<PAGE>
As filed with the Securities and Exchange Commission on January 3, 2000
Registration No. 333-91321
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Amendment No. 1
To
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
CHOICE ONE COMMUNICATIONS INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
Delaware 4813 16-1550742
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
</TABLE>
100 Chestnut Street
Rochester, New York 14604-2417
(716)-246-4231
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Ajay Sabherwal
Senior Vice President and Chief Financial Officer
Choice One Communications Inc.
100 Chestnut Street
Rochester, New York 14604-2417
(716) 246-4231
Facsimile (716) 530-2733
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
<TABLE>
<S> <C>
James A. Locke III, Esq. Richard D. Truesdell, Jr., Esq.
Richard F. Langan, Jr., Esq. Davis Polk & Wardwell
John C. Partigan, Esq. 450 Lexington Avenue
Nixon Peabody LLP New York, New York 10017
1300 Clinton Square (212) 450-4000
Rochester, New York 14604 Facsimile (212) 450-4800
(716) 263-1000
Facsimile (716) 263-1600
</TABLE>
---------------
Approximate date of commencement of proposed sale to public:
As soon as practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier
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 statement number of the earlier registration statement for the
same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier registration statement for the
same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [_]
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Title of Each Class of Proposed Maximum
Securities Amount to be Offering Price Proposed Maximum Amount of
To Be Registered Registered(1) Per Share(2) Aggregate Offering Price Registration Fee
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.01 per share....... 8,216,750 shares $15.00 $123,251,250 $32,539(3)
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
(1) Includes 1,071,750 shares issuable pursuant to an overallotment option
granted to the underwriters.
(2) Estimated solely for the purpose of calculating the registration fees;
based on a bona fide estimate of the maximum offering price per share of
the securities being registered in accordance with Rule 457(a).
(3) Previously paid. ---------------
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 this 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 separate prospectuses. The first
prospectus relates to a public offering in the United States and Canada of an
aggregate of 5,716,000 shares of common stock. The second prospectus relates
to a concurrent offering outside the United States and Canada of an aggregate
of 1,429,000 shares of common stock. The prospectuses for each of the
offerings will be identical with the exception of an alternate front cover
page for the offering outside the United States and Canada. Such alternate
cover page appears in this registration statement immediately following the
cover page for the offering in the United States and Canada.
2
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued January 3, 2000
7,145,000 Shares
[Choice One Communications Inc. Logo]
COMMON STOCK
-----------
We are offering shares of our 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 and $15 per share.
-----------
We have applied for listing of our common stock on the Nasdaq National Market
under the symbol "CWON."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Choice One
-------- ------------- -----------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total............................ $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
1,071,750 shares to cover over-allotments.
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.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
WARBURG DILLON READ LLC
FIRST UNION SECURITIES, INC.
CIBC WORLD MARKETS
, 2000
<PAGE>
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS (Subject to Completion)
Issued January 3, 2000
7,145,000 Shares
[Choice One Communications Inc. Logo]
COMMON STOCK
-----------
We are offering shares of our 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 and $15 per share.
-----------
We have applied for listing of our common stock on the Nasdaq National Market
under the symbol "CWON."
-----------
Investing in the common stock involves risks. See "Risk Factors" beginning on
page 7.
-----------
PRICE $ A SHARE
-----------
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions Choice One
-------- ------------- -----------
<S> <C> <C> <C>
Per Share........................ $ $ $
Total............................ $ $ $
</TABLE>
We have granted the underwriters the right to purchase up to an additional
1,071,750 shares to cover over-allotments.
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.
Morgan Stanley & Co. Incorporated expects to deliver the shares to purchasers
on , 2000.
-----------
MORGAN STANLEY DEAN WITTER
LEHMAN BROTHERS
WARBURG DILLON READ
FIRST UNION SECURITIES, INC.
