<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 27, 1999
REGISTRATION NO. 333-80529
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-----------------
HARVARDNET INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
--------------------------
<TABLE>
<S> <C> <C>
DELAWARE 4813 04-3194739
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
--------------------------
500 RUTHERFORD AVENUE
BOSTON, MA 02129
(617) 242-1700
(Address Including Zip Code, and Telephone Number Including Area Code,
of Registrant's Principal Executive Offices)
--------------------------
MARK M. WASHBURN
PRESIDENT AND CHIEF EXECUTIVE OFFICER
HARVARDNET INC.
500 RUTHERFORD AVENUE
BOSTON, MA 02129
(617) 242-1700
(Name, Address Including Zip Code and Telephone
Number Including Area Code, of Agent for Service)
--------------------------
Copies to:
<TABLE>
<S> <C>
THOMAS S. WARD, ESQ. ANDREW R. SCHLEIDER, ESQ.
HALE AND DORR LLP SHEARMAN & STERLING
60 State Street 599 Lexington Avenue
Boston, Massachusetts 02109 New York, NY 10022
Telephone: (617) 526-6000 Telephone: (212) 848-4000
Telecopy: (617) 526-5000 Telecopy: (212) 848-7179
</TABLE>
--------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof. If any of the securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. / /
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
--------------------------
CALCULATION OF REGISTRATION FEE CHART
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) SHARE (2) PRICE(2) FEE
<S> <C> <C> <C> <C>
Common Stock, $.01 par value.................... 10,235,000 $15.00 $153,525,000 $42,680(3)
</TABLE>
(1) Includes 1,335,000 shares that the Underwriters have the option to purchase
from the Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee.
(3) The Company previously paid $34,750 in connection with the initial filing of
this Registration Statement.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXPLANATORY NOTE
This registration statement contains two forms of prospectus: one to be used
in connection with an offering in the United States and Canada and one to be
used in a concurrent offering outside the United States and Canada. The
prospectuses are identical in all material respects except for the front cover
page. The U.S. prospectus is included herein and is followed by the alternate
front cover page to be used in the international prospectus. The alternate page
for the international prospectus included herein is labeled "Alternate Page for
International Prospectus." Final forms of each prospectus will be filed with the
Securities and Exchange Commission under Rule 424(b).
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY 27, 1999
8,900,000 SHARES
[LOGO]
COMMON STOCK
---------------------
HARVARDNET INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL
PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $13.00 AND
$15.00 PER SHARE.
-------------------
APPLICATION HAS BEEN MADE FOR QUOTATION OF THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "HVNT."
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
-----------------
PRICE $ A SHARE
-----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS HARVARDNET
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL.............................................. $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
HARVARDNET INC. HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN
ADDITIONAL 1,335,000 SHARES TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO.
INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON , 1999.
-------------------
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
, 1999
<PAGE>
HARVARDNET WEB OPERATIONS CENTER
[Graphical depiction of HarvardNET's Web Operations Center. The page contains a
graphic of the operations center with lines pointing to the following labeled
areas: "Private Suites," "Transport Room (multiple local fiber carriers),"
"Network Operations Center," "Security Access Control," "Rack Collocation
Area," "Air Conditioning (313 tons)," "Staging and Receiving," "Electrical
Vault," "15KV Switches (High Voltage)," "(2) 1500 KW Generators," and
"800 KW Generator (Future)."]
<PAGE>
THE MAP
[Graphical depiction of HarvardNET'S Backbone network. In the upper left
corner, the page contains a rectangular box labeled "HarvardNET." Below the
box is the sentence "Our Northeast backbone network connects markets from
Maine to Virginia." Below this is a box labeled "Network Under Development"
that contains subheadings "Network Backbone," "Regional Operations Center,"
"Web hosting facility," "Public peering point" and "Internet transit."
The center graphic is a map of New England and the Mid-Atlantic states
stretching from Maine to Virginia with lines on the map connecting major
metropolitan areas among those states. The map identifies HarvardNET's points
of presence, peering points and target DSL coverage areas.
In the bottom right hand corner is a graphical depiction of the HarvardNET
network. Centered at the top of the box is the phrase "Our Local Network."
Beneath this phrase are the headings "End Users"; "HarvardNet Collocated
Central Office"; "HarvardNet Regional Operations Center"; and "Internet."
Underneath the heading "End Users" are three separate images labeled "Small
and Medium Sized Businesses," "Telecommuter" and "Branch Office." Lines
labeled "Leased Copper" link these images to two additional images, each
labeled "DSL Transmission Equipment." Lines labeled "Leased Fiber" link these
images to an image labeled "Switching and Routing Equipment." From this image
one line labeled "HarvardNet Backbone" leads to an image labeled "Internet,"
and another line labeled "Leased Fiber" leads to a circle labeled "Wholesale
to Internet Service Provider," which then leads to a circle labeled
"Internet."]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Prospectus Summary............................. 1
Risk Factors................................... 5
Use of Proceeds................................ 17
Dividend Policy................................ 17
Capitalization................................. 18
Dilution....................................... 19
Selected Financial Data........................ 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 22
Business....................................... 31
Management..................................... 52
<CAPTION>
PAGE
-----
<S> <C>
Transactions with Affiliates................... 59
Principal Stockholders......................... 60
Description of Capital Stock................... 62
Shares Eligible for Future Sale................ 65
United States Federal Tax Consequences to
Non-U.S. Holders of Common Stock............. 67
Underwriters................................... 70
Legal Matters.................................. 75
Experts........................................ 75
Where You May Find Additional Information...... 76
General Information............................ 76
Index to Financial Statements.................. F-1
</TABLE>
Until , 1999, all dealers that buy, sell or trade common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PROSPECTUS SUMMARY
YOU SHOULD READ THE FOLLOWING SUMMARY TOGETHER WITH THE MORE DETAILED
INFORMATION REGARDING US AND OUR COMMON STOCK AND OUR FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS PROSPECTUS. ALL INFORMATION IN THIS PROSPECTUS
RELATING TO THE NUMBER OF SHARES OF OUR COMMON STOCK, OPTIONS OR WARRANTS IS
BASED UPON INFORMATION AS OF JUNE 30, 1999, ASSUMING A 1.3546862-FOR-1 SPLIT OF
OUR COMMON STOCK AND CLASS B STOCK BEFORE THE OFFERING, AND THE CONVERSION OF
ALL SHARES OF CONVERTIBLE PREFERRED STOCK AND CLASS B STOCK OUTSTANDING AS OF
JUNE 30, 1999 INTO AN AGGREGATE OF 22,803,017 SHARES OF COMMON STOCK ON
COMPLETION OF THIS OFFERING. UNLESS OTHERWISE SPECIFICALLY STATED, THE
INFORMATION THROUGHOUT THIS PROSPECTUS DOES NOT TAKE INTO ACCOUNT THE POSSIBLE
ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK TO THE U.S. UNDERWRITERS PURSUANT
TO THEIR RIGHTS TO PURCHASE ADDITIONAL SHARES TO COVER OVER-ALLOTMENTS.
HARVARDNET
We provide high-speed Internet access, data transport and networking
services to businesses located in the Northeast and Mid-Atlantic regions of the
United States. We provide these services using digital subscriber line, or DSL,
technology, which enables data transport over copper telephone lines, and high
speed digital leased lines. We also offer these businesses a variety of Web site
hosting services that allow customers to store their Web sites and data on
servers housed in our data centers.
We deliver our services over our fiber optic network that connects markets
from Maine to Virginia. This network is designed for reliable, secure, high
performance transport and delivery of digital data. The network primarily
operates at the 155 megabit per second capacity level and includes fiber optic
connections to major Internet exchange points. In addition, we have established
peering relationships with over 90 Internet service providers to facilitate the
efficient and cost-effective exchange of customer traffic.
We have entered into agreements with Bell Atlantic to lease the copper
telephone lines that we will use to carry data for our customers using DSL
technology. These interconnection agreements cover our targeted Northeast and
Mid-Atlantic markets of Massachusetts, Maine, New Hampshire, Rhode Island, New
York, New Jersey, Pennsylvania, Maryland, Washington, D.C. and Virginia. As of
July 26, 1999, we provided service at 51 central office locations and had
installed equipment in 20 additional central office locations in eastern
Massachusetts, southern Maine and southern New Hampshire. We expect to install
equipment in approximately 140 Bell Atlantic central office locations in the
Northeast region by the end of 1999 and in more than 600 central offices in the
Northeast and Mid-Atlantic regions by the middle of 2001.
We market our products and services through our direct sales force. As of
June 30, 1999, we had approximately 540 DSL and leased lines in service and more
than 1,100 business customers for whom we provide Web site hosting services. We
have a diverse customer base and none of our customers accounted for more than
approximately 3% of our revenues in the year ended December 31, 1998 or the
three months ended March 31, 1999. Some of our representative customers include
the Atlantic Monthly, the Boston Museum of Fine Arts, Fidelity Capital, KPMG
Peat Marwick, Nantucket Nectars, Sage Networks and Staples.
In November 1995, we entered the Internet business focusing on providing
high performance Web site hosting services, as well as leased-line Internet
access to business customers in the Boston market. In 1996, we were among the
first companies in the country to commercially deploy DSL technology. In
September 1998, we received equity investments from M/C Venture Partners and
Fidelity Ventures. Since September 1998, we have recruited and built a senior
management team with extensive experience in the data transport and networking
industry, including our President and Chief Executive Officer, Mark Washburn,
who previously served in senior sales and general management positions at Level
3 Communications, XCOM Technologies, Inc., and MFS Communications.
1
<PAGE>
THE MARKET OPPORTUNITY
Data communications is the fastest growing segment of the telecommunications
market. Today, many enterprises find their existing data communications
solutions too expensive, too slow or both. Small- and medium-sized businesses
are seeking cost-effective high-speed Internet access and data transport to
eliminate delays and improve productivity. Over the past ten years, high-speed
local area networks have become increasingly important to enterprises,
permitting employees to share information, send e-mail, search databases and
conduct business. Businesses are seeking to equip many of their employees with
the ability to work at home and in other remote locations, such as branch
offices, to improve employee productivity and reduce operating costs. In
addition, many small- and medium-sized businesses increasingly are starting to
realize the potential of the Internet by establishing an Internet presence. Many
of these businesses want to create a Web site on which they can sell, market and
brand their products and services, execute electronic transactions and provide
information to their customers, suppliers, business partners and employees.
THE HARVARDNET SOLUTION
We provide a full range of services to allow businesses to effectively
outsource their Internet access, data transport and Web site hosting needs. Our
service offerings include:
- high-speed Internet access for small- and medium-sized businesses using
DSL technology;
- virtual private network services for large enterprises that require
high-speed, secure remote access for telecommuting, work-at-home and
mobile professionals;
- Web site hosting, which provides customers a secure location, controlled
environment, active monitoring and high-speed connections to the Internet
via our fiber optic network for their Web sites;
- high speed digital leased lines for Internet-dependent businesses; and
- e-commerce solutions and other enhanced services, including outsourced
e-mail administration and Web-based credit card transaction processing.
We also bundle a number of our service offerings to encourage customers to
purchase multiple services. We believe that the suite of services marketed by
our direct sales force is especially attractive to small- and medium-sized
businesses that typically do not have the information technology personnel or
infrastructure necessary to manage their data transport, networking and
Internet-related needs. We have designed our network and service offerings to
enable customers to purchase the level of service and transmission speed that
meets their existing requirements and to easily upgrade as their needs change.
Our principal executive offices are located at 500 Rutherford Avenue,
Boston, Massachusetts 02129, and our telephone number is (617) 242-1700. Our
World Wide Web site address is www.harvard.net. The information on our Web site
is not incorporated by reference into this prospectus. We are not affiliated
with Harvard University.
2
<PAGE>
THE OFFERING
We are offering 7,120,000 shares of common stock initially in the United
States and Canada and 1,780,000 shares of common stock initially outside the
United States and Canada. The closing of each of these offerings is conditioned
on the closing of the other.
<TABLE>
<S> <C>
Common stock offered:
U.S. offering.................................... 7,120,000 shares
International offering........................... 1,780,000 shares
Total.......................................... 8,900,000 shares
Common stock to be outstanding after this offering... 36,981,263 shares(1)
Over-allotment option................................ 1,335,000 shares
Use of proceeds...................................... We will receive net proceeds from
this offering of approximately
$114.5 million, assuming a per share
price of $14.00. We intend to use
the net proceeds to repay amounts
owed under our credit facility, for
capital expenditures relating to our
planned geographic expansion,
potential acquisitions, working
capital and other general corporate
purposes.
Dividend policy...................................... We do not intend to pay dividends on
our common stock. We plan to retain
any earnings for use in the
operation of our business and to
fund future growth.
Proposed Nasdaq National Market symbol............... HVNT
</TABLE>
- ------------------------
(1) Based on 5,278,246 shares of common stock outstanding as of June 30, 1999,
plus 22,803,017 shares of common stock issuable upon conversion of
outstanding convertible preferred stock and Class B stock as of that date.
Excludes 1,494,135 shares issuable upon the exercise of outstanding stock
options as of June 30, 1999 at a weighted average exercise price of $1.56
per share and 859,091 shares of common stock issuable upon the exercise of
outstanding warrants at a weighted average exercise price of $3.33 per
share.
3
<PAGE>
SUMMARY FINANCIAL DATA
The financial data set forth below should be read together with "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our financial statements included elsewhere in
this prospectus.
The following statement of operations data for the years ended December 31,
1996, 1997 and 1998 are derived from our audited financial statements included
elsewhere in this prospectus. The statement of operations data for the three
month periods ended March 31, 1998 and 1999 and the balance sheet data as of
March 31, 1999 are derived from our unaudited financial statements and reflect
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of our results of operations and financial position. Results
for the three months ended March 31, 1999 are not necessarily indicative of
results that may be expected for the year.
EBITDA consists of net loss excluding interest, taxes, depreciation and
amortization. We have provided EBITDA because it is a measure of financial
performance commonly used in the telecommunications industry, but other
companies may calculate it differently from us. We have presented EBITDA to
enhance your understanding of our operating results. You should not construe it
as an alternative to operating income as an indicator of our operating
performance or as an alternative to cash flows from operating activities as a
measure of liquidity.
Pro forma as adjusted balance sheet data reflects our receipt of the
estimated net proceeds from the sale of 8,900,000 shares of common stock offered
by us in this offering at an assumed initial public offering price of $14.00 per
share, after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by us and the conversion of all outstanding
shares of convertible preferred stock and Class B stock as of March 31, 1999
into an aggregate of 22,320,351 shares of common stock.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
<CAPTION>
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues......................................................... $ 720 $ 1,381 $ 4,282 $ 954 $ 1,600
Operating income (loss).......................................... 37 (181) (1,750) (183) (1,494)
Net income (loss)................................................ 27 (139) (1,260) (136) (1,390)
OTHER DATA:
EBITDA........................................................... $ 43 $ 6 $ (411) $ 135 $ (993)
Capital expenditures............................................. -- 19 1,010 36 627
Net cash provided by (used in) operating activities.............. 96 (44) (93) 428 (1,417)
Net cash used in investing activities............................ -- (19) (1,010) (36) (3,450)
Net cash provided by (used in) financing activities.............. (6) 340 5,916 (10) 8,603
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
PRO FORMA
ACTUAL AS ADJUSTED
--------- -----------
<S> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................................................. $ 8,975 $ 123,503
Working capital........................................................................... 9,141 123,669
Property and equipment, net............................................................... 1,704 1,704
Total assets.............................................................................. 16,049 130,577
Long-term debt, net of current portion.................................................... 50 50
Redeemable convertible preferred stock.................................................... 18,011 --
Total stockholders' equity (deficit)...................................................... (3,245) 129,294
</TABLE>
4
<PAGE>
RISK FACTORS
AN INVESTMENT IN OUR COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CONSIDER CAREFULLY THE RISKS DESCRIBED BELOW, TOGETHER WITH ALL OTHER
INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU DECIDE TO BUY OUR COMMON
STOCK. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL
CONDITION OR RESULTS OF OPERATIONS WOULD LIKELY SUFFER. IN SUCH CASE, THE
TRADING PRICE OF OUR COMMON STOCK COULD FALL, AND YOU MAY LOSE ALL OR PART OF
THE MONEY YOU PAID TO BUY OUR COMMON STOCK.
WE HAVE CHANGED THE FOCUS OF OUR COMPANY FROM AN INTERNET SERVICE PROVIDER TO A
DATA TRANSPORT AND NETWORKING SERVICE COMPANY, WHICH MAKES IT DIFFICULT TO
EVALUATE OUR BUSINESS
Since September 1998, we have recruited a new senior management team and
changed the focus of our business from providing largely dial-up and leased-line
Internet access to providing a suite of high-speed Internet access, data
transport and networking services and Web site hosting services. Because of our
limited operating history in providing all of our current services, you have
limited operating and financial data about our business upon which to base an
evaluation of our performance and an investment in our common stock. In
particular, we have focused on installing equipment in Bell Atlantic central
offices for the provision of digital subscriber lines, and building our fiber
optic network.
WE ARE AN EARLY STAGE COMPANY IN A NEW AND RAPIDLY EVOLVING MARKET, SUBJECT TO A
NUMBER OF RISKS WHICH MAY LIMIT OUR REVENUE GROWTH
You should consider the risks, expenses and difficulties we may encounter,
including those frequently encountered by early stage companies in new and
rapidly evolving markets. If we fail to manage our operations successfully, it
would materially adversely affect our business, financial condition and results
of operations. Our success will depend on our ability to:
- deploy an effective network infrastructure;
- establish arrangements with Bell Atlantic to install our equipment in Bell
Atlantic's central offices;
- develop our billing and operational support systems;
- raise additional capital;
- rapidly expand DSL service within the Northeast and Mid-Atlantic regions
of the United States;
- expand our direct sales force;
- attract and retain customers;
- attract and retain qualified personnel; and
- expand our Web site hosting facilities.
BECAUSE DSL SERVICES ARE NEW AND EVOLVING, WE CANNOT PREDICT WHETHER THEY WILL
BE ACCEPTED BY BUSINESSES AT PROFITABLE PRICES
To be successful, we must develop and market services that are widely
accepted by businesses at profitable prices. If the market for our DSL services
fails to develop, grows more slowly than anticipated or becomes saturated with
competitors, these events could materially adversely affect our business,
financial condition and results of operations. The market for high-speed
Internet access, data transport and networking services using copper telephone
lines is in the early stages of development. We cannot accurately predict the
rate at which this market will grow, if at all, or whether new or increased
competition will result in market saturation. The security, reliability, ease,
cost of access and
5
<PAGE>
quality of service relating to the use of DSL technology for Internet and local
area network access are unresolved and may impact the growth of these services.
THE QUALITY AND CONDITION OF AVAILABLE COPPER TELEPHONE LINES MAY IMPAIR OUR
ABILITY TO PROVIDE DSL SERVICES
We significantly depend on the quality and maintenance of the copper
telephone lines we obtain from Bell Atlantic to provide DSL services. We may not
be able to obtain the copper telephone lines and the services we require on a
timely basis or at quality levels, prices, terms and conditions satisfactory to
us. Bell Atlantic may not maintain the lines in a manner satisfactory to us. In
the event that the condition is not acceptable, we may incur expenses which we
cannot recover or suffer damage to our reputation. If we decide to expand our
operations into geographic areas outside of the Northeast and Mid-Atlantic
regions of the United States, we will be similarly dependent on the quality,
physical condition, availability and maintenance of telephone lines within the
control of the incumbent local exchange carriers in such areas.
OUR DSL SERVICES MAY INTERFERE WITH OR BE AFFECTED BY OTHER TRANSPORT
TECHNOLOGIES
All transport technologies using copper telephone lines have the potential
to interfere with, or to be interfered with by, other traffic on adjacent copper
telephone lines. Such interference could degrade the performance of our services
or make us unable to provide service on selected lines. Interference, or claims
of interference, if widespread, would adversely affect our speed of deployment,
reputation, brand image, service quality and customer retention and
satisfaction. In addition, incumbent carriers may claim that the potential for
interference by DSL technology permits them to restrict or delay our deployment
of DSL services. The telecommunications industry and regulatory agencies are
still developing procedures to resolve interference issues between competitive
carriers and incumbent carriers, and these procedures may not be effective. We
may be unable to successfully negotiate interference resolution procedures with
incumbent carriers.
THE DATA TRANSPORT AND NETWORKING INDUSTRY IS UNDERGOING RAPID TECHNOLOGICAL
CHANGES, AND NEW TECHNOLOGIES MAY BE SUPERIOR TO THE TECHNOLOGY WE USE
The data transport and networking industry is subject to rapid and
significant technological change, including continuing developments in DSL
technology, which does not presently have widely accepted standards, and
alternative technologies for providing high speed data transport and networking.
If we fail to adapt successfully to technological changes or obsolescence, fail
to adopt technology that becomes an industry standard or fail to obtain access
to important technologies, our business, financial condition and results of
operations could be materially adversely affected. As a consequence of this
technological change and the range of technologies available:
- our potential customers have a number of choices for meeting their data
transport and networking needs, including wireless data systems, cable
modems and integrated services digital network technologies;
- our success will depend on our ability to anticipate or adapt to new
technology on a timely basis; and
- new products and technologies may emerge that may be superior to, or may
not be compatible with, our products and technologies.
6
<PAGE>
WE EXPECT TO CONTINUE TO INCUR SUBSTANTIAL LOSSES AND NEGATIVE OPERATING CASH
FLOW
We intend to rapidly and substantially increase our capital expenditures and
operating expenses in an effort to expand our operations, including:
- the expansion of our network in the Northeast and Mid-Atlantic regions of
the United States;
- the installation of our equipment in central offices throughout the major
metropolitan areas of these regions;
- the expansion of our DSL operations; and
- the establishment of additional Web site hosting facilities.
We expect to incur substantial operating and net losses, as well as negative
operating cash flow, for the foreseeable future as we expand our operations. We
will need to obtain additional financing to complete our expansion into the
Northeast and Mid-Atlantic regions. We may not have sufficient revenues to
satisfy our financing requirements and may not ever achieve operating income and
positive operating cash flow or become profitable. The amount and timing of our
capital requirements will vary depending upon the timing and extent of our
rollout, regulatory, technological and competitive developments and the demand
for our services.
WE EXPECT TO INCUR SIGNIFICANT OPERATING LOSSES WHICH WILL REQUIRE US TO SEEK
ADDITIONAL FINANCING, WHICH COULD BE DIFFICULT TO OBTAIN
We intend to grow our business rapidly and expect to incur significant
operating losses and negative cash flow for the foreseeable future. Therefore,
we will require additional external financing in the future. If we are unable to
raise capital to fund our growth on a timely basis and on acceptable terms, our
business, financial condition and results of operations would be materially and
adversely affected. Obtaining additional financing will be subject to a number
of factors, including:
- market conditions;
- our operating performance; and
- investor sentiment, particularly for DSL and Internet-related companies.
These factors may make the timing, amount, terms and conditions of
additional financing unattractive for us.
OUR FAILURE TO ACHIEVE OR SUSTAIN MARKET ACCEPTANCE AT DESIRED PRICING LEVELS
COULD IMPAIR OUR ABILITY TO ACHIEVE PROFITABILITY OR POSITIVE CASH FLOW
We are expanding our operations based upon our prediction of future prices
that we will attain for our services. Our failure to achieve or sustain market
acceptance at desired pricing levels could impair our ability to achieve
profitability or positive cash flow, which would have a material adverse effect
on our business, financial condition and results of operations. Prices for
high-speed Internet access and other data transport and networking services have
fallen historically; a trend we expect will continue. Accordingly, we cannot
predict to what extent we may need to reduce our prices to remain competitive or
whether we will be able to sustain future pricing levels as our competitors
introduce competing services or similar services at lower prices.
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WE ARE DEPENDENT ON BELL ATLANTIC FOR COPPER TELEPHONE LINES, CENTRAL OFFICE
SPACE AND TRANSMISSION FACILITIES, AND BELL ATLANTIC'S RELUCTANCE TO COOPERATE
WITH US OR INABILITY TO PROVIDE THE SERVICES OR FACILITIES WE NEED COULD
ADVERSELY AFFECT OUR BUSINESS
Bell Atlantic is currently our sole supplier of copper telephone lines and
space in central offices in our targeted markets and is often the vendor of
choice for transmission between the central offices in which we have installed
our equipment and our regional operations centers. Because our services compete
with Bell Atlantic's data services, Bell Atlantic may be reluctant to make
capital expenditures to purchase and install additional equipment or cooperate
with us in meeting our supply needs. The FCC's rules give Bell Atlantic
flexibility regarding the timing, technical standards and charges for
conditioning telephone lines, or loops, to enable us to offer our DSL services,
which Bell Atlantic may use to delay performance of loop conditioning that we
may need to provide service or to impose excess charges for such conditions.
In addition, we currently plan to install equipment in approximately 600
Bell Atlantic central offices in the Northeast and Mid-Atlantic regions of the
United States. Space may be exhausted in a particular central office, and we may
face competition from other competitive telecommunication companies to obtain
available space. Bell Atlantic may seek to impose excessive charges for use of
its central office space, or it may reject some of our applications to install
equipment, and we may experience delays between the time we apply for space and
the time that Bell Atlantic actually permits us to place our equipment in this
space. We also rely on Bell Atlantic to provide transmission facilities to our
regional operating centers. If Bell Atlantic does not provide us with
transmission facilities on a timely basis and we are unable to obtain
transmission facilities from other providers, the rollout of our network may be
delayed, which could have a material adverse effect on our business, financial
condition and results of operations. In the event that we decide to expand our
operations into geographic areas outside of the Northeast and Mid-Atlantic
regions of the United States, we will face similar risks from the incumbent
local carriers in such areas.
OUR ACCESS TO BELL ATLANTIC'S CENTRAL OFFICES AND TRANSMISSION FACILITIES IS
DEPENDENT ON THIRD PARTIES
We cannot unilaterally control the terms under which we install our
equipment in Bell Atlantic's central offices, connect to copper telephone lines
or gain the use of Bell Atlantic's transmission facilities. State and federal
tariffs, state public utility commissions, the FCC and interconnection
agreements with Bell Atlantic determine the price, terms and conditions under
which space is made available, as well as the terms and conditions of access to
copper telephone lines and other components of Bell Atlantic's network. Under
current practice, Bell Atlantic unilaterally sets the policies that determine
whether our service can be provided over a particular copper telephone line
without creating interference with other services and the measures we would be
required to take in order to solve any interference problems. There is a risk
that when the FCC or other regulatory authorities adopt interference rules they
may impact our ability to use technology we are deploying or plan to deploy. In
addition, if we decide to expand our operations into geographic areas outside of
the Northeast and Mid-Atlantic regions of the United States, we will face
similar difficulties with the incumbent local carriers in such areas.
OUR SUCCESS DEPENDS ON RENEWING THE AGREEMENTS WITH BELL ATLANTIC THAT ALLOW US
TO LEASE THEIR TELEPHONE LINES
Our access to Bell Atlantic's central offices, transmission facilities and
copper telephone lines depends on our ability to maintain interconnection
agreements with Bell Atlantic that allow us to lease the copper telephone lines
that we will use to carry data for our customers using DSL technology. Our Bell
Atlantic interconnection agreements have initial terms that expire from August
1999 to March 2001. Any delay in renewing interconnection agreements could
materially adversely affect our business, financial condition and results of
operations. Some of our interconnection agreements provide
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that, if the term expires before we have a replacement interconnection
agreement, we are entitled to continue under the rates, terms and conditions of
the original interconnection agreement on a month-to-month basis, but we may not
be able to take advantage of any lower prices that Bell Atlantic may
subsequently offer. Some of our other interconnection agreements provide that,
if the term expires before we have a replacement interconnection agreement, the
rates, terms and conditions of the original interconnection agreement may be
superseded by more generic and, potentially less favorable, rates, terms and
conditions, in which case our business, financial condition and results of
operations could be materially adversely affected. In addition, we may not be
able to negotiate new agreements on terms favorable to us.
OUR SERVICES AND INTERCONNECTION AGREEMENTS ARE SUBJECT TO UNCERTAIN GOVERNMENT
REGULATIONS THAT MAY BE INTERPRETED IN WAYS THAT WOULD HARM OUR BUSINESS
State regulatory commissions, the FCC and the courts oversee, in varying
degrees, our interconnection agreements, as well as the terms and conditions
under which we gain access to incumbent local carrier copper telephone lines and
transmission facilities. These government entities may modify the terms or
prices applicable to our interconnection agreements and the terms governing our
access to Bell Atlantic's copper telephone lines and transmission facilities in
ways that would be adverse to our business. State regulatory commissions have
authority to establish the rates for DSL-capable copper telephone lines, as well
as other rates, terms and conditions of our dealings with Bell Atlantic in
ongoing public proceedings. In some states, these prices have yet to be set by
the regulatory body.
Several parties have brought court challenges to the FCC's interconnection
rules, including the rules that establish the terms under which a competitive
telecommunications company may use portions of an incumbent local carrier's
network and that define the particular network elements to which we are
entitled. In January 1999, the Supreme Court invalidated an FCC rule which
defines the particular elements of an incumbent local carrier's network that
must be provided to competitors like us. The FCC is conducting a proceeding to
re-specify those elements and may not require the continued availability of
elements we need. In addition, the courts have not yet resolved the lawfulness
of the methodology that the FCC established to determine the price that
competitive telecommunications companies would have to pay incumbent local
carriers for use of the incumbent local carriers' networks. The courts may
determine that the FCC's pricing rules are unlawful, which would require the FCC
to establish a new pricing methodology. If this occurs, the new pricing
methodology that the FCC adopts may result in our having to pay a higher price
to incumbent local carriers to use a portion of their networks in providing our
services, and this could have a material adverse effect on our business,
financial condition and results of operations.
Recently, the FCC issued a decision that an incumbent local carrier's data
services are subject to unbundling and resale requirements. This decision is the
subject of a court appeal and a petition for reconsideration filed with the FCC.
Any reversal or revision of this decision could have a material adverse effect
on our business, financial condition and results of operations. The FCC is still
considering alternative corporate structures for the incumbent local carriers
that would allow them to compete more directly with DSL providers like us on an
unregulated basis. This issue is still pending before the FCC. An FCC decision
in favor of the incumbent local carriers could have a material adverse effect on
our business, financial condition and results of operations. Although the FCC
recently adopted new rules designed to provide greater access to central office
space at less cost, these new rules potentially could benefit our competitors to
a greater extent than they benefit us, which could harm our competitiveness.
WE MUST UPGRADE OUR NETWORK TO SERVICE A LARGE NUMBER OF END USERS AT HIGH
PERFORMANCE LEVELS
We are in the process of upgrading our fiber optic network that connects
markets from Maine to Virginia. If we are unable to successfully upgrade our
network in a timely fashion or are unable to
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maintain the network as planned, we may be required to purchase bandwidth from
third party providers, which would result in a significant increase in our
operating expenses and could materially adversely affect our business, financial
condition and results of operations. This upgrade includes the installation of
high speed switching equipment and the leasing of additional transport
bandwidth. We may be unable to upgrade our network to service substantially
increased numbers of end users at high performance levels. In addition, any
upgrade of our network may be delayed or otherwise adversely affected if we are
unable to lease or obtain sufficient additional capacity.
OUR NETWORK MUST BE ABLE TO MANAGE A LARGE NUMBER OF USERS AT HIGH TRANSMISSION
SPEEDS IN ORDER TO BE COMPETITIVE
Due to the limited deployment of our services, our network may not be able
to connect and manage a substantial number of end users at high transmission
speeds. Further, our network may be unable to achieve and maintain competitive
digital transmission speeds. Actual transmission speeds on our network will
depend on a variety of factors and many of these factors are beyond our control,
including the type of DSL technology deployed, the distance an end user is
located from a central office, the quality of the telephone lines, the presence
of interfering transmissions on nearby lines and other factors. As a result, we
may not be able to achieve and maintain digital transmission speeds that are
attractive in the market.
WE RELY ON THIRD PARTIES TO CONNECT OUR NETWORK WITH OTHER NETWORKS FOR THE
EXCHANGE OF DATA TRAFFIC
We rely on a number of public and private network interconnections, commonly
referred to as peering relationships, to connect our network with other networks
for the exchange of data traffic. If we were unable to access other networks to
exchange our customers' traffic on a cost-effective basis, or if we were unable
to pass through to our customers any costs of utilizing these or our existing
networks, our business, financial condition and results of operations could be
materially adversely affected. Currently, all of our peering relationships
provide for interconnections at nominal cost to either party. Many of our
peering relationships are informal and may be discontinued on short, or in some
cases no, notice. If our peering partners were to discontinue their support for
the peering relationships or commence charging for these interconnections, our
ability to exchange traffic at current price levels would be significantly
constrained. Furthermore, our business will be adversely affected if these
peering partners do not add more bandwidth to accommodate increased traffic.
Many of the companies with which we maintain private peering interconnections
are our competitors. There is nothing to prevent any peering partner, many of
which are significantly larger than us, from charging high usage fees,
establishing new and more restrictive criteria for use or denying access. In the
future, private peering partners could refuse to continue to interconnect
directly with us, might impose significant costs on us or limit our customers'
access to their networks.
A FAILURE TO MANAGE FUTURE GROWTH COULD STRAIN OUR RESOURCES AND COULD IMPAIR
THE EXPANSION OF OUR BUSINESS
We plan to rapidly and significantly expand our operations, which will place
a significant strain on our management, financial controls, operations systems,
personnel and other resources. If we fail to manage our growth effectively, it
could adversely affect the expansion of our customer base and service offerings
and would have a material adverse effect on our business, financial condition
and results of operations. We may be unable to meet our customers' need for
services and technical support or provide our customers the service they expect.
To manage our growth effectively, we must:
- improve existing and implement new operational, financial and management
information controls, reporting systems and procedures;
- hire, train and manage sufficient additional qualified personnel;
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- expand and upgrade our technologies; and
- manage multiple relationships with our customers, vendors and other third
parties.
WE MAY ENCOUNTER DIFFICULTY IN UPGRADING OUR BILLING AND OPERATIONAL SUPPORT
SYSTEMS
We plan to upgrade our billing and operational support systems to
accommodate our planned expansion and to achieve operating efficiencies.
Although we have selected vendors with established software packages for these
upgrades, the installation and implementation of the new billing and operational
support systems involve a significant commitment of resources and are subject to
a number of risks, including the potential incurrence of substantial third-party
consulting costs, delays in implementation, undetected software errors,
protracted implementation times, conflicts with our other hardware or software
systems and difficulties arising from continuing business operations during
implementation. The failure to successfully install and implement new billing
and operational support systems in a timely fashion could materially adversely
affect our business, financial condition and results of operations.
WE RELY ON A DIRECT SALES METHOD WHICH MAY NOT BE COST-EFFECTIVE
We market and sell our products through our own dedicated marketing staff
and sales force. The DSL market is new, and our direct marketing efforts may not
be an effective means of selling DSL services to businesses. Many of our
competitors are selling their services indirectly through Internet service
providers, carriers, resellers and integrators. Our direct method may prove to
be a more costly approach. Although we believe that our success depends in
significant part on maintaining a dedicated marketing staff and sales force, we
may not achieve a level of sales sufficient to justify maintaining our own
marketing staff and sales force.
THE MARKET FOR INTERNET ACCESS, DATA TRANSPORT AND NETWORKING SERVICES IS HIGHLY
COMPETITIVE, AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY
The market for Internet access, data transport and networking services is
rapidly evolving and intensely competitive, and we may not be able to compete
effectively. Many of our current competitors, as well as a number of our
potential new competitors, have longer operating histories, greater name
recognition and substantially greater financial, technical and marketing
resources. Some of our competitors or potential competitors may have the
financial resources to withstand substantial price competition. Moreover, our
competitors may be able to negotiate contracts with suppliers of
telecommunications products and services which are more favorable than contracts
negotiated by us.
Many of our competitors are offering, or may soon offer, technologies and
services that will directly compete with some or all of our service offerings.
Our competitors use technologies for local access connections that include DSL,
wireless data systems, cable modems and integrated services digital network
technologies. Some of these technologies may provide performance advantages in
some respects over DSL and other technologies using existing copper telephone
wires.
We expect to face competition for our DSL and leased line services from Bell
Atlantic, alternative DSL providers, competitive local exchange carriers,
Internet service providers, wireless and cable companies. In the Boston, New
York, Philadelphia and Washington, D.C. metropolitan areas, we expect to compete
directly against other DSL providers such as Covad Communications Group, Inc.,
Network Access Solutions Corporation, NorthPoint Communications Group Inc. and
Rhythms NetConnections, Inc. We also expect to compete with cable companies in
the New England area for telecommuting and work at home applications.
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WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY AGAINST BELL ATLANTIC
Bell Atlantic, as the incumbent local carrier operating in the Northeast and
Mid-Atlantic regions of the United States, our initial target market, is both an
essential supplier of facilities and services for DSL and other Internet
connectivity services and a significant competitor. Incumbent local carriers,
like Bell Atlantic, pose a significant risk to the success of our business. Bell
Atlantic has existing networks in local areas and across the major metropolitan
areas in our target market, currently provides basic telephony service to
substantially all of the customers that we hope to serve and has its own
Internet service provider businesses. Absent oversight by federal and state
regulators, Bell Atlantic has the ability to benefit its own DSL operations by
providing them with essential service inputs, such as copper telephone lines,
transmission facilities and collocation on more favorable terms than those
provided to us. Bell Atlantic is deploying DSL services in selected markets and
could deploy DSL services on a widespread basis which could have a material
adverse effect on our business, financial condition and results of operations.
THE MARKET FOR WEB SITE HOSTING SERVICES IS HIGHLY COMPETITIVE, AND WE MAY NOT
BE ABLE TO COMPETE EFFECTIVELY
The market for Web site hosting services is rapidly evolving and intensely
competitive, and we may not be able to compete effectively. Many of our current
competitors, as well as a number of potential new competitors, have longer
operating histories, greater name recognition and substantially greater
financial, technical and marketing resources. Some of our competitors or
potential competitors may have the financial resources to withstand substantial
price competition. We compete in this market against a variety of companies,
including AboveNet Communications Inc., Concentric Network Corporation, Digex
Incorporated, Exodus Communications, Inc., GTE Internetworking, Level 3
Communications, Inc. and NaviSite, Inc.
A SYSTEM FAILURE COULD CAUSE DELAYS OR INTERRUPTIONS OF SERVICE TO OUR CUSTOMERS
Our network infrastructure and customers' equipment located in our Web site
hosting facilities could be damaged by human error, physical or electronic
security breaches, power loss and other facility failures, fire, earthquake,
flood, telecommunications failure, sabotage, vandalism and similar events. Any
damage to or failure of our systems or network, or the systems or networks of
our service providers, could result in reductions in, or terminations of,
services supplied to our customers, which could have a material adverse effect
on our business, financial condition and results of operations. Despite
precautions we have taken and plan to take with future Web site hosting
facilities, a natural disaster or other unanticipated problems at one or more of
our Web site hosting facilities could result in interruptions in our services or
significant damage to customer equipment. In addition, the failure of Bell
Atlantic to provide consistent data communications capacity could result in
interruptions in our services.
A BREACH OF SECURITY OF OUR SYSTEMS COULD CAUSE DELAYS OR INTERRUPTIONS OF
SERVICE TO OUR CUSTOMERS
Our network may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Unauthorized access could also potentially jeopardize
the security of confidential information stored in the computer systems of our
customers, which might cause us to be liable to our customers, and might deter
potential customers. Eliminating computer viruses and alleviating other security
problems may require interruptions, delays or cessation of service to our
customers and our customers' end users. Any of these factors relating to network
security could have a material adverse effect on our business, financial
condition and results of operations.
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OUR OPERATING RESULTS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY, CAUSING OUR STOCK
PRICE TO BE VOLATILE OR TO DECLINE
Our operating results may vary significantly from quarter to quarter due to
a number of factors, not all of which are in our control. Many of our expenses,
particularly personnel costs, central office rental fees and other facility
rental expenses, are relatively fixed and are incurred in part based on
expectations of future revenue. We may be unable to adjust spending quickly
enough to offset any unexpected revenue shortfall. Accordingly, any shortfall in
revenue may cause significant variation in operating results in any quarter.
These variations or any shortfalls could cause the trading price of our common
stock to decline. Future revenue is difficult to forecast and for the
foreseeable future will be influenced by:
- the timing and amount of sales to new customers;
- our planned upgrade to our network infrastructure;
- the installation of our equipment in Bell Atlantic central offices
throughout our target markets;
- our access to copper telephone lines and transmission facilities
controlled by Bell Atlantic;
- the establishment of our regional operating centers;
- our ability to increase awareness of DSL; and
- the success of DSL in general.
Because of these factors, you should not rely on quarter-to-quarter
comparisons of our results of operations as an indication of our future
performance.
IF SALES FORECASTED FOR A PARTICULAR PERIOD ARE NOT REALIZED IN THAT PERIOD DUE
TO THE LENGTHY SALES CYCLE OF OUR VIRTUAL PRIVATE NETWORK SERVICES, OUR
OPERATING RESULTS FOR THAT PERIOD WILL BE HARMED
We offer our virtual private network services to large enterprises, and the
sales cycle can be very lengthy. If sales that we forecast for a particular
period do not occur because of the lengthy sales cycle, it could materially and
adversely affect our business, financial condition and results of operations.
The sales cycle for such large enterprises may last six months or more and
typically involves:
- a significant technical evaluation;
- an initial trial rollout to a relatively small number of end users;
- a commitment of capital and other resources by the customer;
- delays associated with the customer's internal procedures to approve
expenditures;
- time required to engineer the deployment of our services;
- coordination of the activation of copper telephone lines with incumbent
carriers; and
- testing and acceptance of our services.
During this lengthy sales cycle, we may incur significant expenses in
advance of the receipt of revenues.
THE FAILURE OF ONE OF OUR SUPPLIERS TO CONTINUE TO PROVIDE US DSL EQUIPMENT
COULD REQUIRE US TO MAKE SIGNIFICANT CAPITAL EXPENDITURES TO REPLACE EXISTING
EQUIPMENT
Currently, the DSL modem and other equipment used for a single connection
over a copper telephone line must come from the same vendor because there are no
existing interoperability standards for the equipment used in our services. If
one of our suppliers stopped providing DSL equipment
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to us for any reason, or was unable to manufacture and deliver the amount or
quality of equipment we order, we would need to make significant capital
expenditures to replace this equipment, which could have a material adverse
effect on our business, financial condition and results of operations.
OUR SERVICES ARE SUBJECT TO UNCERTAIN GOVERNMENT REGULATION AND CHANGES IN LAWS
OR REGULATIONS COULD RESTRICT THE WAY WE OPERATE OUR BUSINESS
Because many of the facilities and services we need in order to provide DSL
are subject to regulation at the federal, state and local levels, changes in
applicable laws or regulations could have an adverse impact on our business. For
example, the FCC and state telecommunications regulators help determine the
terms under which collocation space is provided to us. They also oversee the
terms under which we gain access to an incumbent local carrier's copper
telephone lines and transport facilities that we need in order to provide DSL
services. We expect incumbent local carriers like Bell Atlantic to pursue
litigation in courts, institute administrative proceedings with the FCC and
state telecommunications regulators and lobby the U.S. Congress in an effort to
affect the applicable laws and regulations in a manner that would be more
favorable to them and may be against our interests. Any changes in our
regulatory environment could create greater competitive advantages for all or
some of our competitors or could make it easier for additional parties to
provide DSL services. In addition, we may choose to expend significant resources
to participate in regulatory proceedings at the federal or state level without
achieving favorable results.
THE ADOPTION OR MODIFICATION OF LAWS OR REGULATIONS RELATING TO THE INTERNET
COULD ADVERSELY AFFECT OUR BUSINESS
The adoption or modification of laws or regulations relating to the Internet
could adversely affect our business. The U.S. Congress has recently considered
Internet laws regarding children's privacy, copyrights, taxation and the
transmission of sexually explicit material. The European Union also recently
enacted its own privacy regulations. The law of the Internet, however, remains
largely unsettled, even in areas where there has been some legislative action.
It may take years to determine whether and how existing laws, such as those
governing intellectual property, privacy, libel and taxation, apply to the
Internet. In addition, the growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws, both in
the United States and abroad, that may impose additional burdens on companies
conducting business online.
WE MAY BE SUBJECT TO REGULATION, TAXATION, ENFORCEMENT OR OTHER LIABILITIES IN
UNEXPECTED JURISDICTIONS
We provide Internet access and Web site hosting services to customers
located throughout the United States and in several foreign countries. As a
result, we may be required to qualify to do business, or be subject to tax or
other laws and regulations, in these jurisdictions even if we do not have a
physical presence or employees or property in these jurisdictions. The
application of these multiple sets of laws and regulations is uncertain, but we
could find we are subject to regulation, taxation, enforcement or other
liability in unexpected ways, which could materially adversely affect our
business, financial condition and results of operations.
OUR SENIOR MANAGEMENT TEAM HAS WORKED TOGETHER FOR ONLY A SHORT PERIOD OF TIME
Our success depends on Mark Washburn, our President and Chief Executive
Officer, and our other executive officers and key employees. Mr. Washburn joined
HarvardNET in September 1998, and our senior management team has worked together
for only a short period of time. There is therefore only a limited period of
time on which you can judge their ability to operate as a group.
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IF WE ARE UNABLE TO ATTRACT AND RETAIN KEY PERSONNEL, OUR BUSINESS WILL SUFFER
We may be unable to continue to employ our key personnel or to attract and
retain qualified personnel in the future. Our future success depends on our
continuing ability to identify, hire, train and retain highly qualified
technical, sales, marketing and customer service personnel. The industry in
which we compete has a high level of employee mobility and aggressive recruiting
of skilled personnel. In particular, we face intense competition for qualified
personnel, particularly in software development, network engineering and product
management.
WE MAY BE SUBJECT TO INFRINGEMENT CLAIMS WHICH COULD MATERIALLY ADVERSELY AFFECT
OUR BUSINESS
Third parties, including our competitors, may assert infringement claims
against us and, in the event of an unfavorable ruling on any claim, we may be
unable to obtain a license or similar agreement to use technology we need to
conduct our business. Our management personnel were previously employees of
other telecommunications companies. In many cases, these individuals are
conducting activities for us in areas similar to those in which they were
involved prior to joining us. As a result, we or our employees could be subject
to allegations of violation of trade secrets and other similar claims. If such
claims materialize, it could materially adversely affect our business, financial
condition and results of operations.
OUR PRINCIPAL STOCKHOLDERS AND MANAGEMENT OWN A SIGNIFICANT PERCENTAGE OF
HARVARDNET AND WILL BE ABLE TO EXERCISE SIGNIFICANT INFLUENCE OVER HARVARDNET,
WHICH COULD HAVE A MATERIAL AND ADVERSE EFFECT ON THE MARKET PRICE OF OUR
COMMON STOCK
Our executive officers, directors and principal stockholders together will
beneficially own 54.7% of our common stock after this offering, or 52.8% if the
underwriters exercise their over-allotment option in full. These stockholders
will be able to determine the composition of our board of directors, will retain
the voting power to approve all matters requiring stockholder approval,
including any merger, and will continue to have significant influence over our
affairs. This concentration of ownership could have the effect of delaying or
preventing a change in our control or otherwise discouraging a potential
acquiror from attempting to obtain control of us, which in turn could have a
material and adverse effect on the market price of our common stock or prevent
you from realizing a premium over the market price for your shares of common
stock.
WE HAVE BEEN UNABLE TO CONFIRM YEAR 2000 COMPLIANCE BY OUR EXTERNAL SERVICE
PROVIDERS, AND THEIR FAILURE TO BE YEAR 2000 COMPLIANT COULD NEGATIVELY IMPACT
OUR BUSINESS
We have to date been unable to confirm that our external service providers,
including Bell Atlantic, will not be negatively impacted by the inability of
computer programs upon which they rely to correctly recognize dates after
December 31, 1999. To the extent that Bell Atlantic or other third parties
experience Year 2000 problems, our network and services could be adversely
affected.
YEAR 2000 ISSUES COULD NEGATIVELY IMPACT OUR CUSTOMERS, WHICH COULD MATERIALLY
ADVERSELY AFFECT OUR BUSINESS
The purchasing patterns of our customers may be affected by Year 2000 issues
as they expend significant resources to correct their current systems for Year
2000 compliance or if such issues have an adverse effect on their business
operations. These expenditures may result in reduced funds available to purchase
our services. Any of these developments could have a material and adverse effect
on our business, financial condition and results of operations.
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THE FAILURE OF AN ACTIVE TRADING MARKET TO DEVELOP FOR OUR COMMON STOCK COULD
MATERIALLY ADVERSELY AFFECT YOUR INVESTMENT IN OUR COMMON STOCK
Our common stock has not been traded in the public market before this
offering, and an active trading in our common stock may not develop or continue
after this offering. We will determine the price you will pay for our common
stock through negotiations with the underwriters. You may not be able to resell
your shares at or above the price you will pay for our common stock. The
estimated initial public offering price range set forth on the cover page of
this preliminary prospectus is subject to change as a result of market
conditions and other factors.
THE HOLDERS OF A SIGNIFICANT NUMBER OF SHARES OF OUR COMMON STOCK HAVE THE RIGHT
TO REQUIRE US TO REGISTER THE SALE OF THEIR SHARES, AND FUTURE SALES OF OUR
COMMON STOCK IN THE PUBLIC MARKET COULD DEPRESS OUR STOCK PRICE
Sales of substantial amounts of common stock in the public market following
this offering, or the appearance that a large number of shares is available for
sale, could adversely affect the market price for our common stock. After this
offering, the holders of 28,080,260 outstanding shares of common stock and
1,172,376 shares of common stock issuable upon the exercise of outstanding
options and warrants will have the right to require us to register the sale of
their shares, subject to limitations and to the lock-up agreements with the
underwriters, and to require us to include their shares in any future public
offerings of our equity securities. Within approximately 180 days after this
offering, we intend to file a registration statement under the Securities Act to
register 6,125,405 shares of common stock subject to outstanding stock options
or reserved for issuance under our stock incentive plans. On the date of this
offering, we intend to file a registration statement under the Securities Act to
register 1,355,000 shares of common stock issuable under our stock purchase
plan. The sale of these additional shares into the public market may further
adversely affect the market price of our common stock. In addition to the
adverse effect a price decline could have on holders of common stock, that
decline would likely impede our ability to raise capital through the issuance of
additional shares of common stock or other equity securities.
OUR CERTIFICATE OF INCORPORATION AND BYLAWS CONTAIN PROVISIONS THAT COULD DELAY
OR PREVENT A CHANGE IN CONTROL AND THEREFORE COULD HURT OUR STOCKHOLDERS
Provisions of our certificate of incorporation and bylaws could make it more
difficult for a third party to acquire control of HarvardNET, even if a change
in control would be beneficial to stockholders. Our certificate of incorporation
will provide for a classified board of directors and will allow our board of
directors to issue, without stockholder approval, preferred stock with terms set
by the board of directors. The preferred stock could be issued quickly with
terms that delay or prevent the change in control of HarvardNET or make removal
of management more difficult. Also, the issuance of preferred stock may cause
the market price of our common stock to decrease.
THIS PROSPECTUS CONTAINS FORWARD LOOKING STATEMENTS WHICH MAY NOT PROVE TO BE
ACCURATE AND SUCH INACCURACY COULD MATERIALLY AND ADVERSELY AFFECT THE MARKET
PRICE OF OUR COMMON STOCK
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Our actual results could differ significantly from those
anticipated in these forward-looking statements as a result of the risks
described above and elsewhere in this prospectus.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 8,900,000 shares of
common stock will be approximately $114.5 million ($131.9 million if the
underwriters exercise their over-allotment option in full) assuming an initial
public offering price of $14.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses of
$1,350,000 payable by us.
We will use a portion of the net proceeds to repay any outstanding amounts
under our credit facility. We anticipate that the outstanding indebtedness under
this credit facility will be approximately $6.0 million upon the closing of this
offering. This facility has a maturity date in May 2004. The facility bears
interest at an annual rate equal to the London inter bank offer rate plus 4.5%,
which was approximately 9.6% as of July 26, 1999. We expect to use the remainder
of the net proceeds for capital expenditures relating to our planned geographic
expansion, potential acquisitions and working capital and other general
corporate purposes. Although we may use a portion of the net proceeds to acquire
businesses, products or technologies that are complementary to our business, we
have no specific acquisitions planned. Pending such uses, we plan to invest the
net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared any cash dividends on common stock or other
securities and do not anticipate paying cash dividends in the foreseeable
future. We currently intend to retain all future earnings, if any, for use in
the operation of our business.
