corporation Trust Company
1209 Orange Street, Corporate Trust Center
Wilmington, DE 19801
Facsimile: (302) 655-5049
with a copy to:
PECO Law Department
2301 Market Street, 23rd Floor
Philadelphia, PA 19101
Attention: John Halderman
Facsimile Number: 215-841-4474
12.04. Assignment; No Third Party Beneficiaries.
(a) Neither Party shall assign its rights or obligations under
this Agreement to any third person or entity (except an Affiliate of such Party)
without the prior written approval of the other Party, which approval shall not
be unreasonably withheld or delayed; provided, however, that Exelon may assign
its right to receive the
27
<PAGE>
Exelon NEON Shares (but not including any other right or obligation of Exelon
hereunder or under any of the Related Agreements, except to the extent expressly
provided herein or therein) to Exelon Capital Partners, a wholly-owned
subsidiary of PECO Energy Company, or any other Affiliate. Subject to the
foregoing, this Agreement and the Related Agreements and all of the provisions
hereof shall be binding upon and inure to the benefit of Exelon and the NEON
Entities and their respective successors and assigns.
(b) Nothing in this agreement is intended to confer upon any
other person except the parties any rights or remedies hereunder or shall create
any third party beneficiary rights in any person, except as explicitly
contemplated in Section 5.03.
12.05. Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of Delaware (regardless of
the laws that might otherwise govern under applicable principles of conflicts of
law).
12.06. Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
12.07. Interpretation. When a reference is made in this Agreement to
a Section, Subsection, Exhibit, Schedule or Appendix, such reference shall be to
a Section or Subsection of, or Exhibit to, this Agreement unless otherwise
indicated. The table of contents and headings contained in this Agreement are
for reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. Whenever the words "include", "includes" or
"including" are used in this Agreement, they shall be deemed to be followed by
the words "without limitation" or equivalent words. The words "hereof", "herein"
and "hereunder" and words of similar import when used in this Agreement shall
refer to this Agreement as a whole and not to any particular provision of this
Agreement. All terms defined in this Agreement shall have the defined meanings
when used in the Related Agreements and any certificate or other document made
or delivered pursuant hereto or thereto unless otherwise defined therein. The
definitions contained in this Agreement are applicable to the singular as well
as the plural forms of such terms and to the masculine as well as to the
feminine and neuter genders of such term. Any agreement, instrument, statute,
regulation, rule or order defined or referred to herein or in any agreement or
instrument that is referred to herein means such agreement, instrument, statute,
regulation, rule or order as from time to time amended, modified or
supplemented, including (in the case of agreements or instruments) by waiver or
consent and (in the case of statutes, regulations, rules or orders) by
succession of comparable successor statutes, regulations, rules or orders and
references to all attachments thereto and instruments incorporated therein.
References to a person are also to its permitted successors and assigns.
28
<PAGE>
12.08. Jurisdiction and Enforcement. Each of the parties irrevocably
submits to the exclusive jurisdiction of (i) the Supreme Court of the State of
Delaware and (ii) the United States District Court of Delaware, for the purposes
of any suit, action or other proceeding arising out of this Agreement or any
transaction contemplated hereby. Each of the parties agreed to commence any
action, suit or proceeding relating hereto either in the United States District
Court of Delaware or, if such suit, action or proceeding may not be brought in
such court for jurisdictional reasons, in the Supreme Court of Delaware. Each of
the parties further agrees that service of process, summons, notice or document
by hand delivery or U.S. registered mail at the address specified for such party
in Section 12.03 (or such other address specified by such party from time to
time pursuant to Section 12.03) shall be effective service of process for any
action, suit or proceeding brought against such party in any such court. Each of
the parties irrevocably and unconditionally waives any objection to the laying
of venue of any action, suit or proceeding arising out of this Agreement or the
transactions contemplated hereby in (i) the Supreme Court of Delaware, or (ii)
the United States District Court of Delaware, and hereby further irrevocably and
unconditionally waives and agrees not to plead or claim in any such court that
any such action, suit or proceeding brought in any such court has been brought
in an inconvenient forum.
12.09. Entire Agreement. This Agreement and the Related Agreements
including the Exhibits, Schedules, Appendices, documents, certificates and
instruments referred to herein or therein and other contracts, agreements and
instruments contemplated hereby or thereby, together with the Confidentiality
Agreements, embody the entire agreement and understanding of the parties in
respect of the transactions contemplated by this Agreement. There are no
restrictions, promises, representations, warranties, covenants or undertakings
other than those expressly set forth or referred to herein or therein. This
Agreement and the Related Agreements supersede all prior agreements and
understandings between or among the parties or any of the parties with respect
to the transactions contemplated hereby and thereby, other than the
Confidentiality Agreements which remain in effect according to the terms and
conditions set forth therein.