CIBC WORLD MARKETS
, 2000
<PAGE>
[Map of northeastern United States, showing current and proposed facilities]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Prospectus Summary................. 2
Risk Factors....................... 7
Use of Proceeds.................... 19
Dividend Policy.................... 19
Capitalization..................... 20
Dilution........................... 21
Selected Consolidated Financial and
Operating Data.................... 22
Unaudited Pro Forma Condensed
Combined Financial Information.... 24
Management's Discussion and
Analysis of Financial Condition
and Results of Operations......... 31
Business........................... 43
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Management.......................... 71
Certain Relationships and Related
Transactions....................... 83
Security Ownership of Certain
Beneficial Owners and Management... 86
Description of Capital Stock........ 88
United States Federal Tax
Considerations for Non-U.S. Holders
of Common Stock.................... 92
Shares Eligible for Future Sale..... 96
Underwriters........................ 98
Legal Matters....................... 102
Experts............................. 102
Where You Can Find More
Information........................ 102
Index to Financial Statements....... F-1
</TABLE>
----------------
Until , 2000, all dealers that buy, sell or trade our common stock,
whether or not participating in this offering, may be required to deliver a
prospectus. This delivery requirement 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. Unless otherwise specifically stated,
all information in this prospectus gives effect to the 353.48041-for-1 split of
our common stock which will occur prior to the closing of this offering and
does not take into account the possible issuance of additional shares of common
stock to the U.S. underwriters pursuant to their right to purchase additional
shares to cover over-allotments.
Choice One Communications
We are an integrated communications provider, or ICP, offering broadband
data and voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
Our offerings include high speed data and Internet service, principally utiliz-
ing digital subscriber line, or DSL, technology, local exchange service and
long distance service. We seek to become the leading integrated communications
provider in each of our target markets by offering a single source for competi-
tively priced, high quality, customized telecommunications services. A key ele-
ment of our strategy is to be one of the first integrated communications prov-
iders to provide comprehensive coverage in each of the markets we serve. We are
achieving this market coverage by installing both data and voice network equip-
ment in multiple telephone company central offices. As of November 15, 1999, we
had installed our equipment in 94 of these central offices. We also intend to
maximize utilization of our market network coverage by offering data and voice
services on a wholesale basis to Internet service and other telecommunications
providers. Through our strategy of connecting substantially all of our clients
directly to our own switches, we are able to more efficiently route traffic,
ensure quality service and control costs. As of November 15, 1999, we had serv-
ice agreements with 3,150 clients for 21,733 access lines, including 254 DSL
lines, of which we had initiated service with 2,459 clients for 14,999 access
lines, including 117 DSL lines.
We currently offer data and voice services in nine markets and intend to
expand into approximately 11 additional markets by the end of the second
quarter 2001. Following completion of our planned expansion to these
approximately 20 markets, we believe our networks will be able to reach
approximately 3.7 million business lines, which constitute more than 75% of the
estimated business lines in these markets, and 5.3 million households.
We have developed a flexible network buildout strategy allowing us to
leverage rapidly evolving telecommunications technology. In each of our first
nine markets, we have deployed or intend to deploy both data and voice
switching platforms. We are entering three additional markets by initially
offering only data services. We will then add voice services within 12 months
after entering these markets. We believe this "DSL first" strategy provides for
faster time to market and lower initial capital costs, while preserving
flexibility for our future development. We expect that our market entry
strategy and network architecture will continue to evolve in order to
capitalize on advances in telecommunications technology and to satisfy the
changing needs of our clients.
We have designed and are developing integrated operations support systems
and other back office systems that we believe will provide significant
competitive advantages by enhancing our efficiency and allowing us to support
rapid and sustained growth and provide exceptional client care. We have
automated most of our back office systems and are in the process of integrating
them into a seamless end-to-end system that will synchronize multiple tasks,
including installation, billing and client care.
2
<PAGE>
In order to minimize the time between a client order and service installation,
we have also established an on-line and real-time connection of our operations
support systems with Bell Atlantic Corporation. We anticipate establishing
similar connections with 17 established telephone companies.
In each of our markets, we have a locally based, dedicated and experienced
sales force that provides high quality, personalized client care. In addition
to our direct sales force, we use third party agencies to sell our services. As
of November 15, 1999, we had 129 persons in our sales and sales support staff
and had sales arrangements with 17 third party agencies.