17
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 1999:
- on an actual basis after giving effect to the 1.3546862-for-1 split of our
common stock and Class B stock;
- on a pro forma basis to reflect the conversion of all shares of Class B
stock and convertible preferred stock outstanding as of March 31, 1999
into common stock; and
- on a pro forma as adjusted basis to reflect the conversion of all shares
of Class B stock and convertible preferred stock outstanding as of March
31, 1999 into common stock, and the sale of common stock in this offering,
assuming an initial public offering price of $14.00 per share, after
deducting the underwriting discounts and commissions and estimated
offering expenses payable by HarvardNET.
The outstanding share information excludes 93,121 shares of common stock
issuable upon exercise of warrants outstanding as of March 31, 1999 at an
exercise price of $.99 per share and 1,163,052 shares of common stock issuable
upon exercise of options outstanding as of March 31, 1999 with a weighted
average exercise price of $.87 per share.
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
-----------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
--------- ----------- -----------
<CAPTION>
(IN THOUSANDS, EXCEPT SHARE
AND PER SHARE DATA)
<S> <C> <C> <C>
Long term debt, less current portion......................................... $ 50 $ 50 $ 50
Redeemable convertible Series A preferred stock; $0.01 par value; 13,749,440
shares authorized, 13,749,440 issued and outstanding; none issued and
outstanding pro forma and pro forma as adjusted basis...................... 18,011 -- --
Stockholders' equity (deficit):
Preferred stock, $.01 par value; 5,000,000 shares authorized and unissued,
pro forma as adjusted...................................................... -- -- --
Common stock, $0.01 par value; 34,237,000 shares authorized, 8,655,939 shares
issued and 5,278,246 outstanding; 34,237,000 shares authorized and
30,976,290 shares issued and 27,598,597 outstanding, pro forma; 100,000,000
shares authorized and 39,876,290 shares issued and 36,498,597 shares
outstanding, pro forma as adjusted......................................... 87 310 399
Class B stock, $.01 par value; 4,486,250 shares authorized, 3,976,381 issued
and outstanding; none issued and outstanding, pro forma and pro forma as
adjusted basis............................................................. 28 -- --
Additional paid-in capital................................................... 10,883 29,312 143,751
Accumulated dividends on preferred stock..................................... 613 -- --
Deferred compensation........................................................ (8,690) (8,690) (8,690)
Accumulated deficit.......................................................... (2,810) (2,810) (2,810)
Treasury stock, at cost...................................................... (3,356) (3,356) (3,356)
--------- ----------- -----------
Total stockholders' equity (deficit)......................................... (3,245) 14,766 129,294
--------- ----------- -----------
Total capitalization......................................................... $ 14,816 $ 14,816 $ 129,344
--------- ----------- -----------
--------- ----------- -----------
</TABLE>
18
<PAGE>
DILUTION
Our pro forma net tangible book value as of March 31, 1999 was approximately
$10.8 million or approximately $.39 per share of common stock. Pro forma net
tangible book value per share represents the amount of our total tangible assets
less total tangible liabilities, divided by 27,598,597 shares of common stock
outstanding, after giving effect to the conversion of all shares of Class B
stock and convertible preferred stock outstanding as of March 31, 1999. After
giving effect to the sale of the common stock offered in this offering at an
assumed initial public offering price of $14.00 per share and after deducting
the estimated underwriting discounts and commissions and offering expenses
payable by us, our pro forma net tangible book value as of March 31, 1999 would
have been approximately $125.3 million, or $3.43 per share of common stock. This
represents an immediate increase in pro forma net tangible book value of $3.04
per share to existing stockholders and an immediate dilution of $10.57 per share
to new investors. The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............................. $ 14.00
Pro forma net tangible book value per share before this offering.......... $ .39
Increase in pro forma net tangible book value per share attributable to
new investors........................................................... 3.04
---------
Pro forma net tangible book value per share after this offering............. 3.43
---------
Dilution per share to new investors......................................... $ 10.57
---------
---------
</TABLE>
The following table summarizes on a pro forma basis as of March 31, 1999,
the difference between the number of shares of common stock purchased from
HarvardNET, the total consideration paid to HarvardNET and the average price per
share paid by existing stockholders and by new investors at an assumed initial
public offering price of $14.00 per share, before deducting estimated
underwriting discounts and commissions and offering expenses payable by
HarvardNET:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
------------------------- -------------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
------------ ----------- ------------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Existing stockholders.................................. 27,598,597 75.6% 20,868,000 14.3% $ .76
New investors.......................................... 8,900,000 24.4 124,600,000 85.7 $ 14.00
------------ ----- ------------- -----
Total................................................ 36,498,597 100.0% 145,468,000 100.0%
------------ ----- ------------- -----
------------ ----- ------------- -----
</TABLE>
- ------------------------
The table above assumes no exercise of warrants and stock options outstanding at
March 31, 1999. As of March 31, 1999, there were warrants outstanding to
purchase a total of 93,121 shares of common stock at an exercise price of $.99
per share and options outstanding to purchase a total of 1,163,052 shares of
common stock at a weighted average exercise price of $.87 per share. To the
extent any of these options or warrants are exercised, there will be further
dilution to new investors.
19
<PAGE>
SELECTED FINANCIAL DATA
The financial data set forth below should be read together with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and related notes included elsewhere in
this prospectus.
The following statement of operations data for the fiscal years ended
December 31, 1996, 1997 and 1998 and the balance sheet data as of December 31,
1997 and 1998 are derived from our financial statements audited by
PricewaterhouseCoopers LLP, independent accountants. The statement of operations
data for the fiscal years ended December 31, 1994 and 1995 and the balance sheet
data as of December 31, 1994, 1995 and 1996 are derived from unaudited financial
statements of HarvardNET not included in this prospectus. The unaudited
financial statements include all adjustments, comprised only of normal recurring
adjustments, which we consider necessary for a fair presentation. In November
1995, HarvardNET entered the Internet service provider business. Prior to that
time, HarvardNET developed software products and network solutions for various
government agencies. HarvardNET believes that the selected data for 1994 and
1995 do not highlight significant trends in its financial condition or results
of operations related to its current business.
The statement of operations data for the three month periods ended March 31,
1998 and 1999 and the balance sheet data as of March 31, 1999 are derived from
our unaudited financial statements and reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of our
results of operations and financial position. Results for the three months ended
March 31, 1999 are not necessarily indicative of results that may be expected
for the year.
EBITDA consists of net loss excluding interest, taxes, depreciation and
amortization. We have provided EBITDA because it is a measure of financial
performance commonly used in the telecommunications industry, but other
companies may calculate it differently from us. We have presented EBITDA to
enhance your understanding of our operating results. You should not construe it
as an alternative to operating income as an indicator of our operating
performance or as an alternative to cash flows from operating activities as a
measure of liquidity.
20
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1994 1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- --------- ---------
(UNAUDITED)
(UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues....................................... $ 207 $ 260 $ 720 $ 1,381 $ 4,282 $ 954 $ 1,600
Costs of services.............................. 109 117 325 704 1,878 420 811
Selling, general and administrative............ 89 132 352 671 2,815 399 1,693
Depreciation and amortization.................. 2 1 6 187 1,339 318 500
Compensation charge for issuance of stock
options...................................... -- -- -- -- -- -- 90
--------- --------- --------- --------- --------- --------- ---------
Operating income (loss)........................ 7 10 37 (181) (1,750) (183) (1,494)
Interest income (expense) net.................. -- -- (1) (2) 32 (3) 19
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before taxes..................... 7 10 36 (183) (1,718) (185) (1,475)
Benefit (provision) for income taxes........... (1) (7) (9) 44 458 49 85
--------- --------- --------- --------- --------- --------- ---------
Net income (loss).............................. $ 6 $ 3 $ 27 $ (139) $ (1,260) $ (136) $ (1,390)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Dividends and accretion of discount on
preferred stock.............................. -- -- -- -- (336) -- (333)
Net income available (loss attributable) to
common stockholders.......................... $ 6 $ 3 $ 27 $ (139) $ (1,596) $ (136) $ (1,723)
Net income (loss) per share--basic and
diluted(1):
Historical................................... $ 0.00 $ 0.00 $ 0.01 $ (0.03) $ (0.21) $ (0.02) $ (0.33)
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Pro forma(2)................................. $ (0.10) $ (0.05)
--------- ---------
--------- ---------
Weighted average shares outstanding(1):
Basic and diluted............................ 4,064 4,064 4,064 4,840 7,526 8,655 5,278
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
OTHER DATA:
EBITDA......................................... $ 9 $ 11 $ 43 $ 6 $ (411) $ 135 $ (904)
Capital expenditure............................ 3 2 -- 19 1,010 36 627
Net cash provided by (used in) operating
activities................................... 38 20 96 (44) (93) 428 (1,417)
Net cash used in investing activities.......... 3 2 -- (19) (1,010) (36) (3,450)
Net cash provided by (used in) financing
activities................................... -- -- (6) 340 5,916 (10) 8,603
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31, 1999
--------------------------------------------------------- ------------------------
1994 1995 1996 1997 1998 (ACTUAL) PRO FORMA(2)
----------- ----------- --------- --------- --------- --------- -------------
(UNAUDITED)
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.................. $ 38 $ 58 $ 148 $ 426 $ 5,239 $ 8,975 $ 8,975
Working capital............................ 38 58 8 234 4,636 9,141 9,141
Total assets............................... 50 77 204 3,958 8,853 16,049 16,049
Long-term debt, net of current portion..... -- -- -- 97 67 50 50
Redeemable convertible preferred stock..... -- -- -- -- 9,365 18,011 --
Accumulated deficit........................ (51) (47) (20) (159) (1,420) (2,719) (29,312)
Total stockholders' equity (deficit)....... (51) (47) 10 2,708 (1,917) (3,245) 14,766
</TABLE>
- --------------------------
(1) For an explanation of the determination of the number of shares used in
computing earnings per share, see note 3 in our financial statements.
(2) Pro forma to reflect the conversion of shares of redeemable convertible
preferred stock and Class B stock outstanding as of March 31, 1999 into an
aggregate of 22,320,351 shares of common stock.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
We began operations in May 1993 as a software and consulting company. In
November 1995, we entered the Internet business focusing on providing high
performance Web site hosting services as well as leased line Internet access to
business customers in the Boston market. In mid-1996, we began to commercially
deploy digital subscriber line, or DSL, technology, focusing on business
customers in the Northeast. On November 12, 1997, we expanded our operations
into Maine and New Hampshire by acquiring all of the common stock of Internet
Northeast, an Internet service provider based in Maine, with approximately 4,000
local dial-up Internet access subscribers.
In September 1998, we received an $18.5 million equity commitment from M/C
Venture Partners, Fidelity Ventures and several other individual investors.
Since that time we have shifted the focus of our efforts from dial-up Internet
access to our DSL leased line and frame relay services, Web site hosting and
other services. As of June 30, 1999, our monthly recurring services were
comprised of:
- DSL services -- 22%;
- leased line services -- 35%;
- Web site hosting -- 14%; and
- dial-up Internet access -- 29%.
We expect the percentage of our monthly recurring revenues from our dial-up
services to decline over time.
In order to implement our strategy, we have increased our overall operating
expenses and capital expenditures to facilitate the development and deployment
of our DSL, virtual private network and Web site hosting services. In addition,
we have increased these expenses in connection with the expansion of the
geographic area in which we provide our services. As a result, since our
September 1998 equity funding, our primary activities have consisted of:
- executing additional interconnection agreements with Bell Atlantic;
- obtaining additional governmental authorizations;
- identifying additional central office space in existing and new markets in
which to install our equipment;
- acquiring and deploying additional equipment and facilities;
- hiring additional management, sales and other personnel;
- upgrading our operations and support systems;
- acquiring substantially all of the assets of the Network Services Division
of Comstor Corporation; and
- raising additional capital.
Currently, we provide DSL service to customers in eastern Massachusetts,
southern Maine and southern New Hampshire. As of July 26, 1999, we provided
service at 51 central office locations and had installed equipment at 20
additional locations. By the middle of 2001, we intend to expand our DSL
coverage to more than 600 central offices throughout the Northeast and
Mid-Atlantic regions, including markets in Rhode Island, New York, New Jersey,
Pennsylvania, Maryland, Washington, D.C. and Virginia. As of July 26, 1999, we
operated regional operations centers in Boston, Massachusetts, Portland, Maine,
Manchester, New Hampshire and McLean, Virginia, at which we aggregate and route
22
<PAGE>
data traffic for each market. We plan to increase the number of these centers in
conjunction with our roll-out of DSL services.
On January 11, 1999, we acquired substantially all of the assets of the
Network Services Division of Comstor Corporation for approximately $2.8 million
in cash, which consisted principally of its East Coast network for the transport
of Internet protocol-based traffic, as well as various peering arrangements. We
plan to upgrade this network as necessary to support the traffic requirements
and needs of our customers. We have a new, approximately 20,000 square foot, Web
operations center in Boston. We intend to establish additional Web operations
centers in New York, Philadelphia and Washington, D.C. in conjunction with our
roll-out of DSL services in these metropolitan areas.
We expect to incur operations, sales and market development expenses as we
enter new markets and further penetrate existing ones. Once we have deployed our
network in a market, the majority of our additional capital expenditures will be
to connect new customers. In addition, we will be required to fund each market's
cash flow deficit as we build our customer base. We expect that our financial
performance will vary from market to market, depending on factors such as:
- the size of the addressable market;
- the level of sale and marketing expenses;
- the number and timing of central offices built out;
- the timing of market entry;
- the length of the sales cycle; and
- the acceptance of our services.
We have received the entire $18.5 million in equity financing under a
funding agreement executed in September 1998. On May 28, 1999 we entered into a
$30.0 million senior secured credit facility to fund our continued expansion. We
expect to incur operating losses, net losses and negative cash flow for the next
several years.
We will amortize deferred compensation of approximately $8.7 million in the
aggregate relating to options granted in the quarter ended March 31, 1999 that
will vest over the next four years, and which will be charged ratably over that
period. For the period from April 1, 1999 through June 10, 1999, we granted
options for the purchase of 282,043 shares of common stock to employees at
exercise prices ranging from $1.00 to $2.21 per share. We recorded deferred
compensation of approximately $3.0 million relating to these grants which will
be amortized as a compensation charge for issuance of stock options, over the
four-year vesting period. For the period from April 1, 1999 through June 10,
1999 we cancelled options for the purchase of 29,126 shares of common stock
previously issued to employees at exercise prices, in each case, of $1.00 per
share. For the period from June 11, 1999 through July 13, 1999, we granted
options to purchase 93,774 shares of our common stock to employees at an
exercise price in each case of $11.81 per share. We recorded deferred
compensation relating to these grants of approximately $174,000, which will be
amortized ratably as a compensation charge for issuance of stock options over
the four year vesting period of such options.
We will record deferred debt issuance costs of approximately $4.4 million in
the quarter ended June 30, 1999 relating to our credit facility which will be
charged to interest expense over the term of the facility using the effective
interest method. As this facility will terminate upon the closing of this
offering, we expect to recognize approximately $4.4 million of this expense in
the quarter ending September 30, 1999.
We will recognize a preferred stock dividend of approximately $4.6 million
in the quarter ended June 30, 1999 relating to the difference between the
issuance price and fair value of 356,294 shares of Series A-2 preferred stock
issued in May 1999.
23
<PAGE>
We are subject to state telecommunications commission, FCC and court
decisions that interpret and implement the 1996 Telecommunications Act, various
telecommunications statutes and regulations and various contractual arrangements
involving incumbent carriers. We are unable to estimate the likelihood that any
future rulings or regulations would result in a material impact on our financial
condition or results of operations. However, one or more of these rulings or
regulations could have a material effect on our business prospects, operating
results and financial condition in the future.
REVENUES
We derive the majority of our revenues from customers who purchase Internet
access, Web site hosting and other data transport and networking services. We
typically bill our customers for monthly recurring charges based on the type and
level of service provided, including the data transfer speed and bandwidth
selected by the customer. In addition to the monthly service fees, we bill users
for nonrecurring activation and installation service related to Internet access,
Web site hosting and other data transport and networking services. These
nonrecurring revenues are recorded when performed.
Recurring revenues consist of monthly service fees for the following
services:
- BusinessSPEED DSL high speed digital leased line;
- RemoteCONNECT virtual private network services;
- Web site hosting;
- E-commerce and other enhanced services, including outsourced e-mail
administration; and
- Dial-up Internet access.
Service revenues related to Internet access, Web site hosting and enhanced
services are recognized as the services are provided. Advance collections
relating to future services are recorded as deferred revenue and recognized as
revenue when earned.
During the past several years, market prices for many telecommunications and
Web site hosting services have been declining, which is a trend we believe will
continue. As prices decline for any given speed, bandwidth or level of service,
we expect that the total number of end users and the proportion of end users
purchasing higher-level, higher-priced services will increase. The cost of these
upgrades are generally minimal.
COSTS OF SERVICES
Our costs of services represent network expenses related to providing
service to our customers, including the transport between the end user and
central office, between central office and regional operations center, and
between the regional operations center and the Internet. As our customer and end
user base grows, we expect these costs to increase, depending upon the amount of
end users added and their bandwidth and level of service requirements. Costs of
services are generally comprised of the following:
- Intra-region costs consist of monthly service fees to Bell Atlantic to
install our equipment in its central offices, connect to copper telephone
lines and use its transmission facilities, as well as for leased transport
from the incumbent and other carriers. In addition, we pay nonrecurring
installation charges for these lines and other related services.
- Inter-region costs consist of leased transport and other operating costs
associated with our fiber optic network.
24
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Sales and marketing costs consist mainly of salaries and benefits for our
direct sales force and marketing personnel and include advertising and new
market launch expenses.
General and administrative costs consist mainly of salaries and benefits for
our administrative, regulatory, provisioning, technical support, network
engineering, customer care and management personnel, as well as fees paid for
professional services.
DEPRECIATION AND AMORTIZATION
Depreciation includes depreciation of furniture and fixtures, computer and,
network infrastructure equipment. Depreciation is computed on a straight-line
basis over estimated useful lives of three to ten years.
Amortization includes the amortization of capital leased equipment as well
as the amortization of intangible assets associated with our acquisitions of
Internet Northeast and the Network Services Division of Comstor Corporation.
Amortization is computed on a straight-line basis over three to five years.
COMPENSATION CHARGE FOR ISSUANCE OF STOCK OPTIONS
Compensation charge for issuance of stock options represents the difference
between the exercise price of stock options granted and the estimated fair
market value of the underlying common stock on the date of grant.
INTEREST INCOME (EXPENSE)
Interest income consists of interest income from our cash and short-term
investments. Interest expense consists of interest associated with capital
leased equipment and a term loan.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED MARCH 31, 1998
REVENUES
Total revenues were $1.6 million for the three months ended March 31, 1999,
as compared to $954,000 for the three months ended March 31, 1998, an increase
of $646,000 or 68%. This increase was attributable to the revenue base of the
Network Services Division of Comstor Corporation which was acquired on January
11, 1999, as well as the addition of new customers and with a higher average
monthly revenue per customer.
COSTS OF SERVICES
Costs of services were $811,000 for the three months ended March 31, 1999,
as compared to $420,000 for the three months ended March 31, 1998, an increase
of $391,000 or 93%. The increase was primarily attributable to the network costs
associated with the acquisition of substantially all of the assets of the
Network Services Division of Comstor Corporation in 1999, as well as an increase
in network costs associated with higher customer counts. Costs of services as a
percentage of revenues was 51% for the three months ended March 31, 1999,
compared to 44% for the three months ended March 31, 1998. The increase as a
percentage of revenues is due to higher costs associated with additional fixed
transport capacity between our regional operations centers and the Internet that
we acquired in the first quarter of 1999. We expect that our transport costs
will decrease as a percentage of revenue in the future as increased traffic can
more fully utilize this existing transport capacity.
25
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $1.7 million for the three
months ended March 31, 1999, compared to $399,000 for the three months ended
March 31, 1998, an increase of $1.3 million or 324%. This increase consisted
primarily of increased salary expenses associated with increases in management,
sales and other personnel and increased fees paid for professional services. The
total number of employees at March 31, 1999 was 98 as compared to 37 at March
31, 1998. We expect selling, general and administrative expenses to increase as
we expand our operations and expand our infrastructure to support future growth
which will reduce cash flow and net income.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $500,000 for the three months
ended March 31, 1999, as compared to $318,000 for the three months ended March
31, 1998, an increase of $182,000. The increase was attributed to the
depreciation associated with the expansion of our network and the amortization
of the intangible asset associated with the acquisition of Comstor. We expect
depreciation and amortization expense to increase as we make investments in our
network and operational infrastructure and if we acquire additional assets or
businesses. Increases in depreciation and amortization expense will reduce net
income.
COMPENSATION CHARGE FOR ISSUANCE OF STOCK OPTIONS
We incurred a charge of $90,000 for the three months ended March 31, 1999
related to the issuance of stock options with exercise prices below fair market
value on the date of grant. Additional unvested outstanding options will
continue to vest over the next four years, which will result in additional
compensation expense of approximately $8,780,000 in the aggregate in periods
subsequent to March 31, 1999 which will be charged ratably over the next four
years.
INTEREST INCOME (EXPENSE)
Interest income for the three months ended March 31, 1999 was $23,000
compared to $0 for the three months ended March 31, 1998. The increase was
primarily due to the interest earned on the proceeds from the redeemable
convertible Series A preferred stock issuance.
Interest expense for the three months ended March 31, 1999 was $4,000
compared to $3,000 for the three months ended March 31, 1998. This increase was
primarily due to the interest payable on leased capital equipment.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997
REVENUES
Total revenues were $4.3 million for the year ended December 31, 1998, as
compared to $1.4 million for the year ended December 31, 1997, an increase of
$2.9 million or 210%. This increase was attributable to a full year of dial-up
service revenue associated with the 1997 acquisition of Internet Northeast.
COSTS OF SERVICES
Costs of services were $1.9 million for the year ended December 31, 1998, as
compared to $704,000 for the year ended December 31, 1997, an increase of $1.2
million or 167%. The increase was primarily attributable to the inclusion of a
full year of dial-up network costs. Cost of services as a percentage of revenues
was 44% for the year ended December 31, 1998, compared to 51% for the year ended
December 31, 1997.
26
<PAGE>
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $2.8 million for the year
ended December 31, 1998 compared to $671,000 for the year ended December 31,
1997, an increase of $2.1 million or 319%. Sales and marketing expenses
increased approximately $435,000. General and administrative expenses increased
$1.7 million. The increases were due to the inclusion of a full year of
operations of Internet Northeast and the establishment of the Boston corporate
office. The total number of employees at December 31, 1998 was 56 as compared to
31 at December 31, 1997. We expect selling, general and administrative expenses
to increase as we expand our operations and expand our infrastructure to support
future growth which will reduce cash flow and net income.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $1.3 million for the year ended
December 31, 1998 as compared to $187,000 for the year ended December 31, 1997,
an increase of $1.1 million. The increase was attributable to the depreciation
on our expanded network and the amortization of the intangible assets and
goodwill associated with the acquisition of Internet Northeast. We expect
depreciation and amortization expense to increase as we make investments in our
network and operational infrastructure and if we acquire additional assets or
businesses. Increases in depreciation and amortization expense will reduce net
income.
INTEREST INCOME (EXPENSE)
Interest income for the year ended December 31, 1998 was $57,000 compared to
$0 for the year ended December 31, 1997. The increase was primarily due to the
interest earned on the proceeds of the Series A preferred stock issuance in
September 1998.
Interest expense for the year ended December 31, 1998 was $25,000 compared
to $2,000 for the year ended December 31, 1997. This increase was primarily due
to the interest on leased capital equipment.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
REVENUES
Total revenues were $1.4 million for the year ended December 31, 1997, as
compared to $720,000 for the year ended December 31, 1996, an increase of
$661,000 or 92%. The increase was attributable to the addition of the dial-up
business in November 1997 from the Internet Northeast acquisition and an overall
increase in customers.
COSTS OF SERVICES
Costs of services were $704,000 for the year ended December 31, 1997, as
compared to $325,000 for the year ended December 31, 1996, an increase of
$379,000 or 116%. This increase was due in part to the addition of Internet
Northeast in November 1997. Costs of services as a percentage of revenues was
51% for the year ended December 31, 1997 compared to 45% for the year ended
December 31, 1996.
SELLING, GENERAL AND ADMINISTRATIVE
Selling, general and administrative expenses were $671,000 for the year
ended December 31, 1997 compared to $352,000 for the year ended December 31,
1996, an increase of $319,000 or 91%. Sales and marketing expenses increased
$28,000. General and administrative expenses increased $291,000. The increases
were due in part to the increase in headcount as a result of the 1997
acquisition of Internet Northeast.
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DEPRECIATION AND AMORTIZATION
Depreciation and amortization expense was $187,000 for the year ended
December 31, 1997, as compared to $6,000 for the year ended December 31, 1996,
an increase of $181,000. This increase was attributable to the amortization of
the intangible assets and goodwill associated with the 1997 acquisition of
Internet Northeast.
INTEREST INCOME (EXPENSE)
Interest income and expense were nominal in both years.
QUARTERLY RESULTS
The following table sets forth unaudited financial data of HarvardNET for
each of the quarters in 1998 and for the first quarter of 1999. This information
has been derived from our unaudited financial statements that, in our opinion,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of this quarterly information. The operating
results for any quarter are not necessarily indicative of results to be expected
for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31,
1998 1998 1998 1998 1999
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Revenues........................................................... $ 954 $ 1,041 $ 1,159 $ 1,128 $ 1,600
Costs of services.................................................. 420 468 461 529 811
Selling, general and administrative................................ 399 605 725 1,086 1,693
Depreciation and amortization...................................... 318 324 332 366 500
Compensation charge for issuance of stock options.................. -- -- -- -- 90
----- ----------- --------- ----------- -----------
Operating income (loss)............................................ (183) (356) (359) (853) (1,494)
Interest income (expense), net..................................... (2) -- 2 33 19
----- ----------- --------- ----------- -----------
Net income (loss) before taxes..................................... (185) (356 ) (357) (820 ) (1,475 )
Benefit (provision) for income taxes............................... 49 95 95 218 85
----- ----------- --------- ----------- -----------
Net income (loss).................................................. $ (136 ) $ (261 ) $ (262) $ (602 ) $ (1,390 )
----- ----------- --------- ----------- -----------
----- ----------- --------- ----------- -----------
</TABLE>
We could experience quarterly variations in revenue and operating income as
a result of many factors, including:
- the introduction of new services by us;
- actions taken by competitors;
- the timing of the acquisition or loss of customers;
- the timing of additional selling, general and administrative expenses
incurred to acquire and support new or additional business; and
- changes in our revenue mix among our various service offerings.
Many of the factors that could cause such variations are outside of our control.
We plan our operating expenditures based on revenue forecasts, and a revenue
shortfall below such forecasts in any quarter could adversely affect our
operating results for that quarter.
LIQUIDITY AND CAPITAL RESOURCES
The development and expansion of our business requires significant capital
expenditures. The principal capital expenditures which we expect to incur, are:
- the procurement, design and construction of, and the deployment of
equipment in, over 600 Bell Atlantic central offices;
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- the design and development of, and the purchase of equipment for, our
intra-region and inter-region networks;
- the buildout of our Web site hosting facilities; and
- the upgrade of our billing and operational support systems.
Our capital expenditures were $1.0 million for 1998 and $627,000 for the
three months ended March 31, 1999. As of May 31, 1999, we had material purchase
commitments of approximately $4.0 million for 1999 for the procurement of
central offices, for the purchase of network equipment and for the purchase of
software and services. We expect our capital expenditures to be approximately
$25 million to $30 million in 1999 and approximately $50 million to $60 million
in 2000.
We have financed operations primarily through revenues and the proceeds of
the private placement of preferred stock totaling $18.5 million since September
1998. On May 28, 1999, we obtained a $30.0 million senior credit facility. The
facility is a five-year term facility with interest only payable for the first
two years. The facility bears interest at an annual rate equal to the London
inter bank offer rate plus 4.5%. The facility is subject to availability and
covenant restrictions and is principally limited to use in our Northeast
markets. It is prepayable without penalty and requires mandatory payment from
the proceeds of an equity offering. Amounts borrowed under the facility will be
repaid with the proceeds of this offering, and the facility will subsequently
terminate. In connection with the repayment of this facility we expect to
recognize approximately $4.4 million of deferred debt issuance costs. We believe
that the term facility in conjunction with existing cash and cash equivalents
and cash flow from operations is sufficient to fund our current operations
through at least the middle of 2000.
During 1998, net cash used in our operating activities was $93,000. Cash was
used for a variety of operating purposes, including salaries, consulting and
legal expenses, network operations and overhead expenses. Net cash provided by
financing activities for 1998 was $5.9 million and was primarily the result of
the receipt of $9.3 million as an installment of our private equity placement
offset by the redemption of common stock in the amount of $3.4 million.
For the three months ended March 31, 1999, net cash used in our operating
activities was $1.4 million. This cash was used for a variety of operating
purposes, including salaries, regulatory, network operations and overhead
expenses. Net cash provided by financing activities for the three months ended
March 31, 1999 was $8.6 million and represented the final installment on our
$18.5 million private equity placement on March 23, 1999. Net cash used in
investing activities for the three months ended March 31, 1999 was $3.5 million
of which $2.8 million represents the purchase of substantially all of the assets
of the Network Services Division of Comstor Corporation while the remainder
represents capital expenditures of $627,000.
We intend to rapidly and substantially increase our capital expenditures and
operating expenses in an effort to expand our operations, including the
expansion of our network in the Northeast and Mid-Atlantic regions of the United
States. As a result of these factors, we expect to incur operating and net
losses and negative operating cash flow which will require us to obtain
additional financing to fully fund this expansion. We believe that the proceeds
of this offering, our existing cash and cash equivalents and future revenue
generated from operations will be sufficient to fund planned expansion and
operating deficits through at least the next 12 months. We will attempt to
finance our expansion beyond this time period through a combination of
commercial borrowings, leasing, vendor financing, the private or public sale of
debt or equity securities or by other available means. However, additional
financing may not be available to us on favorable terms or at all. We may decide
to seek additional capital earlier than the middle of 2000.
Our capital requirements may vary based upon the timing and success of our
rollout, as a result of regulatory, technological and competitive developments,
demand for our services, cash flow from operations, our development plans or
projections, or the timing of the deployment of our network services.
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As of May 31, 1999 we had not entered into any financial instruments that
expose us to material market risk.
IMPACT OF THE YEAR 2000
Many computer programs have been written using two digits rather than four
digits to define the applicable year. This poses a problem at the end of the
century because these computer programs would not properly recognize a year that
begins with "20" instead of "19." This, in turn, could result in major system
failures or miscalculations, and is generally referred to as the Year 2000
issue. We have formulated and are effecting a Year 2000 plan to identify and
address any Year 2000 issues. Our Year 2000 plan addresses the areas of external
suppliers of equipment or software, internal business systems, and external
suppliers or services.
We have substantially completed a compliance check of the equipment and
related software that comprise our network and customer premise equipment. We
have selected vendors whose products are Year 2000 certified to supply software
to support our major internal business processes such as ordering, billing and
provisioning. The implementation is scheduled for completion prior to the end of
1999 at which point our major internal business systems will be Year 2000
compliant. This fact coupled with the fact that our existing internal systems
have been developed within the last few years leads us to believe that our Year
2000 issues are minimal. We have conducted Year 2000 tests on all internal
systems. Upgrades for these systems are scheduled for completion prior to the
end of 1999.
We have substantially completed compliance checks of many of our external
service providers. We have, however, been unable to complete compliance checks
of some of our external service providers, including electric and utility
companies and Bell Atlantic. Because our systems will be interconnected with
those of Bell Atlantic and other service providers, any disruption of operations
in the computer programs of these service providers would likely have an impact
on our systems. We cannot be assured that this impact will not have an adverse
affect on our operations as well.
We have not fully determined the risks associated with the reasonably
worst-case scenario. However, our risk assessment activities assign risk ratings
to our vendors and business partners based upon the impact each would have on
our operations should they experience Year 2000 related failures. We plan to
develop contingency procedures that would go into effect if any of our vendors
or business partners experience Year 2000 failures. These would include manual
back-up processes for all critical interconnections and business functions. To
date, we have expended immaterial resources to address the Year 2000 issue and
we expect future expenditures to be immaterial to our operations and financial
position.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board, or FASB, issued
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value. To
date, we have not engaged in derivative and hedging activities and accordingly
do not believe that the adoption of SFAS No. 133 will have a material impact on
our financial reporting and related disclosures. We will adopt SFAS No. 133 as
required for our first quarterly filing of fiscal year 2001.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use." SOP 98-1 requires computer software
costs associated with internal use software to be charged to operations as
incurred until certain capitalization criteria are met. SOP 98-1 became
effective beginning January 1, 1999. To date, we have not capitalized any
internally developed software.
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BUSINESS
HarvardNET provides high-speed Internet access, data transport and
networking services to businesses located in the Northeast and Mid-Atlantic
regions of the United States. HarvardNET also offers these businesses a variety
of Web site hosting services that allow customers to store their Web sites and
data on servers housed in HarvardNET's data centers. HarvardNET markets its
products and services through its direct sales force. HarvardNET's service
offerings include:
- high-speed Internet access for small- and medium-sized businesses using
digital subscriber line, or DSL, technology, which enables data transport
over telephone company copper lines, at data transfer speeds ranging from
144 kilobits per second to 7 megabits per second;
- virtual private network services for large enterprises that require
high-speed, secure remote access for telecommuting, work-at-home and
mobile professionals;
- Web site hosting solutions, which provide customers with a secure
location, controlled environment, active monitoring and high-speed
connections to the Internet via HarvardNET's fiber optic network for their
Web sites;
- high-speed digital leased lines for Internet-dependent businesses; and
- e-commerce solutions and other enhanced services, including outsourced
e-mail administration and Web-based credit card transaction processing.
HarvardNET delivers its services over its own advanced fiber optic network
that connects markets from Maine to Virginia. This East Coast network uses
technology that transmits data in small bundles, or packets, of information from
multiple users over the same line using Internet protocol, a standard for the
transmission of digital data. HarvardNET's packet-based network is designed for
reliable, secure, high performance transport and delivery of traffic. The
network primarily operates at a 155 megabit per second capacity level and
contains fiber optic connections to major Internet exchange points. In addition,
HarvardNET has peering relationships with over 90 Internet service providers to
facilitate the efficient and cost-effective exchange of customer traffic.
HarvardNET has entered into agreements with Bell Atlantic to lease the
copper telephone lines that it will use to carry data for its customers using
high-speed DSL technology. As of July 26, 1999, HarvardNET provided service at
51 central office locations and had installed equipment in 20 additional central
office locations in eastern Massachusetts, southern Maine and southern New
Hampshire. HarvardNET expects to install equipment in approximately 140 central
office locations in the Northeast region by the end of 1999 and in more than 600
central offices in the Northeast and Mid-Atlantic regions by the middle of 2001.
As of June 30, 1999, HarvardNET had approximately 540 DSL and leased lines
in service and more than 1,100 business customers for its Web site hosting
services. None of our customers accounted for more than 3% of our revenues for
the year ended December 31, 1998 or the three months ended March 31, 1999. Some
of our representative customers include the Atlantic Monthly, the Boston Museum
of Fine Arts, Fidelity Capital, KPMG Peat Marwick, Nantucket Nectars, Sage
Networks and Staples.
MARKET OPPORTUNITY
GROWING MARKET DEMAND FOR HIGH-SPEED DIGITAL COMMUNICATIONS BANDWIDTH
Data communications is the fastest growing segment of the telecommunications
market. The Gartner Group has estimated that data traffic is growing five times
faster than voice traffic. In addition,
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International Data Corporation has estimated that Internet users worldwide will
increase from approximately 100 million at the end of 1998 to approximately 320
million by 2002. International Data Corporation also has estimated that the
value of goods and services sold worldwide through the Internet will increase
from approximately $32 billion in 1998 to over $400 billion in 2002.
Accordingly, to remain competitive, small- and medium-sized businesses
increasingly will need high-speed Internet connections to maintain complex Web
sites, access critical business information, execute electronic business
transactions and communicate more efficiently with employees, customers and
business partners. High-speed digital connections will also become increasingly
important to businesses as Internet usage increases and complex and multimedia
content and applications become more available on the Internet.
The demand for high-speed digital communications services for remote local
area network access is also growing rapidly. Over the past ten years, high-speed
local area networks have become increasingly important to enterprises,
permitting employees to share information, send e-mail, search databases and
conduct business. Businesses are now seeking to extend this same high-speed
connectivity to employees accessing their local area networks from home to
improve employee productivity and reduce operating costs. Forrester Research,
Inc. has estimated that the total market for data networking services and
Internet access will grow from $6.2 billion in 1997 to approximately $49.7
billion by 2002, with approximately $27.9 billion to come from services to
businesses.
EMERGENCE OF DIGITAL SUBSCRIBER LINE TECHNOLOGY
DSL technology has emerged as a cost-effective means of providing high-speed
digital communication capabilities. DSL equipment, when deployed at each end of
standard copper telephone lines, dramatically increases the data carrying
capacity of these lines from analog modem speeds of 56.6 kilobits per second to
DSL speeds of up to 7 megabits per second or more depending on the length and
condition of the copper telephone line. Recent advances in semiconductor
technology and digital signal processing algorithms have made the deployment of
DSL technology on a widespread basis more economical, with equipment prices
falling substantially over the last two years. In addition, because DSL
technology uses existing copper telephone lines, it is significantly less
expensive to deploy on a broad scale than some existing alternative high-speed
digital communication technologies, such as cable modems and wireless data
systems. Moreover, the ability of DSL technology to use existing copper
telephone lines enables DSL service providers to provide more secure networks
for sensitive corporate data than those available to providers employing
technologies which require users to share bandwidth, such as cable modems.
The 1996 Telecommunications Act permits competitive carriers to locate
equipment in the central offices of the incumbent local carriers. The 1996
Telecommunications Act allows competitive carriers to access users through the
existing copper telephone lines. The implementation of the 1996
Telecommunications Act varies among different incumbent local carriers. In many
regions, competitive carriers seeking to offer DSL service have been required to
install their equipment in central offices using a cage that is a minimum of 100
square feet. As part of its implementation of the collocation requirements of
the 1996 Telecommunications Act, Bell Atlantic has given competitive carriers
the option of installing their equipment at Bell Atlantic central offices using
an arrangement that Bell Atlantic has named SCOPE. SCOPE is a form of equipment
installation physically located within a Bell Atlantic central office in which a
competitive carrier's equipment is placed in a locked cabinet that is much
smaller than a standard cage. In addition, SCOPE can be installed for
approximately 75% less capital expense than a standard cage configuration. By
reducing the cost of installing DSL equipment in central offices, SCOPE has
facilitated the delivery of DSL service to customers in a wider geographical
footprint. In addition, the decreased space requirements of a SCOPE installation
may permit a DSL service provider to collocate in an otherwise space-constrained
central office.
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THE NEED OF SMALL- AND MEDIUM-SIZED BUSINESSES FOR COST-EFFECTIVE HIGH-SPEED
INTERNET ACCESS AND DATA TRANSPORT SOLUTIONS
The full potential of Internet and local area network applications cannot be
realized without removing the performance bottlenecks of the existing public
switched telephone network. The fastest commercially available modem that dials
directly into the public telephone network is only 56.6 kilobits per second.
Other high speed connections are also available, including:
- Integrated services digital network--Commonly known as ISDN, an integrated
services digital network line provides standard interfaces for digital
communication networks and is capable of carrying data, voice, and video
over digital circuits.
- T-1 line and fractional T-1--A digital transmission link with a capacity
of 1.54 megabits per second or a portion of this capacity.
- T-3 line and fractional T-3--A digital transmission link with a capacity
of 45 megabits per second or a portion of this capacity.
- Frame relay--A high-speed packet-switched data communications protocol.
The capacity offered by integrated services digital network lines is
improved relative to standard modems, but is still only 128 kilobits per second,
and the cost of an integrated services digital network line is often very
expensive for small- and medium-sized businesses due to the metered usage
pricing of this service. In addition, integrated services digital network lines
require users to establish a connection to the telephone network at the
beginning of each session thereby precluding "always on" access to the Internet.
Alternative data transport technologies like T-1 lines, T-3 lines and frame
relay services are often uneconomical for small- and medium-sized businesses.
With no cost-effective alternative to standard modems or integrated services
digital network lines to connect to the Internet or remotely access the
corporate local area network, workers at a significant number of small- and
medium-sized businesses have been forced to endure delays and productivity
limitations. In addition, some small- and medium-sized businesses perceive that
incumbent local carriers are insufficiently focused on their needs. As a result,
small- and medium-sized businesses are seeking cost-effective high-speed
networking solutions to allow them to take advantage of Internet and local area
network applications to the same extent as large enterprises.
THE NEED OF LARGE ENTERPRISES FOR COST-EFFECTIVE REMOTE ACCESS TO THEIR
CORPORATE NETWORKS
A significant number of large enterprises are similarly demanding increased
speed as their Internet usage increases. Moreover, these businesses are being
driven by competitive, technological and societal forces to equip many of their
employees with the ability to work at home and in other remote locations, such
as branch offices. International Data Corporation has estimated that the number
of residences with computers in their home offices in the United States will
increase from approximately 26 million in 1998 to 37.8 million by 2002.
Telecommuters and other remote users need fast, reliable and secure access to
the Internet and corporate local area networks. Since T-1 lines are too
expensive for these users, corporations are seeking alternatives that can
increase transmission speeds from those provided by standard modems and
integrated services digital network lines and improve productivity at a
reasonable cost.
THE GROWING DEMAND FOR OUTSOURCED WEB SITE HOSTING
Small- and medium-sized businesses increasingly are seeking to realize the
potential of the Internet by establishing an Internet presence. In addition to
obtaining Internet access, many of these businesses want to create a Web site on
which they can sell their products and services, market their company and brand,
execute electronic transactions and provide information to their customers,
suppliers, business partners and employees. At the same time, these operations
and applications are becoming more
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complex and challenging to manage. Ensuring the quality, reliability and
availability of these Internet operations typically requires substantial
investments in developing Internet expertise and operating infrastructures.
However, such a significant investment is often an inefficient use of the
typically limited resources of these businesses. As a result, small- and
medium-sized businesses are increasingly seeking outsourcing arrangements that
can increase performance, provide continuous operation of their Web sites,
reduce Internet operating expenses and eliminate the need for a dedicated
information technology staff. These businesses are also seeking service
providers who can store their Web sites in a secure location with a controlled
environment and active monitoring 24 hours per day, seven days a week.
International Data Corporation has estimated that the demand for these Web site
hosting services in the United States was approximately $770 million in 1998 and
is expected to grow to approximately $12 billion by 2002.
THE CONCENTRATION OF TELECOMMUNICATIONS USERS IN THE NORTHEAST AND
MID-ATLANTIC REGIONS
The Northeast and Mid-Atlantic regions of the United States are among the
most densely populated in the United States and The Yankee Group has estimated
that these regions account for approximately 28% of the total United States
telecommunications market based on the number of telephone access lines. These
regions also have a significant concentration of high technology and
Internet-related businesses. HarvardNET believes that the demographic
characteristics of this region make it among the most attractive markets for
high-speed networking solutions in the country. In particular, the Northeast
region includes more than six million local lines and approximately 300,000
businesses. The Mid-Atlantic region includes more than 23 million local access
lines and approximately one million businesses. Moreover, these regions both
have a high density of central offices. As the availability and speed of DSL
service depends on the distance of the end-user from the nearest central office,
this high central office density permits DSL service providers to offer more
comprehensive coverage and faster transmission speeds than is possible in
geographic regions with a lower density of central offices.
THE HARVARDNET SOLUTION
We provide high-speed Internet access and other data transport and
networking solutions to businesses in the Northeast and Mid-Atlantic regions of
the United States. We also offer these businesses a variety of Web site hosting
services to store their Web sites and data on servers housed in our data
centers. We market and sell our solutions directly to customers, allowing us to
create a close relationship with end-users and providing us information and
feedback that we can use in developing and refining our products and services.
By organizing our sales and service organizations around customers and focusing
on the needs of end-users, we believe we can provide a high level of service and
improve customer satisfaction and loyalty.
We offer our services as a bundled package for small- and medium-sized
businesses seeking to outsource their data transport and networking and Web site
management needs to a single provider. We also allow customers to choose from
among the many types of services we offer to select the most appropriate
solution for their specific business. Our suite of offerings include:
- high-speed DSL Internet access;
- virtual private network services;
- a variety of Web site hosting solutions;
- high-speed digital leased lines for Internet connectivity; and
- e-commerce and other enhanced services, such as outsourced e-mail services
and Web-based credit card transaction processing.
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In addition to these services, we also sell wholesale transit capacity to
Internet service providers and network service providers over our East Coast
packet-based network.
By providing a range of data transport and networking services and
e-commerce solutions, we can offer a number of benefits to our customers
including:
- SINGLE SOURCE SOLUTION. We provide a full range of services to allow
businesses to effectively outsource their Internet access and electronic
business needs. Customers can obtain DSL and leased line Internet access,
Web site hosting and other e-commerce services, such as e-mail and credit
card transaction processing, through a single provider. We also bundle a
number of our service offerings to encourage customers to purchase
multiple service offerings. We believe that a full suite of services is
especially attractive to small- and medium-sized businesses which
typically do not have the information technology personnel or
infrastructure necessary to manage their data communications needs.
- HIGH-SPEED ACCESS AT REASONABLE PRICES. Our BusinessSPEED DSL service is
capable of delivering data transfer rates at speeds ranging from 144
kilobits per second to 7 megabits per second. Our DSL service costs
significantly less per month than high-speed leased lines, such as T-1 or
frame relay, and also includes Internet access, typically resulting in
cost savings of 50-75% over traditional leased line and frame relay
Internet access services. For those customers unable to use DSL or that
need greater bandwidth, we offer our leased line services at a discount to
the rates charged by the incumbent carrier.
- ALWAYS ON SECURE CONNECTIONS. We provide always on access to the Internet;
a user does not a need to dial up the public telephone network to
establish an Internet connection. In addition, since our network access
services use dedicated copper telephone lines, our virtual private network
offerings protect data on its path to and from the end-user.
- FLEXIBILITY AND SCALEABILITY. We have designed our network and service
offerings to enable customers to purchase the level of service and
transmission speed that meets their existing requirements and to easily
upgrade as their use of the Internet grows. We can effect upgrades
remotely, without the need to add additional hardware or to deploy a
technician to the customer's premises.
STRATEGY
Our goal is to become the leading provider of high-speed Internet access,
data transport and networking services for businesses in the Northeast and
Mid-Atlantic regions, as well as the leading provider of Web site hosting
services to this market. In order to achieve this goal we intend to:
FOCUS ON THE HIGH-SPEED DATA TRANSPORT AND NETWORKING NEEDS OF BUSINESS
CUSTOMERS IN THE NORTHEAST AND MID-ATLANTIC REGIONS
We focus on the needs of businesses that require high-speed Internet access,
data transport and networking services in the Northeast and Mid-Atlantic
regions. These regions have a significant number of access lines and a
significant concentration of high technology and Internet-related businesses. We
believe that much of these regions' data traffic is transported within the
region, which enables us to carry this traffic on our network, thereby avoiding
the transit costs associated with using third party networks for data transport.
Because we are deploying our DSL services solely within the footprint of Bell
Atlantic, we believe we can install our equipment at central offices more
efficiently, with fewer regulatory hurdles and without as many protracted
negotiations than would be possible with multiple incumbent carriers. We also
believe that the density of central office locations in these regions presents
the opportunity to realize efficiencies in marketing, installation and
deployment. In addition, we believe our regional focus will enable us to better
analyze the market opportunities in these regions and develop products and
services that better meet our customer's needs.
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We were among the first companies to commercially deploy DSL service in New
England. As of July 26, 1999, we provided service at 51 central office locations
and had installed equipment in 20 additional central office locations in eastern
Massachusetts, southern Maine and southern New Hampshire. We expect to install
equipment in approximately 140 central office locations in the Northeast region
by the end of 1999 and in more than 600 central offices in the Northeast and
Mid-Atlantic regions by the middle of 2001. Installation on this scale requires
significant time and resources, which we believe provides us with a significant
time-to-market advantage over our potential competitors in our target markets.
OFFER FULL SUITE OF DATA TRANSPORT AND NETWORKING AND INTERNET-RELATED
SOLUTIONS
We offer a suite of services to businesses, including high-speed DSL,
high-speed leased line Internet access, virtual private network services, Web
site hosting and enhanced services such as e-mail and credit card transaction
processing. By offering a range of DSL and leased line service offerings, we
allow each customer to select the package of speed, services and price that is
most appropriate for its individual business. Large enterprises typically
purchase our virtual private network services and our collocated Web site
hosting offering that provides Web site hosting services on servers that are
owned by our customers but which are managed and housed by us. Small- and
medium-sized business customers typically purchase our DSL and leased line
offerings for their Internet access needs. In addition, our ability to provide
Web site hosting and enhanced services allows small- and medium-sized businesses
to outsource their key data networking and Internet-related needs to a single
provider. By providing a comprehensive suite of services and bundled service
offerings, we seek to more rapidly penetrate our targeted markets, increase the
revenue we derive from each customer, reduce customer turnover and provide more
sophisticated product offerings and better meet the needs of our customers than
those companies that only provide DSL transport services.
SELL DIRECTLY TO CUSTOMERS
We market our services directly to customers. We believe a direct sales
force enables us to develop close relationships with our customers and manage
the service and sales process more effectively. We have developed a commercial
sales organization focused on small- and medium-sized customers and a corporate
sales organization focused on the needs of large enterprise organizations. Both
sales organizations sell our entire product line and are organized around
customers rather than products. We intend to expand our sales force as we
continue to roll-out our DSL service within our targeted region.
PROVIDE COST-EFFECTIVE, COMPREHENSIVE COVERAGE
We plan to offer DSL and leased line services in targeted markets from Maine
to Virginia and intend to install equipment in a substantial number of central
offices throughout these markets. We plan to use SCOPE installations to lower
the level of capital expenditures that we would otherwise incur upon activating
a central office. In addition, SCOPE installations may also allow us to enter
central offices that would otherwise be closed to us due to space constraints.
For those customers unable to use DSL services due to distance from the central
office or the condition of the copper telephone line or that need greater
bandwidth, we will offer lease lines, frame relay services or dial-up services
as necessary in order to meet their needs. By developing cost-effective,
comprehensive coverage, we can offer large enterprises the ability to provide
remote access to substantially all of their end-users.
PROVIDE SERVICE OVER OUR EAST COAST NETWORK INFRASTRUCTURE
We have established a high capacity fiber optic network that connects
markets between Maine and Virginia. This packet-based network transmits data
using the Internet protocol standard. The network primarily operates at the 155
megabits per second capacity level and can be easily upgraded to higher
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data speeds based upon our success in adding customers. We are in the process of
installing approximately 20 asynchronous transfer mode switches in our targeted
markets in the Northeast and Mid-Atlantic regions. Asynchronous transfer mode
switches control the routing of packets of data in our network. Our objective is
to build a fault-tolerant East Coast network that can be easily upgraded as
needed to support the traffic requirements and needs of our customers as they
grow. By building our network, we have more control over the delivery and
quality of our services. For example, we have end-to-end visibility of the
entire network directly to the customer's equipment, allowing us to actively
monitor performance and connection issues before they can affect the end-user's
experience. We can also control and optimize the routing of traffic on the
network. Our network contains advanced features, including the use of
sophisticated routing protocols such as tag switching, which provide more
efficient traffic management. We believe that the open, non-proprietary
architecture characteristic of a network that transmits data using the Internet
protocol standard affords greater flexibility for new and emerging applications.
We have peering relationships with over 90 other Internet service providers
which allow for the direct exchange of traffic with other Internet service
providers and facilitate the efficient delivery of our customer's traffic and
reduce our transit costs. We own and operate the Boston metropolitan exchange
point, a key regional public peering point in the Northeast region where
Internet service providers exchange their traffic. We have peering arrangements
with six of the top regional Internet service providers at the Boston
metropolitan exchange point.
PROVIDE SUPERIOR CUSTOMER SERVICE
We believe that many small- and medium-sized businesses perceive that the
incumbent local carrier in our targeted markets does not adequately address
their needs because these businesses generally must deal with multiple contacts,
often including representatives of resellers and other indirect sales channels,
preventing them from developing satisfactory relationships with the incumbent
local carrier and its key personnel. By organizing a direct sales organization
around customers and focusing on end-users' needs, we seek to provide superior
service and customer care to attain a high level of customer satisfaction,
achieve customer loyalty and accelerate the adoption of our services. In
addition, we have established a network operations center in Portland, Maine.
Our network operations center performs active network monitoring and management,
24 hours per day, 7 days per week.
PRODUCTS AND SERVICES
We currently offer the following products and services:
- DSL and leased line services marketed under the BusinessSPEED tradename;
- virtual private network solutions marketed under the RemoteCONNECT
tradename;
- Web site hosting services; and
- e-commerce and other enhanced network services.