12.10. Severability. If any term or other provision of this
Agreement is invalid, illegal or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal or incapable of being enforced, the
parties shall negotiate in good faith to modify this Agreement so as to effect
the original intent of the parties as closely as possible to the fullest extent
permitted by applicable law in an acceptable manner to the end that the
transactions contemplated hereby are fulfilled to the extent possible.
12.11. Conflicts. Except as expressly otherwise provided herein or
therein, in the event of any conflict or inconsistency between the terms of this
Agreement and the terms of any Related Agreement, the terms of this Agreement
shall prevail.
29
<PAGE>
12.12. Guaranty of Exelon's Obligations. Parent unconditionally
guaranties the due and prompt payment, but not the performance, of all of
Exelon's obligations set forth in this Agreement. The parties agree that Parent
does not guaranty the performance of Exelon's obligations set forth in this
Agreement, including, without limitation, the performance of any actions
requiring any Governmental Authority consent or approvals. This guaranty is an
irrevocable guaranty of payment (and not just of collection) and shall continue
in effect notwithstanding any extension or modification of the terms of this
Agreement, any assumption of any such guarantied obligation by any other party
or any other act or event which might otherwise operate as a legal or equitable
discharge of Parent under this Section 12.12. This guaranty is in no way
conditioned upon any requirement that either or both of the NEON Entities first
attempt to collect or enforce any guarantied obligation from or against Exelon,
provided however, that such NEON Entity or Entities has first requested payment,
has not refused payment, and has not received payment within 30 days from
Exelon. So long as any obligation of Exelon to either or both of the NEON
Entities remains unpaid or undischarged, Parent hereby waives (but only with
respect to such NEON Entity or Entities and not as to any other parties) all
rights to subrogation arising out of any payment by Parent under this Section
12.12. Parent hereby waives all special suretyship defenses, and protest, notice
of protest, demand for performance, diligence, notice of any other action at any
time taken or omitted to be taken by either or both of the NEON Entities or
Exelon and, generally, all demands and notices of every kind in connection with
this Section 12.12. If any of the waivers set forth in this Section 12.12 is
determined to be contrary to any applicable law or public policy, such waivers
shall be effective only to the extent permitted by law. This guaranty is subject
to the limitations of liability set forth in Section 9.04 of this Agreement.
12.13. Force Majeure. The pre-closing and post-closing obligations
of the Parties under this Agreement are subject to, and neither party shall be
in default under this Agreement due to, any Force Majeure. For purposes of this
Agreement, "Force Majeure" means any failure or delay in performance which, by
exercise of due foresight by the party affected could not reasonably have been
expected to avoid and, which by exercise of due diligence, such party shall be
unable to overcome during the period while such party shall continue to exercise
due diligence, and that is caused by strike or other labor problems; accidents;
acts of God; fire; flood; adverse weather conditions; material or facility
shortages or unavailability not resulting from such party's failure to timely
place orders therefor; lack of transportation; the imposition of any
governmental codes, ordinances, laws, rules, regulations or restrictions after
the date of this Agreement (but not related to the obtaining or maintaining of
the Required Rights (as defined in the System Agreement)); condemnation or the
exercise of rights of eminent domain; or war, acts of war (whether declared or
undeclared), terrorism or civil disorder. Neither party shall, however, be
relieved of liability for failure of performance due to a claimed Force Majeure
hereunder if such failure is due to causes arising out of its own gross
negligence or to removable or remediable causes that it fails to remove or
remedy with reasonable dispatch. Any party affected by an event of
30
<PAGE>
Force Majeure shall promptly notify the other party of any occurrence or
condition which in the affected party's reasonable opinion warrants an extension
of time for the performance of any obligation under this Agreement. Such notice
must be submitted in writing to the other party within five days or such sooner
date as is practicable after the delay is know to the affected party, or shall,
in the exercise of reasonable diligence, become known. Such notice shall specify
in detail the anticipated length of the delay, the cause of the delay, and a
timetable by which any remedial measures shall be implemented. Failure to
provide such notice within such period shall constitute a waiver of any claim of
Force Majeure.
[THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK.]
31
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be signed by
their respective duly authorized officers as of the date first above written.
Exelon Corporation NorthEast Optic Network, Inc.
By: By: /s/ Vincent C. Bisceglia
--------------------------------- ---------------------------------
Name: Name: Vincent C. Bisceglia
------------------------------- -------------------------------
Title: Title: Chairman & CEO
------------------------------ -------------------------------
NEON Communications, Inc.
By: /s/ Vincent C. Bisceglia
--------------------------------
Name: Vincent C. Bisceglia
Title: Chairman & CEO
32
<PAGE>
In accordance with and subject to the terms of Section 12.12 of this Agreement,
the obligations of Exelon Corporation are hereby irrevocably guarantied in full.