We were founded in June 1998 by a group of telecommunications executives led
by Steve Dubnik, the former chief operating officer of North American
Operations of ACC Corp. Our 20 top executives and managers have an average of
15 years of experience in the telecommunications industry. Members of our
management team also have significant experience in the northeastern markets,
having previously served at such companies as Frontier Corporation, Teleport
Communications Group, Inc., and MFS Communications Company.
Our approximately $62.1 million of funded equity has been provided by
experienced investors in the telecommunications industry, including Morgan
Stanley Capital Partners III, L.P., Fleet Equity Partners VI, L.P. and Waller-
Sutton Media Partners, L.P., and our management team. Our credit facility
permits us to borrow up to $150.0 million for the next eight years with maximum
borrowing limits to be reduced during the eight year period, subject to the
covenants, restrictions and significant borrowing conditions described in the
credit facility.
Business Strategy
The key elements of our business strategy are to:
. capitalize on early to market advantage;
. offer broad coverage to small and medium-sized businesses in our target
markets;
. lead competition in providing DSL services;
. use our flexible network buildout strategy to rapidly and cost
effectively enter new markets;
. target underserved clients in second and third tier markets;
. offer customized bundled services with a single point of contact and a
single bill;
. utilize efficient automated and integrated back office systems that can
support rapid and sustained growth;
. increase market share by establishing service-driven client
relationships and creating a local presence;
. accelerate growth through acquisitions of telecommunications and related
businesses; and
. leverage management's experience by drawing upon its expertise and
success in the telecommunications industry.
We have experienced significant losses in our business to date and we
anticipate that we will continue to have losses in the future before we realize
any significant revenues. In addition, our ability to implement our business
strategy may be impaired by the types of risks described in the section
entitled "Risk Factors."
We are a Delaware corporation with our principal executive offices located
at 100 Chestnut Street, Suite 700, Rochester, New York 14604. Our telephone
number is 716-CHOICE1.
3
<PAGE>
THE OFFERING
Common stock offered:
<TABLE>
<C> <S>
U.S. offering...................................... 5,716,000 shares
International offering............................. 1,429,000 shares
Total.............................................. 7,145,000 shares
Common stock to be outstanding after the offering.. 29,868,039 shares,
excluding up to an
additional 1,071,750
shares issuable upon
exercise of the
underwriters' over-
allotment option and an
aggregate of 706,961
shares issuable upon
exercise of stock
options granted as of
January , 2000 (of
which none are currently
exercisable).
Over-allotment option.............................. 1,071,750 shares
Use of proceeds.................................... We estimate that our net
proceeds from the
offering will be
approximately $92.0
million, based on an
assumed initial public
offering price of $14.00
per share. We plan to
use net proceeds from
the offering for capital
expenditures, repayment
of indebtedness and
general corporate
purposes. See "Use of
Proceeds."
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............. CWON
</TABLE>
4
<PAGE>
SUMMARY CONSOLIDATED AND COMBINED FINANCIAL AND OPERATING DATA
The following table sets forth our selected consolidated financial data for
the periods indicated. The consolidated statement of operations data and
consolidated balance sheet data as of and for the period from inception through
December 31, 1998 and as of and for the nine months ended September 30, 1999
have been derived from our consolidated financial statements included elsewhere
in this prospectus, which have been audited by Arthur Andersen LLP, independent
public accountants, as indicated in their report included elsewhere in this
prospectus. The unaudited pro forma combined statement of operations data and
other financial and operating data give effect to the acquisition of Atlantic
Connections, LLC as if it had occurred on January 1, 1998. The unaudited pro
forma combined balance sheet data give effect to that acquisition as if it had
occurred on September 30, 1999. The pro forma as adjusted combined balance
sheet data set forth below are unaudited and give effect to the offering and
the application of the net proceeds of the offering, assuming an initial
offering price of $14.00 per share and after deducting estimated underwriting
discounts and commissions and estimated offering expenses payable by us, as if
they had occurred on September 30, 1999. The unaudited pro forma statements do
not give effect to the up to $2.1 million additional purchase price payable in
cash or, at our option, our common stock, in connection with the acquisition of
Atlantic Connections if specified performance criteria are met in the 12 months
following the acquisition. The results of our operations for the periods
indicated are not necessarily indicative of the results of operations in the
future.