DSL AND LEASED LINE SERVICES
We offer high-speed data transport and Internet access marketed under the
BusinessSPEED tradename at bandwidth options ranging from DSL data transfer
rates of between 144 kilobits per second and 7 megabits per second to T-1 data
transfer rates of 1.54 megabits per second through T-3 data transfer rates up to
45 megabits per second.
DSL SERVICES. Our BusinessSPEED DSL service offers enhanced performance for
small- and medium-sized businesses currently accessing the Internet with
standard modems or integrated services digital network connections.
BusinessSPEED DSL delivers high-speed Internet connections through
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existing copper telephone lines. DSL provides greater speed, reliability and
flexibility than a standard modem or integrated services digital network
connection. DSL is also more cost-effective for many small- and medium-sized
businesses than other common high-speed leased line services. Our BusinessSPEED
service comes in a variety of bandwidth options and provides unlimited access to
the Internet for one flat monthly fee. Our DSL services have been designed to
enable us to upgrade customers to faster speeds without the need to add
additional hardware or deploy a technician to the customer's premises. As part
of our direct sales strategy, our sales representatives assist customers in
analyzing their access, hardware and installation requirements in order to
identify the service that will most effectively meet their needs.
We provide all our DSL services using rate adaptive asymmetric digital
subscriber line technology. This technology permits us to adjust the
transmission rates of data both downstream to the end-user and upstream from the
end-user. Using this technology, we offer users the ability to both receive and
transmit data at rates up to 768 kilobits per second. This technology also
allows us to optimize the data transmission rates to and from the end user to
account for the quality of the copper telephone line.
LEASED LINE AND FRAME RELAY SERVICES. Our BusinessSPEED leased line service
provides large and Internet-dependent businesses with high-capacity links to the
Internet and between multiple locations at a discount to the price offered by
the incumbent carrier. We offer T-1 service in several speeds, with data
transfer rates ranging from 128 kilobits per second to up to 1.54 megabits per
second. Our T-3 service is designed for large corporations that have needs
greater than T-1 service or that want to consolidate several leased lines. T-3
lines provide speeds from three megabits per second to up to 45 megabits per
second.
Our frame relay service enables large corporations to connect branch offices
cost effectively. It also provides a flexible, high-speed connection for small-
and medium-sized businesses that cannot currently receive DSL-based access due
to an end-user's distance from a central office or the quality of the end-user's
telephone line.
We believe that substantially all potential end-users in our target markets
can be served with one of our services. The particular BusinessSPEED DSL service
available to an end-user depends on the user's distance to the nearest central
office and the quality of the end user's telephone line. We estimate that
approximately 75% of our potential end-users are within 18,000 feet of a central
office and can be served by at least our basic DSL service.
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The chart below sets forth information relating to each of our BusinessSPEED
service offerings as of June 30, 1999. The column labelled Speed to end user
sets forth the data transfer rates for information transmitted to the end user,
and the column labelled Speed from end user sets forth the data transfer rates
for information transmitted from the end user to the Internet or corporate
network.
<TABLE>
<CAPTION>
SPEED TO SPEED FROM
END END
SERVICES OFFERED USER(1) USER(1) BEST SUITED FOR COMPANIES OR OFFICES THAT:
<S> <C> <C> <C>
EmergingPOWER DSL 144 Kbps 144 Kbps - Have up to 25 employees
or or - Access the Web occasionally
256 Kbps 256 Kbps - E-mail or transfer few large files and documents
GrowthPOWER DSL 384 Kbps 384 Kbps - Have up to 75 employees
or or - Have many simultaneous Web users
512 Kbps 512 Kbps - E-mail or transfer few large files and documents
Mission- 768 Kbps 768 Kbps - Have up to 150 employees
CriticalPOWER DSL or or - Rely on the Internet to conduct business
1.54 Mbps 1.0 Mbps - Have many simultaneous Web users
or or - E-mail or transfer large files and documents
7.0 Mbps 1.0 Mbps
Frame Relay 56 Kbps 56 Kbps - Have up to 150 employees
or or - Need to connect branch offices
384 Kbps 384 Kbps - Cannot receive DSL service
or or
1.54 Mbps 1.54 Mbps
Fractional T-1 to 128 Kbps 128 Kbps - Have up to 250 employees
T-1 to 1.54 to 1.54 - Have many simultaneous Web users
Mbps Mbps - E-mail or transfer large files and documents
- Support remote users using standard modem and DSL
connections
Fractional T-3 to 3 Mbps to 3 Mbps to - Support several branch offices
T-3 45 Mbps 45 Mbps - Support remote users using standard modem and DSL
connections
- Transfer large files, including graphics, audio, and
video files
- Host multiple Web and file servers
</TABLE>
(1) The term Kbps means kilobits per second and the term Mbps means megabits per
second.
VIRTUAL PRIVATE NETWORK SERVICES
We market our virtual private network services under the RemoteCONNECT
tradename. Our RemoteCONNECT solutions combine our BusinessSPEED DSL services
with our virtual private networking equipment to provide high-speed and secure
connections to the corporate local area network and the Internet. This flexible
and cost-effective solution supports both telecommuters and site-to-site
connections. Our RemoteCONNECT services provide employees with the simplicity of
an always on connection and the increased speed and performance of DSL
technology.
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The diagram below illustrates the uses for which our virtual private network
is typically employed:
[Graphical depiction of HarvardNet's Remote Connect Private Network. At the
center of the page is an image labeled "HarvardNet Managed Backbone and
Internet" with lines radiating to images labeled "Mobil Employee,"
"Telecommuter," "Branch Office," and "Corporate."]
WEB SITE HOSTING
We offer a variety of Web site hosting services. Our solutions can be used
by a range of businesses, from an emerging company launching a Web site for the
first time to an Internet-dependent organization running a heavily utilized
site. We currently have a Web operations center in Boston, Massachusetts and an
approximately 4,700 square foot facility in McLean, Virginia. We have a new,
approximately 20,000 square foot Web operations center in Boston, and intend to
establish similar Web operations centers in New York, Philadelphia and
Washington, D.C. in conjunction with our roll-out of DSL services in these
metropolitan areas.
By using our Web site hosting services or installing their own Web server in
one of our controlled facilities, a customer has the ability to deploy a high
quality, highly reliable Internet presence without investing capital in data
center space, multiple high speed connections or other capital intensive
infrastructure. Our Web operations centers provide customers with:
- monitoring 24 hours per day, 7 days per week;
- redundant AC/DC power;
- emergency back-up generator power, heating, ventilation and air
conditioning systems;
- redundant communications feeds;
- fire suppression; and
- a direct connection to HarvardNET's high-speed fiber optic backbone.
We generally offer Web site hosting options on a flat fee basis, based on
the options and features chosen by the customer. We are a preferred Microsoft
BackOffice Small Business Server provider in our region.
SHARED WEB SITE HOSTING SERVICE. Our shared hosting solution provides Web
site hosting on a server that is owned, managed and housed by us for multiple
customers. These shared Web site hosting solutions that allow companies to
establish a sophisticated presence on the Internet at a reasonable cost,
leveraging the expertise and infrastructure of HarvardNET to deploy an effective
Web site. HarvardNET shared Web site hosting services give companies the
flexibility to grow their Internet business with options such as additional disk
space, bandwidth and Web-based credit card processing.
Our shared Web site hosting service includes the following features:
- disk storage space on a HarvardNET server;
- domain name registration;
- rapid set up and deployment; and
- flexible design, allowing additional options such as additional disk
space, traffic throughput and e-commerce transaction processing.
We offer our shared Web site hosting services on both Windows NT and UNIX
platforms. To protect customer files, all shared servers have regular back-up
procedures. Our shared server offering includes support for Microsoft FrontPage
extensions, detailed site analysis reports and a variety of proprietary Web site
development tools. Through a relationship with CyberCash, a leading provider of
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Web-based credit card transaction processing, we offer customers credit card
transaction processing services.
DEDICATED WEB SITE HOSTING SERVICE. Our dedicated hosting solution provides
Web site hosting on a server that is owned, managed and housed by us for a
single customer. We offer dedicated Web site hosting solutions for larger
customers with more complex requirements. Our Web site hosting service provides
customers with substantially more server and network resources than available
under our shared server plans. Our dedicated Web site hosting solutions include
a Windows NT or UNIX-based server that is owned and maintained by HarvardNET in
one of our Web operations centers. Our dedicated Web site hosting solutions
allow customers to run complex applications without the need for the significant
investment of capital and expert personnel that an internally located Web site
would require. We maintain spare equipment and use regular back-up procedures to
protect customer files.
COLLOCATION SERVICE. Our collocation service provides Web site hosting
services on servers that are owned by our customers but which are managed and
housed by us. We provide these services to customers that require the resources
of a dedicated server, prefer to retain physical access to and ownership of
their server and have the expertise to maintain the Web site and the server. Our
Web operations centers offer customers a secure location, controlled
environment, monitoring and high-speed connections to the Internet via our fiber
optic network.
ENHANCED NETWORK ENABLED SERVICES
We currently offer e-mail administration services and plan to offer private
branch exchange telephone extension and remote backup services. In the future we
plan to expand our portfolio of enhanced network enabled services.
E-MAIL ADMINISTRATION. We offer outsourced e-mail administration branded
under the service name HarvardNET Post Office. HarvardNET Post Office enables
users to access their messages from a Web browser anywhere in the world, giving
them immediate, local access to important information. The service also
eliminates the need for maintaining an on-site e-mail server or adding
information technology staff, because we maintain customer e-mail accounts on a
HarvardNET managed server.
HarvardNET Post Office allows a small business to establish a unique Web
presence (www.yourcompany.com). Remote management tools are available within a
password-protected postmaster account, so a customer's e-mail administrator has
easy access to user account information. HarvardNET Post Office gives customers
the ability to increase productivity through global user access to e-mail and
reduce expenses by eliminating the need for on-site servers and sophisticated
e-mail software.
PRIVATE BRANCH EXCHANGE TELEPHONE EXTENSION SERVICE. HarvardNET private
branch exchange telephone extension service will extend the functionality of a
private branch exchange telephone handset directly into a telecommuter's home or
a company's branch location. This service will support common private branch
exchange functions such as four digit dialing, conference calling, voice mail,
message indicators and speed dialing and will permit users to simultaneously
transmit voice and data communications over the same line. Customers will have
the ability to increase worker productivity, reduce second line expenses for
voice service and aggregate and control long distance charges. We are currently
developing the private branch exchange telephone extension service and selecting
a third party technology provider. We expect to commercially market this service
in the second half of 1999.
REMOTE BACKUP AND DISASTER RECOVERY SERVICE. HarvardNET remote backup and
disaster recovery service will allow end-users to automatically backup data to a
secure remote site. Computer backup can be more cost-effective than substitutes,
such as tape drives and disk cartridge drives. Storing backup data will provide
added protection in the case of a disaster at a customer's main site. We expect
to select a third party to offer the remote backup and disaster service and
expect to commercially market this service in the second half of 1999.
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CUSTOMERS
We offer our services directly to small- and medium-sized businesses and
large enterprise organizations. To a lesser extent, we provide wholesale
services to Internet service providers and network service providers. As of June
30, 1999, we had approximately 540 DSL and leased lines in service and more than
1,100 business customers for whom we provide Web site hosting services. We have
a diversified customer base and none of our customers accounted for more than
approximately 3% of our revenues in the year ended December 31, 1998 or the
three months ended March 31, 1999. Some of our representative customers include
the Atlantic Monthly, the Boston Museum of Fine Arts, Fidelity Capital, KPMG
Peat Marwick, Nantucket Nectars, Sage Networks and Staples.
SALES AND MARKETING
We primarily market our services to customers through our direct sales
force. We believe that establishing a direct relationship with the customer will
provide a competitive advantage by allowing us to develop close relationships
with our customers and manage the sales and service process more effectively.
Unlike large-scale enterprises, small- and medium-sized businesses often do not
have a dedicated communications manager and seek a complete suite of high-speed
data networking solutions and Web site management services from a single
provider. We believe that a direct sales approach to small- and medium-sized
businesses for Internet and data services is a significant shift from the way
these organizations have previously acquired these types of services and better
addresses the needs of these businesses. Although most of our sales force is
focused primarily on selling our bundled services to small- and medium-sized
businesses, our sales force also sells specific solutions, including our virtual
private networking products and high-speed leased line services, to large
enterprises. We also provide wholesale services to Internet service providers
and network service providers. To best meet the needs of our customers, we have
organized our sales organization as follows:
- SMALL- AND MEDIUM-SIZED BUSINESSES--direct commercial account managers;
- LARGE ENTERPRISES--account teams consisting of corporate account managers
and systems engineers; and
- INTERNET SERVICE PROVIDERS AND NETWORK SERVICE PROVIDERS--wholesale
account managers.
DIRECT SALES CHANNELS
As of June 30, 1999, we had 41 sales and technical personnel and four sales
offices supporting our direct sales efforts. We intend to increase the size of
our sales and technical support force to sell and support businesses and open
additional sales sales offices as we enter new geographic markets. We plan to
expand this direct organization to a total of approximately 200 sales and
technical personnel by the end of 2000.
Our commercial account managers are organized into teams, including a sales
manager and a sales engineer. These teams utilize telemarketing and cold calling
to qualify leads and set up initial appointments. Sales territories are
organized around central offices where we have deployed our DSL service with the
goal of calling on every prospective business served by a given central office.
Our commercial organization is highly focused on individual activity and
productivity, and we have developed a sales methodology that is taught to each
new hire through an intensive training program. We believe this methodology to
be a key ingredient in our ability to successfully compete for the data
networking requirements of small- and medium-sized businesses. Commercial
account managers are supported by sales managers and regional sales directors
who provide local sales leadership to the account teams in each market.
Corporate account managers are assigned to specific accounts and recruitment
focuses on finding managers who have experience with large enterprise accounts.
Our target enterprise account profile is a large, information-intensive business
with multiple locations and large numbers of distributed workers.
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Our corporate account managers seek to deal directly with the chief information
officer and the telecommunications manager responsible for data communications
and Web site management in the target account. Corporate account managers are
supported by regional sales directors who provide local leadership and sales
strategy for these large complex accounts.
INDIRECT SALES CHANNELS
As of June 30, 1999, we had five sales and technical personnel supporting
our indirect sales efforts. We also market our services to end-users through
indirect channels, including Internet service providers, network service
providers, agents and value-added resellers. We offer each service provider the
ability to select those services that it would like to bundle with its own
service offerings to offer a total solution to its customers. For example,
Internet service providers typically combine our high-speed connections with
their Internet access services and resell the combination to their existing and
new customers. We address these markets through wholesale account managers
dedicated to each of these indirect channels. We plan to expand our indirect
sales organization to approximately 20 sales and technical personnel by the end
of 2000.
MARKETING
Our marketing team is focused on developing and implementing our
positioning, branding, product, pricing and promotional strategies. We have
formulated detailed criteria for identifying target customers for each of our
services and have created a bundle of services to be offered to each segment of
our potential customer base. In particular, we are focused on building our brand
identification as we roll out our service offerings. We are rolling out our high
speed data transport and Internet access services under the tradename
BusinessSPEED, our virtual private network services under the tradename
RemoteCONNECT and our outsourced e-mail administration services under the
tradename HarvardNET Post Office. We are promoting our brands through direct
mail to targeted accounts, outdoor advertising, radio advertisements and print
advertisements and public relations.
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CUSTOMER CARE
We offer our business and Internet service provider customers a single point
of contact for implementation, maintenance and billing. We have established a
network operations center in Portland, Maine. Our network operations center
provides both active and customer requested maintenance services 24 hours a day,
7 days a week. We also provide a broad range of customer service and network
operations center services through our Web interface. Because we have complete
end-to-end visibility of our network, we are able to actively detect and correct
the majority of our customer's maintenance problems remotely. Customer requested
maintenance and repair requests are managed and resolved primarily through the
network operations center. We use a trouble ticket management system to
communicate customer maintenance problems from the network operations center to
the field service organization. Because our network operations center is fully
staffed 24 hours a day, 7 days a week, we believe our ability to provide
superior active maintenance is significantly enhanced.
NETWORK ARCHITECTURE AND TECHNOLOGY
HarvardNET delivers its services over its advanced East Coast fiber optic
network that connects markets from Maine to Virginia. The network uses
packet-based technologies to transfer data using the Internet protocol standard.
The network includes advanced routers which will be integrated with high-speed
asynchronous transfer mode switching equipment and can be managed remotely from
HarvardNET's network operations center. HarvardNET has designed the network to
be flexible and to facilitate upgrades as needed to support increased traffic
requirements. The network also includes redundancies designed to make it fault
tolerant.
INTRA-REGION NETWORK ARCHITECTURE
HarvardNET establishes each of its regional markets by installing digital
communications equipment in the incumbent telephone company's central offices.
DSL technology provides for high speed transmission of information over existing
copper telephone lines by encoding the information in a digital format.
HarvardNET's equipment uses this technology to transmit high-speed data over
copper lines between its customer and the central office. HarvardNET installs an
endpoint device at the customer's premise to manage the transmission of data
from the customer's internal information technology system to the central
office. HarvardNET connects its equipment in each central office to its regional
operations center using leased fiber optic transport. The regional operations
center is where data is collected in each market. HarvardNET will install
asynchronous transfer mode switches into each of its regional operations centers
to more efficiently aggregate and consolidate data in the region. From the
regional operations center, data is transported on HarvardNET's network to major
Internet traffic exchange points for connection with other network backbones.
Leasing existing transport services from other carriers, including the copper
wire to the customer's premises, wherever possible, allows HarvardNET to focus
its capital outlay on the value-added elements of the network, including digital
communications equipment, asynchronous transfer mode switches, routers and Web
site hosting centers.
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The following is a diagram illustrating the architecture of our intra-region
network:
[Graphical depiction of HarvardNET network. Centered at the top of the paragraph
is the phrase "The HarvardNet Network." Beneath this phrase across the page are
the headings "End Users"; "HarvardNet Collocated Central Office"; "HarvardNet
Regional Operations Center"; and "Internet." Underneath the heading "End Users"
are three separate images labeled "Small and Medium Sized Businesses,"
"Telecommuter" and "Branch Office." Lines labeled "Leased Copper" link these
images to two additional images, each labeled "DSL Transmission Equipment."
Lines labeled "Leased Fiber" link these images to an image labeled "Switching
and Routing Equipment." From this image one line labeled "HarvardNet Backbone"
leads to an image labeled "Internet," and another line labeled "Leased Fiber"
leads to a circle labeled "Wholesale to Internet Service Provider," which then
leads to a circle labeled "Internet."]
INTER-REGION NETWORK ARCHITECTURE
BACKBONE. HarvardNET has established an advanced East Coast fiber optic
network that connects markets from Maine to Virginia using packet-based
technology. HarvardNET's inter-region network uses Cisco core routing equipment
and employs self-healing protection switching to provide high quality reliable
transmission of Internet protocol data. We have entered into long term leases
for transport facilities in the Portland, Maine to New York City corridor and
operate our network from New York City to Washington, D.C. Our network primarily
operates at a 155 megabit per second capacity level and includes fiber optic
connections to major Internet exchange points.
PEERING ARRANGEMENTS. HarvardNET maintains relationships with over 90
national, regional and local Internet service providers by either private
peering with the Internet service providers or by participation in various
public peering locations, known as network access points. Peering arrangements
allow HarvardNET to exchange traffic with other Internet backbones at nominal
transit costs. Recently, a number of service providers that have previously
offered peering have cut back or eliminated peering relations and are
establishing new, more restrictive criteria for peering. HarvardNET believes
that its direct peering relationships with a large number of Internet service
providers, enable HarvardNET to provide better service and higher quality
network performance to its business customers.
WEB OPERATIONS CENTERS
HarvardNET provides its Web site hosting services through Web operations
centers located in Boston, Massachusetts and McLean, Virginia. HarvardNET
expects to build additional Web operations centers in New York, Philadelphia and
Washington, D.C. in conjunction with its DSL deployment in these locations.
HarvardNET's Web operations centers include 24 hours per day, 7 days per week
monitoring, redundant AC/DC power, emergency back-up generator power, heating,
ventilation and air conditioning systems, redundant communications feeds, fire
suppression and direct connectivity to HarvardNET's network backbone.
NETWORK OPERATIONS CENTER
HarvardNET's network is managed from a network operations center located in
Portland, Maine, which was staffed with approximately 32 personnel as of June
30, 1999. From this center, HarvardNET provides end-to-end network monitoring
and management using advanced network management tools 24 hours a day, 7 days a
week. This enhances HarvardNET's ability to address performance or connection
issues before they affect the end-user's experience. From the network operations
center, HarvardNET monitors the equipment and circuits in each regional
operations center, individual end-user lines and customer endpoint devices.
HarvardNET also actively assesses developing technologies with a view to
improving network performance. HarvardNET's engineering efforts focus on the
design and
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development of new technologies and services to increase the speed, efficiency,
reliability and security of its network and to enable network features and
applications.
INFORMATION SYSTEMS
We are currently upgrading our information systems and procedures for
operations support and other back-office systems in order to improve the
processing of large volumes of orders, enhance customer care and reduce costs.
These systems will enter, schedule and track a customer's order from the point
of sale to the installation, provisioning and testing of service and also
include an interface with trouble management, inventory, billing, collection and
customer service systems.
PROVISIONING MANAGEMENT
Our order management software supports the design and management of the
provisioning process, including circuit design and work-flow management. We are
implementing MetaSolv's Telecom Business Solution package to support our
provisioning requirements. We expect this package will be installed and
operational in the second half of 1999. The system has been designed to permit
programming into the system of a standard schedule of tasks that must be
accomplished in order to initiate service to a customer, as well as the standard
time intervals during which each task must be completed. As a result, once a
standard order is selected in the system, each required task in the service
initiation process can be efficiently managed in its assigned time interval.
BILLING
Customer billing inquiries are currently managed by our customer service
center. We are implementing Saville's Convergent Billing Platform on an
outsourced basis to support our billing requirements. We expect this platform to
be operational in the second half of 1999. We selected our information systems
based in part on the integration that exists between our billing vendor and
provisioning management vendor. Customer information will be electronically
interfaced between these two systems via a gateway, thereby integrating all
information into one database record.
EXTERNAL INTERFACES
We plan to implement an external interface that supports electronic bonding
between our operational support systems and those of Bell Atlantic. Electronic
bonding will allow us to access data from Bell Atlantic, submit service requests
electronically and more quickly attend to errors in the local service request
form. We expect that the interface will help us reduce the time required from
the date of order entry to the date of DSL installation from approximately 25
business days to under 10 business days. Electronic bonding should also enable
us to provide better customer care because we will more readily be able to
determine where any problems may have occurred with a customer's order. We
expect that the interface will be operational by the first half of 2000.
COMPETITION
The market for our products and services is rapidly evolving and intensely
competitive. Many of our current competitors, as well as a number of our
potential new competitors, have longer operating histories, greater name
recognition and substantially greater financial, technical and marketing
resources than we have.
Many of our competitors are offering, or may soon offer, technologies or
services that directly compete with our Internet access offerings. These
competitive offerings may include technologies, such as wireless data systems,
cable modems or satellite communication systems, that provide performance
advantages in some respects over DSL and other technologies using existing
copper telephone wires. If
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a substantial portion of our potential customers prefer services using these
alternative technologies, our business, financial condition and results of
operations would be materially and adversely affected.
We expect to face competition from Bell Atlantic, alternative DSL providers,
competitive local exchange carriers, Internet service providers and cable
companies. We expect that Bell Atlantic will be a key competitor in the delivery
of high speed Internet access to end users in the Northeast and Mid-Atlantic
regions. Bell Atlantic has existing networks in local areas and across major
metropolitan areas in our targeted markets, currently serves substantially all
of the customers we hope to serve and has established its own Internet service
provider business. We expect to compete with Bell Atlantic on the basis of price
and our ability to service small- and medium-sized business customers.
In the Boston, New York, Philadelphia and Washington, D.C. metropolitan
areas, we expect to compete directly against other DSL providers. We expect to
compete with these DSL providers based on our direct sales approach, the depth
of our coverage in our targeted markets and our ability to provide additional
services. These additional services include:
- Web site hosting services;
- leased line data transport;
- value-added Internet services such as virtual private network solutions,
e-commerce and e-mail solutions;
- dial-up Internet access; and
- wholesale transport.
In addition, by offering bundled services, we can provide our customers with
comprehensive data transport and networking solutions.
Most cable companies in the New England area are targeting the residential
market with their own brand of high speed Internet access over the cable
network, using cable modem technology. We are focusing on marketing to
businesses in the region, and will only compete against the cable companies for
telecommuting and work-at-home applications. We expect to compete with cable
companies based on the technical advantages of DSL technology compared with
cable modems, service and reliability.
We compete in the Web site hosting segment of our business with a variety of
companies. We seek to compete with these companies for small and medium
businesses by bundling hosting services with DSL and Internet access solutions.
INTERCONNECTION AGREEMENTS WITH BELL ATLANTIC
We have entered into agreements with Bell Atlantic to lease the copper
telephone lines that we will use to carry data using DSL technology. These
interconnection agreements cover Massachusetts, Maine, New Hampshire, Rhode
Island, New York, New Jersey, Pennsylvania, Maryland, Washington, D.C. and
Virginia. These interconnection agreements with Bell Atlantic form a critical
part of our business. These agreements generally cover a number of aspects
including:
- the price we pay to lease access to Bell Atlantic's copper lines;
- the special conditioning Bell Atlantic provides on some of these lines to
enable the transmission of DSL signals;
- the price and terms for many aspects of the collocation of our equipment
in Bell Atlantic's central offices and interconnection of that equipment
with Bell Atlantic's network;
- the price paid by us and access we have to Bell Atlantic's transport
facilities;
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- the operating support systems, service quality parameters and interfaces
that we can use to place orders and trouble reports and monitor Bell
Atlantic's response to our requests;
- the dispute resolution process used to resolve disagreements with Bell
Atlantic on the terms of the interconnection contracts; and
- the term of the interconnection agreements, its transferability to
successors, its liability limits and other general aspects of our
relationship with Bell Atlantic.
Our interconnection agreements with Bell Atlantic typically have terms of
approximately three years, requiring us to renegotiate each of these agreements
in the future. We expect to be able to renew our interconnection agreements and
believe the 1996 Telecommunications Act limits Bell Atlantic's ability not to
renew such agreements.
GOVERNMENT REGULATION
A significant portion of the services that we offer may be subject to
regulation at the federal, state and/or local levels. Future federal or state
regulations and legislation may be less favorable to us than current regulation
and legislation and therefore may have a material and adverse impact on our
business, financial condition and results of operations. In addition, we may
expend significant financial and managerial resources to participate in
proceedings setting rules at either the federal or state level, without
achieving a favorable result.
FEDERAL LEGISLATION AND REGULATION
The 1996 Telecommunications Act establishes local telecommunications
competition as a national policy. This statute directs the Federal
Communications Commission to eliminate barriers to competition that result from
state or federal requirements and to preempt laws restricting competition in the
local exchange market.
The local competition provisions of the 1996 Telecommunications Act empower
the FCC to adopt regulations to implement these statutory provisions. The
outcome of various ongoing FCC rulemaking proceedings and/or judicial appeals of
such proceedings could materially affect our business, financial condition and
results of operations.
One of the FCC's major rules interpreting the local competition provisions
of the 1996 Telecommunications Act was rejected by the United States Supreme
Court in January 1999. Specifically, the Supreme Court found that the FCC's
interpretation of the statutory standard for establishing the network elements,
including copper loops, that incumbent carriers make available to competitive
carriers was not consistent with the 1996 Telecommunications Act. The Supreme
Court ordered the FCC to reexamine which unbundled network elements must be made
available. The future FCC decision on unbundled network elements may adversely
affect our business if the FCC abandons its previous requirement that incumbent
local carriers provide copper loops on an unbundled basis.
In the spring of 1998, four incumbent local carriers petitioned the FCC to
be relieved of various regulatory requirements in connection with their own DSL
services, including obligations to offer as an unbundled network element the end
office electronics used to provide DSL loops, but not the obligation to unbundle
the loops we purchase for our DSL services. In the summer of 1998, the FCC
denied the petitions and ruled that DSL services are telecommunications services
subject to regulation under the 1996 Telecommunications Act. Incumbent local
carriers have challenged this ruling in a petition filed with the FCC and in an
appeal pending before the U.S. Court of Appeals for the D.C. Circuit. The FCC
recently requested that the court remand the appeal to the FCC for further
proceedings. In addition, several bills recently introduced in the U.S. Congress
would relieve incumbent carriers of their unbundling obligations for DSL
service. If the FCC decision is overturned or any of the pending bills is
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enacted, incumbent local carriers would be freed of many of this regulatory
constraints in competing with us.
The FCC currently is considering various other issues of consequence to
competitive carriers deploying DSL services, including whether to allow
incumbent local carriers to create separate affiliates for their DSL businesses
that could operate as competitive carriers free of the resale and unbundling
obligations of the 1996 Telecommunications Act. The FCC has not yet issued a
decision on these issues. Any such decision could give Bell Atlantic additional
flexibility to compete more effectively with us.
In March 1999, an FCC ruling expanded the rights of competitive carriers,
like HarvardNET, to install their equipment in incumbent local carriers' central
offices. While this ruling was favorable to competitive carriers, it is
currently subject to reconsideration. The outcome of that proceeding could
affect our ability to offer DSL service on competitive terms.
Bell Atlantic has filed a tariff with the FCC establishing term and volume
discounts for Internet service providers who order DSL service from Bell
Atlantic for the loops serving the Internet service provider's subscribers. On
June 4, 1999, the FCC allowed the tariff to take effect, subject to a formal
investigation regarding the 1996 Telecommunications Act's wholesale discount
requirements that may apply to the offering. The discounts established by the
tariff may enhance Bell Atlantic's ability to compete with us for Internet
service provider business and the ability of other Internet service providers to
offer competitive DSL services.
STATE REGULATION
While the FCC has broad authority to implement provisions of the 1996
Telecommunications Act, state public utilities commissions also have substantial
authority in this area. For example, although the Supreme Court's decision
validated the FCC's authority to prescribe some pricing methodology incumbent
carriers must use in setting the price of local loops and other network
elements, that same rule gives state public utility commissions authority to
apply that methodology in order to establish actual prices. Many states have set
only temporary prices for some network elements that are critical to the
provision of DSL services because they have not yet completed the regulatory
proceedings necessary to determine permanent prices. The results of those
proceedings may determine the price we pay for these network elements and
services.
The 1996 Telecommunications Act also gives state public utility commissions
authority to approve or reject interconnection agreements that competitive local
carriers enter into with incumbent local carriers and broad authority to resolve
disputes that arise under these interconnection agreements. Under the 1996
Telecommunications Act, incumbent local carriers have a statutory duty to
negotiate in good faith with us for agreements for interconnection and access to
unbundled network elements. A separate agreement is signed for each of the
states in which we operate. During these negotiations either we or the incumbent
local carrier may submit disputes to the state regulatory commission for
mediation. After the expiration of a statutory period, either party may petition
the state public utility commission for arbitration. The 1996 Telecommunications
Act also allows state public utility commissions to supplement FCC regulations
as long as the state regulations are not inconsistent with the FCC's
requirements. Adverse state resolution of any arbitration proceeding in which we
may be involved could affect our ability to offer services at competitive rates.
In addition, HarvardNET offerings may, as to some future customers, be
classified as intrastate services subject to state regulation. All of the states
where we operate, or will operate, require state regulatory approval to provide
intrastate services. We have obtained state authorizations to provide all
relevant types of intrastate services in Maine, Maryland, Massachusetts, New
Hampshire, New York and Rhode Island and provisional approval in Pennsylvania.
Our applications for certificates to provide service in New Jersey, Virginia and
Washington D.C. have been filed and are being considered for approval by the
appropriate state public utility commissions. In most states, intrastate tariffs
also are
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required for various intrastate services, although we are not typically subject
to price or rate of return regulation for tariffed intrastate services. Actions
by state public utility commissions could cause us to incur substantial legal
and administrative expenses.
State laws and regulations could be adopted which address matters that
affect our business. We are unable to predict what laws or regulations may be
adopted in the future, to what extent existing laws and regulations may be found
applicable to our business, or the impact such new or existing laws or
regulations may have on our business. In addition, laws or regulations could be
adopted in the future that may decrease the growth and expansion of Internet
use, which may decrease demand for our services.
LOCAL GOVERNMENT REGULATION
We rely primarily on unbundled network elements of incumbent local carriers
and leased transport capacity to provide our services. If we decide instead to
construct and operate our own facilities, we may be required to obtain various
permits and authorizations from municipalities which may involve significant
costs or delays to our operations.
INTELLECTUAL PROPERTY
We regard our products, services and technology as proprietary and attempt
to protect them with copyrights, trademarks, trade secret laws, restrictions on
disclosure and other methods. We cannot be certain that these methods will be
sufficient protection. We also generally enter into confidentiality or license
agreements with our employees and consultants, and generally control access to
and distribution of our documentation and other proprietary information. Despite
these precautions, it may be possible for a third party to copy or otherwise
obtain and use our products, services or technology without authorization, or to
develop similar technology independently. Currently we have two servicemark
applications pending. In addition, effective intellectual property protection
may be unavailable or limited in some foreign countries. Despite our precautions
we may not be able to prevent misappropriation or infringement of our products,
services, and technology. In addition, in the future we may have to litigate to
enforce our intellectual property rights, to protect our trade secrets or to
determine the validity and scope of the proprietary rights of others. Such
litigation could result in substantial costs and diversion of resources and
could have a material adverse effect on our business, prospects, operating
results and financial condition.
Our logo and some titles and logos of our services mentioned in this
prospectus are either our service marks or service marks that have been licensed
to us. Each trademark, trade name or service mark of any other company appearing
in this prospectus belongs to its holder.
EMPLOYEES
As of June 30, 1999, we had 135 employees, employed in engineering, sales,
marketing, customer support and related activities, and general and
administrative functions. These employees do not include temporary personnel and
consultants who we retain from time to time. None of our employees is
represented by a labor union, and we consider our relations with our employees
to be good. We believe that our future success will depend in part on our
continued ability to attract, hire and retain qualified personnel. Competition
for such personnel is intense, and we may be unable to identify, attract and
retain such personnel in the future.
FACILITIES
We are headquartered in Boston, Massachusetts in facilities consisting of
approximately 22,000 square feet of office space and approximately 20,000 square
feet of space used as a Web operations center. We occupy these facilities under
a lease which expires in 2003. We also lease a 4,700 square
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foot Web operations center in McLean, Virginia under a lease expiring in 2002.
We consider these spaces adequate for our current operations. We also lease
space in a number of Bell Atlantic central offices. While the terms of these
leases are perpetual, the productive use of our central office facilities will
be subject to the terms of federal and state tariffs, regulatory decisions and
our interconnection agreements with Bell Atlantic. We will increase our central
office space as we expand our network. We also maintain offices in Portland,
Maine and Portsmouth, New Hampshire.
LEGAL PROCEEDINGS
We are not currently engaged in any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors, and their ages and positions as of
June 30, 1999 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------------------- --- ---------------------------------------------------
<S> <C> <C>
Mark M. Washburn................................... 36 President, Chief Executive Officer and Director
Todd C. DeSisto.................................... 41 Chief Financial Officer and Treasurer
Eric D. Peterson................................... 35 Vice President, Sales
James M. Newman.................................... 44 Vice President, Operations
Roger W. Ach III................................... 25 Chief Technical Officer
Melanie Haratunian................................. 39 General Counsel, Director of Regulatory Affairs,
and Secretary
Joseph Bartlett.................................... 34 Director of Marketing
William H. Southworth(1)........................... 53 Chairman of the Board of Directors and Director
Peter H.O. Claudy(2)............................... 37 Director
Leo J. Esposito.................................... 53 Director
Robert C. Ketterson(1)(2).......................... 36 Director
Jeffrey Osborn(2).................................. 40 Director
Matthew J. Rubins(1)............................... 31 Director
</TABLE>
- ------------------------
(1) Member of the audit committee
(2) Member of the compensation committee
MARK M. WASHBURN joined HarvardNET in September 1998 as Chief Operating
Officer and a Director and was promoted to President and Chief Executive Officer
in February 1999. From April 1998 to September 1998, Mr. Washburn served as Vice
President of Sales, Central Region for Level 3 Communications. From June 1997 to
April 1998, Mr. Washburn served as Vice President of Sales and Marketing for
XCOM Technologies, Inc., a competitive local exchange carrier specializing in
data communications. From February 1989 to June 1997, Mr. Washburn held a number
of sales and general management positions with MFS Communications, Inc., a
competitive local exchange carrier, including Vice President of Sales for the
Northeast region. Mr. Washburn previously held positions in sales and marketing
with AT&T/Paradyne and Terminal Networks.
TODD C. DESISTO joined HarvardNET in December 1998 as Chief Financial
Officer and was also elected Treasurer. From October 1993 to December 1998, Mr.
DeSisto served as Vice President and Chief Financial Officer of Atlantic
Cellular Company, a wireless telecommunications provider. Prior to his tenure at
Atlantic Cellular Company, Mr. DeSisto served in various finance and related
positions, including senior management consultant with Deloitte & Touche and
Vice President of Tanner Capital Corporation, an investment banking firm
providing growth capital for early stage businesses.
ERIC D. PETERSON joined HarvardNET in January 1999 as Vice President of
Sales. From May 1996 to January 1999, Mr. Peterson served as Vice President of
Sales and Marketing for FaxNet. From April 1991 to May 1996, he held various
executive sales positions at Allnet Communications, most recently as National
Account Manager--Wholesale. He was previously Director of Sales at First Phone.
JAMES M. NEWMAN joined HarvardNET in January 1999 as Vice President of
Operations. From March 1991 to January 1999, Mr. Newman served as Northeast
Regional Director of Operations for MFS Communications/WorldCom. From April 1988
to March 1991 he was a Network Manager for Raytheon Corp.
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ROGER W. ACH III joined HarvardNET in June 1996 as Chief Technical Officer.
From January 1993 to May 1996, Mr. Ach served as a technical computing assistant
for the University of Chicago.
MELANIE HARATUNIAN joined HarvardNET in December 1998 as General Counsel and
Director of Regulatory Affairs and was also elected Secretary in February 1999.
From December 1993 to November 1998, Ms. Haratunian was a partner in the law
firm of Halprin, Temple, Goodman & Sugrue, specializing in domestic and
international telecommunications law, and was an associate at this firm from
April 1992 to December 1993. Prior to April 1992, Ms. Haratunian served as an
associate with the law firm of Ginsburg, Feldman & Bress and with the Federal
Communications Commission as a legal assistant to the Common Carrier Bureau
Chief and an Attorney-Advisor in the Policy and Program Planning Division.
JOSEPH BARTLETT joined HarvardNET in March 1999 as Director of Marketing.
From February 1997 to March 1999, Mr. Bartlett served as the Director of
Internet Market Strategies practice at The Yankee Group. From November 1994 to
February 1997, he was a management consultant for COBA-- Boston, a consulting
company.
WILLIAM H. SOUTHWORTH founded HarvardNET in 1992 and has served as Chairman
of the Board of Directors since inception. Mr. Southworth served as President
and Chief Executive Officer of HarvardNET from November 1992 to February 1999.
Prior to founding HarvardNET, Mr. Southworth held various positions in the
electronics industry, including co-founding Cadmus Computer, serving as Vice
President of International Sales and Vice President of Engineering for Infoton
Inc., and serving in engineering and general management positions with Digital
Equipment Corporation, Data General Corporation, Massachusetts Institute of
Technology and Instrumentation Laboratory.
PETER H.O. CLAUDY has served as a Director of HarvardNET since September
1998. Since December 1997, Mr. Claudy has served as a general partner of
Media/Communications Partners III L.P. and since December 1998, he has served as
a general partner of M/C Venture Partners IV L.P., each of which is a
communications-focused private equity fund. From January 1994 to December 1997,
Mr. Claudy served as a Vice President of Media/Communications Partners, prior to
which he had served as an associate of this investment fund manager since August
1991. Mr. Claudy serves on the Board of Directors of McLeodUSA Inc., a publicly
traded integrated communications provider.
LEO J. ESPOSITO has served as a Director of HarvardNET since May 1999. Mr.
Esposito has served as a Senior Vice President of Fidelity Ventures
Telecommunications and Technology Group since July 1998. From April 1995 to June
1998, Mr. Esposito served as President of Fidelity Telecommunications Company.
From September 1988 to March 1995, Mr. Esposito served as a Vice President of
Goldman Sachs & Company, where he was the senior executive responsible for
global telecommunications network and trading technologies. Mr. Esposito
previously held various positions with IBM Corporation.
ROBERT C. KETTERSON has served as a Director of HarvardNET since September
1998. Mr. Ketterson has served as a Vice President of Fidelity Ventures
Telecommunications and Technology Group since July 1996. From September 1993 to
July 1996, Mr. Ketterson served as a principal of Fidelity Ventures. From
September 1990 to August 1993, Mr. Ketterson served as a manager in the
high-technology practice of The Boston Consulting Group, Inc.
JEFFREY OSBORN has served as a Director of HarvardNET since November 1997.
Mr. Osborn has served as the Principal of Osborn Capital LLC, an investment
company, since January 1999. From February 1997 to December 1998, Mr. Osborn
managed personal investments and participated as a member of the boards of
directors of several of his portfolio companies. From November 1993 to February
1997, Mr. Osborn served in a variety of sales positions with UUNET Technologies,
Inc., an Internet service provider, including Director of Sales and Marketing
and Vice President of Sales.
MATTHEW J. RUBINS has served as a Director of HarvardNET since September
1998. Since December 1998, Mr. Rubins has served as a Principal of M/C Venture
Partners, a communications-focused private equity firm. From July 1997 to
December 1998, Mr. Rubins served as a senior associate with
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Media/Communications Partners, an investment firm and predecessor of M/C Venture
Partners. From August 1996 to June 1997, Mr. Rubins served as an Assistant Vice
President in the telecommunications and data networking areas of the Deutsche
Morgan Grenfell Technology Group. Mr. Rubins served as an Associate with
Donaldson, Lufkin & Jenrette in the communications and high yield groups from
August 1995 to July 1996.
We intend to elect one additional independent director within 90 days after
the date of this prospectus to comply with the listing requirements of the
Nasdaq National Market.
BOARD OF DIRECTORS
Our board of directors is currently fixed at seven members. Upon the
completion of this offering, we will divide our board of directors into the
following three classes:
<TABLE>
<CAPTION>
TERM EXPIRES AT
INITIAL ANNUAL MEETING OF
CLASS DIRECTORS STOCKHOLDERS IN
- ------------------------------------------------------------------ --------------------------- -------------------
<S> <C> <C>
Class I........................................................... Leo J. Esposito 2000
Matthew J. Rubins
Class II.......................................................... Peter H.O. Claudy 2001
Robert C. Ketterson
William H. Southworth
Class III......................................................... Mark M. Washburn 2002
Jeffrey Osborn
</TABLE>
At each annual meeting of stockholders after the initial classification, the
successors to directors whose term is then expiring will be elected to serve
from the time of election and qualification until the third annual meeting
following their election. This classification of our board of directors may have
the effect of delaying or preventing changes in control or management of
HarvardNET. Each officer serves at the discretion of our board of directors.
There are no family relationships among any of our directors.
COMPENSATION OF DIRECTORS. Directors currently do not receive any cash
compensation from HarvardNET for their services as members of our board of
directors, although we reimburse non-employee directors for reasonable
out-of-pocket expenses incurred in attending meetings of our board of directors.
We intend to grant stock options and other equity awards on an annual basis to
our non-employee directors from time to time pursuant to our 1999 director stock
option plan. We have not yet determined the amount and timing of such grants or
awards. No director who is an employee of HarvardNET receives separate
compensation for services rendered as a director.
BOARD COMMITTEES. Our board of directors has established a compensation
committee and an audit committee. The compensation committee, which consists of
Messrs. Claudy, Ketterson and Osborn, reviews executive salaries, administers
our bonus, incentive compensation and stock options plans, and approves the
salaries and other benefits of our executive officers. In addition, the
compensation committee consults with our management regarding our pension and
other benefit plans and compensation policies and practices. The audit
committee, which consists of Messrs. Ketterson, Southworth and Rubins, reviews
the professional services provided by our independent accountants, the
independence of such accountants from our management, our annual financial
statements and our system of internal accounting controls. The audit committee
also reviews such other matters with
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respect to our accounting, auditing and financial reporting practices and
procedures as it may find appropriate or may be brought to its attention.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
None of the members of the compensation committee is currently or has been,
at any time since the formation of HarvardNET, an officer or employee of
HarvardNET. No member of the compensation committee serves as a member of our
board of directors or compensation committee of any entity that has one or more
executive officers serving as a member of our board of directors or compensation
committee.
EXECUTIVE COMPENSATION
The following table sets forth, for the year ended December 31, 1998, the
cash compensation paid and shares underlying options granted to (1) our current
Chief Executive Officer, (2) our former Chief Executive Officer, (3) our current
Chief Financial Officer and Treasurer and (4) our other most highly compensated
executive officer during fiscal 1998 who received annual compensation during
such year in excess of $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
- ------------------------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
Mark M. Washburn, President and Chief Executive Officer(1)................................ $ 37,293 --
William H. Southworth(2).................................................................. 123,868 $ 45,230
Todd C. DeSisto, Chief Financial Officer and Treasurer(3)................................. 10,400 --
Brent Paine(4)............................................................................ 68,600 49,734
</TABLE>
- ------------------------
(1) Mark M. Washburn began his employment with us on September 29, 1998 as Chief
Operating Officer. Mr. Washburn became our President and Chief Executive
Officer on February 18, 1999. Mr. Washburn's current annual salary is
$220,000.
(2) William H. Southworth served as Chief Executive Officer during the fiscal
year ended December 31, 1998 and resigned as Chief Executive Officer
effective February 18, 1999. Mr. Southworth serves as Chairman of the Board
of Directors.
(3) Todd C. DeSisto became our Chief Financial Officer and Treasurer in December
1998. Mr. DeSisto's current annual salary is $200,000.
(4) Brent Paine resigned as President of HarvardNET on September 1, 1998.
STOCK OPTIONS AND FISCAL YEAR-END OPTION VALUES
None of the officers listed in the Summary Compensation Table was granted
options to purchase common stock in the year ended December 31, 1998, and none
of these officers has any options to purchase common stock.
EMPLOYMENT AND SEVERANCE AGREEMENTS
We have a severance and non-competition agreement with William H.
Southworth, our Chairman of the Board of Directors, which terminates on the
second anniversary of the date that Mr. Southworth ceases to be employed by us.
As long as he is not terminated for cause, we will pay Mr. Southworth a
severance payment in the amount of $120,000. For Mr. Southworth, cause means:
- the conviction for various crimes;
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- a material violation of any policy of HarvardNET relating to ethical
business conduct, fiduciary duties or conflicts of interest;
- mental incompetence;
- any conduct that would cause the suspension or revocation of any license,
permit, authorization or right material to HarvardNET;
- gross and habitual neglect of duty;
- prolonged absence; or
- material breach of this agreement.
This severance payment is subject to Mr. Southworth's compliance with the
terms of this agreement. Mr. Southworth has agreed not to compete with us during
the term of this agreement.
We have an employment agreement with Mark M. Washburn, our President and
Chief Executive Officer. This agreement establishes a base salary, subject to
increase by the board of directors. Mr. Washburn's base salary is $220,000.
Under the agreement, Mr. Washburn is eligible for a bonus of up to $40,000 for
1999. Upon execution of his employment agreement, we issued Mr. Washburn
2,430,984 shares of Class B stock, at an aggregate purchase price of $1,794.50.
Of these shares, 486,183 shares are vested but can be repurchased by HarvardNET
if Mr. Washburn voluntarily terminates his employment prior to September 30,
1999; 648,271 shares vest on September 29, 1999; 648,271 shares vest on
September 29, 2000; and 648,259 shares vest on September 29, 2001. We have the
right to repurchase the unvested shares if Mr. Washburn ceases to be employed by
us for any reason. Upon the completion of this offering, any unvested shares
will vest in full. Mr. Washburn has agreed not to compete with us during the
term of the agreement and for one year following the termination of his
employment. As long as he is not terminated for cause, we will pay Mr.
Washburn's salary in effect at the time of termination and his medical benefits
during this one-year non-competition period. For Mr. Washburn, cause means:
- breach of his fiduciary duty to HarvardNET;
- commission of dishonest acts relating to HarvardNET;
- conviction of various crimes;
- mental incompetence;
- failure to perform his duties;
- prolonged absence; or
- material breach of his employment agreement.
However, if Mr. Washburn obtains subsequent employment with a non-competing
business during this period, any amount we owe Mr. Washburn will be offset by
Mr. Washburn's compensation from his subsequent employment, and we will not be
required to provide Mr. Washburn with medical benefits if he is able to receive
substantially similar benefits.
We have an employment agreement with Todd C. DeSisto, our Chief Financial
Officer and Treasurer. This agreement establishes a base salary, subject to
increase by the board of directors. Mr. DeSisto's base salary is $200,000. Under
the agreement, Mr. DeSisto is eligible for a bonus of up to $40,000 for 1999.
Upon execution of his employment agreement, we issued Mr. DeSisto 759,680 shares
of Class B stock, at an aggregate purchase price of $5,608. These shares vest in
four equal annual installments, and we have the right to repurchase the unvested
shares if Mr. DeSisto ceases to be employed by us for any reason. Upon the
completion of this offering, any unvested shares will vest in full. Mr. DeSisto
has agreed not to compete with us during the term of the agreement and for one
year following the termination of his employment. As long as he is not
terminated for cause, we will
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pay Mr. DeSisto's salary in effect at the time of termination and his medical
benefits during this one-year non-competition period. For Mr. DeSisto, cause has
the same meaning as for Mr. Washburn. However, if Mr. DeSisto obtains subsequent
employment with a non-competing business during this period, any amount we owe
Mr. DeSisto will be offset by Mr. DeSisto's compensation from his subsequent
employment, and we will not be required to provide Mr. DeSisto with medical
benefits if he is able to receive substantially similar benefits.
BENEFIT PLANS
1997 STOCK INCENTIVE PLAN
The 1997 stock incentive plan provides for the grant of restricted stock and
other stock-based awards and stock options. A maximum of 406,406 shares of
common stock are authorized to be issued pursuant to the 1997 stock incentive
plan. As of June 30, 1999, options to purchase an aggregate of 406,406 shares of
common stock at an exercise price of $0.62 were outstanding under the 1997 stock
incentive plan. No additional grants will be made under the 1997 Stock Incentive
Plan.
1999 STOCK INCENTIVE PLAN
The 1999 stock incentive plan provides for the grant of stock options,
restricted stock and other stock-based awards for up to a maximum of 5,419,000
shares of common stock. As of June 30, 1999, options to purchase an aggregate of
1,087,729 shares of common stock at a weighted average exercise price of $1.92
were outstanding under the 1999 stock incentive plan. Our officers, employees,
directors, consultants and advisors are eligible to receive awards under the
1999 stock incentive plan; however, incentive stock options may be granted only
to employees.
The 1999 stock incentive plan is administered by our board of directors. Our
board of directors has the authority to adopt, amend and repeal the
administrative rules, guidelines and practices relating to the plan and to
interpret its provisions. Under the terms of the 1999 Stock Incentive Plan, our
board of directors may delegate authority under the plan to one or more
committees of the board of directors and, subject to various limitations, to one
or more of our executive officers. Subject to any applicable limitations
contained in the plan, the board of directors or any committee or executive
officer to whom the board of directors delegates authority, as the case may be,
selects the recipients of awards and determines:
- the number of shares of common stock covered by options and the dates upon
which such options become exercisable,
- the exercise price of options,
- the duration of options, and
- the number of shares of common stock subject to any restricted stock or
other stock-based awards and the terms and conditions of such awards,
including the conditions for repurchase, issue price and repurchase price.
In the event of a merger resulting in a change in control of HarvardNET, a
sale of substantially all of HavardNET's assets or the liquidation of
HarvardNET, our board of directors is authorized to provide for outstanding
options or other stock-based awards to be assumed or substituted for by the
acquiror. If the acquiror does not assume the options and awards, our board of
directors may provide that all unexercised options will become exercisable in
full prior to the completion of such event and that these options will terminate
upon the completion of the event if not previously exercised. In addition,
immediately prior to the consummation of such an event, each outstanding option
will become exercisable for one-half of the shares subject to each such option
with the remaining half vesting in accordance with the original vesting
schedule, and restrictions on one-half of each other outstanding stock-based
award will lapse.