PECO Energy Company
By:
--------------------------------
Name:
------------------------------
Title:
-----------------------------
COUNTY OF ___________________ )
) ss.
STATE OF _____________________ )
Before me, the undersigned Notary Public, in and for said County and
State, personally appeared the above-named ________________________, known to me
to be the _______________ of NorthEast Optic Network, Inc., who, being duly
sworn, acknowledged that he/she did sign the above instrument and that the same
is her free act and deed.
WITNESS my hand and official seal this 23rd day of November, 1999.
Notary Public
My Commission Expires:________________
COUNTY OF ___________________ )
) ss.
STATE OF _____________________ )
Before me, the undersigned Notary Public, in and for said County and
State, personally appeared the above-named ________________________, known to me
to be the _______________ of NEON Communications, Inc., who, being duly sworn,
acknowledged that he/she did sign the above instrument and that the same is her
free act and deed.
WITNESS my hand and official seal this 23rd day of November, 1999.
Notary Public
My Commission Expires:________________
33
<PAGE>
COUNTY OF ___________________ )
) ss.
STATE OF ____________________ )
Before me, the undersigned Notary Public, in and for said County and
State, personally appeared the above-named __________________, known to me to be
the _______________ of Exelon Corporation, who, being duly sworn, acknowledged
that he/she did sign the above instrument and that the same is her free act and
deed.
WITNESS my hand and official seal this 23rd day of November, 1999.
Notary Public
My Commission Expires:________________
COUNTY OF ___________________ )
) ss.
STATE OF _____________________ )
Before me, the undersigned Notary Public, in and for said County and
State, personally appeared the above-named __________________, known to me to be
the _______________ of PECO Energy Company, who, being duly sworn, acknowledged
that he/she did sign the above instrument and that the same is her free act and
deed.
WITNESS my hand and official seal this 23rd day of November, 1999.
Notary Public
My Commission Expires:________________
34
<PAGE>
EXHIBIT 12.1
<TABLE>
<CAPTION>
Schedule of Earnings to Fixed Charges
Year ended December 31,
1996 1997 1998 1999
<S> <C> <C> <C> <C>
EARNINGS
ADD:
Pre tax income from continuing operations (1,045,984) (2,301,226) (12,776,191) (27,529,768)
Fixed Charges 268,086 309,082 10,546,132 24,733,319
Amortization of capitalized interest -- 4,814 4,628 170,699
--------------------------------------------------
(777,898) (1,987,330) (2,225,431) (2,625,750)
SUBTRACT:
Interest capitalized 180,501 142,457 1,543,520 3,095,200
Minority interest in pre-tax income of subs that
have not incurred fixed charges 248,039 994,000 1,026,001 --
--------------------------------------------------
Total Earnings 428,540 1,136,457 2,569,521 3,095,200
Ratio of earnings to fixed charges (1,206,438) (3,123,787) (4,794,952) (5,720,950)
(4.50)x (10.11)x (0.45)x (0.23)x
</TABLE>
<PAGE>
EXHIBIT 21.1
SUBSIDIARIES OF THE REGISTRANT
1. NEON Securities Corp. (Massachusetts)
2. NEON Acquisition, Inc. (Delaware)
3. NEON Communications, Inc. (Delaware)
4. NorthEast Optic Network of Connecticut, Inc. (Delaware)
5. NorthEast Optic Network of New York, Inc. (Delaware)
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of
our reports included in this Form 10-K into the Company's previously filed
registration statement File No. 333-64969 on Form S-8.
/s/ ARTHUR ANDERSEN LLP
Boston, Massachusetts
March 30, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF OPERATIONS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 4,768,389
<SECURITIES> 89,321,922
<RECEIVABLES> 1,975,201
<ALLOWANCES> (117,000)
<INVENTORY> 0
<CURRENT-ASSETS> 96,442,835
<PP&E> 100,614,294
<DEPRECIATION> (5,689,451)
<TOTAL-ASSETS> 280,633,376
<CURRENT-LIABILITIES> 27,514,702
<BONDS> 180,000,000
0
0
<COMMON> 163,935
<OTHER-SE> 67,302,855
<TOTAL-LIABILITY-AND-EQUITY> 280,633,376
<SALES> 5,665,276
<TOTAL-REVENUES> 5,665,276
<CGS> 6,365,758
<TOTAL-COSTS> 6,365,758
<OTHER-EXPENSES> 13,530,071
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,011,474
<INCOME-PRETAX> (27,529,768)
<INCOME-TAX> 0
<INCOME-CONTINUING> (27,529,768)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (27,529,768)
<EPS-BASIC> (1.70)
<EPS-DILUTED> (1.70)
</TABLE>