Included in other financial data are EBITDA, as adjusted, amounts. EBITDA,
as adjusted, represents earnings before interest, income taxes, depreciation
and amortization and non-cash deferred compensation. EBITDA, as adjusted,
reflects non-cash deferred compensation of $.1 million in 1998 and $1.0 million
for the nine month period ended September 30, 1999. EBITDA is used by
management and certain investors as an indicator of a company's historical
ability to service debt. Management believes that an increase in EBITDA is an
indicator of improved ability to service existing debt, to sustain potential
future increases in debt and to satisfy capital requirements. However, EBITDA
is not intended to represent cash flows for the period, nor has it been
presented as an alternative to either operating income, as determined by
generally accepted accounting principles, nor as an indicator of operating
performance or cash flows from operating, investing and financing activities,
as determined by generally accepted accounting principles, and is thus
susceptible to varying calculations. EBITDA as presented may not be comparable
to other similarly titled measures of other companies. We expect that under the
credit facility, our discretionary use of funds reflected by EBITDA will be
limited in order to conserve funds for capital expenditures and debt service.
5
<PAGE>
You should read the financial data set forth below in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," our audited financial statements with related notes and our
unaudited pro forma financial data with related notes contained elsewhere in
this prospectus.
<TABLE>
<CAPTION>
Period Ended Nine Months Ended
December 31, 1998 September 30, 1999
-------------------- ---------------------
Actual Pro forma Actual Pro forma
------- ----------- -------- -----------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Statement of Operations Data:
Revenues........................... $ - $ 6,472 $ 947 $ 7,186
Operating expenses:
Network costs.................... - 5,287 2,577 7,371
Selling, general and
administrative.................. 4,684 6,495 12,826 14,310
Noncash deferred compensation.... 87 87 996 996
Depreciation and amortization.... 36 1,333 3,373 4,044
------- ------- -------- --------
Total operating expenses....... 4,807 13,202 19,772 26,721
------- ------- -------- --------
Loss from operations........... (4,807) (6,730) (18,825) (19,535)
Interest income (expense), net..... 22 (866) (832) (1,498)
------- ------- -------- --------
Net loss........................... $(4,785) $(7,596) $(19,657) $(21,033)
======= ======= ======== ========
Net loss per share, basic and
diluted(1)........................ $ (0.27) $ (0.42) $ (0.90) $ (0.96)
======= ======= ======== ========
</TABLE>
<TABLE>
<CAPTION>
As of September 30, 1999
---------------------------------
Pro forma,
Actual Pro forma as adjusted
-------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents.................... $ 3 $ 230 $77,650
Working capital (deficit).................... (9,582) (10,089) 68,675
Property, plant and equipment, net........... 50,780 50,863 50,863
Total assets................................. 54,180 64,135 141,555
Long-term debt............................... 5,000 13,266 -
Stockholder's equity......................... 38,420 38,420 130,450
</TABLE>
<TABLE>
<CAPTION>
Period Ended Nine Months Ended
December 31, 1998 September 30, 1999
--------------------- ---------------------
Actual Pro forma Actual Pro forma
-------- ----------- -------- -----------
(unaudited) (unaudited)
(in thousands, except per share data)
<S> <C> <C> <C> <C>
Other Financial Data:
Net cash provided by (used in)
operating activities............. $ 6,587 $(18,763)
Net cash used in investing
activities....................... (21,146) (33,043)
Net cash provided by financing
activities....................... 16,050 50,318
Capital expenditures.............. 21,146 33,043
EBITDA, as adjusted............... (4,684) (14,456)
Operating Data:
Lines sold........................ - 1,854 12,303 16,151
UNE's installed................... - - 6,060 6,060
T-1 channels installed............ - - 869 869
DSL lines installed............... - - 57 57
Resold lines installed............ - 1,854 - 3,848
-------- ----- -------- ------
Total lines installed............. - 1,854 6,986 10,834
Collocations installed............ - - 68 68
Markets in operation.............. - 2 5 7
Number of switches deployed....... - - 5 5
</TABLE>
- --------
(1) Unaudited pro forma net loss per share, as adjusted to give effect to the
portion of the offering proceeds used to repay debt, would be $(0.89) per
share.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision.