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1999 EMPLOYEE STOCK PURCHASE PLAN
The 1999 employee stock purchase plan was adopted by our board of directors
in June 1999, and we expect it to be approved by our stockholders prior the
closing of this offering. The 1999 employee stock purchase plan provides for the
issuance of a maximum of 1,355,000 shares of common stock. The 1999 employee
stock purchase plan will be administered by the compensation committee. With
some exceptions, all eligible employees, including directors and officers,
regularly employed by HarvardNET for at least one month on the applicable
offering commencement date are eligible to participate in the plan. We will make
one or more offerings to employees to purchase common stock under the 1999
employee stock purchase plan. During each offering, a participating employee may
purchase a maximum number of shares equal to 85% of the market value of a share
of common stock on the first day of the offering period divided by 10% of the
employee's annualized compensation, or a lower percentage if established by the
compensation committee, for the immediately preceding six-month period. The
exercise price for the option granted in each payment period will be 85% of the
lesser of the last reported sales price of HarvardNET common stock on the first
or last business day of the plan period. An employee may elect to have up to 10%
deducted from his or her regular salary, or such lower percentage as may be
established by the compensation committee, for this purpose. The price at which
an employee's option is exercised is the lesser of the last reported sale on the
first or last business day of the offering period. The first offering under this
plan will begin on the effective date of this offering and will end on February
29, 2000.
1999 DIRECTOR STOCK OPTION PLAN
The 1999 director stock option plan is expected to be adopted by our board
of directors and approved by our stockholders in July 1999. The 1999 director
stock option plan provides for the issuance of a maximum 300,000 shares of
common stock to non-employee directors of HarvardNET. Under the 1999 director
stock option plan, HarvardNET will grant an option to purchase 10,000 shares of
common stock to each non-employee director on the date on which the initial
public offering price of the common stock is determined with an exercise price
equal to the initial public offering price and an option to purchase 10,000
shares of common stock on each of August 1, 2000 and August 1, 2001, each with
an exercise price equal to the fair market value on the date of grant. Each such
option will have an exercise price equal to the initial public offering price.
In addition, HarvardNET will grant each new non-employee director an option to
purchase 10,000 shares of common stock upon election to our board of directors
and an option to purchase 10,000 shares of common stock on August 1 of each of
the next two years following his or her election to the board of directors, each
with an exercise price equal to the fair market value on the date of grant.
HarvardNET will also grant annual options to purchase 3,333 shares of common
stock to each non-employee director on August 1 of each year commencing in the
year following the initial three option grants to such director described above,
each with an exercise price equal to the fair market value on the date of grant.
Each option granted to the directors under the plan is fully vested and
exercisable on the date of grant.
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TRANSACTIONS WITH AFFILIATES
Since January 1, 1996, HarvardNET has engaged in the following transactions
with the following directors, executive officers and stockholders who
beneficially own more than 5% of the outstanding capital stock of HarvardNET,
and affiliates of such directors, officers and 5% stockholders.
On August 15, 1997, HarvardNET issued and sold an aggregate of 609,608
shares of its common stock at a purchase price of $.62 per share to five
individuals. Jeffrey Osborn, a director of HarvardNET, purchased 162,562 of
these shares.
On September 1, 1998, December 7, 1998 and March 23, 1999, HarvardNET issued
and sold an aggregate of 13,749,440 shares of its Series A convertible preferred
stock at a purchase price of $1.34551 per share to ten purchasers. FTT Ventures
Limited purchased an aggregate of 2,972,850 of these shares and Fidelity
Investors II Limited Partnership purchased an aggregate of 2,972,850 of these
shares. In addition, funds affiliated with M/C Partners purchased an aggregate
of 7,432,130 of these shares, and Jeffrey Osborn purchased an aggregate of
74,320 of these shares.
On September 1, 1998, HarvardNET redeemed 3,377,693 shares of common stock
for a purchase price of $.99 per share; 1,016,014 of these shares were jointly
held by William Southworth, Chairman of the board of directors of HarvardNET,
who was also then Chief Executive Officer, and his wife; and 1,556,683 of these
shares were held by Brent Paine, who was then President of HarvardNET.
HarvardNET believes that the securities issued in the transactions described
above were sold at their then fair market value and that the terms of the
transactions described above were no less favorable than HarvardNET could have
obtained from unaffiliated third parties.
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PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding beneficial ownership of
our common stock as of June 30, 1999 and as adjusted to reflect the sale of the
shares in this offering and the conversion of all outstanding shares of
convertible preferred stock and Class B stock into shares of common stock held
by:
- each person whom we know to own beneficially more than 5% of the
outstanding shares of common stock,
- each of our directors,
- each of our executive officers named in the Summary Compensation Table
under "Management--Executive Compensation," and
- all our directors and executive officers as a group.
Unless otherwise indicated, the address for each listed stockholder is: c/o
HarvardNET Inc., 500 Rutherford Avenue, Boston, Massachusetts 02129. The persons
named in the table have sole voting and investment power with respect to all
shares of common stock shown as beneficially owned by them, subject to community
property laws where applicable and the information contained in this table and
the notes that follow.
<TABLE>
<CAPTION>
% OF TOTAL
----------------------------
<S> <C> <C> <C>
SHARES
BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING OFFERING
- --------------------------------------------------------------------------- ------------ ----------- ---------------
Media/Communications Partners (1).......................................... 10,068,203 35.9% 27.2%
75 State Street
Boston, MA 02110
Fidelity Investors II Limited Partnership.................................. 4,027,278 14.3% 10.9%
82 Devonshire Street
Boston, MA 02109
FTT Ventures Limited....................................................... 4,027,278 14.3% 10.9%
82 Devonshire Street
Boston, MA 02109
William H. Southworth (2).................................................. 2,565,377 9.1% 6.9%
Mark M. Washburn........................................................... 2,258,457 8.0% 6.1%
Morgan Stanley Senior Funding, Inc. (3).................................... 1,547,470 5.4% 4.1%
1585 Broadway
New York, NY 10036
Todd C. DeSisto............................................................ 705,766 2.5% 1.9%
Brent Paine................................................................ 274,703 * *
Peter H.O. Claudy (4)...................................................... 9,220,789 32.8% 24.9%
Leo J. Esposito............................................................ -- --
Robert C. Ketterson (5).................................................... 4,027,278 14.3% 10.9%
Jeffrey Osborn............................................................. 263,242 * *
Matthew J. Rubins.......................................................... -- --
All executive officers and directors as a group (13 people) (6)............ 20,451,973 71.8% 54.7%
</TABLE>
- ------------------------
* Less than 1% of the outstanding common stock.
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(1) Consists of shares beneficially owned by Media/Communications Partners III
L.P., M/C Venture Partners IV, L.P., M/C Investors LLC and Chestnut Street
Partners, Inc. The address for the M/C entities is 75 State Street, Boston,
MA 02110.
(2) Consists of shares held jointly by Mr. Southworth and Barbara Southworth,
his wife.
(3) Includes 582,138 shares issuable upon the exercise of warrants within 60
days of June 30, 1999.
(4) Consists of shares beneficially owned by Media/Communications Partners III
L.P. and M/C Venture Partners IV, L.P. Mr. Claudy is a Manager of M/C III
L.L.C., which is the General Partner of Media/Communications Partners III
L.P. Mr. Claudy is also a Manager of M/C VP IV LLC, which is the General
Partner of M/C Venture Partners IV L.P. Mr. Claudy may be considered the
beneficial owner of these shares. Mr. Claudy disclaims beneficial ownership
of these shares, except as to his direct pecuniary interest in such shares.
(5) Consists of shares beneficially owned by FTT Ventures Limited. Mr. Ketterson
is an executive officer and director of FTT Ventures Limited and may be
considered the beneficial owner of these shares. Mr. Ketterson disclaims
beneficial ownership of these shares, except as to his direct pecuniary
interest in such shares.
(6) Includes 406,406 shares issuable upon the exercise of options exercisable
within 60 days of June 30, 1999.
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DESCRIPTION OF CAPITAL STOCK
Effective upon the closing of this offering, our authorized capital stock
will consist of 100,000,000 shares of common stock, $.01 par value per share,
and 5,000,000 shares of preferred stock, $.01 par value per share. We also have
issued the warrants described below.
The following summary describes the material terms of our capital stock as
of the closing this offering. However, you should refer to the actual terms of
the capital stock contained in our restated certificate of incorporation and
other agreements referenced below which are filed as exhibits to the
registration statement of which this prospectus is part. The following summary
gives effect to the conversion of all outstanding shares of convertible
preferred stock and Class B stock into common stock upon the completion of this
offering.
COMMON STOCK
As of June 30, 1999, there were 5,278,246 shares of common stock outstanding
held by 14 stockholders of record. Based upon the number of shares outstanding
as of June 30, 1999, and giving effect to the conversion of shares of Class B
stock and preferred stock outstanding as of that date into an aggregate of
22,803,017 shares of common stock upon the closing of this offering and to the
issuance of the 8,900,000 shares of common stock offered by us in this offering,
there will be 36,981,263 shares of common stock outstanding upon the closing of
this offering. In addition, as of June 30, 1999, there were outstanding stock
options for the purchase of a total of 1,494,135 shares of common stock at a
weighted average exercise price of $1.56 per share.
Holders of common stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Directors are elected by a plurality of the votes of the shares present
in person or by proxy at the meeting and entitled to vote in such election.
Holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by our board of directors out of funds legally available
therefor, subject to any preferential dividend rights of outstanding preferred
stock. Upon the liquidation or dissolution of HarvardNET, the holders of common
stock are entitled to receive ratably our net assets available after the payment
of all our debts and other liabilities, subject to the prior rights of any
outstanding preferred stock. Holders of the common stock have no preemptive,
subscription, redemption or conversion rights, nor are they entitled to the
benefit of any sinking fund. The rights, powers, preferences and privileges of
holders of common stock are subject to, and may be adversely affected by, the
rights of the holders of shares of any series of preferred stock which we may
designate and issue in the future.
WARRANTS
As of June 30, 1999, a total of 859,091 shares of common stock were issuable
upon the exercise of outstanding warrants at a weighted average exercise price
of $3.33 per share. These warrants will remain outstanding after the closing of
this offering. These warrants contain a cashless exercise feature which could
result in the issuance of shares of common stock with no additional proceeds to
HarvardNET.
PREFERRED STOCK
Following the closing of this offering, our board of directors will be
authorized, subject to any limitations prescribed by law, without further
stockholder approval, to issue from time to time up to an aggregate of 5,000,000
shares of preferred stock, in one or more series. Each series of preferred stock
will have the number of shares, designations, preferences, voting powers,
qualifications and special or relative rights or privileges as are determined by
our board of directors, which may include, among others, dividend rights, voting
rights, redemption provisions, liquidation preferences, conversion rights and
preemptive rights.
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Our stockholders have granted our board of directors authority to issue the
preferred stock and to determine its rights and preferences in order to
eliminate delays associated with a stockholder vote on specific issuances. The
rights of the holders of common stock will be subject to the rights of holders
of any preferred stock issued in the future. The issuance of preferred stock,
while providing desirable flexibility in connection with possible acquisitions
and other corporate purposes, could adversely affect the voting power or other
rights of the holders of common stock, and could make it more difficult for a
third party to acquire, or discourage a third party from attempting to acquire,
a majority of our outstanding voting stock.
DELAWARE LAW AND CHARTER AND BY-LAW PROVISIONS; ANTI-TAKEOVER EFFECTS
We are subject to the provisions of Section 203 of the General Corporation
Law of Delaware. Section 203 prohibits a publicly-held Delaware corporation from
engaging in a business combination involving an interested stockholder or their
affiliates for a period of three years after the date of the transaction in
which the person became an interested stockholder. An interested stockholder is
defined for purposes of Section 203 as any person or entity that is the
beneficial owner of at least 15% of a corporation's voting stock or is an
affiliate of the corporation or the owner of 15% or more of the outstanding
voting stock of the corporation at any time in the past three years.
Effective upon the closing of this offering, our restated certificate of
incorporation and restated by-laws will provide for the division of our board of
directors into three classes, as nearly equal in size as possible, with
staggered three-year terms. In addition, our restated certificate of
incorporation and restated by-laws will provide that directors may be removed
only for cause by the affirmative vote of the holders of at least 75% of the
shares of our capital stock entitled to vote. Under our restated certificate of
incorporation and restated by-laws any vacancy on our board of directors,
however occurring, including a vacancy resulting from an enlargement of the
board, will only be filled by vote of a majority of the directors then in
office. The classification of our board of directors and the limitations on the
removal of directors and filling of vacancies could have the effect of making it
more difficult for a third party to acquire, or of discouraging a third party
from acquiring, control.
Our restated certificate of incorporation and restated by-laws will also
provide that, after the closing of this offering, any action required or
permitted to be taken by our stockholders at an annual meeting or special
meeting of stockholders may only be taken if it is properly brought before such
meeting and may not be taken by written action in lieu of a meeting. The
restated certificate of incorporation and restated by-laws will further provide
that special meetings of the stockholders may only be called by our President or
our board of directors. Under the restated by-laws, in order for any matter to
be considered properly brought before a meeting, a stockholder will have to
comply with various requirements regarding advance notice to us. The foregoing
provisions could have the effect of delaying until the next stockholders'
meeting stockholder actions which are favored by the holders of a majority of
our outstanding voting securities. These provisions may also discourage another
person or entity from making a tender offer for our common stock, because such
person or entity, even if it acquired a majority of our outstanding voting
securities, would be able to take action as a stockholder, such as electing new
directors or approving a merger, only at a duly called stockholders meeting, and
not by written consent.
The General Corporation Law of Delaware provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or by-laws,
unless a corporation's certificate of incorporation or by-laws, as the case may
be, requires a greater percentage. Effective upon the closing of this offering,
our restated certificate of incorporation will require the affirmative vote of
the holders of at least 75% of the shares of our capital stock issued and
outstanding and entitled to vote to amend or repeal any of the foregoing
restated certificate of incorporation provisions. The restated by-laws will also
require a majority vote of our board of directors or the holders of at least 75%
of the shares of our capital stock issued and
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outstanding and entitled to vote to amend or repeal any of its provisions,
subject to any limitations set forth in the restated by-laws. The stockholder
vote would be in addition to any separate class vote that might in the future be
required pursuant to the terms of any series preferred stock that might be
outstanding at the time any such amendments are submitted to stockholders.
LIMITATION OF LIABILITY AND INDEMNIFICATION
Our restated certificate of incorporation provides that we will indemnify
our directors and officers to the fullest extent authorized by Delaware law, as
it now exists or may in the future be amended, against all expenses and
liabilities reasonably incurred in connection with the service for us or on our
behalf. The restated certificate of incorporation further provides that our
directors will not be personally liable for monetary damages to HarvardNET for
breaches of their fiduciary duty as directors, unless they acted in bad faith or
knowingly or intentionally violated the law. In addition, HarvardNET plans to
enter into indemnification agreements with its directors containing provisions
which may require HarvardNET, among other things, to indemnify its directors
against liabilities that may arise by virtue of their status or service as
directors, and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is EquiServe L.P.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have 36,981,263 shares of common
stock outstanding, 38,316,263 shares if the U.S. underwriters exercise their
over-allotment option in full, assuming no exercise of outstanding options or
warrants. Of these shares, the 8,900,000 shares, 10,235,000 shares if the
over-allotment option is exercised in full, to be sold in this offering will be
freely tradable without restriction or further registration under the Securities
Act of 1933, as amended, except that any shares purchased by our affiliates, as
that term is defined in Rule 144 under the Securities Act, may generally only be
sold in compliance with the limitations of Rule 144 described below.
SALES OF RESTRICTED SHARES
The remaining 28,081,263 shares of common stock outstanding upon completion
of this offering are deemed restricted securities under Rule 144 or Rule 701
under the Securities Act. Subject to the lock-up agreements described below,
none of these restricted shares will be eligible for sale in the public market
under Rule 144(k) on the date of this prospectus. Subject to the lock-up
agreements described below, approximately 419,952 of these restricted shares
will be eligible for sale in the public market under Rule 144(k) 90 days after
the date of this prospectus. Upon expiration of lock-up agreements, 180 days
after the date of this prospectus, approximately 18,018,074 additional shares of
common stock will be eligible for sale in the public market under Rule 144 under
the Securities Act.
In general, under Rule 144, a person (or persons whose shares are
aggregated), including an affiliate of HarvardNET, who has beneficially owned
restricted shares for at least one year is entitled to sell, within any
three-month period, a number of such shares that does not exceed the greater of,
- one percent of the then outstanding shares of common stock, which will
equal approximately 369,813 shares immediately after this offering; or
- the average weekly trading volume in the common stock on the Nasdaq
National Market during the four calendar weeks preceding the date on which
notice of such sale is filed.
Sales under Rule 144 are also subject to requirements concerning
availability of public information, manner of sale and notice of sale. In
addition, affiliates of HarvardNET must comply with the restrictions and
requirements of Rule 144, other than the one-year holding period requirement, in
order to sell shares of common stock which are not restricted securities. Under
Rule 144(k), a person who is not an affiliate of HarvardNET and has not been an
affiliate of HarvardNET for at least three months prior to the sale and who has
beneficially owned restricted shares for at least two years may resell such
shares without compliance with the foregoing requirements. In meeting the one-
and two-year holding periods described above, a holder of restricted shares can
include the holding periods of a prior owner who was not an affiliate of
HarvardNET. The one- and two-year holding periods described above do not begin
to run until the full purchase price or other consideration is paid by the
person acquiring the restricted shares from the issuer or an affiliate of
HarvardNET.
Rule 701 provides that currently outstanding shares of common stock acquired
under our employee compensation plans may be resold beginning 90 days after the
date of this prospectus by persons, other than affiliates of HarvardNET, subject
only to the manner of sale provisions of Rule 144, and by affiliates of
HarvardNET under Rule 144 without compliance with its one-year minimum holding
period, subject to limitations.
OPTIONS
Rule 701 also provides that the shares of common stock acquired upon the
exercise of currently outstanding options or pursuant to other rights granted
under our 1997 stock incentive plan or our 1999 stock incentive plan may be
resold beginning 90 days after the date of this prospectus
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- by persons, other than affiliates of HarvardNET, subject only to the
manner of sale provisions of Rule 144; and
- by affiliates of HarvardNET under Rule 144, without compliance with its
one-year minimum holding period, subject to limitations.
At June 30, 1999, 406,406 shares of common stock were issuable upon exercise
of vested options under our 1997 stock incentive plan. All of these shares are
subject to lock-up agreements with the underwriters. None of the options granted
under the 1999 stock incentive plan had vested as of June 30, 1999.
We intend to file one or more registration statements on Form S-8 under the
Securities Act to register up to 7,480,405 shares of common stock subject to
outstanding stock options or other rights granted under our 1997 stock incentive
plan, 1999 stock incentive plan, 1999 director stock option plan and 1999
employee stock purchase plan. These registration statements are expected to
become effective upon filing. Subject to lock-up agreements with the
underwriters, vested options covered by these registration statements will be
eligible for sale in the public market upon the exercise of underlying options
to the extent not previously sold pursuant to Rule 701.
LOCK-UP AGREEMENTS
HarvardNET and its executive officers, directors and specified
securityholders have agreed that, without the prior written consent of Morgan
Stanley & Co. Incorporated, that they will not during the period ending 180 days
after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend, or otherwise transfer or dispose of,
directly or indirectly, any shares of common stock or any securities
convertible into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
regardless of whether any such transactions described above are to be settled by
delivery of such common stock or such other securities, in cash or otherwise. In
addition, stockholders that are parties to a registration rights agreement with
HarvardNET have agreed not to engage in any of the transactions described above
for a period of 180 days from the date of this prospectus. HarvardNET has agreed
not to waive these restrictions without the consent of Morgan Stanley & Co.
Incorporated.
REGISTRATION RIGHTS
HarvardNET and stockholders of HarvardNET holding an aggregate of 28,080,260
outstanding shares of common stock and 1,172,376 shares of common stock issuable
upon the exercise of outstanding options and warrants are parties to a
registration rights agreement. Under the terms of this agreement, these
stockholders are entitled to demand that HarvardNET register their shares under
the Securities Act after the closing of this offering. We are not required to
effect a registration within six months after the closing of this offering. We
are generally required to bear all of the expenses of all registrations, other
than underwriting discounts and commissions. Registration of any of the shares
of common stock would result in such shares becoming freely tradable without
restriction under the Securities Act upon effectiveness of the registration
statement.
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UNITED STATES FEDERAL TAX CONSEQUENCES
TO NON-U.S. HOLDERS OF COMMON STOCK
GENERAL
The following is a general discussion of the material United States federal
income and estate tax consequences of the ownership and disposition of our
common stock that may be relevant to you if you are a non-U.S. holder under U.S.
federal income tax laws. A non-U.S. holder is a beneficial owner of our common
stock that is, for United States federal income tax purposes:
- a nonresident alien individual;
- a foreign corporation;
- a foreign estate or trust; or
- a foreign partnership.
This discussion does not address all aspects of United States federal income
and estate taxation that may be relevant to you in light of your particular
circumstance. It also does not address any foreign, state or local tax
consequences. Furthermore, this discussion is based on provisions of the
Internal Revenue Code, Treasury regulations and administrative and judicial
interpretations as of the date hereof. All of these are subject to change,
possibly with retroactive effect, or different interpretations. If you are
considering buying our common stock, you should consult your own tax advisor
about current and possible future tax consequences of holding and disposing of
our common stock in your particular situation.
DISTRIBUTIONS
As noted elsewhere in this prospectus, we do not intend to pay dividends. In
the event that we change this policy and declare dividends on our common stock,
any such dividends paid to a non-U.S. holder may be subject to withholding. If
the dividends are not effectively connected with a United States trade or
business of the non-U.S. holder or, if a tax treaty applies, are not
attributable to a United States permanent establishment or fixed base of the
non-U.S. holder, any dividends will, to the extent paid out of earnings and
profits, be subject to United States withholding tax. The withholding tax will
be imposed at a 30 percent rate or, if a tax treaty applies, a lower rate
specified by the treaty. To receive a reduced treaty rate, a non-U.S. holder
must furnish to us or our paying agent a duly completed Form 1001 or Form
W-8BEN, or substitute form, certifying to its qualification for such rate.
Dividends that are effectively connected with the conduct of a trade or
business within the United States of a non-U.S. holder and, if a tax treaty
applies, are attributable to a United States permanent establishment or fixed
base of the non-U.S. holder, are exempt from United States federal withholding
tax. To qualify for such exemption, the non-U.S. holder must furnish to us or
our paying agent a duly completed Form 4224 or Form W-8ECI, or substitute form,
certifying its qualification for the exemption. However, dividends exempt from
United States withholding because they are effectively connected or they are
attributable to a United States permanent establishment or fixed base are
subject to United States federal income tax on a net income basis at the regular
graduated United States federal income tax rates. Any such effectively connected
dividends received by a foreign corporation may, under some circumstances, be
subject to an additional branch profits tax at a 30 percent rate or a lower rate
specified by an applicable income tax treaty.
Under current United States Treasury regulations, dividends paid before
January 1, 2001 to an address outside the United States are presumed to be paid
to a resident of the country of address for purposes of the withholding
discussed above and for purposes of determining the applicability of a tax
treaty rate. However, United States Treasury regulations applicable to dividends
paid after December 31, 2000 eliminate this presumption, subject to various
transition rules.
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For dividends paid after December 31, 2000, a non-U.S. holder generally will
be subject to United States backup withholding tax at a 31 percent rate under
the backup withholding rules described below, rather than at a 30 percent rate
or a reduced rate under an income tax treaty, as described above, unless the
non-U.S. holder complies with certain Internal Revenue Service certification
procedures or, in the case of payments made outside the United States with
respect to an offshore account, certain IRS documentary evidence procedures.
Further, to claim the benefit of a reduced rate of withholding under a tax
treaty for dividends paid after December 31, 2000, a non-U.S. holder must comply
with certain modified IRS certification requirements. Special rules also apply
to dividend payments made after December 31, 2000 to foreign intermediaries,
United States or foreign wholly owned entities that are disregarded for United
States federal income tax purposes and entities that are treated as fiscally
transparent in the United States, the applicable income tax treaty jurisdiction,
or both. You should consult your own tax advisor concerning the effect, if any,
of the rules affecting post-December 31, 2000 dividends on your possible
investment in our common stock.
A non-U.S. holder may obtain a refund of any excess amounts withheld by
filing an appropriate claim for refund along with the required information with
the IRS.
GAIN ON DISPOSITION OF COMMON STOCK
A non-U.S. holder generally will not be subject to United States federal
income tax with respect to gain recognized on a sale or other disposition of our
common stock unless one of the following applies:
- The gain is effectively connected with a trade or business of the non-U.S.
holder in the United States and, if a tax treaty applies, the gain is
attributable to a United States permanent establishment or fixed base
maintained by the non-U.S. holder. In this case, the non-U.S. holder will,
unless an applicable treaty provides otherwise, be taxed on its net gain
derived from the sale at regular graduated United States federal income
tax rates. If the non-U.S. holder is a foreign corporation, it may be
subject to an additional branch profits tax equal to 30 percent of its
effectively connected earnings and profits within the meaning of the
Internal Revenue Code for the taxable year, as adjusted for certain items,
unless it qualifies for a lower rate under an applicable income tax treaty
and duly demonstrates such qualification.
- The non-U.S. holder is an individual, holds our common stock as a capital
asset, is present in the United States for 183 or more days in the taxable
year of the disposition, and certain other conditions are met. In this
case, the non-United States holder will be subject to a flat 30 percent
tax on the gain derived from the sale, which may be offset by certain
United States capital losses.
- We are or have been a United States real property holding corporation for
United States federal income tax purposes at any time during the shorter
of the five-year period ending on the date of the disposition or the
period during which the non-U.S. holder held our common stock. We believe
that we never have been and are not currently a United States real
property holding corporation for United States federal income tax
purposes. Although we consider it unlikely based on our current business
plans and operations, we may become a United States real property holding
corporation in the future. Even if we were to become a United States real
property holding corporation, any gain realized by a non-U.S. holder would
not be subject to United States federal income tax as described in this
paragraph if our common stock were considered to be "regularly traded on
an established securities market" and the non-U.S. holder did not own,
actually or constructively, at any time during the shorter of the periods
described above, more than five percent of our common stock.
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FEDERAL ESTATE TAX
Common stock owned or treated as owned by an individual non-U.S. holder at
the time of death, or common stock as to which the non-U.S. holder made certain
lifetime transfers, will be included in such holder's gross estate for United
States federal estate tax purposes, unless an applicable estate tax treaty
provides otherwise.
INFORMATION REPORTING AND BACKUP WITHHOLDING TAX
Under United States Treasury regulations, we must report annually to the IRS
and to each non-U.S. holder the amount of dividends paid to such holder and the
tax withheld with respect to such dividends. These information reporting
requirements apply even if withholding was not required because the dividends
were effectively connected dividends or withholding was reduced by an applicable
income tax treaty. Pursuant to an applicable tax treaty, information may also be
made available to the tax authorities in the country in which the non-U.S.
holder resides.
United States federal backup withholding generally is a withholding tax
imposed at the rate of 31 percent on certain payments to persons that fail to
furnish certain required information. Backup withholding generally will not
apply to dividends paid before January 1, 2001 to non-U.S. holders. See the
discussion under "Distributions" above for rules regarding reporting
requirements to avoid backup withholding on dividends paid after December 31,
2000.
As a general matter, information reporting and backup withholding will not
apply to a payment by or through a foreign office of a foreign broker of the
proceeds of a sale of our common stock effected outside the United States.
However, information reporting requirements, but not backup withholding, will
apply to a payment by or through a foreign office of a broker of the proceeds of
a sale of our common stock effected outside the United States if that broker:
- is a United States person for United States federal income tax purposes,
- is a foreign person that derives 50 percent or more of its gross income
for certain periods from the conduct of a trade or business in the United
States,
- is a controlled foreign corporation as defined in the Internal Revenue
Code, or
- is a foreign partnership with certain United States connections for
payments made after December 31, 2000.
Information reporting requirements will not apply in the above cases if the
broker has documentary evidence in its records that the holder is a non-U.S.
holder and certain conditions are met or the holder otherwise establishes an
exemption.
Payment by or through a United States office of a broker of the proceeds of
a sale of our common stock is subject to both backup withholding and information
reporting unless the holder certifies to the payor as to its status as a
non-U.S. holder on a duly completed Form W-8BEN, or substitute form, under
penalties of perjury or otherwise establishes an exemption.
Amounts withheld under the backup withholding rules do not constitute a
separate United States federal income tax. Rather, any amounts withheld under
the backup withholding rules will be refunded or allowed as a credit against the
holder's United States federal income tax liability, if any, provided the
required information or appropriate claim for refund is filed with the IRS.
THE FOREGOING DISCUSSION IS A SUMMARY OF CERTAIN UNITED STATES FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION
OF OUR COMMON STOCK BY NON-U.S. HOLDERS. YOU ARE URGED TO CONSULT YOUR OWN TAX
ADVISOR WITH RESPECT TO THE PARTICULAR TAX CONSEQUENCES TO YOU OF OWNERSHIP AND
DISPOSITION OF OUR COMMON STOCK, INCLUDING THE EFFECT OF ANY STATE, LOCAL,
FOREIGN OR OTHER TAX LAWS.
69
<PAGE>
UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date of this prospectus, the U.S. underwriters named below,
for whom Morgan Stanley & Co. Incorporated, Merrill Lynch, Pierce, Fenner &
Smith Incorporated and Salomon Smith Barney Inc. are acting as U.S.
representatives, and the international underwriters named below for whom Morgan
Stanley & Co. International Limited, Merrill Lynch International and Salomon
Brothers International Limited are acting as international representatives, have
severally agreed to purchase, and we have agreed to sell to them, severally, the
respective number of shares of common stock set forth opposite the names of such
underwriters below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
- ----------------------------------------------------------------------------------------------------- ----------
<S> <C>
U.S. Underwriters:
Morgan Stanley & Co. Incorporated....................................................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...............................................................................
Salomon Smith Barney Inc.............................................................................
Subtotal............................................................................................. 7,120,000
----------
International Underwriters:
Morgan Stanley & Co. International Limited...........................................................
Merrill Lynch International..........................................................................
Salomon Brothers International Limited...............................................................
Subtotal............................................................................................. 1,780,000
----------
Total.............................................................................................. 8,900,000
----------
----------
</TABLE>
The U.S. underwriters and the international underwriters are collectively
referred to as the underwriters, and the U.S. representatives and the
international representatives are collectively referred to as the
representatives. The underwriters are offering the shares of common stock
subject to their acceptance of the shares from us and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered hereby are
subject to the approval of various legal matters by their counsel and to several
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered hereby, other than those covered by the U.S.
underwriters' over-allotment option described below, if any such shares are
taken.
Under the agreement between U.S. and international underwriters, each U.S.
underwriter has represented and agreed that, with some exceptions:
- it is not purchasing any shares for the account of anyone other than a
United States or Canadian person; and
70
<PAGE>
- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the shares
outside the United States or Canada or to anyone other than a United
States or Canadian person.
Under the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that, with some exceptions:
- it is not purchasing any shares for the account of any United States or
Canadian person; and
- it has not offered or sold, and will not offer or sell, directly or
indirectly, any shares or distribute any prospectus relating to the shares
in the United States or Canada or to any United States or Canadian person.
With respect to any underwriter that is a U.S. underwriter and an
international underwriter, the foregoing representations and agreements made by
it in its capacity as a U.S. underwriter apply only to it in its capacity as a
U.S. underwriter and made by it in its capacity as an international underwriter
apply only to it in its capacity as an international underwriter. The foregoing
limitations do not apply to stabilization transactions or to other transactions
specified in the agreement between U.S. and international underwriters. As used
herein, United States or Canadian person means any national or resident of the
United States or Canada, or any corporation, pension, profit-sharing or other
trust or other entity organized under the laws of the United States or Canada or
of any political subdivision thereof, other than a branch located outside the
United States and Canada of any United States or Canadian person, and includes
any United States or Canadian branch of a person who is otherwise not a United
States or Canadian person.
Under the agreement between U.S. and international underwriters, sales may
be made between the U.S. underwriters and international underwriters of any
number of shares as may be mutually agreed. The per share price of any shares
sold shall be the public offering price set forth on the cover page hereof, in
United States dollars, less an amount not greater than the per share amount of
the concession to dealers set forth below.
Under the agreement between U.S. and international underwriters, each U.S.
underwriter has represented that it has not offered or sold, and has agreed not
to offer or sell, any shares, directly or indirectly, in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and has
represented that any offer or sale of shares in Canada will be made only
pursuant to an exemption from the requirement to file a prospectus in the
province or territory of Canada in which such offer or sale is made. Each U.S.
underwriter has further agreed to send to any dealer who purchases from it any
of the shares a notice stating in substance that, by purchasing such shares,
such dealer represents and agrees that it has not offered or sold, and will not
offer or sell, directly or indirectly, any of such shares in any province or
territory of Canada or to, or for the benefit of, any resident of any province
or territory of Canada in contravention of the securities laws thereof and that
any offer or sale of shares in Canada will be made only pursuant to an exemption
from the requirement to file a prospectus in the province or territory of Canada
in which such offer or sale is made, and that such dealer will deliver to any
other dealer to whom it sells any of such shares a notice containing
substantially the same statement as is contained in this sentence.
Under the agreement between U.S. and international underwriters, each
international underwriter has represented and agreed that:
- it has not offered or sold and, prior to the date six months after the
closing date for the sale of the shares to the international underwriters,
will not offer or sell, any shares to persons in the United Kingdom except
to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments as principal or agent for the
purposes of their businesses or otherwise in circumstances which have not
resulted and will not result in an offer to the
71
<PAGE>
public in the United Kingdom within the meaning of the Public Offers of
Securities Regulations 1995;
- it has complied and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in
relation to the shares in, from or otherwise involving the United Kingdom;
and
- it has only issued or passed on and will only issue or pass on in the
United Kingdom any document received by it in connection with the offering
of the shares to a person who is of a kind described in Article 11(3) of
the Financial Services Act 1986 (Investment Advertisements) (Exemptions)
Order 1996, as amended, or is a person to whom such document may otherwise
lawfully be issued or passed on.
Under the agreement between U.S. and international underwriters, each
international underwriter has further represented that it has not offered or
sold, and has agreed not to offer or sell, directly or indirectly, in Japan or
to or for the account of any resident thereof, any of the shares acquired in
connection with the distribution contemplated hereby, except for offers or sales
to Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law. Each
international underwriter has further agreed to send to any dealer who purchases
from it any of the shares a notice stating in substance that, by purchasing such
shares, such dealer represents and agrees that it has not offered or sold, and
will not offer or sell, any of such shares, directly or indirectly, in Japan or
to or for the account of any resident thereof except for offers or sales to
Japanese international underwriters or dealers and except pursuant to any
exemption from the registration requirements of the Securities and Exchange Law
and otherwise in compliance with applicable provisions of Japanese law, and that
such dealer will send to any other dealer to whom it sells any of such shares a
notice containing substantially the same statement as is contained in this
sentence.
The underwriters initially propose to offer part of the shares of common
stock directly to the public at the public offering price set forth on the cover
page hereof and part to various dealers at a price that represents a concession
not in excess of $ a share under the public offering price. Any
underwriter may allow, and such dealers may reallow, a concession not in excess
of $ a share to other underwriters or to various dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
HarvardNET has granted to the U.S. underwriters an option, exercisable for
30 days from the date of this prospectus, to purchase up to an aggregate of
1,335,000 additional shares of common stock at the public offering price set
forth on the cover page hereof, less underwriting discounts and commissions. The
U.S. underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, made in connection with the offering of the shares of
common stock offered hereby. To the extent such option is exercised, each U.S.
underwriter will become obligated, subject to specified conditions, to purchase
approximately the same percentage of such additional shares of common stock as
the number set forth next to such U.S. underwriter's name in the preceding table
bears to the total number of shares of common stock set forth next to the names
of all U.S. underwriters in the preceding table. If the U.S. underwriters'
option is exercised in full, the total price to the public would be
$143,290,000, the total underwriters' discounts and commissions would be
$10,030,300 and total proceeds to HarvardNET would be $133,259,700.
The underwriters have informed HarvardNET that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares of
common stock offered by them.
At the request of HarvardNET, the underwriters will reserve up to 445,000
shares of common stock to be issued by HarvardNET and offered hereby for sale,
at the initial offering price, to directors,
72
<PAGE>
officers, employees and associates. This directed share program will be
administered by Morgan Stanley & Co. Incorporated. The number of shares of
common stock available for sale to the general public will be reduced to the
extent such persons purchase such reserved shares. Any reserved shares which are
not so purchased will be offered by the underwriters to the general public on
the same basis as the other shares offered hereby.
Affiliates of Morgan Stanley & Co. Incorporated beneficially own more than
10% of the Company's common stock. Under the rules of the National Association
of Securities Dealers, when an NASD member such as Morgan Stanley & Co.
Incorporated distributes securities of a company in which one of its affiliates
owns more than 10% of the Company's common stock, the public offering price of
the securities can be no higher than that recommended by a qualified independent
underwriter under the rules of the National Association Securities Dealers. In
accordance with such requirements, Salomon Smith Barney Inc. has agreed to serve
as a qualified independent underwriter and has conducted due diligence and has
recommended a maximum price for the common stock.
Application has been made for quotation of the common stock on the Nasdaq
National Market under the symbol "HVNT".
Each of HarvardNET and the directors, executive officers and some
stockholders of HarvardNET has agreed that, without the prior written consent of
Morgan Stanley & Co. Incorporated on behalf of the underwriters, it will not,
during the period ending 180 days after the date of this prospectus:
- offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right
or warrant to purchase, lend or otherwise transfer or dispose of, directly
or indirectly, any shares of common stock or any securities convertible
into or exercisable or exchangeable for common stock; or
- enter into any swap or other arrangement that transfers to another, in
whole or in part, any of the economic consequences of ownership of the
common stock,
whether any such transaction described above is to be settled by delivery of
common stock or such other securities, in cash or otherwise.
The restrictions described in the previous paragraph do not apply to:
- the sale of shares to the underwriters;
- the issuance by HarvardNET of shares of common stock upon the exercise of
an option or a warrant or the conversion of a security outstanding on the
date of this prospectus of which the underwriters have been advised in
writing;
- transactions by any person other than HarvardNET relating to shares of
common stock or other securities convertible or exchangeable for shares of
common stock acquired in open market transactions after the completion of
the offering; or
- transfers as bona fide gifts or to any trust for the benefit of the
stockholder or members of the stockholder's immediate family as long as
the stockholder notifies Morgan Stanley & Co. Incorporated prior to any
transfer and the recipient of the shares agrees to these restrictions.
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
common stock. Specifically, the underwriters may over-allot in connection with
the offering, creating a short position in the common stock for their own
account. In addition, to cover over-allotments or to stabilize the price of the
common stock, the underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing shares of
common stock in the offering, if the syndicate repurchases previously
distributed
73
<PAGE>
common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
HarvardNET and the underwriters have agreed to indemnify each other against
various liabilities, including liabilities under the Securities Act.
From time to time, Morgan Stanley & Co. Incorporated has provided, and
continues to provide, investment banking services to HarvardNET for which they
have received customary fees and commissions.
Morgan Stanley Senior Funding, Inc., an affiliate of Morgan Stanley & Co.
Incorporated, entered into a credit agreement establishing HarvardNET's $30.0
million credit facility on May 28, 1999. In connection with the credit
agreement, Morgan Stanley Senior Funding, Inc. received warrants to purchase
765,970 shares of common stock at an exercise price of $3.62 per share and is
entitled to an annual administration fee of $35,000, of which HarvardNET paid
the initial installment on May 28, 1999.
In addition, in connection with the credit agreement, on May 28, 1999,
Morgan Stanley Senior Funding, Inc. purchased 356,294 shares of Series A-2
convertible preferred stock from HarvardNET at a purchase price of $4.21 per
share, and 482,666 shares of common stock held jointly by Barbara Southworth and
William H. Southworth, the Chairman of the Board of Directors of HarvardNET, at
a purchase price of $3.11 per share. The shares of convertible preferred stock
will automatically convert into common stock upon the closing of this offering.
PRICING OF THE OFFERING
Prior to this offering, there has been no public market for the common
stock. The initial public offering price will be determined by negotiations
between HarvardNET and the U.S. representatives. Among the factors to be
considered in determining the initial public offering price will be the future
prospects of HarvardNET and its industry in general, sales, earnings and other
financial and operating information of HarvardNET in recent periods, and the
price-earnings ratios, price-sales ratios, market prices of securities and
financial and operating information of companies engaged in activities similar
to those of HarvardNET. The estimated initial public offering price range set
forth on the cover page of this preliminary prospectus is subject to change as a
result of market conditions and other factors.
74
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by Hale and Dorr LLP, Boston, Massachusetts. Various legal matters
in connection with this offering will be passed upon for the underwriters by
Shearman & Sterling, New York, New York.
EXPERTS
The financial statements of HarvardNET Inc. as of December 31, 1997 and 1998
and for each of the three years in the period ended December 31, 1998 included
in the prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
The financial statements of Internet Northeast as of December 31, 1996 and
October 31, 1997 and for the year ended December 31, 1996 and the ten months
ended October 31, 1997 included in this prospectus have been so included in
reliance on the report of PricewaterhouseCoopers LLP, independent accountants,
given on the authority of said firm as experts in auditing and accounting.
The financial statements of the Network Services Division of Comstor
Corporation as of December 31, 1998 and for the year ended December 31, 1998
included in this prospectus have been so included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
75
<PAGE>
WHERE YOU MAY FIND ADDITIONAL INFORMATION
We have filed with the SEC, a registration statement on Form S-1 under the
Securities Act with respect to the common stock to be sold in this offering.
This prospectus does not contain all of the information set forth in the
registration statement and the exhibits and schedules to the registration
statement. For further information with respect to HarvardNET and the common
stock to be sold in this offering, we refer you to the registration statement
and the exhibits and schedules filed as a part of the registration statement.
Statements contained in this prospectus concerning the contents of any contract
or any other document are not necessarily complete. If a contract or document
has been filed as an exhibit to the registration statement, we refer you to the
copy of the contract or document that has been filed. Each statement in this
prospectus relating to a contract or document filed as an exhibit is qualified
in all respects by the filed exhibit. The registration statement, including
exhibits and schedules thereto, may be inspected without charge at the SEC's
public reference rooms at:
- Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549;
- Seven World Trade Center, 13th Floor, New York, New York 10048; or
- Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661.
Copies of all or any part of the registration statement may be obtained from
such office after payment of fees prescribed by the SEC. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the public reference
rooms. The SEC also maintains a Web site that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the SEC at http://www.sec.gov.
We intend to provide our stockholders with annual reports containing
consolidated financial statements audited by an independent public accounting
firm.
GENERAL INFORMATION
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information that is different
from that contained in this prospectus. We are offering to sell, and seeking
offers to buy, shares of common stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of the common stock.
WE HAVE NOT TAKEN ANY ACTION TO PERMIT A PUBLIC OFFERING OF THE SHARES OF
COMMON STOCK OUTSIDE THE UNITED STATES OR TO PERMIT THE POSSESSION OR
DISTRIBUTION OF THIS PROSPECTUS OUTSIDE THE UNITED STATES. PERSONS OUTSIDE THE
UNITED STATES WHO COME INTO POSSESSION OF THIS PROSPECTUS MUST INFORM THEMSELVES
ABOUT AND OBSERVE ANY RESTRICTIONS RELATING TO THE OFFERING OF THE SHARES OF
COMMON STOCK AND THE DISTRIBUTION OF THIS PROSPECTUS OUTSIDE OF THE UNITED
STATES.
76
<PAGE>
HARVARDNET INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----------
<S> <C>
HarvardNET Inc.--Financial Statements:
Report of Independent Accountants F-2
Balance Sheets as of December 31, 1997 and 1998 (audited), and as of March 31, 1999 (unaudited) and
pro forma as of March 31, 1999 (unaudited)....................................................... F-3
Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 (audited), and for
the three months ended March 31, 1998 and 1999 (unaudited)....................................... F-4
Statements of Stockholders' Equity (Deficit) for the Years Ended December 31, 1996, 1997 and 1998
(audited), and the three months ended March 31, 1999 (unaudited)................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 (audited), and the
three months ended March 31, 1998 and 1999 (unaudited)........................................... F-6
Notes to Financial Statements...................................................................... F-7
Pro Forma Condensed Consolidated Financial Statement (Unaudited):
Pro Forma Condensed Consolidated Statement of Operations for the Year Ended December 31, 1998
(unaudited)...................................................................................... F-20
Internet Northeast--Financial Statements:
Report of Independent Accountants.................................................................. F-22
Balance Sheets as of December 31, 1996 and October 31, 1997........................................ F-23
Statements of Operations for the Year Ended December 31, 1996 and for the ten months ended October
31, 1997......................................................................................... F-24
Statements of Stockholders' Equity for the Year Ended December 31, 1996 and for the ten months
ended October 31, 1997........................................................................... F-25
Statements of Cash Flows for the Year Ended December 31, 1996 and for the ten months ended October
31, 1997......................................................................................... F-26
Notes to Financial Statements...................................................................... F-27
Network Services Division of Comstor Corporation--Financial Statements:
Report of Independent Accountants.................................................................. F-29
Balance Sheet as of December 31, 1998.............................................................. F-30
Statement of Operations and Parent Company Investment for the Year Ended December 31, 1998......... F-31
Statement of Cash Flows for the Year Ended December 31, 1998....................................... F-32
Notes to Financial Statements...................................................................... F-33
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
HarvardNET Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, cash flows and stockholders' equity (deficit) present fairly, in
all material respects, the financial position of HarvardNET Inc. as of December
31, 1997 and 1998, and the results of its operations and its cash flows for each
of the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 10, 1999, except for the
information in the seventh and eighth paragraphs
of Note 16, for which
the date is July 26, 1999
F-2
<PAGE>
HARVARDNET INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31,
----------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1999
--------------------- PRO FORMA
1997 1998 1999 (NOTE 2)
--------- ---------- ---------- ----------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................................... $ 425,564 $5,239,100 $8,975,348 $8,975,348
Accounts receivable, net of allowance for doubtful accounts of
$24,717, $50,000 and $83,489................................ 168,331 175,345 546,397 546,397
Prepaid expenses and other current assets..................... 3,500 228,296 605,058 605,058
--------- ---------- ---------- ----------
Total current assets........................................ 597,395 5,642,741 10,126,803 10,126,803
Property and equipment, net..................................... 228,514 1,056,598 1,704,262 1,704,262
Intangible assets, net.......................................... 3,132,202 2,042,740 3,998,433 3,998,433
Other assets.................................................... -- 111,362 219,452 219,452
--------- ---------- ---------- ----------
Total assets................................................ $3,958,111 $8,853,441 $16,048,950 $16,048,950
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................................. $ 225,714 $ 438,109 $ 328,289 $ 328,289
Deferred revenue.............................................. -- 37,071 53,052 53,052
Accrued expenses.............................................. 60,541 440,157 516,602 516,602
Current portion of note payable............................... 18,474 -- -- --
Current portion of obligations under capital lease............ 35,759 69,840 63,506 63,506
Current portion of note payable to stockholder................ 23,016 21,454 24,007 24,007
--------- ---------- ---------- ----------
Total current liabilities................................... 363,504 1,006,631 985,456 985,456
Obligations under capital leases................................ 35,848 33,228 21,603 21,603
Note payable to stockholder..................................... 61,165 33,366 28,814 28,814
Deferred tax liability.......................................... 789,793 332,293 247,293 247,293
--------- ---------- ---------- ----------
Total liabilities............................................... 1,250,310 1,405,518 1,283,166 1,283,166
Commitments and contingencies
Redeemable convertible Series A preferred stock; $0.01 par
value; 13,749,440 shares authorized, 7,344,299 and 13,749,440
issued and outstanding at December 31, 1998 and March 31,
1999, respectively; none issued and outstanding on a pro forma
basis (liquidation preference $19,119,547 at March 31,
1999)......................................................... -- 9,365,073 18,010,638 --
Stockholders' equity (deficit):
Common stock, $0.01 par value; 34,237,000 shares authorized;
8,654,936 issued and outstanding at December 31, 1997;
8,655,939 issued and 5,278,246 outstanding at December 31,
1998 and March 31, 1999; and 34,237,000 shares authorized
30,976,290 issued and 27,598,597 outstanding on a pro forma
basis....................................................... 86,549 86,559 86,559 309,763
Class B stock, $0.01 par value; 4,486,250 shares authorized,
3,190,664 and 3,976,381 issued and outstanding at December
31, 1998 and March 31, 1999, respectively; none issued and
outstanding on a pro forma basis............................ -- 26,299 28,356 --
Additional paid-in capital.................................... 2,780,518 2,438,630 10,883,304 29,311,895
Accumulated dividends on preferred stock...................... -- 306,969 612,801 --
Deferred compensation......................................... (8,689,669) (8,689,669)
Accumulated deficit........................................... (159,266) (1,419,585) (2,810,183) (2,810,183)
Treasury stock, at cost, 3,377,693 shares..................... -- (3,356,022) (3,356,022) (3,356,022)
--------- ---------- ---------- ----------
Total stockholders' equity (deficit)........................ 2,707,801 (1,917,150) (3,244,854) 14,765,784
--------- ---------- ---------- ----------
Total liabilities, redeemable convertible preferred stock
and stockholders' equity (deficit)........................ $3,958,111 $8,853,441 $16,048,950 $16,048,950
--------- ---------- ---------- ----------
--------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-3
<PAGE>
HARVARDNET INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------------------- ----------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ------------ ------------- ------------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues.................................. $ 720,338 $ 1,381,199 $ 4,282,063 $ 953,698 $ 1,600,103
Operating expenses:
Costs of services....................... 325,142 703,838 1,877,827 419,608 810,834
Selling, general and administrative..... 351,893 671,116 2,814,860 399,197 1,693,203
Depreciation and amortization........... 6,211 187,353 1,339,382 317,531 500,363
Compensation charge for issuance of
stock options......................... -- -- -- -- 90,204
---------- ------------ ------------- ------------- -------------
Total operating expenses.............. 683,246 1,562,307 6,032,069 1,136,336 3,094,604
---------- ------------ ------------- ------------- -------------
Operating income (loss)................... 37,092 (181,108) (1,750,006) (182,638) (1,494,501)
Interest income (expense):
Interest income......................... 201 20 57,075 -- 23,376
Interest expense........................ (1,535) (2,372) (24,888) (2,557) (4,473)
---------- ------------ ------------- ------------- -------------
Income (loss) before taxes................ 35,758 (183,460) (1,717,819) (185,195) (1,475,598)
Benefit (provision) for income taxes...... (8,709) 44,500 457,500 49,322 85,000
---------- ------------ ------------- ------------- -------------
Net income (loss)......................... 27,049 (138,960) (1,260,319) (135,873) (1,390,598)
Dividends and accretion of issuance costs
on preferred stock...................... -- -- (336,026) -- (333,142)
---------- ------------ ------------- ------------- -------------
Net income available (loss attributable)
to common stockholders.................. $ 27,049 $ (138,960) $ (1,596,345) $ (135,873) $ (1,723,740)
---------- ------------ ------------- ------------- -------------
---------- ------------ ------------- ------------- -------------
Net income (loss) per share:
Basic and diluted....................... $ 0.01 $ (0.03) $ (0.21) $ (0.02) $ (0.33)
---------- ------------ ------------- ------------- -------------
---------- ------------ ------------- ------------- -------------
Weighted average number of
shares outstanding:
Basic and diluted....................... 4,064,059 4,839,921 7,526,019 8,654,936 5,278,246
---------- ------------ ------------- ------------- -------------
---------- ------------ ------------- ------------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-4
<PAGE>
HARVARDNET INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1996, 1997, 1998 AND FOR THE THREE MONTHS ENDED
MARCH 31, 1999 (UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK CLASS B STOCK ADDITIONAL DIVIDENDS
---------------------- ---------------------- PAID-IN ON PREFERRED DEFERRED
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK COMPENSATION
--------- ----------- --------- ----------- ---------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996............ 4,064,059 $ 40,641
Net income............................
--------- -----------
Balance at December 31, 1996.......... 4,064,059 40,641
Issuance of common stock.............. 609,609 6,096 $ 369,204
Issuance of common stock for
acquisition of Internet Northeast... 3,981,268 39,812 2,411,314
Net loss..............................
--------- ----------- ----------
Balance at December 31, 1997.......... 8,654,936 86,549 2,780,518
September 1, 1998, redemption of
3,377,693 shares of common stock at
$0.99 per share.....................
Issuance of shares of common stock at
$1.00 per share for consulting
services............................ 1003 10 990
Warrants.............................. 19,447
Issuance of Class B stock, net of
subscription receivable of $5,608... 3,190,664 $ 26,299 (26,299)
Preferred stock dividend.............. (306,969) $ 306,969
Accretion of preferred stock issuance
costs............................... (29,057)
Net loss..............................
--------- ----------- --------- ----------- ---------- ------------ -------------
Balance at December 31, 1998.......... 8,655,939 86,559 3,190,664 26,299 2,438,630 306,969
Issuance of Class B stock, net of
subscription receivable of $5,800... 785,717 2,057 (2,057)
Deferred compensation on grant of
stock options....................... 8,779,873 (8,779,873)
Amortization of deferred
compensation........................ 90,204
Preferred stock dividend.............. (305,832) 305,832
Accretion of preferred stock issuance
costs............................... (27,310)
Net loss..............................