Risks Related to Our Business
History of Operations--We only have a limited history upon which you can base
your investment decision
We were formed in June 1998 and we have recently entered nine markets and
are starting the process of entering additional markets. As a result of our
limited operating history, prospective investors have limited operating and
financial data about us upon which to base an evaluation of our performance
and an investment in our common stock. Our ability to provide an integrated
package of bundled telecommunications services on a widespread basis and to
generate operating profits and positive operating cash flow will depend upon
our ability, among other things, to:
. develop our operational support and other back office systems;
. obtain state authorizations to operate as a competitive local exchange
carrier and any other required governmental authorizations;
. attract and retain an adequate client base;
. raise additional capital;
. attract and retain qualified personnel; and
. enter into and implement interconnection agreements with established
telephone companies on satisfactory terms.
We cannot assure you that we will be able to achieve any of these
objectives, generate sufficient revenues to achieve or sustain profitability,
meet our working capital and debt service requirements or compete successfully
in the telecommunications industry.
Future Revenues--We anticipate having future negative EBITDA and operating
losses before we realize any significant revenues
The development of our business and the deployment of our services and
systems will require significant capital expenditures, a substantial portion
of which will need to be incurred before the realization of sufficient
revenues. We expect that our earnings before interest, taxes, depreciation and
amortization, or EBITDA, will be negative while we emphasize development,
construction and expansion of our telecommunications services business and
until we establish a sufficient revenue-generating client base. For the nine
months ended September 30, 1999 and for the period from inception (June 2,
1998) through December 31, 1998, after giving pro forma effect to the
acquisition of Atlantic Connections and the incurrence of debt in connection
therewith, we would have had operating losses of $19.5 million and $6.7
million, net losses of $21.0 million and $7.6 million and negative EBITDA of
$14.5 million and $5.3 million. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations." We expect that each of our
markets will generally produce negative EBITDA for at least 18 to 30 months
after operations commence in such market, and we expect to experience
increasing operating losses, net losses and negative EBITDA as we expand our
operations. We cannot assure you that we will achieve or sustain profitability
or generate sufficient EBITDA to meet our working capital and debt service
requirements, which could have a material adverse effect on our business,
financial condition and results of operations.
7
<PAGE>
Future Capital Requirements--To expand and develop our business we will need a
significant amount of cash, which we may be unable to obtain
The expansion and development of our business and the deployment of our
networks, services and systems will require significant capital expenditures,
working capital, debt service and cash flow deficits.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of, among other things, the demand
for our services and regulatory, technological and competitive developments,
including additional market developments and new opportunities, in our
industry. If our actual capital requirements exceed our estimates, we may not
be able to enter all of our targeted markets. Our revenues and costs may also
be dependent upon factors that are not within our control, including
regulatory changes, changes in technology, and increased competition. Due to
the uncertainty of these factors, actual revenues and costs may vary from
expected amounts, possibly to a material degree, and such variations are
likely to affect our future capital requirements.
We also expect that we may require additional financing or require
financing sooner than anticipated if our development plans change or prove to
be inaccurate or if we alter the schedule of our roll-out plan. We may also
require additional financing in order to develop new services or to otherwise
respond to changing business conditions or unanticipated competitive
pressures. Sources of additional financing may include commercial bank
borrowings, vendor financing, or the private or public sale of equity or debt
securities. We cannot assure you that we will be successful in raising
sufficient additional capital on favorable terms or at all or that the terms
of any indebtedness we may incur will not impair our ability to develop our
business. Failure to raise sufficient funds may require us to modify, delay or
abandon some of our planned future expansion or expenditures, which could have
a material adverse effect on our business, financial condition and results of
operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
Business Development and Expansion Risks--We expect to grow and cannot
guarantee that we will be able to effectively manage our future growth
We have recently begun operations in the first nine markets of our
development plan. Our success will depend upon, among other things, our
ability to access potential markets, obtain required governmental
authorizations, franchises and permits, secure financing, market to, sell and
provision, new clients, implement interconnection and collocation with
established telephone companies' facilities, lease adequate trunking capacity,
purchase and install switches in additional markets, implement efficient
operations support systems and other back office systems, and develop a
sufficient client base. The successful implementation of our business plan
will result in rapid expansion of our operations and the provision of bundled
telecommunications services on a widespread basis, which could place a
significant strain on our management, operational, financial and other
resources and increase demands on our systems and controls.