--------- ----------- --------- ----------- ---------- ------------ -------------
Balance at March 31, 1999
(unaudited)......................... 8,655,939 $ 86,559 3,976,381 $ 28,356 $10,883,304 $ 612,801 $(8,689,669)
--------- ----------- --------- ----------- ---------- ------------ -------------
--------- ----------- --------- ----------- ---------- ------------ -------------
<CAPTION>
TREASURY STOCK
----------------------- SHAREHOLDERS'
ACCUMULATED EQUITY
DEFICIT SHARES AMOUNT (DEFICIT)
------------ --------- ---------- -------------
<S> <C> <C> <C> <C>
Balance at January 1, 1996............ $ (47,355) $ (6,714)
Net income............................ 27,049 27,049
------------ -------------
Balance at December 31, 1996.......... (20,306) 20,335
Issuance of common stock.............. 375,300
Issuance of common stock for
acquisition of Internet Northeast... 2,451,126
Net loss.............................. (138,960) (138,960)
------------ -------------
Balance at December 31, 1997.......... (159,266) 2,707,801
September 1, 1998, redemption of
3,377,693 shares of common stock at
$0.99 per share..................... (3,377,693) $(3,356,022) (3,356,022)
Issuance of shares of common stock at
$1.00 per share for consulting
services............................ 1,000
Warrants.............................. 19,447
Issuance of Class B stock, net of
subscription receivable of $5,608... --
Preferred stock dividend.............. --
Accretion of preferred stock issuance
costs............................... (29,057)
Net loss.............................. (1,260,319) (1,260,319)
------------ --------- ---------- -------------
Balance at December 31, 1998.......... (1,419,585) (3,377,693) (3,356,022) (1,917,150)
Issuance of Class B stock, net of
subscription receivable of $5,800... --
Deferred compensation on grant of
stock options.......................
Amortization of deferred
compensation........................ 90,204
Preferred stock dividend..............
Accretion of preferred stock issuance
costs............................... (27,310)
Net loss.............................. (1,390,598) (1,390,598)
------------ --------- ---------- -------------
Balance at March 31, 1999
(unaudited)......................... $(2,810,183) (3,377,693) $(3,356,022) $(3,244,854)
------------ --------- ---------- -------------
------------ --------- ---------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-5
<PAGE>
HARVARDNET INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
FOR THE YEARS ENDED DECEMBER 31, ENDED MARCH 31,
-------------------------------------- --------------------------
<S> <C> <C> <C> <C> <C>
1996 1997 1998 1998 1999
---------- ----------- ------------- ----------- -------------
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss).......................... $ 27,049 $ (138,960) $ (1,260,319) $ (135,873) $ (1,390,598)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Deferred income taxes.................... -- (66,500) (457,500) (49,322) (85,000)
Depreciation and amortization............ 6,211 187,353 1,339,382 317,531 500,363
Provision for bad debt................... -- 24,717 25,283 -- 33,489
Compensation charge for issuance of stock
options................................ -- -- -- -- 90,204
Changes in operating assets and
liabilities, excluding effects of
business combinations:
Accounts receivable.................... (37,143) (140,561) (32,297) (24,905) (181,342)
Prepaid expenses and other current
assets............................... -- (3,500) (224,796) 119 (376,762)
Other assets........................... -- 924 (111,362) -- 9,962
Accounts payable....................... 77,043 60,916 212,395 24,791 (109,820)
Deferred revenue....................... -- -- 37,071 -- 15,981
Accrued expenses....................... 22,456 31,796 379,616 295,161 76,445
---------- ----------- ------------- ----------- -------------
Net cash provided by (used in) operating
activities................................. 95,616 (43,815) (92,527) 427,502 (1,417,078)
---------- ----------- ------------- ----------- -------------
Cash flows from investing activities:
Purchase of the Network Services Division
of Comstor Corporation................... -- -- -- -- (2,822,573)
Purchases of property and equipment........ -- (18,762) (1,009,810) (36,207) (627,398)
---------- ----------- ------------- ----------- -------------
Net cash used in investing activities...... -- (18,762) (1,009,810) (36,207) (3,449,971)
---------- ----------- ------------- ----------- -------------
Cash flows from financing activities:
Payments on capital lease obligations...... (5,789) (28,019) (42,812) -- (17,959)
Payments on note payable................... -- (3,831) (18,474) (4,401) --
Payments on note payable to stockholder.... -- (3,614) (25,076) (5,541) (2,000)
Redemption of common stock for treasury.... -- -- (3,356,022) -- --
Proceeds from issuance of redeemable
convertible Series A preferred stock..... -- -- 9,356,463 -- 8,623,256
Proceeds from issuance of Class B stock.... -- -- 1,794 -- --
Proceeds from issuance of common stock..... -- 375,300 -- -- --
---------- ----------- ------------- ----------- -------------
Net cash provided by (used in) financing
activities................................. (5,789) 339,836 5,915,873 (9,942) 8,603,297
---------- ----------- ------------- ----------- -------------
Net increase in cash and equivalents......... 89,827 277,259 4,813,536 381,353 3,736,248
Cash and cash equivalents, beginning of the
period..................................... 58,478 148,305 425,564 425,564 5,239,100
---------- ----------- ------------- ----------- -------------
Cash and cash equivalents, end of the
period..................................... $ 148,305 $ 425,564 $ 5,239,100 $ 806,917 $ 8,975,348
---------- ----------- ------------- ----------- -------------
---------- ----------- ------------- ----------- -------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-6
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
1. NATURE OF BUSINESS:
HarvardNET Inc. (the "Company") a Delaware corporation, provides high-speed
data networking solutions and Web site hosting services to customers located in
the Northeast and Mid-Atlantic regions of the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
CASH EQUIVALENTS
Cash equivalents consist of short-term investments with remaining maturities
of three months or less at the date of purchase.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated on a straight-line
basis over estimated useful lives of three and ten years. Leasehold improvements
are depreciated over the shorter of related lease terms or the estimated useful
lives. Property and equipment acquired under capital leases is depreciated over
the useful life of the asset. Upon retirement or sale, the costs of the assets
disposed and the related accumulated depreciation are removed from the accounts
and any resulting gain or loss is included in the determination of income.
Repairs and maintenance costs are charged to expense as incurred.
INTANGIBLE ASSETS
Intangible assets consist of the cost of the acquired customer bases,
network leases, peering arrangements and goodwill resulting from business
combinations. Intangible assets are amortized using the straight-line method
over three to five years. The carrying value of the intangible assets is
reviewed on a quarterly and annual basis for the existence of facts or
circumstances both internally and externally that may suggest impairment. To
date, no such impairment has occurred. The Company determines whether an
impairment has occurred based on gross expected future cash flows and measures
the amount of the impairment based on the related future estimated discounted
cash flows. The cash flow estimates used to determine the impairment, if any,
contain management's best estimates, using appropriate and customary assumptions
and projections at that time.
REVENUE RECOGNITION
Revenues are principally generated from the provision of Internet access,
Web site hosting and other related data services. These revenues are recognized
at the time services are provided. Service plans range from one month to one
year. Advance collections relating to future access services are recorded as
deferred revenue and recognized as revenue when earned. Revenues related to
non-recurring installation and activation fees are recorded when the services
are provided. These fees are a result of the one-time events related to the
set-up of a new customer service. In certain situations the Company waives
non-recurring installation and activation fees. The Company expenses the related
direct costs of installation and activation as incurred.
F-7
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
COSTS OF SERVICES
Costs of services principally include costs of data transmission and
Internet access, exclusive of depreciation and amortization.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 ("SFAS 109"), "Accounting for Income Taxes". SFAS
109 is an asset and liability approach that requires the recognition of deferred
tax assets and liabilities for the expected future tax consequences of events
that have been recognized in the Company's financial statements or tax returns.
In estimating future tax consequences, SFAS 109 generally considers all expected
future events other than enactment of changes in the tax law or rates. Valuation
allowances are provided if, based upon the weight of available evidence, it is
more likely than not that some or all of the deferred tax assets will not be
realized.
STOCK-BASED COMPENSATION
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation" encourages but does not require companies to record
compensation cost for stock-based employee compensation at fair value. The
Company has chosen to account for stock-based compensation granted to employees
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
interpretations. Accordingly, compensation cost for stock options granted to
employees is measured as the excess, if any, of the fair value of the Company's
stock at the date of the grant over the amount that must be paid to acquire the
stock. Compensation cost to non-employees is measured using the fair value
method prescribed by SFAS No. 123.
USE OF ESTIMATES
The presentation 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 amount of revenues and expenses during the reporting
period. Actual results could differ from those estimates. Significant estimates
in these financial statements include valuation of acquired assets and
liabilities, deferred tax assets, net realizable values and useful lives of
intangible assets.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to
concentrations of credit risk consist primarily of cash, cash equivalents and
accounts receivable. At December 31, 1998, March 31, 1999 and periodically
throughout the period, the Company had cash balances at certain financial
institutions in excess of federally insured limits. However, the Company does
not believe that it is subject to any unusual credit risk beyond the normal
credit risk associated with commercial banking relationships. The
F-8
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Company believes that concentration of credit risk with respect to accounts
receivable is limited due to the Company's broad customer base.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments and hedging activities. It requires that an entity recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The Company, to date, has
not engaged in derivative and hedging activities, and accordingly does not
believe that the adoption of SFAS No. 133 will have a material impact on the
financial reporting and related disclosures of the Company. The Company will
adopt SFAS No. 133 as required for its first quarterly filing of fiscal year
2000.
On January 1, 1999, the Company adopted the provisions of Statement of
Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use." Accordingly, the Company capitalizes costs
associated with the design and implementation of their operating systems,
including internally and externally developed software. Capitalized external
software include actual costs of purchasing existing software from vendors.
Capitalized internal software generally include costs of personnel incurred in
the enhancement and implementation of purchased software packages. To date,
internal costs eligible for capitalization under SOP 98-1 have been immaterial.
INTERIM FINANCIAL INFORMATION
The consolidated financial statements of the Company as of March 31, 1999
and for the three months ended March 31, 1998 and 1999 are unaudited. All
adjustments (consisting only of normal recurring adjustments) have been made,
which in the opinion of management, are necessary for a fair presentation.
Results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999 or for any other future period.
PRO FORMA BALANCE SHEET (UNAUDITED)
Upon the closing of the Company's initial public offering, all of the
outstanding shares of redeemable convertible preferred stock and Class B stock
will automatically convert into approximately 22,320,351 shares of HarvardNET
Inc. common stock assuming an offering price of $14.00. The unaudited pro forma
presentation of the balance sheet has been prepared assuming the conversion of
the redeemable convertible preferred stock and Class B stock into common stock
at March 31, 1999.
3. NET INCOME (LOSS) PER SHARE AND PRO FORMA INCOME (LOSS) PER SHARE:
Basic income (loss) per share is computed using the weighted average number
of common shares outstanding during the period. Dilutive income (loss) per share
is computed using the weighted average number of common shares outstanding
during the period, plus the dilutive effect of common stock equivalents. Common
stock equivalent shares consist of preferred stock, stock options and warrants.
During the years ended December 31, 1997 and 1998 and the three-month period
ended March 31,
F-9
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
3. NET INCOME (LOSS) PER SHARE AND PRO FORMA INCOME (LOSS) PER SHARE:
(CONTINUED)
1999, options to purchase 406,406, 406,406 and 1,163,052 shares of common stock,
respectively, preferred stock convertible into 0, 9,949,221 and 18,626,173
shares of common stock, respectively, and warrants to purchase 0, 93,121 and
93,121 shares of common stock, respectively, were excluded from the calculation
of earnings per share since their inclusion would be antidilutive. Pro forma
basic and diluted income (loss) per share have been calculated assuming the
conversion of all outstanding shares of preferred stock and Class B stock into
common stock, as if the shares had converted immediately upon their issuance.
Accordingly, net income (loss) has not been adjusted for the accrued dividends
for preferred stock in the calculation of pro forma income (loss) per share.
The following is a calculation of pro forma net loss per share (unaudited):
<TABLE>
<CAPTION>
FOR THE THREE
YEAR ENDED MONTHS ENDED
DECEMBER 1998 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
Basic and diluted:
Net loss.......................................................................... $ (1,260,319) $ (1,390,598)
Weighted average number of common stock outstanding............................... 7,526,019 5,278,246
Weighted average assumed number of common shares upon conversion of preferred
stock and Class B stock......................................................... 4,946,579 22,320,351
-------------- --------------
Total weighted average number of shares used in computing pro forma net loss per
share........................................................................... 12,472,598 27,598,597
Basic and diluted pro forma net loss per common share............................. $ (0.10) $ (0.05)
-------------- --------------
-------------- --------------
</TABLE>
4. ACQUISITIONS:
On November 12, 1997, the Company acquired all of the common stock of
Internet Northeast in exchange for 3,981,268 shares of common stock of the
Company. The transaction was accounted for using the purchase method. The
purchase price was estimated to be approximately $2,450,000 based on the value
at which the Company's common stock had recently been sold to third party
investors. The fair value of the net tangible assets acquired approximated
$39,000, which consisted primarily of computer, network and communications
equipment. The remaining purchase price was allocated to the acquired customer
base, which is being amortized over three years, the estimated life of the
customer base. No patents, material non-competition agreements, or operating
know-how was acquired. No value was ascribed to the employee base. A total of
approximately $856,000 was recorded for goodwill associated with the tax effect
of the transaction. The goodwill is being amortized over three years.
On January 11, 1999, the Company acquired certain assets of the Internet
service provider business of Comstor Corporation ("Network Services Division of
Comstor Corporation") for approximately $2,823,000 in cash. This transaction was
accounted for using the purchase method. The fair value of the net tangible
assets acquired, consisting primarily of computer, network and communications
equipment, approximated $498,000. The remaining purchase price was allocated to
the acquired network, peering arrangements and the customer base, which are each
being amortized over five years. No patents, non-competition agreements or other
operating know-how was acquired. No value was ascribed to the employee base. A
total of approximately $775,000 was recorded for goodwill associated with the
tax effect of the transaction. The goodwill is being amortized over five years.
F-10
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
The results of operations for Internet Northeast are included in the
Company's statements of operations from November 12, 1997, the effective
acquisition dates. The results of operations of the Network Services Division of
Comstor Corporation are included in the Company's statements of operations from
January 11, 1999, the date of acquisition.
The following unaudited pro forma combined historical results present
HarvardNET and Internet Northeast as if the acquisition had occurred at the
beginning of 1997, and HarvardNET and the Network Services Division of Comstor
Corporation as if the acquisition had occurred at the beginning of 1998. The pro
forma results include amortization of intangibles and goodwill resulting from
the acquisitions, and assumed taxes. The unaudited pro forma combined historical
results are not necessarily indicative of the results of operations that would
actually have occurred if the transactions had been consummated as of January 1,
and is not intended to indicate the expected results for any future period.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1997 1998
------------- -------------
<S> <C> <C>
Revenues............................................................................ $ 2,641,026 $ 5,293,292
Net loss............................................................................ (1,142,098) (2,342,432)
Net loss per share-basic and diluted................................................ $ (0.24) $ (0.31)
</TABLE>
5. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ MARCH 31, DEPRECIABLE
1997 1998 1999 LIVES
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Computer and networking equipment...... $ 384,527 $ 1,400,611 $ 1,979,740 3 years
Software............................... 5,003 52,883 96,717 3 years
Furniture and fixtures................. 2,729 16,769 97,655 10 years
Leasehold improvements................. 8,294 8,294 83,309 lease term
---------- ------------ ------------
400,553 1,478,557 2,257,421
Accumulated depreciation and
amortization......................... (172,039) (421,959) (553,159)
---------- ------------ ------------
Property and equipment, net............ $ 228,514 $ 1,056,598 $ 1,704,262
---------- ------------ ------------
---------- ------------ ------------
</TABLE>
Equipment under capital leases included above at:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- MARCH 31, DEPRECIABLE
1997 1998 1999 LIVES
--------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
(UNAUDITED)
Computer and networking equipment........... $ 99,626 $ 210,832 $ 210,832 3 years
Less accumulated amortization............... (28,019) (107,764) (124,599)
--------- ---------- -----------
$ 71,607 $ 103,068 $ 86,233
--------- ---------- -----------
--------- ---------- -----------
</TABLE>
F-11
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
5. PROPERTY AND EQUIPMENT: (CONTINUED)
Depreciation and amortization expense for the years ended December 31, 1996,
1997 and 1998 was $6,211, $98,475, $249,920, respectively, and for the three
months ended March 31, 1998 and 1999 was $43,628, and $131,200, respectively.
6. INTANGIBLE ASSETS:
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------- MARCH 31, USEFUL
1997 1998 1999 LIVES
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Acquired customer base.............. $ 2,412,092 $ 2,412,092 $ 3,187,044 3 to 5 years
Peering arrangements................ -- -- 774,952 5 years
Goodwill............................ 856,293 856,293 1,631,245 3 to 5 years
Less accumulated amortization....... (136,183) (1,225,645) (1,594,808)
------------ ------------ ------------
Intangible assets, net.............. $ 3,132,202 $ 2,042,740 $ 3,998,433
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
7. ACCRUED EXPENSES:
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31 MARCH 31
--------------------- ----------
1997 1998 1999
--------- ---------- ----------
<S> <C> <C> <C>
Telecommunication charges.................................. $ 28,000 $ 20,771 $ 180,555
Sales tax.................................................. 31,804 50,000 51,797
Wages, salaries, commissions and related taxes............. 737 39,073 111,750
Professional fees.......................................... -- 199,066 85,000
Other accrued expenses..................................... -- 131,247 87,500
--------- ---------- ----------
$ 60,541 $ 440,157 $ 516,602
--------- ---------- ----------
--------- ---------- ----------
</TABLE>
8. NOTES PAYABLE:
In 1997, the Company assumed a 1995 term loan agreement between Internet
Northeast and a bank for $50,000 at an interest rate of 10.5% to be repaid over
three years. At December 31, 1997, the balance outstanding on the loan was
$18,474. This loan was repaid during 1998.
In 1997, the Company assumed a term loan between Internet Northeast and a
stockholder of the Company for $100,000 at an interest rate of 10% to be repaid
over four years. The balance outstanding on this loan at December 31, 1997, 1998
and March 31, 1999 was $84,181, $54,820 and $52,821, respectively.
F-12
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
9. COMMITMENTS:
LEASES
The Company leases its facilities and certain equipment under operating and
capital leases. The leases expire at various dates through September 30, 2000
and generally require the payment of real estate taxes, insurance, maintenance,
and operating costs. The minimum aggregate future obligations under
noncancelable leases are as follows:
<TABLE>
<CAPTION>
OPERATING CAPITAL
YEAR ENDING DECEMBER 31, LEASES LEASES
- ------------------------------------------------------------------------ ----------- ---------
<S> <C> <C>
1999.................................................................... $ 46,055 $ 77,349
2000.................................................................... 6,250 34,955
----------- ---------
Total................................................................... $ 52,305 112,304
-----------
-----------
Less interest........................................................... (9,236)
---------
Total principal obligation.............................................. 103,068
Less: current portion................................................... (69,840)
---------
Noncurrent portion of principal obligation.............................. $ 33,228
---------
---------
</TABLE>
10. REDEEMABLE CONVERTIBLE SERIES A PREFERRED STOCK:
During 1998, the Company issued 7,344,299 shares of redeemable convertible
Series A Preferred Stock ("Series A Preferred Stock") to private investors for
$9,356,463, net of issuance costs of $525,366. On March 23, 1999, the Company
issued 6,405,141 shares of Series A Preferred Stock to private investors for
$8,621,320.
The Series A Preferred stockholders are entitled to votes equaling the
number of shares of common stock into which each share may be converted. The
amended Certificate of Incorporation, which includes a redemption agreement,
provides that the Company shall redeem, at the request of any holder or holders
of issued and outstanding Series A Preferred Stock on or after September 1,
2003, all of the outstanding shares of Series A Preferred Stock held by such
requesting holder or holders.
The amended Certificate of Incorporation provides that, at any time, a
Series A Preferred stockholder shall be entitled to voluntarily convert all
shares into a number of shares of Common Stock on a 1.3546862-for-one basis,
subject to anti-dilution adjustment. Furthermore, each share of Series A
Preferred Stock shall automatically be converted into common stock immediately
upon the conversion of 60% or more of the outstanding Series A Preferred Stock
or upon an initial public offering of the Company's common stock at a minimum
offering price of $3.97 per share which results in gross proceeds of at least
$20,000,000 on a 1.3546862-for-one basis, subject to anti-dilution adjustment.
In the case of the sale of the Company, the Series A Preferred Stock converts
into a number of shares of common stock on a 1.3546862-for-one basis, subject to
anti-dilution adjustment.
The Series A Preferred stockholders have preference upon liquidation over
common and Class B stockholders and are entitled to participate ratably in any
dividends paid to holders of common stock based on the conversion rate in effect
at the time.
F-13
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
11. STOCKHOLDERS' EQUITY:
STOCK SPLITS
On November 7, 1997, the Company effected a 100-for-1 stock split through a
stock dividend of common stock. On November 11, 1998, the Company effected a
10-for-1 stock split through a stock dividend of Series A Preferred Stock, Class
B Stock and Common Stock. In July 1999, the Board of Directors of the Company
declared a 1.3546862-for-1 stock split to be effected through a stock dividend
of its Class B Stock and Common Stock. All references to preferred, Class B
Stock and Common Stock share and per share amounts including options and
warrants to purchase common stock have been retroactively restated to reflect
the stock splits.
COMMON STOCK
The common stockholders are entitled to one vote per share. At December 31,
1998 and March 31, 1999, the Company had reserved 13,639,412 and 23,095,381,
shares of common stock, respectively, for future issuance upon conversion of
Series A Preferred Stock and Class B Stock and the exercise of warrants and
stock options.
On December 7, 1998, the Company issued 1,003 shares of common stock to one
entity in connection with the provision of $1,000 of consulting services to the
Company.
CLASS B STOCK
During 1998, the Company issued 3,190,664 shares of Class B Stock to two
officers of the Company for $7,402, $5,608 of which was received in the form of
a subscription receivable. During January 1999, the Company issued 785,717
shares of Class B stock to two other officers of the Company for a subscription
receivable of $5,800. All subscription receivables were paid by the officers in
May 1999.
The holders of Class B Stock are entitled to one vote for each share held.
Dividends, distributions in liquidation or other distributions are payable to
the extent that payments made to common and preferred stockholders exceed
$24,144,164 plus any accumulated but unpaid Series A Preferred stock dividends.
The Class B Stock is convertible at any time at the discretion of the holder
into one share of common stock for an exercise price of $0.99 per share. The
Class B stock automatically converts into common stock upon the consummation of
an initial public offering of the Company's common stock at a minimum offering
price per share of $3.97 which results in gross proceeds of $20,000,000. Upon
automatic conversion, the Class B Stock converts at a rate calculated by
dividing the difference between the offering price and the Class B Stock
conversion price of $0.99 by the offering price. The outstanding Class B stock
is subject to repurchase by the Company on terms set forth in each holder's
employment agreement with the Company.
WARRANTS
On September 1, 1998, the Company issued warrants in conjunction with the
preferred stock financing for the purchase of 93,121 shares of its common stock
at a purchase price of $0.99 per share. The warrants were exercisable upon
issuance and expire on September 1, 2003. The Company estimated the value of the
warrants to be $19,447 at the date of issuance.
F-14
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
11. STOCKHOLDERS' EQUITY: (CONTINUED)
STOCK OPTIONS
1997 STOCK INCENTIVE PLAN
In November 1997, the Board of Directors adopted the 1997 Stock Incentive
Plan (the "1997 Plan") for the issuance of incentive and nonqualified stock
options. The number of shares of common stock authorized for issuance under the
1997 Plan is 406,406 shares. Options to purchase common stock are granted at the
discretion of the Board of Directors.
Under the terms of the 1997 Plan, the exercise price of incentive stock
options granted must not be less than 100% (110% in certain cases) of the fair
market value of the common stock on the date of grant, as determined by the
Board of Directors. The exercise price of nonqualified stock options may be less
than the fair market value of the common stock on the date of grant, as
determined by the Board of Directors but in no case may the exercise price be
less than the statutory minimum. Vesting of options granted is at the discretion
of the Board of Directors.
1999 STOCK INCENTIVE PLAN
In January 1999, the Board of Directors adopted the 1999 Stock Incentive
Plan (the "1999 Plan") for the issuance of incentive and nonqualified stock
options. Awards may be made under the 1999 Plan for up to 5,419,000 shares of
common stock. Options to purchase common stock are granted at the discretion of
the Board of Directors. In March 1999, options to purchase an aggregate of
756,646 shares of common stock which vest over a four year period were granted
to employees with an exercise price of $1.00 per share. At the date of grant,
the Company recorded deferred compensation of $8,780,000, which will be charged
ratably to income over the four year vesting period. These options remained
unexercised at March 31, 1999.
At December 31, 1998 and March 31, 1999, 406,406 and 1,343,104 shares,
respectively, were available for grant under the 1997 and 1999 plans.
A summary of activity under the Company's 1997 and 1999 plans for the years
ended December 31, 1997 and 1998, and the three months ended March 31, 1999 is
presented below:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
EXERCISE
SHARES PRICE
---------- -----------
<S> <C> <C>
Outstanding at January 1, 1997........................................ -- --
Granted............................................................... 406,406 $ 0.62
----------
Outstanding at December 31, 1997...................................... 406,406 $ 0.62
No activity........................................................... -- --
----------
Outstanding at December 31, 1998...................................... 406,406 $ 0.62
Granted............................................................... 756,646 $ 1.00
----------
Outstanding at March 31, 1999......................................... 1,163,052 $ 0.87
----------
----------
Options exercisable at March 31, 1999................................. 406,406 $ 0.62
----------
----------
</TABLE>
F-15
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
11. STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes information about stock options outstanding
at March 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
REMAINING
EXERCISE CONTRACTUAL SHARES
PRICE SHARES LIFE (YEARS) EXERCISABLE
- ------------- ---------- --------------- -----------
<S> <C> <C> <C>
$0.62 406,406 8.4 406,406
$1.00 756,646 9.8 --
---------- -----------
1,163,052 9.3 406,406
---------- -----------
---------- -----------
</TABLE>
The fair value of the options granted in 1997 and the three months ended
March 31, 1999 is estimated to be $0.17 and $11.77 per share, respectively. The
fair value of the option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions: risk free
rate of 5.8% and 4.6%; no expected dividend; an expected life of 4 years; and no
volatility. Had the Company accounted for stock options to employees under the
fair value method prescribed under SFAS No. 123, net losses as reported for the
year ended December 31, 1997 and for the three months ended March 31, 1999 would
have increased $50,250 to $189,210 and $25,000 to 1,415,598, respectively. Pro
forma net loss per share (basic and diluted) reported for the year ended
December 31, 1997 and March 31, 1999 would have increased $0.01 to $0.04 and
remain unchanged at $0.33, respectively.
12. INCOME TAXES:
The provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
1996 1997 1998 1999
--------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
(UNAUDITED)
Current
Federal....................................................... $ 6,000 $ 15,000 -- --
State......................................................... 2,709 7,000 -- --
--------- ---------- ----------- -------------
8,709 22,000 -- --
Deferred
Federal....................................................... -- (62,500) $ (428,500) $ (80,000)
State......................................................... -- (4,000) (29,000) (5,000)
--------- ---------- ----------- -------------
-- (66,500) (457,500) (85,000)
--------- ---------- ----------- -------------
Total provision (benefit)....................................... $ 8,709 $ (44,500) $ (457,500) $ (85,000)
--------- ---------- ----------- -------------
--------- ---------- ----------- -------------
</TABLE>
F-16
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
12. INCOME TAXES: (CONTINUED)
The Company's effective tax rate varies from the statutory rate as follows:
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH
1996 1997 1998 1999
--------- --------- --------- ---------------
<S> <C> <C> <C> <C>
(UNAUDITED)
U.S. Federal income tax rate.................... 34.0% (34.0)% (34.0)% (34.0 )%
Benefit of graduated U.S. Federal income tax
rate.......................................... (19.4)% (10.2)% 1.5% --
State income tax rate........................... 4.7% 1.0% (1.1)% (1.4 )%
Nondeductible acquisition expenses.............. -- 13.0% -- --
Nondeductible intangible amortization........... -- 6.5% 5.6% 1.4%
Valuation allowance............................. -- -- -- 29.3%
Other........................................... 5.1% (0.6)% 1.4% (1.4 )%
--------- --------- --------- -----
24.4% (24.3)% (26.6)% (6.1 )%
--------- --------- --------- -----
--------- --------- --------- -----
</TABLE>
The components of the net deferred tax liability are as follows:
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
Deferred Tax Assets
Net operating loss carryforwards.................................. -- $ 100,000
Accounts receivable reserve....................................... $ 9,000 18,000
Accrued expenses.................................................. 6,000 62,000
Depreciation...................................................... 16,000 23,000
----------- -----------
31,000 203,000
Deferred Tax Liability
Intangible assets................................................. (821,000) (535,000)
----------- -----------
Net deferred tax liability........................................ $ (790,000) $ (332,000)
----------- -----------
----------- -----------
</TABLE>
As of December 31, 1998, the Company had federal net operating loss
carryforwards of approximately $280,000 which begin to expire in 2018.
Ownership changes resulting from the Company's issuance of capital stock may
limit the amount of net operating loss carryforwards that can be utilized
annually to offset future taxable income. The amount of the annual limitation is
determined based upon the Company's value immediately prior to ownership change.
Subsequent significant changes in ownership could further affect the limitation
in the future.
13. EMPLOYEE BENEFIT PLAN:
In May 1998, the Company established a savings plan for its employees which
is designed to be qualified under Section 401(k) of the Internal Revenue Code.
Eligible employees are permitted to contribute to the 401(k) plan through
payroll deductions within statutory and plan limits. The Company has not
contributed to the savings plan to date.
F-17
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
14. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The following is the supplemental cash flow information for all periods
presented:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------
<S> <C> <C> <C>
1996 1997 1998
--------- --------- ----------
Cash paid during the period for interest.................... $ 1,535 $ 2,372 24,888
Cash paid during the period for income taxes................ $ 18,384 -- --
Noncash financing and investing activities:
Issuance of Class B stock in exchange for promissory
notes................................................... -- -- $ 5,608
Acquisition of equipment through capital lease............ $ 75,809 $ 23,817 $ 111,206
</TABLE>
15. SEGMENT REPORTING:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131
"Disclosures about Segments of an Enterprise and Related Information", which
requires certain information to be reported about operating segments consistent
with management's internal view of the Company.
The Company has a single operating segment, Internet access services. The
Company has no organizational structure dictated by product lines, geography or
customer type.
Sales are derived from one service line, Internet access service, and are
provided to residential and business customers in Maine, New Hampshire and
Massachusetts. The Company evaluates performance based on profit or loss from
operations before interest, income taxes, depreciation and amortization.
16. SUBSEQUENT EVENT:
On May 28, 1999, the Company entered into a credit facility with Morgan
Stanley Senior Funding, Inc. ("Morgan Stanley"). Newcourt Commercial Financial
Corporation ("Newcourt") is a co-arranger under the credit facility. The credit
facility provides for maximum borrowings of $30.0 million and has a term of five
years. The Company issued warrants to purchase an aggregate of 765,970 shares of
the Company's common stock for $3.62 per share. The warrants are exercisable
immediately and expire on May 28, 2004. The fair value of the warrants on the
date of grant was approximately $7,171,000. The fair value was determined using
the Black Scholes derivative valuation model with the following assumptions:
expected life of 2 years, volatility of 50%, risk free rate of return of 4.91%
and no dividend rate. Deferred debt issuance costs of approximately $4,398,000
were recorded upon issuance and will be charged to interest expense over the
term of the credit facility using the effective interest method.
On May 28, 1999, Morgan Stanley purchased 356,294 shares of Series A-2
redeemable convertible preferred stock for $1,500,000 from the Company and
purchased 482,666 shares of common stock of the Company from the Chairman of the
Board of Directors and his spouse for $1,500,000. A dividend of approximately
$4,582,000 was recorded upon the issuance of the Series A-2 preferred stock to
reflect the difference between the issuance price and the fair value per share.
On May 28, 1999, the Company amended its Certificate of Incorporation to
increase the number of shares of authorized preferred stock to an aggregate of
14,105,734 shares of Series A Preferred Stock. The Company's Series A Preferred
Stock was further subdivided into 13,749,440 shares of Series
F-18
<PAGE>
HARVARDNET INC.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(THE INFORMATION PRESENTED RELATING TO THE THREE MONTHS ENDED MARCH 31, 1998 AND
1999 IS UNAUDITED)
16. SUBSEQUENT EVENT: (CONTINUED)
A-1 preferred stock and 356,294 shares of Series A-2 preferred stock. All shares
of Series A Preferred Stock then issued were designated as shares of Series A-1
preferred stock. Series A-2 preferred stock is identical to Series A-1 preferred
stock, except that the dividend rate, the liquidation preference, the redemption
price and the conversion price is different for the Series A-1 preferred stock
and the Series A-2 preferred stock. Both the Series A-1 and A-2 preferred stock
converts into common stock on a 1.3546862-for-one basis, subject to
anti-dilution adjustments.
For the period from April 1, 1999 through June 10, 1999 (unaudited), the
Company granted options for the purchase of 282,043 shares of common stock to
employees at exercise prices ranging from $1.00 to $2.21 per share. The Company
recorded deferred compensation of approximately $3,037,000 relating to these
grants which will be recognized as compensation charges for issuance of stock
options over the four-year vesting period.
For the period from April 1, 1999 through June 10, 1999 (unaudited), the
Company canceled options for the purchase of 29,126 shares of common stock
previously issued to employees at exercise prices, in each case, of $1.00 per
share.
In June 1999 (unaudited), the Board of Directors of the Company adopted the
1999 Employee Stock Purchase Plan. This plan is effective upon the closing of
the anticipated initial public offering and allows eligible employees to
purchase shares of Common Stock at a price equal to the lower of 85% of the
average market price on the beginning or ending of each offering period. This
plan terminates on February 29, 2000.
On July 26, 1999, the stockholders approved an amendment to the Company's
certificate of incorporation increasing the common shares authorized for
issuance to 34,237,000. The Board of Directors authorized a 1.3546862-for-1
stock split, which will be effected through a stock dividend of Class B and
Common Stock (see Note 11). All references to Common Stock and Class B shares,
per share, option and warrant information relating to the Company's stock
including the accompanying financial statements have been retroactively restated
to reflect the stock split.
In July 26, 1999, the Company decreased the number of shares of Common Stock
under the 1997 Stock Incentive Plan to 406,406. Additionally, on July 26, 1999,
the Company increased the number of shares of Common Stock under the 1999 Stock
Incentive Plan to 5,419,000. The information in these financial statements has
been restated to reflect the increases in Common Stock issuable under the
certificate of incorporation and the changes to the 1997 and 1999 Stock
Incentive Plan.
F-19
<PAGE>
HARVARDNET INC.
PROFORMA CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
(UNAUDITED)
On January 11, 1999, the Company acquired certain assets of the Internet
service provider business of Comstor Corporation ("Network Services Division of
Comstor Corporation") for approximately $2,823,000 in cash. This transaction was
accounted for using the purchase method. The fair value of the net tangible
assets acquired, consisting primarily of computer, network and communications
equipment, approximated $498,000. The remaining purchase price was allocated to
the acquired network leases and peering arrangements and customer base which are
each being amortized over five years. No patents, non-competition agreements or
other operating know-how was acquired. No value was ascribed to the employee
base.
The results of operations of the Network Services Division of Comstor
Corporation are included in the Company's statement of operations from January
11, 1999, the date of acquisition. A pro forma statement of operations for the
three months ended March 31, 1999 has not been presented as it would not be
materially different from unaudited statement of operations of HarvardNET Inc.
for the three months ended March 31, 1999.
The following unaudited pro forma condensed statement of operations for the
year ended December 31, 1998 present HarvardNET Inc. and the Network Services
Division of Comstor Corporation assuming that the acquisition had occurred at
the beginning of 1998. The unaudited pro forma condensed statement of operations
is not necessarily indicative of the results of operations that would actually
have occurred if the transactions had been consummated as of January 1, and is
not intended to indicate the expected results for any future period. This
statement should be read in conjunction with the historical financial statements
and related notes of the Company and certain acquired businesses, included
herewith.
F-20
<PAGE>
HARVARDNET INC.
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31,
<TABLE>
<CAPTION>
1998
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NETWORK SERVICES
DIVISION
HARVARDNET INC. OF COMSTOR CORPORATION ADJUSTMENTS TOTAL PRO FORMA(D)
--------------- ----------------------- ----------- ---------- -------------
Revenue................... $ 4,282,063 $ 1,390,229 $(379,000)(B) $5,293,292 $ 5,293,292
Operating expenses:
Costs of revenues....... 1,877,827 1,491,229 (367,000)(B) 3,002,056 3,002,056
Selling, general and
administrative.......... 2,814,860 300,482 3,115,342 3,115,342
Depreciation and
amortization............ 1,339,382 30,383 465,000(A) 1,834,765 1,834,765
--------------- ----------- ----------- ---------- -------------
Total operating
expenses.............. 6,032,069 1,822,094 98,000 7,952,163 7,952,163
--------------- ----------- ----------- ---------- -------------
Operating income (loss)... (1,750,006) (431,865) (477,000) (2,658,871) (2,658,871)
Interest income (expense),
net..................... 32,187 (16,612) -- 15,575 15,575
Benefit from income
taxes................... 457,500 -- 179,390(C) 636,890 636,890
--------------- ----------- ----------- ---------- -------------
Net income (loss)......... (1,260,319) (448,477) (297,610) (2,006,406) (2,006,406)
Preferred stock
dividends............... (336,026) -- -- (336,026) --
--------------- ----------- ----------- ---------- -------------
Net income (loss)
applicable to common
stockholders............ $(1,596,345) $ (448,477) $(297,610) $(2,342,432) $(2,006,406)
--------------- ----------- ----------- ---------- -------------
--------------- ----------- ----------- ---------- -------------
Basic and diluted earnings
per share............... $ (0.31) $ (0.10)
---------- -------------
---------- -------------
Weighted average number of
shares outstanding:
Basic and diluted......... 7,526,019 20,439,463
---------- -------------
---------- -------------
</TABLE>
Notes
A. Acquired customer base, network leases, peering arrangements and goodwill
were a result of the acquisition in 1999, which are amortized over a five
year period. Additional amortization expense of approximately $465,000 for
1998, would have been recorded if this acquisition had occurred at the
beginning of such period. Total amounts that would have been recorded as
acquired customer base, network leases, peering arrangements and goodwill
was $2,325,000 at January 1, 1998.
B. Intercompany transactions between HarvardNET and the Network Services
Division of Comstor Corporation are eliminated for this pro forma financial
statement.
C. Adjustment for Federal and state income taxes assuming an effective income
tax rate of 40%.
D. The pro forma presentation has been prepared assuming the conversion of
HarvardNET's redeemable convertible preferred stock and Class B stock into
common stock as of January 1, 1998. Accordingly, the pro forma presentation
excludes the effect of the accrual of preferred stock dividends.
F-21
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholders of
HarvardNET Inc.:
In our opinion, the accompanying balance sheets and the related statements
of operations, stockholders' equity and cash flows, present fairly, in all
material respects, the financial position of Internet Northeast at December 31,
1996 and October 31, 1997, and the results of its operations and its cash flows
for the year ended December 31, 1996 and for the ten months ended October 31,
1997, in conformity with generally accepted accounting principles. 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 of these financial statements in accordance
with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 10, 1999
F-22
<PAGE>
INTERNET NORTHEAST
BALANCE SHEETS
<TABLE>
<CAPTION>
OCTOBER 31,
DECEMBER 31, 1996 1997
----------------- ---------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Accounts receivable........................................................ $ 12,560 $ --
Prepaid expenses -- 13,000
-------- ---------------
Total current assets..................................................... 12,560 13,000
Property and equipment, net.................................................. 188,829 175,161
Other assets................................................................. 2,228 2,745
-------- ---------------
Total assets............................................................. $ 203,617 $ 190,906
-------- ---------------
-------- ---------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable........................................................... 49,381 --
Accrued expenses........................................................... 686 20,312
Cash overdraft............................................................. 37,572 21,461
Current portion of note payable............................................ 12,808 22,305
Current portion of stockholder note payable................................ -- 26,629
-------- ---------------
Total current liabilities................................................ 100,447 90,707
Commitments and contingencies (Note 3)
Note payable................................................................. 22,305 --
Stockholder note payable..................................................... -- 61,165
-------- ---------------
Total liabilities........................................................ 122,752 151,872
Stockholders' equity:
Common stock, no par; 3,000 shares authorized; 3,000 shares issued and
outstanding................................................................ 16,831 16,831
Retained earnings............................................................ 64,034 22,203
-------- ---------------
Total stockholders' equity............................................... 80,865 39,034
-------- ---------------
Total liabilities and stockholders' equity............................... $ 203,617 $ 190,906
-------- ---------------
-------- ---------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-23
<PAGE>
INTERNET NORTHEAST
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, 1996 OCTOBER 31, 1997
----------------- -----------------
<S> <C> <C>
Revenues.................................................................... $ 737,366 $ 1,259,827
Operating expenses:
Costs of revenues......................................................... 215,557 370,688
Selling, general and administrative....................................... 358,844 818,835
Depreciation and amortization............................................. 52,414 105,303
-------- -----------------
Total operating expenses.............................................. 626,815 1,294,826
-------- -----------------
Operating income (loss)..................................................... 110,551 (34,999)
Interest expense............................................................ (5,125) (5,836)
-------- -----------------
Net income (loss)........................................................... $ 105,426 $ (40,835)
-------- -----------------
-------- -----------------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-24
<PAGE>
INTERNET NORTHEAST
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
---------------------- RETAINED
SHARES VALUE EARNINGS TOTAL
----------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 1, 1996............................................ 3,000 $ 16,831 $ 17,505 $ 34,336
Stockholder distributions........................................... (58,897) (58,897)
Net income.......................................................... 105,426 105,426
----- --------- ---------- ----------
Balance at December 31, 1996.......................................... 3,000 16,831 64,034 80,865
Stockholder distributions........................................... (996) (996)
Net loss............................................................ (40,835) (40,835)
----- --------- ---------- ----------
Balance at October 31, 1997........................................... 3,000 $ 16,831 $ 22,203 $ 39,034
----- --------- ---------- ----------
----- --------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-25
<PAGE>
INTERNET NORTHEAST
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED TEN MONTHS ENDED
DECEMBER 31, 1996 OCTOBER 31, 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................................... $ 105,426 $ (40,835)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization........................................... 52,414 105,303
Loss on disposal of property and equipment.............................. 17,337 130,963
Changes in assets and liabilities
Prepaid expenses...................................................... -- (13,000)
Accounts receivable................................................... (11,510) 12,560
Accounts payable...................................................... 48,906 (49,381)
Accrued expenses...................................................... 686 19,626
Other assets.......................................................... -- (517)
----------------- -----------------
Net cash provided by operating activities................................... 213,259 164,719
----------------- -----------------
Cash flows from investing activities:
Purchase of property and equipment........................................ (190,184) (222,598)
----------------- -----------------
Cash flows from financing activities:
Proceeds from stockholder note payable.................................... -- 100,000
Payments on note payable.................................................. (30,148) (12,808)
Payments on stockholder note payable...................................... -- (12,206)
Cash overdraft............................................................ 37,572 (16,111)
Stockholder distributions................................................. (58,897) (996)
----------------- -----------------
Net cash provided by (used in) financing activities......................... (51,473) 57,879
----------------- -----------------
Net decrease in cash equivalents............................................ (28,398) --
Cash at beginning of period................................................. 28,398 --
----------------- -----------------
Cash and cash equivalents at end of period.................................. $ -- $ --
----------------- -----------------
----------------- -----------------
Supplemental disclosure of cash flow information:
Interest paid............................................................. $ 4,621 $ 8,102
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-26
<PAGE>
INTERNET NORTHEAST
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF THE BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:
Internet Northeast (the "Company"), a Maine corporation, was incorporated on
August 1, 1995 to provide Internet access, Web hosting and other related data
services to customers in Maine and New Hampshire.
On November 12, 1997, the Company merged with HarvardNET Inc. through an
exchange of all shares of the Company's common stock for 2,938,890 shares of
common stock of HarvardNET Inc. The transaction was accounted for using the
purchase method.
REVENUE RECOGNITION
Revenues are recognized when Internet access services are provided.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated over their
estimated useful lives using the straight-line method. Leasehold improvements
are depreciated over the lesser of related lease terms or the estimated
productive useful lives. Property and equipment acquired under capital leases is
depreciated over the useful life of the asset.
Betterments and major renewals are capitalized and included in property and
equipment accounts, while expenditures for maintenance and repairs and minor
renewals are charged to expense. When assets are retired or otherwise disposed
of, the assets and related accumulated depreciation and amortization are
eliminated from the accounts and any resulting gain or loss is reflected in
income.
ADVERTISING COSTS
Advertising costs are expensed as incurred. Advertising expense of
approximately $23,068 and $26,738 was charged to operations in 1996 and 1997,
respectively.
USE OF 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 reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
INCOME TAXES
The Company is taxed as an S-Corporation. Accordingly, the stockholders of
the Company are subject to federal income taxes rather than the Company.
F-27
<PAGE>
INTERNET NORTHEAST
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. PROPERTY AND EQUIPMENT:
Cost of property and equipment and depreciable lives are summarized as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, OCTOBER 31, DEPRECIABLE
1996 1997 LIFE YEARS
------------ ----------- ----------------------
<S> <C> <C> <C>
Equipment..................................................... $ 232,622 $ 320,603 3
Furniture and fixtures........................................ 433 2,731 10
Leasehold improvements........................................ 7,802 9,158 3
------------ -----------
240,857 332,492
Less: accumulated depreciation................................ (52,028) (157,331)
------------ -----------
Property and equipment, net................................... $ 188,829 $ 175,161
------------ -----------
------------ -----------
</TABLE>
3. COMMITMENTS:
The Company leases its facilities and vehicles under operating leases. The
leases expire at various dates.
Rent expense under all operating leases of approximately $11,384 and $26,230
was charged to operations in 1996 and 1997, respectively.
4. NOTE PAYABLE:
In 1995, the Company entered a $50,000 term loan agreement with a bank
bearing an interest rate of 10.5% to be repaid over three years. At December 31,
1996 and October 31, 1997, the balance outstanding on the loan was $35,113 and
$22,305, respectively.
5. STOCKHOLDER NOTE PAYABLE:
In 1997, the Company entered into a note payable with a stockholder of the
Company for $100,000 bearing an interest rate of 10% to be repaid over four
years. At October 31, 1997, the balance outstanding on the loan was $87,794.
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and the Stockholders of
HarvardNET Inc.:
In our opinion, the accompanying balance sheet and the related statements of
operations, parent company investment and cash flows, present fairly, in all
material respects, the financial position of the Network Services Division of
Comstor Corporation at December 31, 1998 and the results of its operations and
its cash flows for the year ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 1, the accompanying financial statements of the Network
Services Division of Comstor Corporation were derived from the historical books
and records of Comstor Corporation and may not be indicative of the financial
position and results of operations and cash flows had the Network Services
Division of Comstor Corporation operated as a nonaffiliated, autonomous entity.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
May 14, 1999
F-29
<PAGE>
NETWORK SERVICES DIVISION OF COMSTOR CORPORATION
BALANCE SHEET
AS OF DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Accounts receivable............................................................. $ 351,690
Prepaid expenses................................................................ 12,631
---------
Total current assets.......................................................... 364,321
Property and equipment, net..................................................... 211,981
Deposits........................................................................ 11,600
---------
Total assets.................................................................. $ 587,902
---------
---------
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable................................................................ 68,450
Accrued expenses................................................................ 5,000
---------
Total current liabilities..................................................... 73,450
Parent company investment....................................................... 514,452
---------
$ 587,902
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-30
<PAGE>
NETWORK SERVICES DIVISION OF COMSTOR CORPORATION
STATEMENT OF OPERATIONS AND
PARENT COMPANY INVESTMENT
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues:
Internet access service....................................................... $ 833,091
Equipment..................................................................... 557,138
---------
Total revenues............................................................ 1,390,229
Operating expenses:
Costs of Internet access service revenues................................... 961,948
Costs of equipment revenues................................................. 529,281
Selling, general and administrative......................................... 300,482
Depreciation and amortization............................................... 30,383
---------
Total operating expenses.................................................. 1,822,094
---------
Operating loss.................................................................. (431,865)
Interest expense................................................................ (16,612)
---------
Net loss........................................................................ $(448,477)
---------
---------
Parent company investment, as of December 31, 1997.............................. $ 10,969
---------
Net loss........................................................................ (448,477)
Net transfers from parent....................................................... 951,960
---------
Parent company investment, as of December 31, 1998.............................. $ 514,452
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-31
<PAGE>
NETWORK SERVICES DIVISION OF COMSTOR CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flow from operating activities:
Net loss....................................................................... $(448,477)
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization................................................ 30,383
Changes in assets and liabilities:
Accounts receivable.......................................................... (234,497)
Prepaid expenses............................................................. (12,631)
Accounts payable and accrued expenses........................................ (58,685)
---------
Net cash used in operating activities...................................... (723,907)
---------
Cash flow from investing activities:
Purchase of property and equipment............................................. (228,053)
---------
Cash flow from financing activities:
Net transfers from parent...................................................... $ 951,960
---------
Net increase (decrease) in cash and cash equivalents............................. --
Cash and cash equivalents, beginning of year..................................... --
---------
Cash and cash equivalents, end of year........................................... --
---------
---------
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-32
<PAGE>
NETWORK SERVICES DIVISION OF COMSTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION AND BASIS OF PRESENTATION
The accompanying financial statements present the financial position and
results of operations as of and for the year ended December 31, 1998, of the
Network Services Division of Comstor Corporation, which during that period was a
division of Comstor Corporation. Comstor Corporation, a wholly owned subsidiary
of General Electric Company had acquired the Internet service provider business
from Management Analysis, Inc. in August 1997.
On January 11, 1999, Comstor Corporation entered into a purchase and sale
agreement for the sale of assets to HarvardNET Inc. The Network Services
Division of Comstor Corporation provides full service access to the Internet for
corporate and individual users primarily in the greater Washington, D.C. area.
These financial statements present the Network Services Division of Comstor
Corporation's results of operations and its financial condition as derived from
the historical books and records of Comstor Corporation, including certain
adjustments necessary for a fair presentation of the business. Certain selling,
general and administrative expenditures incurred by Comstor Corporation on
behalf of the Network Services Division of Comstor Corporation were allocated to
the Network Services Division of Comstor Corporation based upon relative office
space utilization and percentage of revenues. Interest expense was allocated to
the Network Services Division of Comstor Corporation based upon average working
capital levels at an approximated market rate. Management believes that the
methods used for these allocations are reasonable. The statements presented may
not be indicative of the result of operations had the Network Services Division
of Comstor Corporation operated as a nonaffiliated, autonomous entity.
For purposes of this presentation, Comstor Corporation is referred to as the
parent company of the Network Services Division of Comstor Corporation.
USE OF 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. Significant estimates include the allocation of certain costs
incurred by Comstor Corporation to the Network Services Division of Comstor
Corporation. Actual results could differ from those estimates.
CASH
The Network Services Division of Comstor Corporation maintains no cash
balance. Disbursements are made by Comstor Corporation on behalf of the Network
Services Division of Comstor Corporation. Comstor Corporation is reimbursed
monthly by the Network Services Division of Comstor Corporation for cash
disbursements.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over their
estimated useful lives using the straight-line method. Costs of repairs and
maintenance are charged to expense as incurred.
F-33
<PAGE>
NETWORK SERVICES DIVISION OF COMSTOR CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
REVENUE RECOGNITION
The Network Services Division of Comstor Corporation recognizes revenue when
internet access services are provided or when equipment is shipped. Advance
collections relating to future access services are recorded as deferred revenue
and recognized as revenue when earned. Equipment revenue is comprised of routers
and related equipment resold to the Network Services Division of Comstor
Corporation's Internet access customers.
INCOME TAXES
The Network Services Division of Comstor Corporation is not a taxable
entity. Had the Network Services Division of Comstor Corporation been a taxable
entity, the accompanying financial statements would not have been affected, as
the results of operations reflect a loss for the year ended December 31, 1998,
and a tax benefit, if any, would have been reduced by a full valuation
allowance.