Our ability to manage future growth, should it occur, will depend upon our
ability to develop efficient operations support systems and other back office
systems, monitor operations, control costs, maintain regulatory compliance,
maintain effective quality controls and significantly expand our internal
management, technical, information and accounting systems and to attract,
assimilate and retain additional qualified personnel. See "--Dependence on Key
Personnel." Failure to manage our future growth effectively could adversely
affect the expansion of our client base and service offerings.
8
<PAGE>
We cannot assure you that we will successfully implement and maintain
efficient operational and financial systems, procedures and controls or
successfully obtain, integrate and utilize the employees and management,
operational, financial and other resources necessary to manage a developing
and expanding business in our evolving, highly regulated and increasingly
competitive industry. Any failure to expand these areas and to implement and
improve such systems, procedures and controls in an efficient manner at a pace
consistent with the growth of our business could have a material adverse
effect on our business, financial condition and results of operations.
If we were unable to hire sufficient qualified personnel or develop,
acquire and integrate successfully our operational and financial systems,
procedures and controls, our clients could experience delays in connection of
service and/or lower levels of client service, our resources may be strained
and we may be subjected to additional expenses. Our failure to meet client
demands and to manage the expansion of our business and operations could have
a material adverse effect on our business, financial condition and results of
operations.
Information and Processing Systems--If we are unable to develop or integrate
our systems or properly maintain and upgrade them, we may not be able to
effectively bill our clients or provide adequate client service
Sophisticated back office information and processing systems are vital to
our growth and our ability to monitor costs, bill clients, provision client
orders and achieve operating efficiencies. Our plans for the development and
implementation of these systems rely, for the most part, on choosing products
and services offered by third party vendors and integrating such products and
services in-house to produce efficient operational solutions. We cannot assure
you that these systems will be successfully implemented on a timely basis or
that they will be implemented at all or that, once implemented, they will
perform as expected. Risks to our business associated with our systems
include:
. failure by these vendors to deliver their products and services in a
timely and effective manner and at acceptable costs;
. failure by us to adequately identify all of our information and
processing needs;
. failure of our related processing or information systems; or
. failure by us to effectively integrate new products or services.
Furthermore, as our suppliers revise and upgrade their hardware, software and
equipment technology, we could encounter difficulties in integrating the new
technology into our business or the new systems may not be appropriate for our
business. In addition, our right to use these systems is dependent upon
license agreements with third party vendors. Some of these agreements may be
cancelled by the vendor and the cancellation or nonrenewal of these agreements
may have an adverse effect on us. See "--Risks Associated with Year 2000."
Difficulties in Implementation of Local and Enhanced Services--We may need to
rely on the established local telephone companies to implement successfully
our switched and enhanced services whose failure to cooperate with us could
affect the services we offer
We are a recent entrant into the newly created competitive local
telecommunications services industry. The local exchange services market in
most states was only recently opened to competition. There are numerous
operating complexities associated with providing these services. We will be
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<PAGE>
required to develop new products, services and systems and will need to
develop new marketing initiatives to sell these services. We cannot assure you
that we will be able to develop such products and services.
We are deploying high capacity voice and data switches in the cities in
which we will operate networks. We initially intend to rely on the networks of
established telephone companies or those of new market entrants, known as
competitive local exchange carriers, or CLECs, for some aspects of
transmission. Subject to agreements to lease portions of other carriers'
networks, including space in their equipment buildings, we will be able to
offer a variety of switched access services, high bandwidth data services,
enhanced services and local dial tone services. Federal law requires most of
the traditional monopoly carriers to lease or "unbundle" elements of their
networks and permit us to purchase the call origination and call termination
services we need, thereby decreasing our operating expenses. Given that the
unbundling rules of the Federal Communications Commission have recently been
modified (See "Business--Regulation"), we cannot assure you that such
unbundling will continue to occur in a timely manner or that the prices for
such elements will be favorable to us. In addition, our ability to implement
successfully our switched and enhanced services will require the negotiation
of interconnection and collocation agreements with established telephone
companies and CLECs, which can take considerable time, effort and expense and
are subject to federal, state and local regulation.