2. PROPERTY AND EQUIPMENT:
Cost of property and equipment and depreciable lives are summarized as
follows:
<TABLE>
<CAPTION>
DEPRECIABLE
1998 LIFE IN YEARS
---------- -----------------
<S> <C> <C>
Computer and networking equipment................................... $ 231,371 3
Leasehold improvements.............................................. 10,993 3
Less accumulated depreciation and amortization...................... (30,383)
----------
Property and equipment, net......................................... $ 211,981
----------
----------
</TABLE>
3. OPERATING LEASES:
The Company leases office space under lease terms of less than one year.
Rent expense under all operating leases of approximately $32,000 was charged
to operations in 1998.
4. RELATED PARTY TRANSACTIONS:
The financial statements include approximately $95,000 of accounts
receivable, $379,000 of revenues, and $367,000 of costs of revenues related to
business transactions with HarvardNET Inc., as well as approximately $41,000 of
revenues and $39,000 of costs of revenues related to business transactions with
General Electric Company.
F-34
<PAGE>
Remote Connect Virtual Private Network
[Graphical depiction of HarvardNet's Remote Connect Private Network. At the
center of the page is an image labeled "HarvardNet Managed Backbone and
Internet" with lines radiating to images labeled "Mobil Employee,"
"Telecommuter," "Branch Office," and "Corporate."]
<PAGE>
[LOGO]
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS
PROSPECTUS (SUBJECT TO COMPLETION)
ISSUED JULY 27, 1999
8,900,000 SHARES
[LOGO]
COMMON STOCK
---------------------
HARVARDNET INC. IS OFFERING SHARES OF ITS COMMON STOCK. THIS IS OUR INITIAL
PUBLIC OFFERING AND NO PUBLIC MARKET CURRENTLY EXISTS FOR OUR SHARES. WE
ANTICIPATE THAT THE INITIAL PUBLIC OFFERING PRICE WILL BE BETWEEN $13.00 AND
$15.00 PER SHARE.
-------------------
APPLICATION HAS BEEN MADE FOR QUOTATION OF THE COMMON STOCK ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "HVNT."
-------------------
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 5.
-----------------
PRICE $ A SHARE
-----------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC COMMISSIONS HARVARDNET
------------------ ------------------ ------------------
<S> <C> <C> <C>
PER SHARE.......................................... $ $ $
TOTAL.............................................. $ $ $
</TABLE>
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE
NOT APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS
IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
HARVARDNET INC. HAS GRANTED THE UNDERWRITERS THE RIGHT TO PURCHASE UP TO AN
ADDITIONAL 1,335,000 SHARES TO COVER OVER-ALLOTMENTS. MORGAN STANLEY & CO.
INCORPORATED EXPECTS TO DELIVER THE SHARES TO PURCHASERS ON , 1999.
-------------------
MORGAN STANLEY DEAN WITTER
MERRILL LYNCH INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL
, 1999
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than the
underwriting discount, payable by the Registrant in connection with the sale of
common stock being registered. All amounts are estimates except the SEC
registration fee, the NASD filing fees and the Nasdaq National Market listing
fee.
<TABLE>
<S> <C>
SEC registration fee............................................................ $ 34,750
NASD filing fee................................................................. 13,000
Nasdaq National Market listing fee.............................................. 95,000
Printing and engraving expenses................................................. 200,000
Legal fees and expenses......................................................... 400,000
Accounting fees and expenses.................................................... 550,000
Blue Sky fees and expenses (including legal fees)............................... 15,000
Transfer agent and registrar fees and expenses.................................. 17,000
Miscellaneous................................................................... 25,250
---------
Total....................................................................... $1,350,000
---------
---------
</TABLE>
HarvardNET will bear all expenses shown above.
Item 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant's Restated Certificate of Incorporation (the "Restated
Certificate") provides that, except to the extent prohibited by the Delaware
General Corporation Law (the "DGCL"), the Registrant's directors shall not be
personally liable to the Registrant or its stockholders for monetary damages for
any breach of fiduciary duty as directors of the Registrant. Under the DGCL, the
directors have a fiduciary duty to the Registrant which is not eliminated by
this provision of the Restated Certificate and, in appropriate circumstances,
equitable remedies such as injunctive or other forms of nonmonetary relief will
remain available. In addition, each director will continue to be subject to
liability under the DGCL for breach of the director's duty of loyalty to the
Registrant, for acts or omissions which are found by a court of competent
jurisdiction to be not in good faith or involving intentional misconduct, for
knowing violations of law, for actions leading to improper personal benefit to
the director, and for payment of dividends or approval of stock repurchases or
redemptions that are prohibited by the DGCL. This provision also does not affect
the directors' responsibilities under any other laws, such as the federal
securities laws or state or federal environmental laws. The Registrant has
obtained liability insurance for its officers and directors.
Section 145 of the DGCL empowers a corporation to indemnify its directors
and officers and to purchase insurance with respect to liability arising out of
their capacity or status as directors and officers, provided that this provision
shall not eliminate or limit the liability of a director: (i) for any breach of
the director's duty of loyalty to the corporation or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) arising under Section 174 of the DGCL including
for an unlawful payment of dividend or unlawful stock purchase or redemption, or
(iv) for any transaction from which the director derived an improper personal
benefit. The DGCL provides further that the indemnification permitted thereunder
shall not be deemed exclusive of any other rights to which the directors and
officers may be entitled under the corporation's by-laws, any agreement, a vote
of stockholders or otherwise. The Restated Certificate eliminates the personal
liability of directors to the fullest extent permitted by the DGCL and, together
with the Registrant's Amended and Restated By-Laws (the "Restated By-Laws"),
provides that the Registrant shall fully indemnify any person who was or is a
party or is threatened to be made a party to
II-1
<PAGE>
any threatened, pending or completed action, suit or proceeding (whether civil,
criminal, administrative or investigative) by reason of the fact that such
person is or was a director or officer of the Registrant, or is or was serving
at the request of the Registrant as a director or officer of another
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise, against expenses (including attorney's fees), judgments, fines and
amounts paid in settlement actually and reasonably incurred by such person in
connection with such action, suit or proceeding. Reference is made to the
Registrant's Form of Amended and Restated Certificate of Incorporation and Form
of Amended and Restated By-Laws filed as Exhibits 3.3 and 3.4 hereto,
respectively.
The Underwriting Agreement provides that the underwriters are obligated,
under specified circumstances, to indemnify directors, officers and controlling
persons of HarvardNET against specified liabilities, including liabilities under
the Securities Act of 1933, as amended (the "Securities Act"). Reference is made
to the form of Underwriting Agreement to be filed as Exhibit 1.1 hereto.
At present, there is no pending litigation or proceeding involving any
director, officer, employee or agent as to which indemnification will be
required or permitted under the Restated Certificate. The Registrant is not
aware of any threatened litigation or proceeding that may result in a claim for
such indemnification.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES.
In the three years preceding the filing of this registration statement, we
have issued the following securities that were not registered under the
Securities Act as summarized below. The share information provided below
reflects a 100-for-1 split of the common stock effected on November 12, 1997 and
a 10-for-1 split of the Series A convertible preferred stock, Class B stock and
common stock effected on November 16, 1998 and a 1.3546862-for-one split of the
common stock and Class B stock to be effective immediately prior to the closing
of this offering:
(a) Issuances of Capital Stock, Notes and Warrants. Since January 1, 1996,
the Registrant has issued the following securities that were not registered
under the Securities Act as summarized below. The share information provided
below reflects a 100-for-1 split of the common stock effected on November 12,
1997 and a 10-for-1 split of the Series A convertible preferred stock, Class B
stock and common stock effected on November 16, 1998:
1. On August 15, 1997, the Registrant issued and sold a total of 609,608
shares of its common stock to five individuals, each of whom was an
accredited investor, for an aggregate purchase price of $375,300. These
issuances were conducted pursuant to Section 4(2) of the Securities Act.
2. On November 12, 1997, the Registrant issued an aggregate of 3,981,273
shares of common stock to six individuals in connection with the merger of
another corporation with and into the Registrant on such date. This issuance
was conducted pursuant to Section 4(2) of the Securities Act.
3. On September 1, 1998, December 7, 1998 and March 23, 1999, the
Registrant issued and sold a total of 13,749,440 shares of its Series A
convertible preferred stock to two individuals and eight entities, each of
whom or which was an accredited investor, for an aggregate purchase price of
$18,500,000. In connection with the sale of these shares of Series A
convertible preferred stock, the Registrant issued a common stock purchase
warrant to one placement agent for 93,121 shares of common stock at an
purchase price of $0.99 per share. These issuances were conducted pursuant
to Section 4(2) of the Securities Act. The Registrant paid $832,500 in
commissions to the placement agent in connection with the sale of these
shares of Series A convertible preferred stock.
4. On September 29, 1998, December 3, 1998, January 4, 1998 and January
18, 1998, the Registrant issued and sold an aggregate of 3,976,381 shares of
Class B stock to four executive
II-2
<PAGE>
officers for an aggregate purchase price of $13,202. This issuance was
conducted pursuant to Section 4(2) of the Securities Act.
5. On December 7, 1998, the Registrant issued 1,003 shares of common
stock to one entity in connection with the provision of $1,000 of consulting
services to the Registrant. This issuance was conducted pursuant to Section
4(2) of the Securities Act.
6. On May 28, 1999, the Registrant issued and sold a total of 482,666
shares of its Series A convertible preferred stock to one entity, an
accredited investor, for an aggregate purchase price of $1,500,000. In
connection with the sale of these shares, the Registrant also issued common
stock warrants to the purchaser of these shares for 765,970 shares of common
stock at a purchase price of $3.62 per share. These issuances were conducted
pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
(b) Certain Grants and Exercises of Stock Options. The Registrant's 1997
Stock Incentive Plan was adopted by the Board of Directors on August 15, 1997.
The Registrant's 1999 Stock Incentive Plan was approved by the Board of
Directors on January 26, 1999. As of May 31, 1999, options to purchase 406,406
shares of common stock were outstanding under the 1997 Stock Incentive Plan and
options to purchase 1,009,564 shares of common stock were outstanding under the
1999 Stock Incentive Plan. As of such date, no options had been exercised. The
options issued under the 1997 Stock Incentive Plan and the 1999 Stock Incentive
Plan were offered in reliance upon the exemption from registration under Rule
701 promulgated under the Securities Act.
No underwriters were involved in the foregoing sales of securities.
Item 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(A) EXHIBITS:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1+ Restated and Amended Certificate of Incorporation of the Registrant dated May 28, 1999
3.2+ Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed upon the
closing of this public offering
3.3 Second Amended and Restated By-Laws of the Registrant
3.4+ Form of Amended and Restated By-Laws of the Registrant
4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant
5.1* Opinion of Hale and Dorr LLP with respect to the validity of the securities being offered
10.1** Amended and Restated 1997 Stock Incentive Plan of the Registrant
10.2** Amended and Restated 1999 Stock Incentive Plan of the Registrant
10.3** 1999 Employee Stock Purchase Plan of the Registrant
10.4 1999 Director Stock Option Plan of the Registrant
10.5+ Redemption and Non Competition Agreement between William and Barbara Southworth and the Registrant
dated as of September 1, 1998
10.6+ Employment Agreement between the Registrant and Mark M. Washburn effective as of September 29, 1998
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.7+ Employment Agreement between the Registrant and Todd C. DeSisto effective as of December 3, 1998
10.8+ Lease dated October 30, 1998 by and between Hood Business Park LLC and the Registrant
10.9+ Amendment A to Lease as of March 15, 1998 by and between Hood Business Park LLC and the Registrant
10.10+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of February 24, 1999 by and between New England Telephone and Telegraph Company d/b/a Bell
Atlantic--New Hampshire and the Registrant
10.11+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of February 24, 1999 by and between New England Telephone and Telegraph Company d/b/a Bell
Atlantic--Maine and the Registrant
10.12+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of February 24, 1999 by and between New England Telephone and Telegraph Company d/b/a Bell
Atlantic--Rhode Island and the Registrant
10.13+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of January 19, 1998 by and between New England Telephone and Telegraph Company d/b/a Bell
Atlantic--Massachusetts and the Registrant
10.14+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--Virginia, Inc. and the Registrant
10.15+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--Maryland, Inc. and the Registrant
10.16+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--Washington D.C., Inc. and the Registrant
10.17+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--Pennsylvania and the Registrant
10.18+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--New Jersey, Inc. and the Registrant
10.19+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1996 by and between New York Telephone Company d/b/a Bell Atlantic--New York and the
Registrant
10.20+ Registration Rights Agreement dated September 1, 1998 between the Registrant and the Purchasers and
Holders identified therein
10.21+ First Amendment to Registration Rights Agreement dated May 28, 1999 between the Registrant and the
Purchasers and Holders identified therein
10.22+ Second Amendment to Registration Rights Agreement dated July 14, 1999 between the Registrant and the
Purchasers and Holders identified therein.
10.23+ Form of Director Indemnification Agreement
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
21.1+ Subsidiaries of the Registrant
23.1* Consent of Hale and Dorr LLP (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1+ Powers of Attorney
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Supersedes previously filed exhibit.
+ Previously filed.
(b) Financial Statement:
Schedule II--Valuation and Qualifying Accounts
<TABLE>
<CAPTION>
BALANCE ADDITIONS
AT CHARGES TO
BEGINNING COSTS AND BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES OF PERIOD
- -------------------------------------------------------------------------- ----------- ----------- --------------
<S> <C> <C> <C>
Allowance for doubtful accounts:
Three Months Ended March 31, 1999 (unaudited)............................. $ 50,000 $ 33,489 $ 83,489
Year Ended December 31, 1998.............................................. 24,717 25,283 50,000
Year Ended December 31, 1997.............................................. -- 24,717 24,717
Year Ended December 31, 1996.............................................. -- -- --
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
II-5
<PAGE>
Item 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreements, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the Delaware General Corporation Law, the Restated
Certificate of the registrant, the Underwriting Agreement, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, the registrant will,
unless in the opinion of counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purpose of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or 497(h)
under the Act shall be deemed to be part of this Registration Statement as of
the time it was declared effective.
(2) For purpose of determining any liability under the Securities Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new Registration Statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in Boston,
Massachusetts, on this 27th day of July, 1999.
<TABLE>
<S> <C> <C>
HARVARDNET INC.
By: /s/ MARK M. WASHBURN
-----------------------------------------
Mark M. Washburn
PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Amendment No. 2 to the Registration Statement has been signed by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
President, Chief Executive
/s/ MARK M. WASHBURN Officer and Director
- ------------------------------ (Principal Executive July 27, 1999
Mark M. Washburn Officer)
Chief Financial Officer and
* Treasurer (Principal
- ------------------------------ Financial and Accounting July 27, 1999
Todd DeSisto Officer)
* Chairman and Director
- ------------------------------ July 27, 1999
William H. Southworth
* Director
- ------------------------------ July 27, 1999
Peter H.O. Claudy
* Director
- ------------------------------ July 27, 1999
Leo J. Esposito
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------ --------------------------- -------------------
<C> <S> <C>
* Director
- ------------------------------ July 27, 1999
Robert C. Ketterson
* Director
- ------------------------------ July 27, 1999
Jeffrey Osborn
* Director
- ------------------------------ July 27, 1999
Matthew J. Rubins
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ MARK M. WASHBURN
-------------------------
Mark M. Washburn
ATTORNEY-IN-FACT
</TABLE>
II-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTS ON SCHEDULE II
To the Board of Directors and Stockholders of
HarvardNET Inc.:
Our report on the financial statements of HarvardNET Inc. is included in this
Registration Statement. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule listed
in Item 16(b) of this Registration Statement.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements as a whole, presents
fairly, in all material respects, the information required to be included
therein.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
June 10, 1999
II-9
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement
3.1+ Restated and Amended Certificate of Incorporation of the Registrant dated May 28, 1999
3.2+ Form of Amended and Restated Certificate of Incorporation of the Registrant to be filed upon the
closing of this public offering
3.3 Second Amended and Restated By-Laws of the Registrant
3.4+ Form of Amended and Restated By-Laws of the Registrant
4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the Registrant
5.1* Opinion of Hale and Dorr LLP with respect to the validity of the securities being offered
10.1** Amended and Restated 1997 Stock Incentive Plan of the Registrant
10.2** Amended and Restated 1999 Stock Incentive Plan of the Registrant
10.3** 1999 Employee Stock Purchase Plan of the Registrant
10.4 1999 Director Stock Option Plan of the Registrant
10.5+ Redemption and Non Competition Agreement between William and Barbara Southworth and the Registrant
dated as of September 1, 1998
10.6+ Employment Agreement between the Registrant and Mark M. Washburn effective as of September 29, 1998
10.7+ Employment Agreement between the Registrant and Todd C. DeSisto effective as of December 3, 1998
10.8+ Lease dated October 30, 1998 by and between Hood Business Park LLC and the Registrant
10.9+ Amendment A to Lease as of March 15, 1998 by and between Hood Business Park LLC and the Registrant
10.10+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of February 24, 1999 by and between New England Telephone and Telegraph Company d/b/a Bell
Atlantic--New Hampshire and the Registrant
10.11+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of February 24, 1999 by and between New England Telephone and Telegraph Company d/b/a Bell
Atlantic--Maine and the Registrant
10.12+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of February 24, 1999 by and between New England Telephone and Telegraph Company d/b/a Bell
Atlantic--Rhode Island and the Registrant
10.13+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of January 19, 1998 by and between New England Telephone and Telegraph Company d/b/a Bell
Atlantic--Massachusetts and the Registrant
10.14+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--Virginia, Inc. and the Registrant
10.15+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--Maryland, Inc. and the Registrant
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
10.16+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--Washington D.C., Inc. and the Registrant
10.17+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--Pennsylvania and the Registrant
10.18+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1999 by and between Bell Atlantic--New Jersey, Inc. and the Registrant
10.19+ Interconnection Agreement under Sections 251 and 252 of the Telecommunications Act of 1996 dated as
of May 26, 1996 by and between New York Telephone Company d/b/a Bell Atlantic--New York and the
Registrant
10.20+ Registration Rights Agreement dated September 1, 1998 between the Registrant and the Purchasers and
Holders identified therein
10.21+ First Amendment to Registration Rights Agreement dated May 28, 1999 between the Registrant and the
Purchasers and Holders identified therein
10.22+ Second Amendment to Registration Rights Agreement dated July 14, 1999 between the Registrant and the
Purchasers and Holders identified therein.
10.23+ Form of Director Indemnification Agreement
21.1+ Subsidiaries of the Registrant
23.1* Consent of Hale and Dorr LLP (included in Exhibit 5.1)
23.2 Consent of PricewaterhouseCoopers LLP
24.1+ Powers of Attorney
27.1+ Financial Data Schedule
</TABLE>
- ------------------------
* To be filed by amendment.
** Supersedes previously filed exhibit.
+ Previously filed.
<PAGE>
8,900,000 SHARES
HARVARDNET INC.
COMMON STOCK, PAR VALUE $.01 PER SHARE
UNDERWRITING AGREEMENT
August [_], 1999
<PAGE>
August [ ], 1999
Morgan Stanley & Co. Incorporated
Merrill Lynch & Co., Merrill Lynch, Pierce,
Fenner & Smith Incorporated
Salomon Smith Barney Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Merrill Lynch International
Salomon Smith Barney International Limited
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
HarvardNet Inc., a Delaware corporation (the "COMPANY"),
proposes to issue and sell to the several Underwriters (as defined below)
8,900,000 shares of its Common Stock, par value $.01 per share (the "FIRM
SHARES").
It is understood that, subject to the conditions hereinafter
stated, 7,120,000 Firm Shares (the "U.S. FIRM SHARES") will be sold to the
several U.S. Underwriters named in Schedule I hereto (the "U.S. UNDERWRITERS")
in connection with the offering and sale of such U.S. Firm Shares in the United
States and Canada to United States and Canadian Persons (as such terms are
defined in the Agreement Between U.S. and International Underwriters of even
date herewith), and 1,780,000 Firm Shares (the "INTERNATIONAL SHARES") will be
sold to the several International Underwriters named in Schedule II hereto (the
"INTERNATIONAL UNDERWRITERS") in connection with the offering and sale of such
International Shares outside the United States and Canada to persons other than
United States and Canadian Persons. Morgan Stanley & Co. Incorporated, Merrill
Lynch & Co, Merrill Lynch, Pierce, Fenner & Smith Incorporated and Salomon Smith
Barney Inc. shall act as representatives (the "U.S.
<PAGE>
REPRESENTATIVES") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited, Merrill Lynch International and Salomon Smith Barney
International Limited shall act as representatives (the "INTERNATIONAL
REPRESENTATIVES" of the several International Underwriters. The U.S.
Underwriters and the International Underwriters are hereinafter collectively
referred to as the "UNDERWRITERS".
The Company also proposes to issue and sell to the several
U.S. Underwriters not more than an additional 1,335,000 shares of its Common
Stock, par value $.01 per share (the "ADDITIONAL SHARES"), if and to the extent
that the U.S. Representatives shall have determined to exercise, on behalf of
the U.S. Underwriters, the right to purchase such shares of common stock granted
to the U.S. Underwriters in Section 2 hereof. The Firm Shares and the Additional
Shares are hereinafter collectively referred to as the "SHARES". The shares of
Common Stock, par value $.01 per share, of the Company to be outstanding after
giving effect to the sales contemplated hereby are hereinafter referred to as
the "COMMON STOCK".
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement relating to the Shares.
The registration statement contains two prospectuses to be used in connection
with the offering and sale of the Shares: the U.S. prospectus, to be used in
connection with the offering and sale of Shares in the United States and Canada
to United States and Canadian Persons, and the international prospectus, to be
used in connection with the offering and sale of Shares outside the United
States and Canada to persons other than United States and Canadian Persons. The
international prospectus is identical to the U.S. prospectus except for the
outside front cover page. The registration statement as amended at the time it
becomes effective, including the information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A under
the Securities Act of 1933, as amended (the "SECURITIES ACT"), is hereinafter
referred to as the "REGISTRATION STATEMENT"; the U.S. prospectus and the
international prospectus in the respective forms first used to confirm sales of
Shares are hereinafter collectively referred to as the "PROSPECTUS". If the
Company has filed an abbreviated registration statement to register additional
shares of Common Stock pursuant to Rule 462(b) under the Securities Act (the
"RULE 462 REGISTRATION STATEMENT"), then any reference herein to the term
"Registration Statement" shall be deemed to include such Rule 462 Registration
Statement.
Morgan Stanley & Co. Incorporated ("Morgan Stanley" has agreed
to reserve a portion of the Shares to be purchased by it under this Agreement
for sale to the Company's directors, officers, employees and business associates
and other parties related to the Company (collectively, "Participants"), as set
forth in the Prospectus under the heading "Underwriters" (the "Directed Share
Program"). The Shares to be sold by Morgan Stanley pursuant to the Directed
Share Program are referred to hereinafter as the "Directed Shares". Any Directed
Shares not orally confirmed for purchase by any Participant by the end of the
business day on which this Agreement is executed will be offered to the public
by the Underwriters as set forth in the Prospectus.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to and agrees with each of the Underwriters that:
(a) The Registration Statement has become effective;
no stop order suspending the effectiveness of the Registration
Statement is in effect, and no proceedings for such purpose are pending
before or, to the Company's knowledge, threatened by the Commission.
(b) (i) The Registration Statement, when it became
effective, did not contain and, as amended or supplemented, if
applicable, will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, (ii) the
Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with
the Securities Act and the applicable rules and regulations of the
Commission thereunder and (iii) the Prospectus does not contain and, as
amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact necessary
to make the statements therein, in the light of the circumstances under
which they were made, not misleading, except that the representations
and warranties set forth in this paragraph do not apply to statements
or omissions in the Registration Statement or the Prospectus based upon
information relating to any Underwriter furnished to the Company in
writing by such Underwriter through you expressly for use therein.
(c) The Company has been duly incorporated, is
validly existing as a corporation in good standing under the laws of
the jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the Company and
its subsidiaries, taken as a whole; such jurisdictions are comprised of
the Commonwealths of Massachusetts, Pennsylvania and Virginia, the
States of Connecticut, Maine, Maryland, New Hampshire, New Jersey, New
York and Rhode Island and the District of Columbia.
(d) Each subsidiary of the Company has been duly
incorporated, is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to conduct its
business as described in the Prospectus and is duly qualified to
transact business and is in good standing in each jurisdiction in which
the conduct of its business or its ownership or leasing of property
requires such qualification (which jurisdiction is comprised solely of
the Commonwealth of Virginia), except to the extent that the failure to
be so qualified or be in good standing would not have a material
adverse effect on the Company and its subsidiaries,
<PAGE>
taken as a whole; the Company has only one subsidiary,
HarvardNet--Virginia, Inc. (the "Sole Subsidiary"), which is an
inactive subsidiary; all of the issued shares of capital stock of such
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned directly by the
Company, free and clear of all liens, encumbrances, equities or claims.
(e) This Agreement has been duly authorized, executed
and delivered by the Company.
(f) The authorized capital stock of the Company
conforms as to legal matters to the description thereof contained in
the Prospectus.
(g) The shares of Common Stock outstanding prior to
the issuance of the Shares have been duly authorized and are validly
issued, fully paid and nonassessable.
(h) The Shares have been duly authorized and, when
issued and delivered in accordance with the terms of this Agreement,
will be validly issued, fully paid and nonassessable, and the issuance
of such Shares will not be subject to any preemptive or similar rights.
(i) The execution and delivery by the Company of, and
the performance by the Company of its obligations under, this Agreement
will not contravene any provision of applicable law or the certificate
of incorporation or bylaws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any subsidiary, and no consent,
approval, authorization or order of, or qualification with, any
governmental body or agency is required for the performance by the
Company of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(j) There has not occurred any material adverse
change, or any development involving a prospective material adverse
change, in the condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the date of this
Agreement).
(k) There are no legal or governmental proceedings
pending or, to the Company's knowledge, threatened to which the Company
or any of its subsidiaries is a party or to which any of the properties
of the Company or any of its subsidiaries is subject that are required
to be described in the Registration Statement or the Prospectus and are
not so described or any statutes, regulations, contracts or other
documents that are required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the
<PAGE>
Registration Statement that are not described or filed as required.
(l) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(m) The Company is not and, after giving effect to
the offering and sale of the Shares and the application of the proceeds
thereof as described in the Prospectus, will not be an "investment
company" as such term is defined in the Investment Company Act of 1940,
as amended.
(n) The Company and its subsidiaries (i) are in
compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health
and safety, the environment or hazardous or toxic substances or wastes,
pollutants or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received
all permits, licenses or other approvals required of them under
applicable Environmental Laws to conduct their respective businesses
and (iii) are in compliance with all terms and conditions of any such
permit, license or approval, except where such noncompliance with
Environmental Laws, failure to receive required permits, licenses or
other approvals or failure to comply with the terms and conditions of
such permits, licenses or approvals would not, singly or in the
aggregate, have a material adverse effect on the Company and its
subsidiaries, taken as a whole.
(o) There are no costs or liabilities associated with
Environmental Laws (including, without limitation, any capital or
operating expenditures required for cleanup, closure of properties or
compliance with Environmental Laws or any permit, license or approval,
any related constraints on operating activities and any potential
liabilities to third parties) which would, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries,
taken as a whole.
(p) The Company is in the process of reviewing its
operations and that of its subsidiaries to evaluate the extent to which
the business or operations of the Company or any of its subsidiaries
will be affected by the Year 2000 Problem (that is, any significant
risk that computer hardware or software applications used by the
Company and its subsidiaries will not, in the case of dates or time
periods occurring after December 31, 1999, function at least as
effectively as in the case of dates or time periods occurring prior to
January 1, 2000); as a result of such review, (i) the Company has no
reason to believe, and does not believe, that (A) there are any issues
related to the Company's preparedness to address the Year 2000 Problem
that are of a character required to be described or referred to in the
Registration Statement or Prospectus which have not been accurately
described in the Registration Statement or Prospectus and (B), except
as disclosed in the Registration Statement and Prospectus, the Year
2000 Problem will have a material adverse effect on the
<PAGE>
condition, financial or otherwise, or on the earnings, business or
operations of the Company and its subsidiaries, taken as a whole, or
result in any material loss or interference with the business or
operations of the Company and its subsidiaries, taken as a whole.
(q) Except as disclosed in the Prospectus, there are
no contracts, agreements or understandings between the Company and any
person granting such person the right to require the Company to file a
registration statement under the Securities Act with respect to any
securities of the Company or to require the Company to include such
securities with the Shares registered pursuant to the Registration
Statement.
(r) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
(i) the Company and its subsidiaries have not incurred any material
liability or obligation, direct or contingent, nor entered into any
material transaction not in the ordinary course of business; (ii) the
Company has not purchased any of its outstanding capital stock, nor
declared, paid or otherwise made any dividend or distribution of any
kind on its capital stock other than ordinary and customary dividends;
and (iii) there has not been any material change in the capital stock,
short-term debt or long-term debt of the Company and its subsidiaries,
except in each case as described in the Prospectus.
(s) The Company and its subsidiaries have good and
marketable title to all personal property owned by them which is
material to the business of the Company and its subsidiaries, in each
case free and clear of all liens, encumbrances and defects except such
as are described in the Prospectus or such as do not materially affect
the value of such property and do not materially interfere with the use
made and proposed to be made of such property by the Company and its
subsidiaries; neither the Company nor its subsidiaries owns any real
property; and any real property and buildings held under lease by the
Company and its subsidiaries are held by them under valid, subsisting
and enforceable leases with such exceptions as are not material and do
not materially interfere with the use made and proposed to be made of
such property and buildings by the Company and its subsidiaries, in
each case except as described in the Prospectus.
(t) The Company and its subsidiaries own or possess,
or can acquire on reasonable terms, all material patents, patent
rights, licenses, inventions, copyrights, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or
confidential information, systems or procedures), trademarks, service
marks and trade names currently employed by them in connection with the
business now operated by them, and neither the Company nor any of its
subsidiaries has received any notice of infringement of or conflict
with asserted rights of others with respect to any of the foregoing
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would have a material adverse effect on
the Company and its subsidiaries, taken as a whole.
(u) No material labor dispute with the employees of
the Company or any of its subsidiaries exists, except as described in
the Prospectus, or, to the knowledge of the
<PAGE>
Company, is imminent; and the Company is not aware of any existing,
threatened or imminent labor disturbance by the employees of any of its
principal suppliers, manufacturers or contractors that could have a
material adverse effect on the Company and its subsidiaries, taken as a
whole.
(v) The Company and its subsidiaries are insured by
insurers of recognized financial responsibility against such losses and
risks and in such amounts as are prudent and customary in the
businesses in which they are engaged; neither the Company nor any of
its subsidiaries has been refused any insurance coverage sought or
applied for; and neither the Company nor any of its subsidiaries knows
of any facts which give it a reason to believe that it will not be able
to renew its existing insurance coverage as and when such coverage
expires or to obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not have a
material adverse effect on the Company and its subsidiaries, taken as a
whole, except as described in the Prospectus.
(w) The Company and its subsidiaries possess all
certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct
their respective businesses, other than those which, singly or in the
aggregate, if not so possessed, would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole; and
neither the Company nor any of its subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
certificate, authorization or permit which, singly or in the aggregate,
if the subject of an unfavorable decision, ruling or finding, would
have a material adverse effect on the Company and its subsidiaries,
taken as a whole, except as described the Prospectus.
(x) The Company and each of its subsidiaries maintain
a system of internal accounting controls sufficient to provide
reasonable assurance that (i) transactions are executed in accordance
with management's general or specific authorizations; (ii) transactions
are recorded as necessary to permit preparation of financial statements
in conformity with generally accepted accounting principles and to
maintain asset accountability; (iii) access to assets is permitted only
in accordance with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared with the
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
Furthermore, the Company represents and warrants to Morgan
Stanley that (i) the Registration Statement, the Prospectus and any preliminary
prospectus comply, and any further amendments or supplements thereto will
comply, with any applicable laws or regulations of foreign jurisdictions in
which the Prospectus or any preliminary prospectus, as amended or supplemented,
if applicable, are distributed in connection with the Directed Share Program,
and that (ii) no authorization, approval, consent, license, order, registration
or qualification of or with any government, governmental instrumentality or
court, other than such as have been obtained, is
<PAGE>
necessary under the securities laws and regulations of foreign jurisdictions in
which the Directed Shares are offered outside the United States.
The Company has not offered, or caused the Underwriters to
offer, Shares to any person pursuant to the Directed Share Program with the
specific intent to unlawfully influence (i) a customer or supplier of the
Company to alter the customer's or supplier's level or type of business with the
Company, or (ii) a trade journalist or publication to write or publish favorable
information about the Company or its products.
2. AGREEMENTS TO SELL AND PURCHASE. The Company hereby agrees
to sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from the
Company the respective numbers of Firm Shares set forth in Schedules I and II
hereto opposite its names at U.S.$[_____] a share ("PURCHASE PRICE").
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to sell to the U.S. Underwriters the Additional Shares, and the U.S.
Underwriters shall have a one-time right to purchase, severally and not jointly,
up to 1,335,000 Additional Shares at the Purchase Price. If the U.S.
Representatives, on behalf of the U.S. Underwriters, elect to exercise such
option, the U.S. Representatives shall so notify the Company in writing not
later than 30 days after the date of this Agreement, which notice shall specify
the number of Additional Shares to be purchased by the U.S. Underwriters and the
date on which such shares are to be purchased. Such date may be the same as the
Closing Date (as defined below) but not earlier than the Closing Date nor later
than ten business days after the date of such notice. Additional Shares may be
purchased as provided in Section 4 hereof solely for the purpose of covering
overallotments made in connection with the offering of the Firm Shares. If any
Additional Shares are to be purchased, each U.S. Underwriter agrees, severally
and not jointly, to purchase the number of Additional Shares (subject to such
adjustments to eliminate fractional shares as the U.S. Representatives may
determine) that bears the same proportion to the total number of Additional
Shares to be purchased as the number of U.S. Firm Shares set forth in Schedule I
hereto opposite the name of such U.S. Underwriter bears to the total number of
U.S. Firm Shares.
The Company hereby agrees that, without the prior written
consent of Morgan Stanley & Co. Incorporated on behalf of the Underwriters, it
will not, during the period ending 180 days after the date of the Prospectus,
(i) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, lend, or otherwise transfer or dispose of, directly or
indirectly, any shares of Common Stock or any securities convertible into or
exercisable or exchangeable for Common Stock or (ii) enter into any swap or
other arrangement that transfers to another, in whole or in part, any of the
economic consequences of ownership of the Common Stock, whether any such
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Shares to be sold hereunder, (B) the
issuance by the Company of shares of Common Stock upon the exercise
<PAGE>
of an option or warrant or the conversion of a security outstanding on the date
hereof of which the Underwriters have been advised in writing or (C) the
issuance by the Company of shares of Common Stock or options to purchase shares
of Common Stock issued pursuant to the Company's existing stock plans as
described in the Prospectus, PROVIDED that any such shares of Common Stock
described in this clause (C), whether to be issued directly or upon exercise of
any option, shall not be issued prior to the 181st day after the date of the
Prospectus unless the recipient of such shares executes and delivers to you on
or before the date of such issuance a "lock-up" agreement substantially in the
form of Exhibit B hereto.
3. TERMS OF PUBLIC OFFERING. The Company is advised by you
that the Underwriters propose to make a public offering of their respective
portions of the Shares as soon after the Registration Statement and this
Agreement have become effective as in your judgment is advisable. The Company is
further advised by you that the Shares are to be offered to the public initially
at U.S.$[_____] a share (the "PUBLIC OFFERING PRICE") and to certain dealers
selected by you at a price that represents a concession not in excess of
U.S.$[____] a share under the Public Offering Price, and that any Underwriter
may allow, and such dealers may reallow, a concession, not in excess of
U.S.$[____] a share, to any Underwriter or to certain other dealers.
4. PAYMENT AND DELIVERY. Payment for the Firm Shares shall be
made to the Company in Federal or other funds immediately available in New York
City against delivery of such Firm Shares for the respective accounts of the
several Underwriters at 10:00 a.m., New York City time, on [____________], 1999,
or at such other time on the same or such other date, not later than
[_________], 1999, as shall be designated in writing by you. The time and date
of such payment are hereinafter referred to as the "CLOSING DATE". The closing
of the offering and sale of the Firm Shares will be held at the offices of Hale
and Dorr LLP, 60 State Street, Boston, Massachusetts.
Payment for any Additional Shares shall be made to the Company
in Federal or other funds immediately available in New York City against
delivery of such Additional Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on the date specified in the
notice described in Section 2 or at such other time on the same or on such other
date, in any event not later than [_______], 1999, as shall be designated in
writing by the U.S. Representatives. The time and date of such payment are
hereinafter referred to as the "OPTION CLOSING DATE". The closing of the
offering and sale of Additional Shares will be held at the offices of Hale and
Dorr LLP, 60 State Street, Boston, Massachusetts.
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
<PAGE>
5. CONDITIONS TO THE UNDERWRITERS' OBLIGATIONS. The
obligations of the Company to sell the Shares to the Underwriters and the
several obligations of the Underwriters to purchase and pay for the Shares on
the Closing Date are subject to the condition that the Registration Statement
shall have become effective not later than [_______] (New York City time) on the
date hereof.
The several obligations of the Underwriters are subject to the
following further conditions:
(a) Subsequent to the execution and delivery of this
Agreement and prior to the Closing Date:
(i) there shall not have occurred any
downgrading, nor shall any notice have been given of any
intended or potential downgrading or of any review for a
possible change that does not indicate the direction of the
possible change, in the rating accorded any of the Company's
securities by any "nationally recognized statistical rating
organization," as such term is defined for purposes of Rule
436(g)(2) under the Securities Act; and
(ii) there shall not have occurred any
change, or any development involving a prospective change, in
the condition, financial or otherwise, or in the earnings,
business or operations of the Company and its subsidiaries,
taken as a whole, from that set forth in the Prospectus
(exclusive of any amendments or supplements thereto subsequent
to the date of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the
Closing Date a certificate, dated the Closing Date and signed by an
executive officer of the Company, to the effect set forth in Section
5(a)(i) above and to the effect that the representations and warranties
of the Company contained in this Agreement are true and correct as of
the Closing Date and that the Company has complied with all of the
agreements and satisfied all of the conditions on its part to be
performed or satisfied hereunder on or before the Closing Date.
The officer signing and delivering such certificate
may rely upon the best of his or her knowledge as to proceedings
threatened.
(c) The Underwriters shall have received on the
Closing Date an opinion of Hale and Dorr LLP, outside counsel for the
Company, dated the Closing Date, to the effect that:
<PAGE>
(i) the Company has been duly incorporated,
is validly existing as a corporation in good standing under
the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to
conduct its business as described in the Prospectus and is
duly qualified to transact business and is in good standing in
the Commonwealths of Massachusetts, Pennsylvania and Virginia,
the States of Connecticut, Maine, Maryland, New Hampshire, New
Jersey, New York and Rhode Island and the District of
Columbia, which are the only jurisdictions in the United
States in which the Company, to such counsel's knowledge,
maintains an office or owns or leases real property;
(ii) the Sole Subsidiary has been duly
incorporated, is validly existing as a corporation in good
standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus and is duly qualified to transact business and is
in good standing in the Commonwealth of Virginia, which is the
only jurisdiction in the United States in which the Sole
Subsidiary, to such counsel's knowledge, maintains an office
or owns or leases real property;
(iii) the authorized capital stock of the
Company conforms as to legal matters to the description
thereof contained in the Prospectus;
(iv) the shares of Common Stock outstanding
prior to the issuance of the Shares have been duly authorized
and are validly issued, fully paid and nonassessable;
(v) all of the issued shares of capital
stock of the Sole Subsidiary have been duly and validly
authorized and issued, are fully paid and non-assessable and
are owned of record directly by the Company, to our knowledge,
free and clear of all liens, encumbrances, equities or claims;
(vi) the Shares have been duly authorized
and, when issued, delivered and paid for in accordance with
the terms of this Agreement, will be validly issued, fully
paid and nonassessable, and the issuance of such Shares will
not be subject to any preemptive or similar rights under the
Delaware General Corporation Law statute, contained in the
Company's Certificate of Incorporation or Bylaws of the
Company or, to such counsel's knowledge, under any agreement
or other instrument that has been filed as an exhibit to the
Registration Statement;
(vii) this Agreement has been duly
authorized, executed and delivered by the Company;
(viii) the execution and delivery by the
Company of, and the performance by the Company of its
obligations under, this Agreement will not
<PAGE>
contravene any provision of applicable law or the certificate
of incorporation or bylaws of the Company or, to such
counsel's knowledge, any agreement or other instrument binding
upon the Company or any of its subsidiaries that has been
filed as an exhibit to the Registration Statement, or, to such
counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over
the Company or any subsidiary and specifically naming the
Company or any subsidiary, and no consent, approval,
authorization or order of, or qualification with, any
governmental body or agency is required for the performance by
the Company of its obligations under this Agreement, except
such as may be required by the securities or Blue Sky laws of
the various states in connection with the offer and sale of
the Shares by the U.S. Underwriters;
(ix) the statements (A) in the Prospectus
under the caption "Description of Capital Stock," the first
sentence under the caption "Business--Legal Proceedings" and
the first, second, tenth and fifteenth paragraphs under the
caption "Underwriters" and (B) in the Registration Statement
in Items 14 and 15, in each case insofar as such statements
constitute matters of law or legal conclusions, have been
reviewed by us, fairly present the information called for with
respect to such legal matters and are correct in all material
respects
(x) after due inquiry, such counsel does not
know of any legal or governmental proceedings pending or
threatened to which the Company or any of its subsidiaries is
a party or to which any of the properties of the Company or
any of its subsidiaries is subject that are required to be
described in the Registration Statement or the Prospectus and
are not so described or of any statutes, regulations,
contracts or other documents that are required by the
Securities Act of the rules and regulations promulgated
thereunder to be filed as exhibits to the Registration
Statement that are not filed as required;
(xi) the Company is not and, after giving
effect to the offering and sale of the Shares and the
application of the proceeds thereof as described in the
Prospectus, will not be an "investment company" as such term
is defined in the Investment Company Act of 1940, as amended;
(xii) the statements in the Prospectus under
the caption "United States Federal Tax Consequences to
Non-U.S. Holders of Common Stock," insofar as such statements
constitute a summary of the United States federal tax law
referred to therein, are correct in all material respects and
fairly summarize in all material respects the United States
federal tax laws referred to therein; and
(xiii) in addition, such counsel shall state
(A) that the Registration Statement and Prospectus (except for
financial statements and
<PAGE>
schedules and other financial and statistical data included
therein as to which such counsel need not express any opinion)
comply as to form in all material respects with the Securities
Act and the applicable rules and regulations of the Commission
thereunder and (B) that they have participated in conferences
with officers and other representatives of the Company,
representatives of the independent public or certified public
accountants for the Company and with representatives of and
counsel for the Underwriters, at which conferences such
counsel made inquiries of such persons and others and
discussed the contents of the Registration Statement and the
Prospectus and any supplements or amendments thereto. Such
counsel shall also state that while the limitations inherent
in the independent verification of factual matters and the
character of determinations involved in the registration
process are such that such counsel is not passing upon and
does not assume any responsibility for the accuracy,
completeness or fairness of the statements contained in the
Registration Statement or Prospectus, or any supplements or
amendments thereto, except with respect to paragraphs (ix) and
(xii) above, subject to and on the basis of such
participation, inquiries and discussions, no facts have come
to the attention of such counsel which have caused such
counsel to believe that (A) the Registration Statement and the
prospectus included therein at the time the Registration
Statement became effective contained any untrue statement of a
material fact or omitted to state a material fact required to
be stated therein or necessary to make the statements therein
not misleading (except for financial statements and schedules
and other financial and statistical data included therein as
to which such counsel need not express any belief) and (B) the
Prospectus when issued contained, or as of the date such
opinion is delivered, contains, any untrue statement of a
material fact or omitted or omits to state a material fact
necessary in order to make the statements therein, in the
light of the circumstances under which they were made, not
misleading (except for financial statements and schedules and
other financial and statistical data included therein as to
which such counsel need not express any belief).
In rendering such opinion such counsel may (i) state
that they render no opinion as to matters of law other than the General
Corporation Law statute of the State of Delaware, the law of the
Commonwealth of Massachusetts and federal law of the United States and
(ii) rely as to matters of fact, to the extent such counsel deems
reasonable, upon certificates of officers of the Company and its
subsidiaries.
The opinion of Hale and Dorr LLP described in Section
5(c) above shall be rendered to the Underwriters at the request of the
Company and shall so state therein.
(d) The Underwriters shall have received on the
Closing Date an opinion of Levine, Blaszak, Block and Boothby, LLP,
regulatory counsel for the Company, dated the Closing Date, in the form
of Exhibit A hereto.
<PAGE>
The opinion of Levine, Blaszak, Block and Boothby, LLP
described in Section 5(d) above shall be rendered to the Underwriters
at the request of the Company and shall so state therein.
(e) The Underwriters shall have received on the
Closing Date an opinion of Preti, Flaherty, Beliveau, Pachios & Haley
LLC, Maine regulatory counsel for the Company, dated the Closing Date,
in the form of Exhibit B hereto.
The opinion of Preti, Flaherty, Beliveau, Pachios &
Haley LLC described in Section 5(e) above shall be rendered to the
Underwriters at the request of the Company and shall so state therein.
(f) The Underwriters shall have received on the
Closing Date an opinion of Sulloway & Hollis, P.L.L.C., New Hampshire
regulatory counsel for the Company, dated the Closing Date, in the form
of Exhibit B hereto.
The opinion of Sulloway & Hollis, P.L.L.C. described
in Section 5(f) above shall be rendered to the Underwriters at the
request of the Company and shall so state therein.
(g) The Underwriters shall have received on the
Closing Date an opinion of and Foley, Hoag & Eliot, Massachusetts
regulatory counsel for the Company, dated the Closing Date, in the form
of Exhibit B hereto.
The opinion of Foley, Hoag & Eliot described in
Section 5(g) above shall be rendered to the Underwriters at the request
of the Company and shall so state therein.
(h) The Underwriters shall have received on the
Closing Date an opinion of Shearman & Sterling, counsel for the
Underwriters, dated the Closing Date, in form and substance
satisfactory to you.
(i) The Underwriters shall have received, on each of
the date hereof and the Closing Date, a letter dated the date hereof or
the Closing Date, as the case may be, in form and substance
satisfactory to the Underwriters, from PriceWaterhouseCoopers LLP,
independent public accountants, containing statements and information
of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus; PROVIDED that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
<PAGE>
(j) The "lockup" agreements, each substantially in
the form of Exhibit Cg1 hereto, between you and certain officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain other securities,
delivered to you on or before the date hereof, shall be in full force
and effect on the Closing Date.
(k) The Common Stock shall have been approved for
quotation on the Nasdaq National Market, subject only to official
notice of issuance.
(l) The Registration Rights Agreement between the
Company and the purchasers named therein dated September 1, 1998 as
amended on May 31, 1999 (the "Registration Rights Agreement"), shall
have been amended in a form satisfactory to you to provide that the
purchasers party thereto shall be subject to "lockup agreements,
substantially in the form of Exhibit B hereto under the circumstances
described in the Registration Rights Agreement.
(m) You shall have received such other documents and
certificates as are reasonably requested by you or your counsel.
The several obligations of the U.S. Underwriters to purchase
Additional Shares hereunder are subject to the delivery to the U.S.
Representatives on the Option Closing Date of such documents as they may
reasonably request with respect to the good standing of the Company, the due
authorization and issuance of the Additional Shares and other matters related to
the issuance of the Additional Shares.
6. COVENANTS OF THE COMPANY. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, four signed
copies of the Registration Statement (including exhibits thereto) and
for delivery to each other Underwriter a conformed copy of the
Registration Statement (without exhibits thereto) and to furnish to you
in New York City, without charge, prior to 10:00 a.m. New York City
time on the business day next succeeding the date of this Agreement and
during the period mentioned in Section 6(c) below, as many copies of
the Prospectus and any supplements and amendments thereto or to the
Registration Statement as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement and not to file any such proposed
amendment or supplement to which you reasonably object, and to file
with the Commission within the applicable period specified in Rule
424(b) under the Securities Act any prospectus required to be filed
pursuant to such Rule.
(c) If, during such period after the first date of
the public offering of the
<PAGE>
Shares as in the opinion of counsel for the Underwriters the Prospectus
is required by law to be delivered in connection with sales by an
Underwriter or dealer, any event shall occur or condition exist as a
result of which it is necessary to amend or supplement the Prospectus
in order to make the statements therein, in the light of the
circumstances when the Prospectus is delivered to a purchaser, not
misleading, or if, in the opinion of counsel for the Underwriters, it
is necessary to amend or supplement the Prospectus to comply with
applicable law, forthwith to prepare, file with the Commission and
furnish, at its own expense, to the Underwriters and to the dealers
(whose names and addresses you will furnish to the Company) to which
Shares may have been sold by you on behalf of the Underwriters and to
any other dealers upon request, either amendments or supplements to the
Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the
Prospectus is delivered to a purchaser, be misleading or so that the
Prospectus, as amended or supplemented, will comply with law.
(d) To endeavor to qualify the Shares for offer and
sale under the securities or Blue Sky laws of such jurisdictions as you
shall reasonably request.
(e) To make generally available to the Company's
security holders and to you as soon as practicable an earning statement
covering the twelve-month period ending [________], 2000 that satisfies
the provisions of Section 11(a) of the Securities Act and the rules and
regulations of the Commission thereunder.
(f) Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, to pay
or cause to be paid all expenses incident to the performance of its
obligations under this Agreement, including: (i) the fees,
disbursements and expenses of the Company's counsel and the Company's
accountants in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in
connection with the preparation and filing of the Registration
Statement, any preliminary prospectus, the Prospectus and amendments
and supplements to any of the foregoing, including all printing costs
associated therewith, and the mailing and delivering of copies thereof
to the Underwriters and dealers, in the quantities hereinabove
specified, (ii) all costs and expenses related to the transfer and
delivery of the Shares to the Underwriters, including any transfer or
other taxes payable thereon, (iii) the cost of printing or producing
any Blue Sky or Legal Investment memorandum in connection with the
offer and sale of the Shares under state securities laws and all
expenses in connection with the qualification of the Shares for offer
and sale under state securities laws as provided in Section 6(d)
hereof, including filing fees and the reasonable fees and disbursements
of counsel for the Underwriters in connection with such qualification
and in connection with the Blue Sky or Legal Investment memorandum,
(iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association
of Securities Dealers, Inc. (the "NASD"), including the fees and
disbursements incurred on behalf of Salomon Smith Barney Inc. in its
capacity as "qualified independent underwriter," (v) all
<PAGE>
fees and expenses in connection with the preparation and filing of the
registration statement on Form 8-A relating to the Common Stock and all
costs and expenses incident to quotation of the Shares on the Nasdaq
National Market, (vi) the cost of printing certificates representing
the Shares, (vii) the costs and charges of any transfer agent,
registrar or depositary, (viii) the costs and expenses of the Company
relating to investor presentations on any "road show" undertaken in
connection with the marketing of the offering of the Shares, including,
without limitation, expenses associated with the production of road
show slides and graphics, fees and expenses of any consultants engaged
in connection with the road show presentations with the prior approval
of the Company, travel and lodging expenses of the representatives and
officers of the Company and any such consultants, and the cost of any
aircraft chartered in connection with the road show, (ix) all other
costs and expenses incident to the performance of the obligations of
the Company hereunder for which provision is not otherwise made in this
Section. It is understood, however, that except as provided in this
Section, Section 7 entitled "Indemnity and Contribution", and the last
paragraph of Section 9 below, the Underwriters will pay all of their
costs and expenses, including fees and disbursements of their counsel,
stock transfer taxes payable on resale of any of the Shares by them and
any advertising expenses connected with any offers they may make.
(g) That in connection with the Directed Share
Program, the Company will ensure that the Directed Shares will be
restricted to the extent required by the NASD or the NASD rules from
sale, transfer, assignment, pledge or hypothecation for a period of
three months following the date of the effectiveness of the
Registration Statement. Morgan Stanley will notify the Company as to
which Participants will need to be so restricted. The Company will
direct the transfer agent to place stop transfer restrictions upon such
securities for such period of time.
(h) To pay all fees and disbursements of counsel
incurred by the Underwriters in connection with the Directed Share
Program and stamp duties, similar taxes or duties or other taxes, if
any, incurred by the Underwriters in connection with the Directed Share
Program.
Furthermore, the Company covenants with Morgan Stanley that
the Company will comply with all applicable securities and other applicable
laws, rules and regulations in each foreign jurisdiction in which the Directed
Shares are offered in connection with the Directed Share Program.
7. INDEMNITY AND CONTRIBUTION. (a) The Company agrees to
indemnify and hold harmless each Underwriter and each person, if any, who
controls any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Securities Exchange Act of 1934, as amended
(the "EXCHANGE ACT"), from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any
<PAGE>
untrue statement or alleged untrue statement of a material fact contained in the
Registration Statement or any amendment thereof, any preliminary prospectus or
the Prospectus (as amended or supplemented if the Company shall have furnished
any amendments or supplements thereto), or caused by any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as such
losses, claims, damages or liabilities are caused by any such untrue statement
or omission or alleged untrue statement or omission based upon information
relating to any Underwriter furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(b) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, its directors, its officers who sign
the Registration Statement and each person, if any, who controls the Company
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act to the same extent as the foregoing indemnities from the
Company to such Underwriter, but only with reference to information relating to
such Underwriter furnished to the Company in writing by such Underwriter through
you expressly for use in the Registration Statement, any preliminary prospectus,
the Prospectus or any amendments or supplements thereto.
(c) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 7(a) or 7(b), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel or (ii) the
named parties to any such proceeding (including any impleaded parties) include
both the indemnifying party and the indemnified party and representation of both
parties by the same counsel would be inappropriate due to actual or potential
differing interests between them. It is understood that the indemnifying party
shall not, in respect of the legal expenses of any indemnified party in
connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the fees and expenses of more than one separate firm (in addition
to any local counsel) for all such indemnified parties and that all such fees
and expenses shall be reimbursed as they are incurred. Such firm shall be
designated in writing by Morgan Stanley, in the case of parties indemnified
pursuant to Section 7(a) and by the Company, in the case of parties indemnified
pursuant to Section 7(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. Notwithstanding
the foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the
<PAGE>
indemnified party for fees and expenses of counsel as contemplated by the second
and third sentences of this paragraph, the indemnifying party agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by such indemnifying party of the aforesaid request and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement. No indemnifying party
shall, without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding. Notwithstanding anything
contained herein to the contrary, if indemnity may be sought pursuant to Section
7(g) hereof in respect of such action or proceeding, then in addition to such
separate firm for the indemnified parties, the indemnifying party shall be
liable for the reasonable fees and expenses of not more than one separate firm
(in addition to any local counsel) for Morgan Stanley for the defense of any
losses, claims, damages and liabilities arising out of the Directed Share
Program, and all persons, if any, who control Morgan Stanley within the meaning
of either Section 15 of the Act or Section 20 of the Exchange Act.
(d) To the extent the indemnification provided for in Section
7(a), 7(b) or 7(e) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and the Underwriters on the
other hand from the offering of the Shares or (ii) if the allocation provided by
clause 7(d)(i) above is not permitted by applicable law, in such proportion as
is appropriate to reflect not only the relative benefits referred to in clause
7(d)(i) above but also the relative fault of the Company on the one hand and of
the Underwriters on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, as well
as any other relevant equitable considerations. The relative benefits received
by the Company on the one hand and the Underwriters on the other hand in
connection with the offering of the Shares shall be deemed to be in the same
respective proportions as the net proceeds from the offering of the Shares
(before deducting expenses) received by the Company and the total underwriting
discounts and commissions received by the Underwriters, in each case as set
forth in the table on the cover of the Prospectus, bear to the aggregate Public
Offering Price of the Shares. Benefits received by Salomon Smith Barney Inc.
(the "Independent Underwriter") in its capacity as "qualified independent
underwriter" (within the meaning of National Association of Securities Dealers,
Inc. Conduct Rule 2720) shall be deemed to be equal to the compensation received
by the Independent Underwriter for acting in such capacity. The relative fault
of the Company on the one hand and the Underwriters on the other hand shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to
<PAGE>
information supplied by the Company or by the Underwriters and the parties'
relative intent, knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Underwriters' respective obligations to
contribute pursuant to this Section 7 are several in proportion to the
respective number of Shares they have purchased hereunder, and not joint.
(e) Without limitation of and in addition to its obligations
under the other paragraphs of this Section 7, the Company agrees to indemnify
and hold harmless the Independent Underwriter, its directors, officers,
employees and agents and each person who controls Independent Underwriter within
the meaning of either the Act or the Exchange Act against any and all losses,
claims, damages or liabilities (or action in respect thereof) that arise out of
or are based upon Independent Underwriter's acting as a "qualified independent
underwriter" (within the meaning of the National Association of Securities
Dealers, Inc. Conduct Rule 2720) in connection with the offering contemplated by
this Agreement, and agrees to reimburse each such indemnified party, as
incurred, for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; PROVIDED, HOWEVER, that the Company will not be liable in
any such case to the extent that any such loss, claim, damage or liability
results from the gross negligence or willful misconduct of the Independent
Underwriter.
(f) The Company and the Underwriters agree that it would not
be just or equitable if contribution pursuant to this Section 7 were determined
by PRO RATA allocation (even if the Underwriters were treated as one entity for
such purpose) or by any other method of allocation that does not take account of
the equitable considerations referred to in Section 7(d). The amount paid or
payable by an indemnified party as a result of the losses, claims, damages and
liabilities referred to in the immediately preceding paragraph shall be deemed
to include, subject to the limitations set forth above, any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigating or defending any such action or claim. Notwithstanding the
provisions of this Section 7, (i) no Underwriter shall be required to contribute
any amount in excess of the amount by which the total price at which the Shares
underwritten by it and distributed to the public were offered to the public
exceeds the amount of any damages that such Underwriter has otherwise been
required to pay by reason of such untrue or alleged untrue statement or omission
or alleged omission and (ii) the Independent Underwriter in its capacity as
"qualified independent underwriter" (within the meaning of National Association
of Securities Dealers, Inc. Conduct Rule 2720) shall not be responsible for any
amount in excess of the compensation received by the Independent Underwriter for
acting in such capacity. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The remedies provided for in this Section 7 are not exclusive
and shall not limit any rights or remedies which may otherwise be available to
any indemnified party at law or in equity.
<PAGE>
(g) The Company agrees to indemnify and hold harmless Morgan
Stanley and each person, if any, who controls Morgan Stanley within the meaning
of either Section 15 of the Securities Act or Section 20 of the Exchange Act
("MORGAN STANLEY ENTITIES"), from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) (i) caused by any untrue statement or alleged untrue
statement of a material fact contained in material prepared by or with the
consent of the Company for distribution to Participants in connection with the
Directed Share Program or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; (ii) caused by the failure of any Participant
to pay for and accept delivery of the Directed Shares that the Participant
agreed to purchase; or (iii) related to, arising out of, or in connection with
the Directed Share Program other than losses, claims, damages or liabilities (or
expenses relating thereto) that are finally judicially determined to have
resulted from the bad faith or gross negligence of the Morgan Stanley Entities.
(h) In case any proceeding (including any governmental
investigation) shall be instituted involving any Morgan Stanley Entity in
respect of which indemnity may be sought pursuant to Section 7(g), the Morgan
Stanley Entity seeking indemnity shall promptly notify the Company in writing
and the Company, upon request of the Morgan Stanley Entity, shall retain counsel
reasonably satisfactory to the Company to represent the Morgan Stanley Entity
and any others the Company may designate in such proceeding and shall pay the
fees and disbursements of such counsel related to such proceeding. In any such
proceeding, any Morgan Stanley Entity shall have the right to retain its own
counsel, but the fees and expenses of such counsel shall be at the expense of
such Morgan Stanley Entity unless (i) the Company and the Morgan Stanley Entity
shall have agreed to the retention of such counsel or (ii) the named parties to
any such proceeding (including any impleaded parties) include both the Company
and the Morgan Stanley Entity and representation of both parties by the same
counsel would be inappropriate due to actual or potential differing interests
between them. The Company shall not, in respect of the legal expenses of the
Morgan Stanley Entities in connection with any proceeding or related proceedings
in the same jurisdiction, be liable for the fees and expenses of more than one
separate firm (in addition to any local counsel) for all Morgan Stanley
Entities. Any such separate firm for the Morgan Stanley Entities shall be
designated in writing by Morgan Stanley. The Company shall not be liable for any
settlement of any proceeding effected without its written consent, but if
settled with such consent or if there be a final judgment for the plaintiff, the
Company agrees to indemnify the Morgan Stanley Entities from and against any
loss or liability by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time a Morgan Stanley Entity shall have requested
the Company to reimburse it for fees and expenses of counsel as contemplated by
the second and third sentences of this paragraph, the Company agrees that it
shall be liable for any settlement of any proceeding effected without its
written consent if (i) such settlement is entered into more than 30 days after
receipt by the Company of the aforesaid request and (ii) the Company shall not
have reimbursed the Morgan Stanley Entity in accordance with such request prior
to the date of such settlement. The
<PAGE>
Company shall not, without the prior written consent of Morgan Stanley, effect
any settlement of any pending or threatened proceeding in respect of which any
Morgan Stanley Entity is or could have been a party and indemnity could have
been sought hereunder by such Morgan Stanley Entity, unless such settlement
includes an unconditional release of the Morgan Stanley Entities from all
liability on claims that are the subject matter of such proceeding.
(i) To the extent the indemnification provided for in Section
7(g) is unavailable to a Morgan Stanley Entity or insufficient in respect of any
losses, claims, damages or liabilities referred to therein, then the Company, in
lieu of indemnifying the Morgan Stanley Entity thereunder, shall contribute to
the amount paid or payable by such Morgan Stanley Entity as a result of such
losses, claims, damages or liabilities (i) in such proportion as is appropriate
to reflect the relative benefits received by the Company on the one hand and the
Underwriters on the other hand from the offering of the Directed Shares or (ii)
if the allocation provided by clause 7(i)(i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause 7(i)(i) above but also the relative
fault of the Company on the one hand and of the Morgan Stanley Entity on the
other hand in connection with the statements or omissions that resulted in such
losses, claims, damages or liabilities, as well as any other relevant equitable
considerations. The relative benefits received by the Company on the one hand
and the Morgan Stanley Entity on the other hand in connection with the offering
of the Directed Shares shall be deemed to be in the same respective proportions
as the net proceeds from the offering of the Directed Shares (before deducting
expenses) and the total underwriting discounts and commissions received by the
Morgan Stanley Entities for the Directed Shares, bear to the aggregate Public
Offering Price of the Directed Shares. If the loss, claim, damage or liability
is caused by an untrue or alleged untrue statement of a material fact, the
relative fault of the Company on the one hand and the Morgan Stanley Entities on
the other hand shall be determined by reference to, among other things, whether
the untrue or alleged untrue statement or the omission or alleged omission
relates to information supplied by the Company or by the Morgan Stanley Entities
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(j) The Company and the Morgan Stanley Entities agree that it
would not be just or equitable if contribution pursuant to this Section 7 were
determined by PRO RATA allocation (even if the Morgan Stanley Entities were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 7(i). The amount paid or payable by the Morgan Stanley Entities as a
result of the losses, claims, damages and liabilities referred to in the
immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, no Morgan
Stanley Entity shall be required to contribute any amount in excess of the
amount by which the total price at which the Directed Shares distributed to the
public were offered to the public exceeds the amount of any damages that such
Morgan Stanley Entity has otherwise been required to pay. The remedies provided
for in this Section 7 are not exclusive and shall not limit any rights or
<PAGE>
remedies which may otherwise be available to any indemnified party at law or in
equity.
(k) The indemnity and contribution provisions contained in
this Section 7 and the representations, warranties and other statements of the
Company contained in this Agreement shall remain operative and in full force and
effect regardless of (i) any termination of this Agreement, (ii) any
investigation made by or on behalf of any Underwriter or any person controlling
any Underwriter, any Morgan Stanley Entity or by or on behalf of the Company,
its officers or directors or any person controlling the Company and (iii)
acceptance of and payment for any of the Shares or any of the Directed Shares.
8. TERMINATION. This Agreement shall be subject to termination
by notice given by you to the Company, if (a) after the execution and delivery
of this Agreement and prior to the Closing Date (i) trading generally shall have
been suspended or materially limited on or by, as the case may be, any of the
New York Stock Exchange, the American Stock Exchange, the National Association
of Securities Dealers, Inc., the Chicago Board of Options Exchange, the Chicago
Mercantile Exchange or the Chicago Board of Trade, (ii) trading of any
securities of the Company shall have been suspended on any exchange or in any
over-the-counter market, (iii) a general moratorium on commercial banking
activities in New York shall have been declared by either Federal or New York
State authorities or (iv) there shall have occurred any outbreak or escalation
of hostilities or any change in financial markets or any calamity or crisis
that, in your judgment, is material and adverse and (b) in the case of any of
the events specified in clauses 8(a)(i) through 8(a)(iv), such event, singly or
together with any other such event, makes it, in your judgment, impracticable to
market the Shares on the terms and in the manner contemplated in the Prospectus.
9. EFFECTIVENESS; DEFAULTING UNDERWRITERS. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it has or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I or Schedule
II bears to the aggregate number of Firm Shares set forth opposite the names of
all such non-defaulting Underwriters, or in such other proportions as you may
specify, to purchase the Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date; PROVIDED
that in no event shall the number of Shares that any Underwriter has agreed to
purchase pursuant to this Agreement be increased pursuant to this Section 9 by
an amount in excess of one-ninth of such number of Shares without the written
consent of such Underwriter. If, on the Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Firm Shares and the aggregate
number of Firm Shares with respect to which such default occurs is more than
one-tenth of the aggregate number
<PAGE>
of Firm Shares to be purchased, and arrangements satisfactory to you and the
Company for the purchase of such Firm Shares are not made within 36 hours after
such default, this Agreement shall terminate without liability on the part of
any non-defaulting Underwriter or the Company. In any such case either you or
the Company shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any Underwriter or
Underwriters shall fail or refuse to purchase Additional Shares and the
aggregate number of Additional Shares with respect to which such default occurs
is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company to
comply with the terms or to fulfill any of the conditions of this Agreement, or
if for any reason the Company shall be unable to perform its obligations under
this Agreement, the Company will reimburse the Underwriters or such Underwriters
as have so terminated this Agreement with respect to themselves, severally, for
all out-of-pocket expenses (including the fees and disbursements of their
counsel) reasonably incurred by such Underwriters in connection with this
Agreement or the offering contemplated hereunder.
10. COUNTERPARTS. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
11. APPLICABLE LAW. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
<PAGE>
12. HEADINGS. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
Very truly yours,
HARVARDNET INC.
By:_______________________
Name:
Title:
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
MERRILL LYNCH & CO., MERRILL LYNCH, PIERCE
FENNER & SMITH INCORPORATED
SALOMON SMITH BARNEY INC.
Acting severally on behalf of themselves and
the several U.S. Underwriters named in
Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:___________________________
Name:
Title:
MORGAN STANLEY & CO. INTERNATIONAL LIMITED
MERRILL LYNCH INTERNATIONAL
SALOMON SMITH BARNEY INTERNATIONAL LIMITED
Acting severally on behalf of themselves
and the several International Underwriters
named in Schedule II hereto.
By: Morgan Stanley & Co. International Limited
By: ____________________________
Name:
Title:
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
---------------
<S> <C>
Morgan Stanley & Co. Incorporated
Merrill Lynch & Co., Merrill Lynch, Pierce
Fenner & Smith Incorporated
Salomon Smith Barney Inc.
[NAMES OF OTHER U.S. UNDERWRITERS]
---------------
Total U.S. Firm Shares .............. 7,120,000
---------------
---------------
</TABLE>
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
---------------
<S> <C>
Morgan Stanley & Co. International Limited
Merrill Lynch International
Salomon Smith Barney International Limited
[NAMES OF OTHER INTERNATIONAL UNDERWRITERS]
---------------
Total International Firm Shares ...... 1,780,000
---------------
---------------
</TABLE>
<PAGE>
EXHIBIT A
[FORM OF REGULATORY OPINION OF LEVINE, BLASZAK]
Attach opinion of Levine, Blaszak, Block and Boothby, LLP, regulatory
counsel for the Company, to be delivered pursuant to the Underwriting Agreement
to the effect that:
(i) (A) the execution and delivery by the Company of, and performance
of its obligations under, the Underwriting Agreement and the consummation of
the transactions contemplated thereby (collectively, the "Transactions"),
will not materially violate (1) the Communications Act, any rules or
regulations of the FCC applicable to the Company, (2) any Maryland or New
York State Law relating to telecommunications and applicable to the Company,
or (3) to the best of our knowledge, any decree from any federal, Maryland,
or New York court or tribunal relating to telecommunications regulatory
matters and issued in a proceeding to which the Company was a party; and
(B) except for the approval of the New York PSC (which has
been applied for and is likely to be obtrained) no authorization from the
FCC or the PSC of Maryland or New York is necessary for the execution and
delivery by the Company of, or the performance of its obligations under, the
Underwriting Agreement or the consummation of the Transactions;
(ii) (A) the Company is authorized (1) to provide facilities-based and
resold local exchange telecommunications services as a CLEC in Maryland, and
(2) to operate as a facilities- based common carrier and reseller of
telephone services in New York, not including the provision of local
exchange services (I.E., local dial-tone) and emergency operator services in
accordance with Section 649.6 of the New York PSC's rules (the services
described in (1) and (2) to be referred to collectively as the "Service");
and
(B) the Company has applied for authorization to provide
services as a CLEC in Washington, D.C., and the Company's subsidiary has
applied for authorization to provide services as a CLEC in Virginia;
(iii) (A) to the best of our knowledge, the Company (1) has paid all
fees required by the FCC and by the PSCs of Maryland and New York, (2) has
(or has applied for and is likely to obtain) all telecommunications
certificates, permits, licenses, authorizations, consents and approvals with
respect to its status in Maryland and New York that are required by the PSCs
in such states and from the FCC; and (3) has made all reports, filings, and
registrations which the Company is or has been required to make with the FCC
or the PSCs of Maryland or New York, in each case that are material to the
Company's business and that are necessary to own, lease, license and use its
properties and assets to conduct its business in the manner described in the
Prospectus; and
<PAGE>
(B) to the best of our knowledge, (1) no proceedings relating
to the revocation, modification or non-renewal of any of the certificates,
orders, permits, licenses, authorizations, consents, or approvals described
in the preceding paragraph have been issued by the FCC or the PSC of
Maryland or New York, and (2) the Company has not received any notice, from
the FCC or from the PSC of Maryland or New York of the qualification or
rejection of any report, filing or registration by the Company with the FCC
or the Maryland or New York PSC, the effect of which, in the aggregate,
would have a material adverse effect on the Company;
(iv) to the best of our knowledge, the Company is not in violation of
the Communications Act, the rules, regulations, or orders of the FCC or, to
the extent applicable to the Company, Maryland or New York State Law to a
degree which, in the aggregate, would have a material adverse effect on the
Company;
(v) to the best of our knowledge,
(A) no judgment, decree, notice of violation, order to show
cause, or other order has been issued by the FCC, the Maryland or New York
PSC, or any federal or state court in Maryland or New York in a proceeding
or action relating to telecommunications regulatory issues and to which the
Company was a party, except such as would not have a material adverse effect
on the Company; and
(B) no litigation, proceeding, inquiry or investigation
relating to telecommunications regulatory issues has been commenced or
threatened against the Company before or by the FCC, the Maryland or New
York PSC, or any federal or state court in Maryland or New York;
(C) other than as generally discussed in the Prospectus, there
are no rulemakings or other administrative proceedings pending before the
FCC or the New York or Maryland PSC's which (x) are generally applicable to
telecommunications services and (y) if decided adversely to the interests of
the Company, would have a material adverse effect on the Company, taken as a
whole; and
(vi) the statements in the Prospectus under the captions "Risk
Factors--We are dependent on Bell Atlantic for copper telephone lines,
central office space and transmission facilities, and Bell Atlantic's
reluctance to cooperate with us or inability to provide the services or
facilities we need could adversely affect our business," "Risk Factors--Our
access to Bell Atlantic's central offices and transmission facilities is
dependent on third parties," "Risk Factors--Our services are subject to
uncertain government regulation regulations and changes in laws or
regulations could restrict the way we operate our business," "Risk
Factors--The adoption or modification of laws or regulations relating to the
Internet could adversely affect our business;" "Risk Factors--Our services
and interconnection agreements are subject to uncertain government
regulations that may be interpreted in ways that would
<PAGE>
harm our business" "Business--Market Opportunity--Emergence of Digital
Subscriber Line Technology," "Business--Interconnection Agreements with
Bell Atlantic" and "Business--Government Regulation," insofar as such
statements constitute a summary of the legal matters, documents or
proceedings referred to therein, fairly summarize the matters referred
to therein.
<PAGE>
EXHIBIT B
[FORM OF REGULATORY OPINION FOR LOCAL COUNSEL]
Attach opinion of local regulatory counsel for the Company, to be
delivered pursuant to the Underwriting Agreement to the effect that:
(i) (A) the execution and delivery by the Company of, and performance
of its obligations under, the Underwriting Agreement and the consummation of
the transactions contemplated thereby do not violate (1) any state or local
law, rule or regulation relating to telecommunications applicable to the
Company or its subsidiary ("State Law") or (2) to the best of such counsel's
knowledge, any decree from any court or tribunal, and (B) no authorization
of or filing with any state authority regulating telecommunications services
provided by the Company or its subsidiary, including state public utility
commissions ("State Authorities"), is necessary for the execution and
delivery by the Company of, or the performance of its obligations under, the
Underwriting Agreement or the consummation of the transactions contemplated
thereby;
(ii) the Company and its subsidiary are certified and/or registered to
provide DSL based local exchange and local exchange access services in [ ],
and the Company has a tariff on file in [ ]. No further authority is
required from any of the State Authorities by the Company or any of its
subsidiaries to conduct its business as described in the Prospectus;
(iii) (A) each of the Company and its subsidiary (1) has paid all fees
required by the State Authorities; and (2) has all certificates, orders,
permits, licenses, authorizations, consents and approvals of and from, and
has made all reports, filings and registrations, with the State Authorities,
all self regulatory organizations and all courts and tribunals necessary to
own, lease, license and use its properties and assets and to conduct its
business in the manner described in the Prospectus and is conducting its
business in accordance therewith; and (B) to the best of such counsel's
knowledge, neither the Company nor its subsidiary has received any notice of
proceedings relating to the revocation, modification or non-renewal of any
such certificates, orders, permits, licenses, authorizations, consents or
approvals, or the qualification or rejection of any such report, filing or
registration, the effect of which, singly or in the aggregate, would have a
material adverse effect on the Company and its subsidiary, taken as a whole;
<PAGE>
(iv) neither the Company nor its subsidiary is in violation of, or in
default under the telecommunications rules or regulations of State Law the
effect of which, singly or in the aggregate, would have a material adverse
effect on the Company and its subsidiary, taken as a whole; and
(v) to the best of such counsel's knowledge, (A) no judgment, decree or
order of any State Authority has been issued against the Company or its
subsidiary and (B) no litigation, proceeding, inquiry or investigation has
been commenced or threatened, and no notice of violation or order to show
cause has been issued, against the Company or its subsidiary before or by
any State Authority. To the best of such counsel's knowledge, there are no
rulemakings or other administrative proceedings pending before any State
Authority which (x) are generally applicable to telecommunications services
and (y) if decided adversely to the interests of the Company or its
subsidiary, would have a material adverse effect on the Company and its
subsidiary, taken as a whole.
<PAGE>
EXHIBIT C
[FORM OF LOCK-UP LETTER]
____________, 1999
Morgan Stanley & Co. Incorporated
Merrill Lynch & Co., Merrill Lynch, Pierce
Fenner & Smith Incorporated
Salomon Smith Barney Inc.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Merrill Lynch International
Salomon Smith Barney International Limited
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co. Incorporated
("MORGAN STANLEY") and Morgan Stanley & Co. International Limited ("MSIL")
propose to enter into an Underwriting Agreement (the "UNDERWRITING AGREEMENT")
with HarvardNet Inc., a Delaware corporation (the "COMPANY") providing for the
public offering (the "PUBLIC OFFERING") by the several Underwriters, including
Morgan Stanley and MSIL (the "UNDERWRITERS"), of shares (the "SHARES") of the
Common Stock, par value $.01 per share of the Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public Offering
to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley on behalf of the Underwriters, it will not, during the period commencing
on the date hereof and ending 180 days after the date of the final prospectus
relating to the Public Offering (the "PROSPECTUS"), (1) offer, pledge, sell,
contract to sell, sell any option or contract to purchase, purchase any option
or contract to sell, grant any option, right or warrant to purchase, lend, or
otherwise transfer or dispose of, directly or indirectly, any shares of Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock or (2) enter into any swap or other arrangement that transfers to
another, in whole or in part, any of the economic consequences of ownership of
Common Stock, whether any such transaction described in clause (1) or (2) above
is to be settled by delivery of Common Stock or such other securities, in cash
or otherwise. The foregoing sentence shall not apply to (a) the sale of any
Shares to the Underwriters pursuant to the Underwriting Agreement or (b)
transactions relating to shares of Common Stock or other securities acquired in
open market transactions after the completion of the Public Offering. In
addition, the undersigned agrees that, without the prior written consent of
Morgan Stanley on behalf of the Underwriters, it will not, during the period
commencing on the date hereof and ending 180 days after the date of the
Prospectus, make any demand for or exercise any right with respect to, the
registration of any shares of Common Stock or any security convertible into
<PAGE>
or exercisable or exchangeable for Common Stock.
Whether or not the Public Offering actually occurs depends on a number
of factors, including market conditions. Any Public Offering will only be made
pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company and the Underwriters.
Very truly yours,
-----------------------
(Name)
-----------------------
(Address)
<PAGE>
SECOND AMENDED AND RESTATED BY-LAWS
OF
HARVARDNET INC.
<PAGE>
BY-LAWS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ARTICLE 1 - Stockholders..........................................................................................1
1.1 PLACE OF MEETINGS......................................................................1
1.2 ANNUAL MEETING.........................................................................1
1.3 SPECIAL MEETINGS.......................................................................1
1.4 NOTICE OF MEETINGS.....................................................................1
1.5 VOTING LIST............................................................................2
1.6 QUORUM.................................................................................2
1.7 ADJOURNMENTS...........................................................................2
1.8 VOTING AND PROXIES.....................................................................2
1.9 ACTION AT MEETING......................................................................2
1.10 ACTION WITHOUT MEETING.................................................................3
ARTICLE 2 - Directors............................................................................................3
2.1 GENERAL POWERS.........................................................................3
2.2 NUMBER; ELECTION AND QUALIFICATION.....................................................3
2.3 ENLARGEMENT OF THE BOARD...............................................................3
2.4 TENURE.................................................................................3
2.5 VACANCIES..............................................................................4
2.6 RESIGNATION............................................................................4
2.7 REGULAR MEETINGS.......................................................................4
2.8 SPECIAL MEETINGS.......................................................................4
2.9 NOTICE OF SPECIAL MEETINGS.............................................................4
2.10 MEETINGS BY TELEPHONE CONFERENCE CALLS.................................................4
2.11 QUORUM.................................................................................5
2.12 ACTION AT MEETING......................................................................5
2.13 ACTION BY CONSENT......................................................................5
2.14 REMOVAL................................................................................5
2.15 COMMITTEES.............................................................................5
2.16 COMPENSATION OF DIRECTORS..............................................................6
ARTICLE 3 - Officers..............................................................................................6
3.1 ENUMERATION............................................................................6
3.2 ELECTION...............................................................................6
3.3 QUALIFICATION..........................................................................6
3.4 TENURE.................................................................................6
3.5 RESIGNATION AND REMOVAL................................................................6
</TABLE>
-ii-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
3.6 VACANCIES..............................................................................7
3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD...................................7
3.8 PRESIDENT..............................................................................7
3.9 VICE PRESIDENTS........................................................................7
3.10 SECRETARY AND ASSISTANT SECRETARIES....................................................8
3.11 TREASURER AND ASSISTANT TREASURERS.....................................................8
3.12 SALARIES...............................................................................9
ARTICLE 4 - Capital Stock.........................................................................................9
4.1 ISSUANCE OF STOCK......................................................................9
4.2 CERTIFICATES OF STOCK..................................................................9
4.3 TRANSFERS.............................................................................10
LOST, STOLEN OR DESTROYED CERTIFICATES..................................................................10
4.5 RECORD DATE...........................................................................10
ARTICLE 5 - General Provisions...................................................................................11
5.1 FISCAL YEAR...........................................................................11
5.2 CORPORATE SEAL........................................................................11
5.3 WAIVER OF NOTICE......................................................................11
5.4 VOTING OF SECURITIES..................................................................11
5.5 EVIDENCE OF AUTHORITY.................................................................11
5.6 CERTIFICATE OF INCORPORATION..........................................................11
5.7 TRANSACTIONS WITH INTERESTED PARTIES..................................................11
5.8 SEVERABILITY..........................................................................12
5.9 PRONOUNS..............................................................................12
ARTICLE 6 - Amendments...........................................................................................12
ARTICLE 7 - Prohibitions on Certain Actions Without Stockholder Consent..........................................13
</TABLE>
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EXHIBIT 3.3
BY-LAWS
OF
HARVARDNET INC.
ARTICLE 1 - Stockholders
1.1 PLACE OF MEETINGS. All meetings of stockholders shall be held at
such place within or without the State of Delaware as may be designated from
time to time by the Board of Directors or the President or, if not so
designated, at the registered office of the corporation.
1.2 ANNUAL MEETING. The annual meeting of stockholders for the election
of directors and for the transaction of such other business as may properly be
brought before the meeting shall be held on a date to be fixed by the Board of
Directors or the President (which date shall not be a legal holiday in the place
where the meeting is to be held) at the time and place to be fixed by the Board
of Directors or the President and stated in the notice of the meeting. If no
annual meeting is held in accordance with the foregoing provisions, the Board of
Directors shall cause the meeting to be held as soon thereafter as convenient.
If no annual meeting is held in accordance with the foregoing provisions, a
special meeting may be held in lieu of the annual meeting, and any action taken
at that special meeting shall have the same effect as if it had been taken at
the annual meeting, and in such case all references in these By-laws to the
annual meeting of the stockholders shall be deemed to refer to such special
meeting.
1.3 SPECIAL MEETINGS. Special meetings of stockholders may be called at
any time by the President or by the Board of Directors. Business transacted at
any special meeting of stockholders shall be limited to matters relating to the
purpose or purposes stated in the notice of meeting.
1.4 NOTICE OF MEETINGS. Except as otherwise provided by law, written
notice of each meeting of stockholders, whether annual or special, shall be
given not less than 10 nor more than 60 days before the date of the meeting to
each stockholder entitled to vote at such meeting. The notices of all meetings
shall state the place, date and hour of the meeting. The notice of a special
meeting shall state, in addition, the purpose or purposes for which the meeting
is called. If mailed, notice is given when deposited in the United States mail,
postage prepaid, directed to the stockholder at his address as it appears on the
records of the corporation.
1.5 VOTING LIST. The officer who has charge of the stock ledger of the
corporation shall prepare, at least 10 days before every meeting of
stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the
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address of each stockholder and the number of shares registered in the name of
each stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least 10 days prior to the meeting, at a place within the city
where the meeting is to be held. The list shall also be produced and kept at the
time and place of the meeting during the whole time of the meeting, and may be
inspected by any stockholder who is present.
1.6 QUORUM. Except as otherwise provided by law, the Certificate of
Incorporation or these By-laws, the holders of a majority of the shares of the
capital stock of the corporation issued and outstanding and entitled to vote at
the meeting, present in person or represented by proxy, shall constitute a
quorum for the transaction of business.
1.7 ADJOURNMENTS. Any meeting of stockholders may be adjourned to any
other time and to any other place at which a meeting of stockholders may be held
under these By-laws by the stockholders present or represented at the meeting
and entitled to vote, although less than a quorum, or, if no stockholder is
present, by any officer entitled to preside at or to act as Secretary of such
meeting. It shall not be necessary to notify any stockholder of any adjournment
of less than 30 days if the time and place of the adjourned meeting are
announced at the meeting at which adjournment is taken, unless after the
adjournment a new record date is fixed for the adjourned meeting. At the
adjourned meeting, the corporation may transact any business which might have
been transacted at the original meeting.
1.8 VOTING AND PROXIES. Each stockholder shall have one vote for each
share of stock entitled to vote held of record by such stockholder and a
proportionate vote for each fractional share so held, unless otherwise provided
in the Certificate of Incorporation. Each stockholder of record entitled to vote
at a meeting of stockholders, or to express consent or dissent to corporate
action in writing without a meeting, may vote or express such consent or dissent
in person or may authorize another person or persons to vote or act for him by
written proxy executed by the stockholder or his authorized agent and delivered
to the Secretary of the corporation. No such proxy shall be voted or acted upon
after three years from the date of its execution, unless the proxy expressly
provides for a longer period.
1.9 ACTION AT MEETING. When a quorum is present at any meeting, the
holders of shares of stock representing a majority of the votes cast on a matter
(or if there are two or more classes of stock entitled to vote as separate
classes, then in the case of each such class, the holders of shares of stock of
that class representing a majority of the votes cast on a matter) shall decide
any matter to be voted upon by the stockholders at such meeting, except when a
different vote is required by express provision of law, the Certificate of
Incorporation or these By-Laws. When a quorum is present at any meeting, any
election by stockholders shall be determined by a plurality of the votes cast on
the election.
1.10 ACTION WITHOUT MEETING. Any action required or permitted to be
taken at any annual or special meeting of stockholders of the corporation may be
taken without a meeting,
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without prior notice and without a vote, if a consent in writing, setting forth
the action so taken, is signed by the holders of outstanding stock having not
less than the minimum number of votes that would be necessary to authorize or
take such action at a meeting at which all shares entitled to vote on such
action were present and voted. Prompt notice of the taking of corporate action
without a meeting by less than unanimous written consent shall be given to those
stockholders who have not consented in writing.
ARTICLE 2 - Directors
2.1 GENERAL POWERS. The business and affairs of the corporation shall
be managed by or under the direction of a Board of Directors, who may exercise
all of the powers of the corporation except as otherwise provided by law or the
Certificate of Incorporation. In the event of a vacancy in the Board of
Directors, the remaining directors, except as otherwise provided by law, may
exercise the powers of the full Board until the vacancy is filled.
2.2 NUMBER; ELECTION AND QUALIFICATION. The number of directors which
shall constitute the whole Board of Directors shall be determined by resolution
of the stockholders or the Board of Directors, but in no event shall be less
than one. Subject to Section 7.1 below, the number of directors may be decreased
at any time and from time to time either by the stockholders or by a majority of
the directors then in office, but only to eliminate vacancies existing by reason
of the death, resignation, removal or expiration of the term of one or more
directors. The directors shall be elected at the annual meeting of stockholders
by such stockholders as have the right to vote on such election. Directors need
not be stockholders of the corporation.
2.3 ENLARGEMENT OF THE BOARD. Subject to Section 7.1 below, the number
of directors may be increased at any time and from time to time by the
stockholders or by a majority of the directors then in office.
2.4 TENURE. Each director shall hold office until the next annual
meeting and until his successor is elected and qualified, or until his earlier
death, resignation or removal.
2.5 VACANCIES. Unless and until filled by the stockholders, and subject
to the provisions of that certain Director Voting Agreement dated October 31,
1997 between the corporation and the stockholders of the corporation named
therein, any vacancy in the Board of Directors, however occurring, including a
vacancy resulting from an enlargement of the Board, may be filled by vote of a
majority of the directors then in office, although less than a quorum, or by a
sole remaining director. A director elected to fill a vacancy shall be elected
for the unexpired term of his predecessor in office, and a director chosen to
fill a position resulting from an increase in the number of directors shall hold
office until the next annual meeting of
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stockholders and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
2.6 RESIGNATION. Any director may resign by delivering his written
resignation to the corporation at its principal office or to the President or
Secretary. Such resignation shall be effective upon receipt unless it is
specified to be effective at some other time or upon the happening of some other
event.
2.7 REGULAR MEETINGS. Regular meetings of the Board of Directors may be
held without notice at such time and place, either within or without the State
of Delaware, as shall be determined from time to time by the Board of Directors;
provided that any director who is absent when such a determination is made shall
be given notice of the determination. A regular meeting of the Board of
Directors may be held without notice immediately after and at the same place as
the annual meeting of stockholders.
2.8 SPECIAL MEETINGS. Special meetings of the Board of Directors may be
held at any time and place, within or without the State of Delaware, designated
in a call by the Chairman of the Board, President, two or more directors, or by
one director in the event that there is only a single director in office.
2.9 NOTICE OF SPECIAL MEETINGS. Notice of any special meeting of
directors shall be given to each director by the Secretary or by the officer or
one of the directors calling the meeting. Notice shall be duly given to each
director (i) by giving notice to such director in person or by telephone at
least 48 hours in advance of the meeting, (ii) by sending a telegram or telex,
or delivering written notice by hand, to his last known business or home address
at least 48 hours in advance of the meeting, or (iii) by mailing written notice
to his last known business or home address at least 72 hours in advance of the
meeting. A notice or waiver of notice of a meeting of the Board of Directors
need not specify the purposes of the meeting.
2.10 MEETINGS BY TELEPHONE CONFERENCE CALLS. Directors or any members
of any committee designated by the directors may participate in a meeting of the
Board of Directors or such committee by means of conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other, and participation by such means shall constitute
presence in person at such meeting.
2.11 QUORUM. A majority of the total number of the whole Board of
Directors shall constitute a quorum at all meetings of the Board of Directors.
In the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each such director
so disqualified; provided, however, that in no case shall less than one-third
(1/3) of the number so fixed constitute a quorum. In the absence of a quorum at
any such meeting, a majority of the directors present may adjourn the meeting
from time to time without further notice other than announcement at the meeting,
until a quorum shall be present.
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2.12 ACTION AT MEETING. At any meeting of the Board of Directors at
which a quorum is present, the vote of a majority of those present shall be
sufficient to take any action, unless a different vote is specified by law, the
Certificate of Incorporation or these By-Laws.
2.13 ACTION BY CONSENT. Any action required or permitted to be taken at
any meeting of the Board of Directors or of any committee of the Board of
Directors may be taken without a meeting, if all members of the Board or
committee, as the case may be, consent to the action in writing, and the written
consents are filed with the minutes of proceedings of the Board or committee.
2.14 REMOVAL. Except as otherwise provided by the General Corporation
Law of Delaware, any one or more or all of the directors may be removed, with or
without cause, by the holders of a majority of the shares then entitled to vote
at an election of directors, except that the directors elected by the holders of
a particular class or series of stock may be removed without cause only by vote
of the holders of a majority of the outstanding shares of such class or series.
2.15 COMMITTEES. The Board of Directors may designate one or more
committees, each committee to consist of one or more of the directors of the
corporation. The Board may designate one or more directors as alternate members
of any committee, who may replace any absent or disqualified member at any
meeting of the committee. In the absence or disqualification of a member of a
committee, the member or members of the committee present at any meeting and not
disqualified from voting, whether or not he or they constitute a quorum, may
unanimously appoint another member of the Board of Directors to act at the
meeting in the place of any such absent or disqualified member. Any such
committee, to the extent provided in the resolution of the Board of Directors
and subject to the provisions of the General Corporation Law of the State of
Delaware, shall have and may exercise all the powers and authority of the Board
of Directors in the management of the business and affairs of the corporation
and may authorize the seal of the corporation to be affixed to all papers which
may require it. Each such committee shall keep minutes and make such reports as
the Board of Directors may from time to time request. Except as the Board of
Directors may otherwise determine, any committee may make rules for the conduct
of its business, but unless otherwise provided by the directors or in such
rules, its business shall be conducted as nearly as possible in the same manner
as is provided in these By-laws for the Board of Directors.
2.16 COMPENSATION OF DIRECTORS. Directors may be paid such compensation
for their services and such reimbursement for expenses of attendance at meetings
as the Board of Directors may from time to time determine. No such payment shall
preclude any director from serving the corporation or any of its parent or
subsidiary corporations in any other capacity and receiving compensation for
such service.
ARTICLE 3 - Officers
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3.1 ENUMERATION. The officers of the corporation shall consist of a
President, a Secretary, a Treasurer and such other officers with such other
titles as the Board of Directors shall determine, including a Chairman of the
Board, a Vice-Chairman of the Board, and one or more Vice Presidents, Assistant
Treasurers, and Assistant Secretaries. The Board of Directors may appoint such
other officers as it may deem appropriate.
3.2 ELECTION. The President, Treasurer and Secretary shall be elected
annually by the Board of Directors at its first meeting following the annual
meeting of stockholders, PROVIDED THAT, pursuant to Section 7.10, the election
of the President shall also require the affirmative vote of holders of not less
than 76% of the then outstanding shares of Common Stock. Other officers may be
appointed by the Board of Directors at such meeting or at any other meeting.
3.3 QUALIFICATION. No officer need be a stockholder. Any two or more
offices may be held by the same person.
3.4 TENURE. Except as otherwise provided by law, by the Certificate of
Incorporation or by these By-laws, each officer shall hold office until his
successor is elected and qualified, unless a different term is specified in the
vote choosing or appointing him, or until his earlier death, resignation or
removal.
3.5 RESIGNATION AND REMOVAL. Any officer may resign by delivering his
written resignation to the corporation at its principal office or to the
President or Secretary. Such resignation shall be effective upon receipt unless
it is specified to be effective at some other time or upon the happening of some
other event.
Any officer may be removed at any time, with or without cause, by vote
of a majority of the entire number of directors then in office.
Except as the Board of Directors may otherwise determine, no officer
who resigns or is removed shall have any right to any compensation as an officer
for any period following his resignation or removal, or any right to damages on
account of such removal, whether his compensation be by the month or by the year
or otherwise, unless such compensation is expressly provided in a duly
authorized written agreement with the corporation.
3.6 VACANCIES. The Board of Directors may fill any vacancy occurring in
any office for any reason and may, in its discretion, leave unfilled for such
period as it may determine any offices other than those of President, Treasurer
and Secretary. Each such successor shall hold office for the unexpired term of
his predecessor and until his successor is elected and qualified, or until his
earlier death, resignation or removal.
3.7 CHAIRMAN OF THE BOARD AND VICE-CHAIRMAN OF THE BOARD. The Board of
Directors may appoint a Chairman of the Board and may designate the Chairman of
the Board as Chief
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Executive Officer, PROVIDED THAT, pursuant to Section 7.10, the election of
the Chairman of the Board shall also require the affirmative vote of holders
of not less than 76% of the then outstanding shares of Common Stock. If the
Board of Directors appoints a Chairman of the Board, he shall perform such
duties and possess such powers as are assigned to him by the Board of
Directors. If the Board of Directors appoints a Vice-Chairman of the Board,
he shall, in the absence or disability of the Chairman of the Board, perform
the duties and exercise the powers of the Chairman of the Board and shall
perform such other duties and possess such other powers as may from time to
time be vested in him by the Board of Directors.
3.8 PRESIDENT. The President shall, subject to the direction of the
Board of Directors, have general charge and supervision of the business of the
corporation. Unless otherwise provided by the Board of Directors, he shall
preside at all meetings of the stockholders and, if he is a director, at all
meetings of the Board of Directors. Unless the Board of Directors has designated
the Chairman of the Board or another officer as Chief Executive Officer, the
President shall be the Chief Executive Officer of the corporation. The President
shall perform such other duties and shall have such other powers as the Board of
Directors may from time to time prescribe.
3.9 VICE PRESIDENTS. Any Vice President shall perform such duties and
possess such powers as the Board of Directors or the President may from time to
time prescribe. In the event of the absence, inability or refusal to act of the
President, the Vice President (or if there shall be more than one, the Vice
Presidents in the order determined by the Board of Directors) shall perform the
duties of the President and when so performing shall have all the powers of and
be subject to all the restrictions upon the President. The Board of Directors
may assign to any Vice President the title of Executive Vice President, Senior
Vice President or any other title selected by the Board of Directors.
3.10 SECRETARY AND ASSISTANT SECRETARIES. The Secretary shall perform
such duties and shall have such powers as the Board of Directors or the
President may from time to time prescribe. In addition, the Secretary shall
perform such duties and have such powers as are incident to the office of the
secretary, including without limitation the duty and power to give notices of
all meetings of stockholders and special meetings of the Board of Directors, to
attend all meetings of stockholders and the Board of Directors and keep a record
of the proceedings, to maintain a stock ledger and prepare lists of stockholders
and their addresses as required, to be custodian of corporate records and the
corporate seal and to affix and attest to the same on documents.
Any Assistant Secretary shall perform such duties and possess such
powers as the Board of Directors, the President or the Secretary may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Secretary, the Assistant Secretary, (or if there shall be more than one, the
Assistant Secretaries in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Secretary.
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In the absence of the Secretary or any Assistant Secretary at any
meeting of stockholders or directors, the person presiding at the meeting shall
designate a temporary secretary to keep a record of the meeting.
3.11 TREASURER AND ASSISTANT TREASURERS. The Treasurer shall perform
such duties and shall have such powers as may from time to time be assigned to
him by the Board of Directors or the President. In addition, the Treasurer shall
perform such duties and have such powers as are incident to the office of
treasurer, including without limitation the duty and power to keep and be
responsible for all funds and securities of the corporation, to deposit funds of
the corporation in depositories selected in accordance with these By-laws, to
disburse such funds as ordered by the Board of Directors, to make proper
accounts of such funds, and to render as required by the Board of Directors
statements of all such transactions and of the financial condition of the
corporation.
The Assistant Treasurers shall perform such duties and possess such
powers as the Board of Directors, the President or the Treasurer may from time
to time prescribe. In the event of the absence, inability or refusal to act of
the Treasurer, the Assistant Treasurer, (or if there shall be more than one, the
Assistant Treasurers in the order determined by the Board of Directors) shall
perform the duties and exercise the powers of the Treasurer.
3.12 SALARIES. Officers of the corporation shall be entitled to such
salaries, compensation or reimbursement as shall be fixed or allowed from time
to time by the Board of Directors.
ARTICLE 4 - Capital Stock
4.1 ISSUANCE OF STOCK. Unless otherwise voted by the stockholders and
subject to the provisions of the Certificate of Incorporation, the whole or any
part of any unissued balance of the authorized capital stock of the corporation
or the whole or any part of any unissued balance of the authorized capital stock
of the corporation held in its treasury may be issued, sold, transferred or
otherwise disposed of by vote of the Board of Directors in such manner, for such
consideration and on such terms as the Board of Directors may determine.
4.2 CERTIFICATES OF STOCK. Every holder of stock of the corporation
shall be entitled to have a certificate, in such form as may be prescribed by
law and by the Board of Directors, certifying the number and class of shares
owned by him in the corporation. Each such certificate shall be signed by, or in
the name of the corporation by, the Chairman or Vice-Chairman, if any, of the
Board of Directors, or the President or a Vice President, and the Treasurer or
an Assistant Treasurer, or the Secretary or an Assistant Secretary of the
corporation. Any or all of the signatures on the certificate may be a facsimile.
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Each certificate for shares of stock which are subject to any
restriction on transfer pursuant to the Certificate of Incorporation, the
By-laws, applicable securities laws or any agreement among any number of
shareholders or among such holders and the corporation shall have conspicuously
noted on the face or back of the certificate either the full text of the
restriction or a statement of the existence of such restriction.
If the corporation shall be authorized to issue more than one class of
stock or more than one series of any class, the powers, designations,
preferences and relative, participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of each certificate representing shares of such
class or series of stock, provided that in lieu of the foregoing requirements
there may be set forth on the face or back of each certificate representing
shares of such class or series of stock a statement that the corporation will
furnish without charge to each stockholder who so requests a copy of the full
text of the powers, designations, preferences and relative, participating,
optional or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
4.3 TRANSFERS. Except as otherwise established by rules and regulations
adopted by the Board of Directors, and subject to applicable law, shares of
stock may be transferred on the books of the corporation by the surrender to the
corporation or its transfer agent of the certificate representing such shares
properly endorsed or accompanied by a written assignment or power of attorney
properly executed, and with such proof of authority or the authenticity of
signature as the corporation or its transfer agent may reasonably require.
Except as may be otherwise required by law, by the Certificate of Incorporation
or by these By-laws, the corporation shall be entitled to treat the record
holder of stock as shown on its books as the owner of such stock for all
purposes, including the payment of dividends and the right to vote with respect
to such stock, regardless of any transfer, pledge or other disposition of such
stock until the shares have been transferred on the books of the corporation in
accordance with the requirements of these By-laws.
4.4 LOST, STOLEN OR DESTROYED CERTIFICATES. The corporation may issue a
new certificate of stock in place of any previously issued certificate alleged
to have been lost, stolen, or destroyed, upon such terms and conditions as the
Board of Directors may prescribe, including the presentation of reasonable
evidence of such loss, theft or destruction and the giving of such indemnity as
the Board of Directors may require for the protection of the corporation or any
transfer agent or registrar.
4.5 RECORD DATE. The Board of Directors may fix in advance a date as a
record date for the determination of the stockholders entitled to notice of or
to vote at any meeting of stockholders or to express consent (or dissent) to
corporate action in writing without a meeting, or entitled to receive payment of
any dividend or other distribution or allotment of any rights in respect of any
change, conversion or exchange of stock, or for the purpose of any other lawful
action. Such record date shall not be more than 60 nor less than 10 days before
the date of such
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meeting, nor more than 10 days after the date of adoption of a record date for a
written consent without a meeting, nor more than 60 days prior to any other
action to which such record date relates.
If no record date is fixed, the record date for determining
stockholders entitled to notice of or to vote at a meeting of stockholders shall
be at the close of business on the day before the day on which notice is given,
or, if notice is waived, at the close of business on the day before the day on
which the meeting is held. The record date for determining stockholders entitled
to express consent to corporate action in writing without a meeting, when no
prior action by the Board of Directors is necessary, shall be the day on which
the first written consent is properly delivered to the corporation. The record
date for determining stockholders for any other purpose shall be at the close of
business on the day on which the Board of Directors adopts the resolution
relating to such purpose.
A determination of stockholders of record entitled to notice of or to
vote at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
ARTICLE 5 - General Provisions
5.1 FISCAL YEAR. Except as from time to time otherwise designated by
the Board of Directors, the fiscal year of the corporation shall begin on the
first day of January in each year and end on the last day of December in each
year.
5.2 CORPORATE SEAL. The corporate seal shall be in such form as shall
be approved by the Board of Directors.
5.3 WAIVER OF NOTICE. Whenever any notice whatsoever is required to be
given by law, by the Certificate of Incorporation or by these By-laws, a waiver
of such notice either in writing signed by the person entitled to such notice or
such person's duly authorized attorney, or by telegraph, cable or any other
available method, whether before, at or after the time stated in such waiver, or
the appearance of such person or persons at such meeting in person or by proxy,
shall be deemed equivalent to such notice.
5.4 VOTING OF SECURITIES. Except as the directors may otherwise
designate, the President or Treasurer may waive notice of, and act as, or
appoint any person or persons to act as, proxy or attorney-in-fact for this
corporation (with or without power of substitution) at, any meeting of
stockholders or shareholders of any other corporation or organization, the
securities of which may be held by this corporation.
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5.5 EVIDENCE OF AUTHORITY. A certificate by the Secretary, or an
Assistant Secretary, or a temporary Secretary, as to any action taken by the
stockholders, directors, a committee or any officer or representative of the
corporation shall as to all persons who rely on the certificate in good faith be
conclusive evidence of such action.
5.6 CERTIFICATE OF INCORPORATION. All references in these By-laws to
the Certificate of Incorporation shall be deemed to refer to the Certificate of
Incorporation of the corporation, as amended and in effect from time to time.
5.7 TRANSACTIONS WITH INTERESTED PARTIES. No contract or transaction
between the corporation and one or more of the directors or officers, or between
the corporation and any other corporation, partnership, association, or other
organization in which one or more of the directors or officers are directors or
officers, or have a financial interest, shall be void or voidable solely for
this reason, or solely because the director or officer is present at or
participates in the meeting of the Board of Directors or a committee of the
Board of Directors which authorizes the contract or transaction or solely
because his or their votes are counted for such purpose, if:
(1) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the Board of Directors or
the committee, and the Board or committee in good faith authorizes the contract
or transaction by the affirmative votes of a majority of the disinterested
directors, even though the disinterested directors be less than a quorum;
(2) The material facts as to his relationship or interest and as to the
contract or transaction are disclosed or are known to the stockholders entitled
to vote thereon, and the contract or transaction is specifically approved in
good faith by vote of the stockholders; or
(3) The contract or transaction is fair as to the corporation as of the
time it is authorized, approved or ratified, by the Board of Directors, a
committee of the Board of Directors, or the stockholders.
Common or interested directors may be counted in determining the
presence of a quorum at a meeting of the Board of Directors or of a committee
which authorizes the contract or transaction.
5.8 SEVERABILITY. Any determination that any provision of these By-laws
is for any reason inapplicable, illegal or ineffective shall not affect or
invalidate any other provision of these By-laws.
5.9 PRONOUNS. All pronouns used in these By-laws shall be deemed to
refer to the masculine, feminine or neuter, singular or plural, as the identity
of the person or persons may require.
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ARTICLE 6 - Amendments
These By-laws may be altered, amended or repealed or new by-laws may be
adopted only by the affirmative vote of the holders of at least 76% of the
shares of the Common Stock of the corporation issued and outstanding and
entitled to vote at any regular meeting of stockholders, or at any special
meeting of stockholders, provided notice of such alteration, amendment, repeal
or adoption of new by-laws shall have been stated in the notice of such special
meeting.
ARTICLE 7 - Prohibitions on Certain Actions Without Stockholder Consent
So long as any shares of Common Stock shall be outstanding, the
Corporation shall not, without first obtaining the affirmative vote or written
consent of the holders of not less than 76% of the then outstanding shares of
Common Stock:
7.1 Increase or decrease from three (3) the number of directors which
constitutes the entire Board of Directors.
7.2 Authorize or issue any equity securities, or securities exercisable
or exchangeable for or convertible into equity securities;
7.3 Amend or repeal any provision of, or add any provision to, the
corporation's Certificate of Incorporation or By-laws;
7.4 Make any loan or advance of money to any person, including, without
limitation, any officers, directors, employees, stockholders or affiliates of
the Corporation, except loans or advances under the terms of a written agreement
which has been approved by a majority of the members of the Board of Directors;
7.5 Sell, lease or otherwise dispose of all or substantially all of its
property or assets (including the intellectual property of the corporation),
except in the ordinary course of business;
7.6 Voluntarily dissolve, liquidate or wind-up or merge or consolidate
with or into another corporation, corporations or other entity;
7.7 Pay or declare any dividend or distribution on any shares of its
capital stock (except dividends payable solely in shares of Common Stock to all
holders of shares of Common Stock); or apply any of its assets to the
redemption, retirement, purchase or acquisition, directly or indirectly, through
subsidiaries or otherwise, of any shares of its capital stock except pursuant to
contractual obligations which have previously been approved by a majority of the
members of the Board of Directors;
-12-
<PAGE>
7.8 Enter into or amend any employment agreement or consulting
agreement with any stockholders of the corporation;
7.9 Enter into any transaction with any shareholder or director of the
corporation, or any member of their respective immediate families or any
corporation or other entity directly or indirectly controlled by one or more of
such stockholders or directors, which transaction has an aggregate value in
excess of $100,000;
7.10 Appoint or designate its Chairman and Chief Executive Officer and
President and Chief Operating Officer; or
7.11 Make any material change in the business conducted or presently
proposed to be conducted by the corporation.
-13-
<PAGE>
HARVARDNET INC.
AMENDMENT TO SECOND AMENDED
AND RESTATED BY-LAWS OF HARVARDNET INC.
Pursuant to Section 228 of the Delaware General Corporation Law, as of
August 31, 1998, the holders of not less than 76% of the issued and outstanding
Common Stock of HarvardNET Inc., a Delaware corporation (the "Corporation"),
adopted, ratified and approved the following amendments to the Second Amended
and Restated By-laws of the Corporation:
That Article 6 of the Corporation's Seconded Amended and Restated
By-Laws (the "By-Laws") is hereby amended and restated in its entirety to
provide as follows:
"These By-Laws may be altered, amended or repealed or new
By-Laws may be adopted, subject to the provisions of the
Corporation's certificate of incorporation as in effect at
such time, by the affirmative vote of the holders of at
least 50% of the shares of the voting capital of the
corporation issued and outstanding and entitled to vote at
any regular meeting of stockholders, or at any special
meeting of stockholders."
That the By-Laws are hereby further amended by deleting therefrom in
its entirety Article 7 -- Prohibitions on Certain Actions Without Stockholder
Consent; and such Article 7 is of no further force or effect.
-14-
<PAGE>
Number
HN Harvard Net
COMMON STOCK SEE REVERSE FOR
CERTAIN DEFINITIONS
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
THIS CERTIFICATE IS CUSIP 417490 10 9
TRANSFERABLE IN
BOSTON, MA OR NEW YORK NY
THIS CERTIFIES THAT
IS THE OWNER OF
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK,
$.01 PAR VALUE PER SHARE, OF
HARVARDNET INC.
transferable on the books of the Company by the holder hereof in person or by
its duly authorized attorney upon surrender of this Certificate properly
endorsed or assigned. This Certificate and the shares represented hereby are
issued and shall be held subject to the laws of the State of Delaware and the
provisions of the Certificate of Incorporation and the By-laws of the
Company, as amended from time to time, to which the holder by acceptance
hereof assents. This Certificate is not valid unless countersigned and
registered by the Transfer Agent and Registrar.
Witness the facsimile seal of the Company and the facsimile signatures of
its duly authorized officers.
Dated:
HARVARDNET INC.
COUNTERSIGNED AND REGISTERED: 1992
BankBoston, N.A DELAWARE
TRANSFER AGENT /s/ Mark M. Washburn
-------------------------------------
AND REGISTRAR PRESIDENT AND CHIEF EXECUTIVE OFFICER
/s/ Todd C. Desisto
-------------------------------------
AUTHORIZED SIGNATURE TREASURER AND CHIEF FINANCIAL OFFICER
<PAGE>
HARVARDNET INC.
The Company is authorized to issue more than one class of series of
stock. Upon written request the Company will furnish without charge to each
stockholder a copy of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights.
The following abbreviations, when used in the inspection on the face of
this Certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-- Custodian
TEN ENT - as tenants by the entireties -------- --------
JT TEN - as joint tenants with right of (Cust) (Money)
supervisorship and not as tenants Under Uniform Gifts to Minors
in common Act
----------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, hereby, sell, assign and transfer unto
---------------------
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
--------------------------------------
- -------------------------------------------------------------------------------
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING ZIP CODE OF ASSIGNEE)
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint.
- -----------------------------------------------------------------------Attorney
to transfer the said stock on the books of the within named Company with
full power of substitution in the premises.
Dated
-----------------------
--------------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT
MUST CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACT OR THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
- ----------------------------
THE SIGNATURE(S) SHOULD BE
GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS,
STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT
UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM)
PURSUANT TO S.E.C.
RULE 17Ad-15.
<PAGE>
Exhibit 10.1
HarvardNet Inc.
AMENDED AND RESTATED 1997 STOCK INCENTIVE PLAN
1. PURPOSE
The purpose of this 1997 Stock Incentive Plan (the "Plan",) of
HarvardNet Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance based incentives and thereby better
aligning the interests of such persons with those of the Company's Stockholders.
Except where the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporations of HarvardNet Inc. as defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder (the "Code").
2. ELIGIBILITY
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other
stock-based awards (each, an "Award") under the Plan. Any person who has been
granted an Award under the Plan shall be deemed a "Participant".
3. ADMINISTRATION DELEGATION.
(a) ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be
administered by the Board of Directors of the Company (the "Board"). The Board
shall have authority to grant Awards and to adopt, amend and repeal such
administrative rules, guidelines and practices relating to the Plan as it shall
deem advisable. The Board may correct any defect, supply any omission or
reconcile any inconsistency in the Plan or any Award in the manner and to the
extent it shall deem expedient to carry the Plan into effect and it shall be the
sole and final judge of such expediency. All decisions by the Board shall be
made in the Board's sole discretion and shall be final and binding on all
persons having or claiming any interest in the Plan or in any Award. No director
or person acting pursuant to the authority delegated by the Board shall be
liable for any action or determination relating to or under the Plan made in
good faith.
(b) DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted
by applicable law, the Board may delegate to one or more executive officers of
the Company the power to make Awards and exercise such other powers under the
Plan as the Board may determine, provided that the Board shall fix the maximum
number of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) APPOINTMENT OF COMMITTEES. To the extent permitted by
applicable law, the Board may delegate any or all of its powers under the Plan
to one or more committees or subcommittees of the Board (a "Committee"). If and
when the common stock, $.01 par value per
<PAGE>
share, of the Company (the "Common Stock") is registered under the Securities
Exchange Act of 1934 (the "Exchange Act"), the Board shall appoint one such
Committee of not less than two members, each member of which shall be an
"outside director" within the meaning of Section 162(m) of the Code and a
"non-employee director" as defined in Rule 16b-3 promulgated under the Exchange
Act." All references in the Plan to the "Board" shall mean the Board or a
Committee of the Board or the executive officer referred to in Section 3(b) to
the extent that the Board's powers or authority under the Plan have been
delegated to such Committee or executive officer.
4. STOCK AVAILABLE FOR AWARDS.
(a) NUMBER OF SHARES. Subject to adjustment under Section
4(c), Awards may be made under the Plan for up to 406,406 shares of Common
Stock. If any Award expires or is terminated, surrendered or canceled without
having been fully exercised or is forfeited in whole or in part or results in
any Common Stock not being issued, the unused Common Stock covered by such Award
shall again be available for the grant of Awards under the Plan, subject,
however, in the case of Incentive Stock Options (as hereinafter defined), to any
limitation required under the Code. Shares issued under the Plan may consist in
whole or in part of authorized but unissued shares or treasury shares.
(b) PER-PARTICIPANT LIMIT. Subject to adjustment under Section
4(c), for Awards granted after the Common Stock is registered under the Exchange
Act, the maximum number of shares with respect to which an Award may be granted
to any Participant under the Plan shall be 406,406 per calendar year. The
per-participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m) of the Code.
(c) ADJUSTMENT TO COMMON STOCK. In the event of any stock
split, stock dividend, recapitalization, reorganization, merger, consolidation,
combination, exchange of shares, liquidation, spin-off or other similar change
in capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding stock-based Award shall be appropriately adjusted by
the Company (or substituted Awards may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 4(c) applies and Section 8(e)(1)
also applies to any event, Section 8(e)(1) shall be applicable to such event,
and this Section 4(c) shall not be applicable.
5. STOCK OPTIONS
(a) GENERAL. The Board may grant options to purchase Common
Stock (each, an "Option") and determine the number of shares of Common Stock to
be covered by each
-2-
<PAGE>
Option, the exercise price of each Option and the conditions and limitations
applicable to the exercise of each Option, including conditions relating to
applicable federal or state securities laws, as it considers necessary or
advisable. An Option which is not intended to be an Incentive Stock Option (as
hereinafter defined) shall be designated a "Nonstatutory Stock Option".
(b) INCENTIVE STOCK OPTIONS. An Option that the Board intends
to be an "incentive stock option" as defined in Section 422 of the Code (an
"Incentive Stock Option") shall only be granted to employees of the Company and
shall be subject to and shall be construed consistently with the requirements of
Section 422 of the Code. The Company shall have no liability to a Participant,
or any other party, if an Option (or any part thereof) which is intended to be
an Incentive Stock Option is not an Incentive Stock Option.
(c) EXERCISE PRICE. The Board shall establish the exercise
price at the time each Option is granted and specify it in the applicable option
agreement.
(d) DURATION OF OPTIONS. Each Option shall be exercisable at
such times and subject to such terms and conditions as the Board may specify in
the applicable option agreement.
(e) EXERCISE OF OPTION. Options may be exercised only by
delivery to the Company of a written notice of exercise signed by the proper
person together with payment in full as specified in Section 5(f) for the number
of shares for which the Option is exercised.
(f) PAYMENT UPON EXERCISE. Common Stock purchased upon the
exercise of an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option Agreement,
delivery of an irrevocable and unconditional undertaking by a credit worthy
broker to deliver promptly to the Company sufficient funds to pay the exercise
price, or delivery by the Participant to the Company of a copy of irrevocable
and unconditional instructions to a credit worthy broker to deliver promptly to
the Company cash or a check sufficient to pay the exercise price;
(3) to the extent permitted by the Board and explicitly provided in an
Option Agreement (i) by delivery of shares of Common Stock owned by the
Participant valued at their fair market value as determined by the Board in good
faith ("Fair Market Value"), which Common Stock was owned by the Participant at
least six months prior to such delivery, (ii) by delivery of a promissory note
of the Participant to the Company on terms determined by the Board, or (iii) by
payment of such other lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
-3-
<PAGE>
6. RESTRICTED STOCK.
(a) GRANTS. The Board may grant Awards entitling recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares at their issue price or other stated or
formula price (or to require forfeiture of such shares if issued at no cost)
from the recipient in the event that conditions specified by the Board in the
applicable Award are not satisfied prior to the end of the applicable
restriction period or periods established by the Board for such Award (each,
"Restricted Stock Award").
(b) TERMS AND CONDITIONS. The Board shall determine the terms
and conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. OTHER STOCK-BASED AWARDS. The Board shall have the right to grant
other Awards based upon the Common Stock having such terms and conditions as the
Board may determine, including the grant of shares based upon certain
conditions, the grant of securities convertible into Common Stock and the grant
of stock appreciation rights.
8. GENERAL PROVISIONS APPLICABLE TO AWARDS
(a) TRANSFERABILITY OF AWARDS. Except as the Board may
otherwise determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall be
exercisable only by the Participant. References to a Participant, to the extent
relevant in the context, shall include references to authorized transferees.
(b) DOCUMENTATION. Each Award under the Plan shall be
evidenced by a written instrument in such form as the Board shall determine.
Each Award may contain terms and conditions in addition to those set forth in
the Plan.
(c) BOARD DISCRETION. Except as otherwise provided by the
Plan, each type of Award may be made alone or in addition or in relation to any
other type of Award. The terms of each type of Award need not be identical, and
the Board need not treat Participants uniformly.
-4-
<PAGE>
(d) TERMINATION OF STATUS. The Board shall determine the
effect on an Award of the disability, death, retirement, authorized leave of
absence or other change in the employment or other status of a Participant and
the extent to which, and the period during which, the Participant, the
Participant's legal representative, conservator, guardian or Designated
Beneficiary may exercise rights under the Award.
(e) ACQUISITION EVENTS
(1) CONSEQUENCES OF ACQUISITION EVENTS. Upon the occurrence of an
Acquisition Event (as defined below), or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board shall take any one or
more of the following actions with respect to then outstanding Awards: (i)
provide that outstanding Options shall be assumed, or equivalent Options shall
be substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any such Options substituted for Incentive Stock Options
shall satisfy, in the determination of the Board, the requirements of Section
424(a) of the Code; (ii) upon written notice to the Participants, provide that
all then unexercised Options will become exercisable in full as of a specified
time (the "Acceleration Time") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants between the Acceleration Time and the
consummation of such Acquisition Event; (iii) in the event of an Acquisition
Event under the terms of which holders of Common Stock will receive upon
consummation thereof a cash payment for each share of Common Stock surrendered
pursuant to such Acquisition Event (the "Acquisition Price"), provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and each Participant shall receive, in exchange therefor, a cash payment equal
to the amount (if any) by which (A) the Acquisition Price multiplied by the
number of shares of Common Stock subject to such outstanding Options (whether or
not then exercisable), exceeds (B) the aggregate exercise price of such Options;
(iv) provide that all Restricted Stock Awards then outstanding shall become free
of all restrictions prior to the consummation of the Acquisition Event; and (v)
provide that any other stock-based Awards outstanding (A) shall become
exercisable, realizable or vested in full, or shall be free of all conditions or
restrictions, as applicable to each such Award, prior to the consummation of the
Acquisition Event, or (B), if applicable, shall be assumed, or equivalent Awards
shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof).
An "Acquisition Event" shall mean: (a) any merger or consolidation
which results in the voting securities of the Company outstanding immediately
prior thereto representing immediately thereafter (either by remaining
outstanding or by being converted into voting securities of the surviving or
acquiring entity) less than 50% of the combined voting power of the voting
securities of the Company or such surviving or acquiring entity outstanding
immediately after such merger or consolidation; (b) any sale of all or
substantially all of the assets of the Company; or (c) the complete liquidation
of the Company.
-5-
<PAGE>
(2) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. The Board may grant
Awards under the Plan in substitution for stock and stock-based awards held by
employees of another corporation who become employees of the Company as a result
of a merger or consolidation of the employing corporation with the Company or
the acquisition by the Company of property or stock of the employing
corporation. The substitute Awards shall be granted on such terms and conditions
as the Board considers appropriate in the circumstances.
(f) WITHHOLDING. Each Participant shall pay to the Company, or
make provision satisfactory to the Board for payment of, any taxes required by
law to be withheld in connection with Awards to such Participant no later than
the date of the event creating the tax liability. The Board may allow
Participants to satisfy such tax obligations in whole or in part in shares of
Common Stock, including shares retained from the Award creating the tax
obligation, valued at their Fair Market Value. The Company may, to the extent
permitted by law, deduct any such tax obligations from any payment of any kind
otherwise due to a Participant.
(g) AMENDMENT OF AWARD. The Board may amend, modify or
terminate any outstanding Award, including but not limited to, substituting
therefor another Award of the same or a different type, changing the date of
exercise or realization, and converting an Incentive Stock Option to a
Nonstatutory Stock Option, provided that the Participant's consent to such
action shall be required unless the Board determines that the action, taking
into account any related action, would not materially and adversely affect the
Participant.
(h) CONDITIONS ON DELIVERY OF STOCK. The Company will not be
obligated to deliver any shares of Common Stock pursuant to the Plan or to
remove restrictions from shares previously delivered under the Plan until (i)
all conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company s counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(i) ACCELERATION. The Board may at any time provide that any
Options shall become immediately exercisable in full or in part, that any
Restricted Stock Awards shall be free of all restrictions or that any other
stock-based Awards may become exercisable in full or in part or free of some or
all restrictions or conditions, or otherwise realizable in full or in part, as
the case may be.
9. MISCELLANEOUS
(a) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall
have any claim or right to be granted an Award, and the grant of an Award shall
not be construed as giving a Participant the right to continued employment or
any other relationship with the Company. The Company expressly reserves the
right at any time to dismiss or otherwise terminate its
-6-
<PAGE>
relationship with a Participant free from any liability or claim under the Plan,
except as expressly provided in the applicable Award.
(b) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any shares of Common Stock to be distributed
with respect to an Award until becoming the record holder of such shares.
(c) EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become
effective on the date on which it is adopted by the Board, but no Award granted
to a Participant designated as subject to Section 162(m) by the Board shall
become exercisable, vested or realizable, as applicable to such Award, unless
and until the Plan has been approved by the Company's stockholders. No Awards
shall be granted under the Plan after the completion of ten years from the
earlier of (i) the date on which the Plan was adopted by the Board or (ii) the
date the Plan was approved by the Company's stockholders, but Awards previously
granted may extend beyond that date.
(d) AMENDMENT OF PLAN. The Board may amend, suspend or
terminate the Plan or any portion thereof at any time, provided that no Award
granted to a Participant designated as subject to Section 162(m) by the Board
after the date of such amendment shall become exercisable, realizable or vested,
as applicable to such Award (to the extent that such amendment to the Plan was
required to grant such Award to a particular Participant), unless and until such
amendment shall have been approved by the Company's stockholders.
(e) STOCKHOLDER APPROVAL. For purposes of this Plan,
stockholder approval shall mean approval by a vote of the stockholders in
accordance with the requirements of Section 162(m) of the Code.
(f) GOVERNING LAW. The provisions of the Plan and all Awards
made hereunder shall be governed by and interpreted in accordance with the laws
of the State of Delaware, without regard to any applicable conflicts of law.
-7-
<PAGE>
Exhibit 10.2
HARVARDNET INC.
AMENDED AND RESTATED 1999 STOCK INCENTIVE PLAN
1. PURPOSE
The purpose of this 1999 Stock Incentive Plan (the "Plan") of
HarvardNET Inc., a Delaware corporation (the "Company"), is to advance the
interests of the Company's stockholders by enhancing the Company's ability to
attract, retain and motivate persons who make (or are expected to make)
important contributions to the Company by providing such persons with equity
ownership opportunities and performance-based incentives and thereby better
aligning the interests of such persons with those of the Company's stockholders.
Except where the context otherwise requires, the term "Company" shall include
any present or future subsidiary corporations of HarvardNET, Inc. as defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder (the "Code").
2. ELIGIBILITY
All of the Company's full-time employees (as defined below), officers,
directors, consultants and advisors (and any individuals who have accepted an
offer for employment) are eligible to be granted options, restricted stock, or
other stock-based awards (each, an "Award") under the Plan. Any person who has
been granted an Award under the Plan shall be deemed a "Participant."
A "full-time employee" is an employee who works at least 30 hours per
week.
3. ADMINISTRATION, DELEGATION
(1) ADMINISTRATION BY BOARD OF DIRECTORS. The Plan will be administered
by the Board of Directors of the Company (the "Board"). The Board shall have
authority to grant Awards and to adopt, amend and repeal such administrative
rules, guidelines and practices relating to the Plan as it shall deem advisable.
The Board may correct any defect, supply any omission or reconcile any
inconsistency in the Plan or any Award in the manner and to the extent it shall
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(2) DELEGATION TO EXECUTIVE OFFICERS. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided
<PAGE>
that the Board shall fix the maximum number of shares subject to Awards and
the maximum number of shares for any one Participant to be made by such
executive officers.
(3) APPOINTMENT OF COMMITTEES. To the extent permitted by applicable
law, the Board may delegate any or all of its powers under the Plan to one or
more committees or subcommittees of the Board (a "Committee"). If and when the
common stock, $.01 par value per share, of the Company (the "Common Stock") is
registered under the Securities Exchange Act of 1934 (the "Exchange Act"), the
Board shall appoint one such Committee of not less than two members, each member
of which shall be an "outside director" within the meaning of Section 162(m) of
the Code and a "non-employee director" as defined in Rule 16b-3 promulgated
under the Exchange Act." All references in the Plan to the "Board" shall mean
the Board or a Committee of the Board or the executive officer referred to in
Section 3(b) to the extent that the Board's powers or authority under the Plan
have been delegated to such Committee or executive officer.
4. STOCK AVAILABLE FOR AWARDS
(1) NUMBER OF SHARES. Subject to adjustment under Section 4(c), Awards
may be made under the Plan for up to 5,419,000 shares of Common Stock. If any
Award expires or is terminated, surrendered or canceled without having been
fully exercised or is forfeited in whole or in part or results in any Common
Stock not being issued, the unused Common Stock covered by such Award shall
again be available for the grant of Awards under the Plan, subject, however, in
the case of Incentive Stock Options (as hereinafter defined), to any limitation
required under the Code. Shares issued under the Plan may consist in whole or in
part of authorized but unissued shares or treasury shares.
(2) PER-PARTICIPANT LIMIT. Subject to adjustment under Section 4(c),
for Awards granted after the Common Stock is registered under the Exchange Act,
the maximum number of shares with respect to which an Award may be granted to
any Participant under the Plan shall be 1,355,000 per calendar year. The
per-participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m) of the Code.
(3) ADJUSTMENT TO COMMON STOCK. In the event of any stock split, stock
dividend, recapitalization, reorganization, merger, consolidation, combination,
exchange of shares, liquidation, spin-off or other similar change in
capitalization or event, or any distribution to holders of Common Stock other
than a normal cash dividend, (i) the number and class of securities available
under this Plan, (ii) the number and class of security and exercise price per
share subject to each outstanding Option, (iii) the repurchase price per
security subject to each outstanding Restricted Stock Award, and (iv) the terms
of each other outstanding stock-based Award shall be appropriately adjusted by
the Company (or substituted Awards may be made, if applicable) to the extent the
Board shall determine, in good faith, that such an adjustment (or substitution)
is necessary and appropriate. If this Section 4(c) applies and Section 8(e)(1)
also
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applies to any event, Section 8(e)(1) shall be applicable to such event, and
this Section 4(c) shall not be applicable.
5. STOCK OPTIONS
(1) GENERAL. The Board may grant options to purchase Common Stock
(each, an "Option") and determine the number of shares of Common Stock to be
covered by each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option".
(2) INCENTIVE STOCK OPTIONS. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(3) EXERCISE PRICE. The Board shall establish the exercise price at the
time each Option is granted and specify it in the applicable option agreement.
(4) DURATION OF OPTIONS. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement.
(5) EXERCISE OF OPTION. Options may be exercised only by delivery to
the Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(6) PAYMENT UPON EXERCISE. Common Stock purchased upon the exercise of
an Option granted under the Plan shall be paid for as follows:
(1) in cash or by check, payable to the order of the Company;
(2) except as the Board may otherwise provide in an Option
Agreement, delivery of an irrevocable and unconditional undertaking by a
creditworthy broker to deliver promptly to the Company sufficient funds to pay
the exercise price, or delivery by the Participant to the Company of a copy of
irrevocable and unconditional instructions to a creditworthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price;
(3) to the extent permitted by the Board and explicitly
provided in an Option Agreement (i) by delivery of shares of Common Stock owned
by the Participant valued at their fair market value as determined by the Board
in good faith ("Fair Market Value"), which
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Common Stock was owned by the Participant at least six months prior to
such delivery, (ii) by delivery of a promissory note of the Participant to the
Company on terms determined by the Board, or (iii) by payment of such other
lawful consideration as the Board may determine; or
(4) any combination of the above permitted forms of payment.
6. RESTRICTED STOCK
(a) GRANTS. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, "Restricted Stock Award").
(b) TERMS AND CONDITIONS. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of the
Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. OTHER STOCK-BASED AWARDS
The Board shall have the right to grant other Awards based upon the
Common Stock having such terms and conditions as the Board may determine,
including the grant of shares based upon certain conditions, the grant of
securities convertible into Common Stock and the grant of stock appreciation
rights.
8. GENERAL PROVISIONS APPLICABLE TO AWARDS
(1) TRANSFERABILITY OF AWARDS. Except as the Board may otherwise
determine or provide in an Award, Awards shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the person to whom they are
granted, either voluntarily or by operation of law, except by will or the laws
of descent and distribution, and, during the life of the Participant, shall
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be exercisable only by the Participant. References to a Participant, to the
extent relevant in the context, shall include references to authorized
transferees.
(2) DOCUMENTATION. Each Award under the Plan shall be evidenced by a
written instrument in such form as the Board shall determine. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) BOARD DISCRETION. Except as otherwise provided by the Plan, each
type of Award may be made alone or in addition or in relation to any other type
of Award. The terms of each type of Award need not be identical, and the Board
need not treat Participants uniformly.
(d) TERMINATION OF STATUS. The Board shall determine the effect on an
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) ACQUISITION EVENTS
(1) CONSEQUENCES OF ACQUISITION EVENTS.
(A) ASSUMPTION OF OPTIONS AND AWARDS. Upon the
occurrence of an Acquisition Event (as defined below), or the execution by the
Company of any agreement with respect to an Acquisition Event, the Board may
take any one or more of the following actions with respect to then outstanding
Awards: (i) provide that outstanding Options shall be assumed, or equivalent
Options shall be substituted, by the acquiring or succeeding corporation (or an
affiliate thereof), provided that any such Options substituted for Incentive
Stock Options shall satisfy, in the determination of the Board, the requirements
of Section 424(a) of the Code; (ii) provide that any other stock-based Awards
outstanding shall be assumed, or equivalent Awards shall be substituted, by the
acquiring or succeeding corporation (or an affiliate thereof); and (iii) if the
acquiring or succeeding corporation (or an affiliate thereof) is unable or
unwilling to assume the outstanding Options and/or other stock-based Awards,
upon written notice to the Participants, provide that all then unexercised
Options will terminate immediately prior to the consummation of such Acquisition
Event, except to the extent exercised by the Participants prior to the
consummation of such Acquisition Event.
An "Acquisition Event" shall mean: (a) any merger or consolidation
which results in the voting securities of the Company outstanding immediately
prior thereto representing immediately thereafter (either by remaining
outstanding or by being converted into voting securities of the surviving or
acquiring entity) less than a majority of the combined voting power of the
voting securities of the Company or such surviving or acquiring entity
outstanding immediately after such merger or consolidation; (b) any sale of all
or substantially all of the assets of the Company; or (c) the complete
liquidation of the Company.
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<PAGE>
(B) ACCELERATION. Unless otherwise provided in the
option agreement evidencing an Option or the stock restriction agreement
relating to a Restricted Stock Award, upon the occurrence of an Acquisition
Event, (i) one-half the number of shares subject to the Option which were not
already vested shall be exercisable upon the occurrence of an Acquisition Event
and the remaining one-half of such number of shares shall continue to become
vested in accordance with the original vesting schedule set forth in such
option, with one-half of the number of shares that would otherwise have first
become vested becoming so vested on each subsequent vesting date in accordance
with the original schedule and; (ii) the vesting schedule of all Restricted
Stock Awards shall be accelerated in part so that one-half of the number of
shares that would otherwise have first become free from conditions or
restrictions on any date after the Acquisition Event shall immediately become
free from conditions or restrictions and the remaining one-half of such number
of shares shall continue to become free from conditions or restrictions in
accordance with the original schedule set forth in such Restricted Stock Award,
with one-half of the number of shares that would otherwise have first become
free from conditions or restrictions becoming free from conditions or
restrictions on each subsequent vesting date in accordance with the original
schedule. In addition, upon the occurrence of an Acquisition Event, or the
execution by the Company of an agreement with respect to an Acquisition Event,
the Board may take any one of the following actions with respect to then
outstanding Awards: (i) upon written notice to the Participants, provide that
all then unexercised Options will become exercisable in full as of a specified
time (the "Acceleration Time") prior to the Acquisition Event and will terminate
immediately prior to the consummation of such Acquisition Event, except to the
extent exercised by the Participants between the Acceleration Time and the
consummation of such Acquisition Event; (ii) provide that all Restricted Stock
Awards then outstanding shall become free of all restrictions prior to the
consummation of the Acquisition Event; (iii) in the event of an Acquisition
Event under the terms of which holders of Common Stock will receive upon
consummation thereof a cash payment for each share of Common Stock surrendered
pursuant to such Acquisition Event (the "Acquisition Price"), provide that all
outstanding Options shall terminate upon consummation of such Acquisition Event
and each Participant shall receive, in exchange therefor, a cash payment equal
to the amount (if any) by which (A) the Acquisition Price multiplied by the
number of shares of Common Stock subject to such outstanding Options (whether or
not then exercisable), exceeds (B) the aggregate exercise price of such Options;
and (iv) provide that any other stock-based Awards outstanding shall become
exercisable, realizable or vested in full, or shall be free of all conditions or
restrictions, as applicable to each such Award, prior to the consummation of the
Acquisition Event.
(2) ASSUMPTION OF OPTIONS UPON CERTAIN EVENTS. The Board may
grant Awards under the Plan in substitution for stock and stock-based awards
held by employees of another corporation who become employees of the Company as
a result of a merger or consolidation of the employing corporation with the
Company or the acquisition by the Company of property or stock of the employing
corporation. The substitute Awards shall be granted on such terms and conditions
as the Board considers appropriate in the circumstances.
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<PAGE>
(f) WITHHOLDING. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. The Board may allow Participants to
satisfy such tax obligations in whole or in part in shares of Common Stock,
including shares retained from the Award creating the tax obligation, valued at
their Fair Market Value. The Company may, to the extent permitted by law, deduct
any such tax obligations from any payment of any kind otherwise due to a
Participant.
(g) AMENDMENT OF AWARD. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the Participant's consent to such action shall be required
unless the Board determines that the action, taking into account any related
action, would not materially and adversely affect the Participant.
(h) CONDITIONS ON DELIVERY OF STOCK. The Company will not be obligated
to deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(i) ACCELERATION. The Board may at any time provide that any Options
shall become immediately exercisable in full or in part, that any Restricted
Stock Awards shall be free of all restrictions or that any other stock-based
Awards may become exercisable in full or in part or free of some or all
restrictions or conditions, or otherwise realizable in full or in part, as the
case may be.
9. MISCELLANEOUS
(1) NO RIGHT TO EMPLOYMENT OR OTHER STATUS. No person shall have any
claim or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(2) NO RIGHTS AS STOCKHOLDER. Subject to the provisions of the
applicable Award, no Participant or Designated Beneficiary shall have any rights
as a stockholder with respect to any
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<PAGE>
shares of Common Stock to be distributed with respect to an Award until becoming
the record holder of such shares.
(3) EFFECTIVE DATE AND TERM OF PLAN. The Plan shall become effective on
the date on which it is adopted by the Board. No Awards shall be granted under
the Plan after the completion of ten years from the earlier of (i) the date on
which the Plan was adopted by the Board or (ii) the date the Plan was approved
by the Company's stockholders, but Awards previously granted may extend beyond
that date.
(4) AMENDMENT OF PLAN. The Board may amend, suspend or terminate the
Plan or any portion thereof at any time.
(5) GOVERNING LAW. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware, without regard to any applicable conflicts of law.
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Exhibit 10.3
HARVARDNET INC.
1999 EMPLOYEE STOCK PURCHASE PLAN
The purpose of this Plan is to provide eligible employees of
HarvardNET Inc. (the "Company") and certain of its subsidiaries with
opportunities to purchase shares of the Company's common stock, $.01 par
value (the "Common Stock"). One Million Three Hundred Fifty Five Thousand
(1,355,000) shares of Common Stock in the aggregate have been approved for
this purpose. This Plan is intended to qualify as an "employee stock purchase
plan" as defined in Section 423 of the Internal Revenue Code of 1986, as
amended (the "Code"), and the regulations promulgated thereunder, and shall
be interpreted consistent therewith.
1. ADMINISTRATION. The Plan will be administered by the Company's Board
of Directors (the "Board") or by a Committee appointed by the Board (the
"Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.
2. ELIGIBILITY. All employees of the Company, including Directors who
are employees, and all employees of any subsidiary of the Company (as defined in
Section 424(f) of the Code) designated by the Board or the Committee from time
to time (a "Designated Subsidiary"), are eligible to participate in any one or
more of the offerings of Options (as defined in Section 9) to purchase Common
Stock under the Plan provided that:
(a) they are customarily employed by the Company or a
Designated Subsidiary for more than 20 hours a week and for more than
five months in a calendar year; and
(b) they have been employed by the Company or a Designated
Subsidiary for at least one (1) month prior to enrolling in the Plan;
and
(c) they are employees of the Company or a Designated
Subsidiary on the first day of the applicable Plan Period (as defined
below).
No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary. For
purposes of the preceding sentence, the attribution rules of Section 424(d) of
the Code shall apply in determining the stock ownership of an employee, and all
stock which the employee has a contractual right to purchase shall be treated as
stock owned by the employee.
3. OFFERINGS. The Company will make one or more offerings ("Offerings")
to employees to purchase stock under this Plan. Unless otherwise determined by
the Board or the Committee, the first Offering will commence on the effective
date of the Company's initial
<PAGE>
public offering of Common Stock (the "Effective Date") and end on February
29, 2000. Unless otherwise determined by the Board or the Committee,
subsequent Offerings will commence on the date after the end of the preceding
Offering and will end on the last day of the sixth full month thereafter. Each
such period is referred to as a Plan Period (a "Plan Period"). The Board or the
Committee may, at its discretion, choose a different Plan Period for any
Offerings.
4. PARTICIPATION. An employee eligible on the first day of any Offering
(an "Offering Commencement Date") may participate in such Offering by completing
and forwarding a payroll deduction authorization form to the employee's
appropriate payroll office at least seven (7) days prior to the applicable
Offering Commencement Date. The form will authorize a regular payroll deduction
from the Compensation received by the employee during the Plan Period. Unless an
employee files a new form or withdraws from the Plan, his or her deductions and
purchases will continue at the same rate for future Offerings under the Plan as
long as the Plan remains in effect. The term "Compensation" means the amount of
money reportable on the employee's Federal Income Tax Withholding Statement,
excluding overtime, shift premium, incentive or bonus awards, allowances and
reimbursements for expenses such as relocation allowances for travel expenses,
income or gains on the exercise of Company stock options or stock appreciation
rights, and similar items, whether or not shown on the employee's Federal Income
Tax Withholding Statement, but including, in the case of salespersons, sales
commissions to the extent determined by the Board or the Committee.
5. DEDUCTIONS. The Company will maintain payroll deduction accounts for
all participating employees. With respect to any Offering made under this Plan,
an employee may authorize a payroll deduction in any dollar amount up to a
maximum of 10% of the Compensation he or she receives during the Plan Period or
such shorter period during which deductions from payroll are made or such lesser
percentage as the Board or Committee shall determine before the start of each
Plan Period; provided, that such percentage or amount may not result in total
deductions of less than $100 for any employee in any Plan Period.
No employee may be granted an Option (as defined in Section 9) which
permits his rights to purchase Common Stock under this Plan and any other
employee stock purchase plan (as defined in Section 423(b) of the Code) of the
Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the
fair market value of such Common Stock (determined at the Offering Commencement
Date of the Plan Period) for each calendar year in which the Option is
outstanding at any time.
6. DEDUCTION CHANGES. An employee may decrease or discontinue his
payroll deduction once during any Plan Period, by filing a new payroll deduction
authorization form. However, an employee may not increase his payroll deduction
during a Plan Period. If an employee elects to discontinue his payroll
deductions during a Plan Period, but does not elect to withdraw his funds
pursuant to Section 8 hereof, funds deducted prior to his or her election to
<PAGE>
discontinue will be applied to the purchase of Common Stock on the Exercise Date
(as defined below).
7. INTEREST. Interest will not be paid on any employee accounts, except
to the extent that the Board or the Committee, in its sole discretion, elects to
credit employee accounts with interest at such per annum rate as it may from
time to time determine.
8. WITHDRAWAL OF FUNDS. An employee may at any time prior to the close
of business on the last business day in a Plan Period and for any reason
permanently draw out the balance accumulated in the employee's account and
thereby withdraw from participation in an Offering. Partial withdrawals are not
permitted. The employee may not begin participation again during the remainder
of the Plan Period. The employee may participate in any subsequent Offering in
accordance with terms and conditions established by the Board or the Committee.
9. PURCHASE OF SHARES. On the Offering Commencement Date of each Plan
Period, the Company will grant to each eligible employee who is then a
participant in the Plan an option ("Option") to purchase on the last business
day of such Plan Period (the "Exercise Date"), at the Option Price hereinafter
provided for, the largest number of whole shares of Common Stock of the Company
as does not exceed the number of shares determined by multiplying $2,083 by the
number of full months in the Offering Period and dividing the result by the
closing price (as defined below) on the Offering Commencement Date of such Plan
Period.
The purchase price for each share purchased will be 85% of the closing
price of the Common Stock on (i) the first business day of such Plan Period or
(ii) the Exercise Date, whichever closing price shall be less. Such closing
price shall be (a) the closing price on any national securities exchange on
which the Common Stock is listed, (b) the closing price on the Nasdaq National
Market or (c) the average of the closing bid and asked prices in the
over-the-counter-market, whichever is applicable, as published in THE WALL
STREET JOURNAL; provided that, with respect to the first Plan Period, the
closing price on the Offering Commencement Date shall be the initial public
offering price provided for in the underwriting agreement entered into by the
Company in connection with the Company's initial public offering. If no sales of
Common Stock were made on such a day, the price of the Common Stock for purposes
of clauses (a) and (b) above shall be the reported price for the next preceding
day on which sales were made.
Each employee who continues to be a participant in the Plan on the
Exercise Date shall be deemed to have exercised his or her Option at the Option
Price on such date and shall be deemed to have purchased from the Company the
number of full shares of Common Stock reserved for the purpose of the Plan that
his accumulated payroll deductions on such date will pay for, but not in excess
of the maximum number determined in the manner set forth above.
Any balance remaining in an employee's payroll deduction account at the
end of a Plan Period, other than amounts that would otherwise have been applied
for the payment of fractional shares, will be automatically refunded to the
employee.
10. ISSUANCE OF CERTIFICATES. Certificates representing shares of
Common Stock purchased under the Plan may be issued only in the name of the
employee, in the name of the
<PAGE>
employee and another person of legal age as joint tenants with rights of
survivorship, or (in the Company's sole discretion) in the name of a brokerage
firm, bank or other nominee holder designated by the employee. The Company may,
in its sole discretion and in compliance with applicable laws, authorize the use
of book entry registration of shares in lieu of issuing stock certificates.
11. RIGHTS ON RETIREMENT, DEATH OR TERMINATION OF EMPLOYMENT. In the
event of a participating employee's termination of employment prior to the last
business day of a Plan Period, no payroll deduction shall be taken from any pay
due and owing to an employee and the balance in the employee's account shall be
paid to the employee or, in the event of the employee's death, (a) to a
beneficiary previously designated in a revocable notice signed by the employee
(with any spousal consent required under state law) or (b) in the absence of
such a designated beneficiary, to the executor or administrator of the
employee's estate or (c) if no such executor or administrator has been appointed
to the knowledge of the Company, to such other person(s) as the Company may, in
its discretion, designate. If, prior to the last business day of the Plan
Period, the Designated Subsidiary by which an employee is employed shall cease
to be a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the employee
shall be deemed to have terminated employment for the purposes of this Plan.
12. OPTIONEES NOT STOCKHOLDERS. Neither the granting of an Option to an
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him or her.
13. RIGHTS NOT TRANSFERABLE. Rights under this Plan are not
transferable by a participating employee other than by will or the laws of
descent and distribution, and are exercisable during the employee's lifetime
only by the employee.
14. APPLICATION OF FUNDS. All funds received or held by the Company
under this Plan may be combined with other corporate funds and may be used for
any corporate purpose.
15. ADJUSTMENT IN CASE OF CHANGES AFFECTING COMMON STOCK. In the event
of a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common Stock, the number of shares approved for this Plan, and the
share limitation set forth in Section 9, shall be increased proportionately, and
such other adjustment shall be made as may be deemed equitable by the Board or
the Committee. In the event of any other change affecting the Common Stock, such
adjustment shall be made as may be deemed equitable by the Board or the
Committee to give proper effect to such event.
16. MERGER. If the Company shall at any time merge or consolidate with
another corporation and the holders of the capital stock of the Company
immediately prior to such merger or consolidation continue to hold at least 80%
by voting power of the capital stock of the surviving corporation ("Continuity
of Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for
<PAGE>
each share as to which such Option shall be exercised the securities or property
which a holder of one share of the Common Stock was entitled to upon and at the
time of such merger or consolidation, and the Board or the Committee shall take
such steps in connection with such merger or consolidation as the Board or the
Committee shall deem necessary to assure that the provisions of Section 15 shall
thereafter be applicable, as nearly as reasonably may be, in relation to the
said securities or property as to which such holder of such Option might
thereafter be entitled to receive thereunder.
In the event of a merger or consolidation of the Company with or into
another corporation which does not involve Continuity of Control, or of a sale
of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (a) subject to the provisions of
clauses (b) and (c), after the effective date of such transaction, each holder
of an outstanding Option shall be entitled, upon exercise of such Option, to
receive in lieu of shares of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock received pursuant to the
terms of such transaction; or (b) all outstanding Options may be cancelled by
the Board or the Committee as of a date prior to the effective date of any such
transaction and all payroll deductions shall be paid out to the participating
employees; or (c) all outstanding Options may be cancelled by the Board or the
Committee as of the effective date of any such transaction, provided that notice
of such cancellation shall be given to each holder of an Option, and each holder
of an Option shall have the right to exercise such Option in full based on
payroll deductions then credited to his account as of a date determined by the
Board or the Committee, which date shall not be less than ten (10) days
preceding the effective date of such transaction.
17. AMENDMENT OF THE PLAN. The Board may at any time, and from time to
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the shareholders of the Company is required by Section 423 of
the Code, such amendment shall not be effected without such approval, and (b) in
no event may any amendment be made which would cause the Plan to fail to comply
with Section 423 of the Code.
18. INSUFFICIENT SHARES. In the event that the total number of shares
of Common Stock specified in elections to be purchased under any Offering plus
the number of shares purchased under previous Offerings under this Plan exceeds
the maximum number of shares issuable under this Plan, the Board or the
Committee will allot the shares then available on a pro rata basis.
19. TERMINATION OF THE PLAN. This Plan may be terminated at any time by
the Board. Upon termination of this Plan all amounts in the accounts of
participating employees shall be promptly refunded.
20. GOVERNMENTAL REGULATIONS. The Company's obligation to sell and
deliver Common Stock under this Plan is subject to listing on a national stock
exchange or quotation on the Nasdaq National Market (to the extent the Common
Stock is then so listed or quoted) and the approval of all governmental
authorities required in connection with the authorization, issuance or sale of
such stock.
<PAGE>
21. GOVERNING LAW. The Plan shall be governed by Massachusetts law
except to the extent that such law is preempted by federal law.
22. ISSUANCE OF SHARES. Shares may be issued upon exercise of an Option
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
23. NOTIFICATION UPON SALE OF SHARES. Each employee agrees, by entering
the Plan, to promptly give the Company notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
24. EFFECTIVE DATE AND APPROVAL OF SHAREHOLDERS. The Plan shall take
effect on the Effective Date, subject to approval by the shareholders of the
Company as required by Section 423 of the Code, which approval must occur within
twelve months of the adoption of the Plan by the Board.
Adopted by the Board of Directors
on June 29, 1999
<PAGE>
EXHIBIT 10.4
HARVARDNET INC.
1999 STOCK OPTION PLAN FOR NON-EMPLOYEE DIRECTORS
1. PURPOSE
The purpose of this 1999 Stock Option Plan for Non-Employee Directors
(the "Plan") of HarvardNET Inc. (the "Company") is to encourage ownership in
the Company by non-employee directors of the Company whose continued services
are considered essential to the Company's future progress and to provide them
with a further incentive to remain as directors of the Company.
2. ADMINISTRATION
The Board of Directors shall supervise and administer the Plan. All
questions concerning interpretation of the Plan or any options granted under
it shall be resolved by the Board of Directors and such resolution shall be
final and binding upon all persons having an interest in the Plan. The Board
of Directors may, to the full extent permitted by or consistent with
applicable laws or regulations, delegate any or all of its powers under the
Plan to a committee appointed by the Board of Directors, and if a committee
is so appointed, all references to the Board of Directors in the Plan shall
mean and relate to such committee.
3. ELIGIBILITY
There shall be eligible to receive options under the Plan each director
of the Company who is not an employee of the Company or any of its
subsidiaries or affiliates.
4. STOCK SUBJECT TO THE PLAN
(a) The maximum number of shares of the Company's Common Stock, par
value $.01 per share ("Common Stock"), which may be issued under the Plan
shall be 300,000 shares, subject to adjustment as provided in Section 7.
(b) If any outstanding option under the Plan for any reason expires or
is terminated without having been exercised in full, the shares covered by
the unexercised portion of such option shall again become available for
issuance pursuant to the Plan.
(c) All options granted under the Plan shall be non-statutory options
not entitled to special tax treatment under Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
5. TERMS, CONDITIONS AND FORM OF OPTIONS.
<PAGE>
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a)(i) INITIAL GRANTS. Each eligible director shall be granted an option
to purchase 10,000 shares of Common Stock under the Plan on the date on which
the Company prices its initial public offering of Common Stock (the "Pricing
Date") and on each of August 1, 2000 and 2001. Each eligible director who is
elected for the first time to the Board of Directors of the Company after the
Pricing Date shall be granted an option to acquire 10,000 shares of Common
Stock under the Plan upon the date of such initial election and on August 1
on each of the next two calendar years following such initial election.
(ii) SUBSEQUENT GRANTS. Each eligible director who was an eligible
director on the Pricing Date shall be granted an additional option to
purchase 3,333 shares of Common Stock under the Plan on August 1 of each year
commencing in 2002. Each eligible director who becomes an eligible director
after the Pricing Date shall be granted an additional option to purchase
3,333 shares of Common Stock under the Plan on August 1 of each year
commencing in the third calendar year following such director's initial
election to the Board of Directors.
(b) OPTION EXERCISE PRICE. The option exercise price per share for each
option granted under the Plan on the Pricing Date shall equal the price to
the public of one share of Common Stock in the Company's initial public
offering. The option exercise price per share for each option granted under
the Plan, other than an option granted on the Pricing Date, shall equal (i)
the closing price on any national securities exchange on which the Common
Stock is listed, (ii) the closing price of the Common Stock on the Nasdaq
National Market or (iii) the average of the closing bid and asked prices in
the over-the-counter market, whichever is applicable, as published in THE
WALL STREET JOURNAL, on the date of grant. If no sales of Common Stock were
made on the date of grant, the price of the Common Stock for purposes of
clauses (i) and (ii) above shall be the reported price for the next preceding
day on which sales were made.
(c) TRANSFERABILITY OF OPTIONS. Except as the Board may otherwise
determine or provide in an option granted under the Plan, any option granted
under the Plan to an optionee shall not be transferable by the optionee other
than by will or the laws of descent and distribution or pursuant to a
qualified domestic relations order as defined by the Code or Title I of the
Employee Retirement Income Security Act, or the rules thereunder, and shall
be exercisable during the optionee's lifetime only by the optionee or the
optionee's guardian or legal representative. References to an optionee, to
the extent relevant in the context, shall include references to authorized
transferees.
(d) TIME AND MONTH OF EXERCISE.
(i) VESTING. Each option granted under the Plan shall be exercisable
in full on the date of grant.
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<PAGE>
(ii) TERMINATION. Each option shall terminate, and may no longer be
exercised, on the earlier of (i) the date ten years after the date of grant
of such option or (ii) six months after the date on which the optionee ceases
to serve as a director of the Company (or 12 months if such cessation is due
to the death of such director). Each option may be exercised during the six
or 12 month period set forth in clause (ii) above only to the extent it was
exercisable at the time of the optionee's cessation of service as a director.
(iii) EXERCISE PROCEDURE. An option may be exercised in whole or in
part, to the extent it is then exercisable, only by written notice to the
Company at its principal office accompanied by (i) payment in cash or by
check of the full exercise price for the shares as to which it is exercised,
(ii) delivery of outstanding shares of Common Stock (which have been
outstanding for at least six months) having a fair market value on the last
business day preceding the date of exercise equal to the option exercise
price, (iii) an irrevocable undertaking by a creditworthy broker to deliver
promptly to the Company sufficient funds to pay the exercise price or
delivery of irrevocable instructions to a creditworthy broker to deliver
promptly to the Company cash or a check sufficient to pay the exercise price,
or (iv) any combination of the foregoing.
(iv) EXERCISE BY REPRESENTATIVE FOLLOWING DEATH OF DIRECTOR. An
optionee, by written notice to the Company, may designate one or more persons
(and from time to time change such designation), including his or her legal
representative, who, by reason of the optionee's death, shall acquire the
right to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.
6. LIMITATION OF RIGHTS.
(a) NO RIGHT TO CONTINUE AS A DIRECTOR. Neither the Plan, nor the
granting of an option nor any other action taken pursuant to the Plan, shall
constitute or be evidence of any agreement or understanding, express or
implied, that the Company will retain the optionee as a director for any
period of time.
(b) NO STOCKHOLDERS' RIGHTS FOR OPTIONS. An optionee shall have no
rights as a stockholder with respect to the shares covered by his or her
option until the date of the issuance to him or her of a stock certificate
therefor, and no adjustment will be made for dividends or other rights
(except as provided in Section 7) for which the record date is prior to the
date such certificate is issued.
(c) COMPLIANCE WITH SECURITIES LAWS. Each option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the
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<PAGE>
listing, registration or qualification of the shares subject to such option
upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or the disclosure
of non-public information or the satisfaction of any other condition is
necessary as a condition of, or in connection with, the issuance or purchase
of shares thereunder, such option may not be exercised in whole or in part,
unless such listing, registration, qualification, consent or approval, or
satisfaction of such condition shall have been effected or obtained on
conditions acceptable to the Board of Directors. Nothing herein shall be
deemed to require the Company to apply for or to obtain such listing,
registration or qualification, or to satisfy such condition.
7. ADJUSTMENT PROVISIONS FOR MERGERS, RECAPITALIZATIONS AND RELATED
TRANSACTIONS.
If, through or as a result of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse
stock split, or other similar transaction, (i) the outstanding shares of
Common Stock are exchanged for a different number or kind of securities of
the Company or of another entity, or (ii) additional shares or new or
different shares or other securities of the Company or of another entity are
distributed with respect to such shares of Common Stock, the Board of
Directors shall make an appropriate and proportionate adjustment in (x) the
maximum number and kind of shares reserved for issuance under the Plan, (y)
the number and kind of shares or other securities subject to then outstanding
options under the Plan, and (z) the price for each share subject to any then
outstanding options under the Plan (without changing the aggregate purchase
price for such options), to the end that each option shall be exercisable,
for the same aggregate exercise price, for such securities as such
optionholder would have held immediately following such event if he had
exercised such option immediately prior to such event. No fractional shares
will be issued under the Plan on account of any such adjustments.
8. TERMINATION AND AMENDMENT OF THE PLAN.
The Board of Directors may suspend or terminate the Plan or amend it in
any respect whatsoever.
9. EFFECTIVE DATE.
The Plan shall become effective on the date that it is approved by the
stockholders of the Company.
Adopted by the Board of Directors on
June 29, 1999
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<PAGE>
Approved by the stockholders as of
_______________ ___, 1999
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<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in this Amendment No. 2 to Registration Statement
on Form S-1 (No. 333-80529) of our report dated June 10, 1999, except for the
information in the seventh and eighth paragraphs of Note 16, for which the date
is July 26, 1999, relating to the financial statements of HarvardNET Inc. and of
our reports dated June 10, 1999 relating to the financial statement schedule of
HarvardNET Inc. and the financial statements of Internet Northeast, and of our
report dated May 14, 1999 relating to the financial statements of the Network
Services Division of Comstor Corporation, which appear in such Registration
Statement. We also consent to the references to us under the headings "Experts"
and "Selected Financial Data" in such Registration Statement.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
July 27, 1999