In August 1996, the FCC released a decision implementing the
interconnection portions of the Telecommunications Act, known as the local
competition order. The local competition order establishes rules for
negotiating interconnection agreements and guidelines for review of such
agreements by state public utilities commissions. These rules are, for the
most part, beneficial to our business. However, some of these rules have been
appealed and are not yet permanently established. Continued delays in
establishing final interconnection rules could delay implementation of our
business plan.
Many new carriers have experienced difficulties in working with the
established telephone companies with respect to ordering, interconnecting,
leasing premises, and implementing the systems used by these new carriers to
order and receive unbundled network elements and wholesale services from the
established telephone companies. Coordination with established telephone
companies is necessary for new carriers such as us to provide local service to
clients on a timely and competitive basis. Federal law has created an
incentive for one large group of established telephone companies, the regional
Bell operating companies, to cooperate with new carriers and permit access to
their networks by denying them the ability to provide long distance services
within the same region that they provide local service until they have
satisfied statutory conditions designed to open their local markets to
competition. However, we cannot assure you that these established telephone
companies will be accommodating to us once they are permitted to offer long
distance service. If we are unable to obtain the cooperation of an established
telephone company in a region, whether or not such company has been authorized
to offer long distance service, our ability to offer local services in such
region on a timely and cost-effective basis would be adversely affected. In
addition, both proposed and recently completed mergers involving regional Bell
operating companies, including Bell Atlantic's proposed merger with GTE, SBC's
merger with Ameritech and the proposed acquisition by Qwest of US West as well
as MCI WorldCom's proposed acquisition of Sprint, could facilitate such a
combined entity's ability to provide many of the services offered by us,
thereby making it more difficult to compete against them.
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<PAGE>
We cannot assure you that we will be able to obtain the interconnections
and unbundled network elements we require on terms and conditions that will
permit us to offer switched and advanced, high speed digital services at rates
that are both competitive and profitable. Various states, including New York,
are conducting or will conduct proceedings to determine the prices for
interconnection and unbundled network elements in the future. We cannot
predict the outcome of these proceedings. See "--We Depend on Portions of the
Established Telephone Companies' Networks for DSL Technology" and "--
Difficulties in Implementing Local and Enhanced Services."
Our data and voice services may not be profitable due to, among other
factors, lack of client demand, inability to secure access to established
telephone company facilities on acceptable terms, and competition and pricing
pressure from the established telephone companies and CLECs. We cannot assure
you that we will be able to successfully implement our switched and enhanced
services strategy. Implementation of our data and voice services is also
dependent upon equipment manufacturers' ability to meet our switch deployment
schedule. We cannot assure you that switches will be deployed on the schedule
contemplated by us or that, if deployed, such switches will be utilized to the
degree contemplated by us. Any of the foregoing factors could have a material
adverse effect on our business, financial condition and results of operations.
We Depend on Portions of the Established Telephone Companies' Networks for DSL
Technology--DSL technology may not operate as expected on incumbent local
carrier networks and may interfere with or be affected by other transport
technologies
We depend significantly on the quality of the copper telephone lines we
obtain from Bell Atlantic, or other established telephone companies providing
services in our target markets, and their maintenance of these lines to
provide DSL services. We cannot assure you that we will be able to obtain the
copper telephone lines and the services we require from these established
telephone companies on a timely basis or at quality levels, prices, terms and
conditions satisfactory to us or that such established telephone companies
will maintain the lines in a satisfactory manner.
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. This interference could degrade the performance of our
services or make us unable to provide service on selected lines. 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. Interference, or claims of interference, if widespread,
would adversely affect our speed of deployment, reputation, brand image,
service quality and client retention and satisfaction and may have a material
adverse effect on our business, financial condition and results of operations.
Dependence on Leased Trunking Capacity--If we fail to obtain permits or
rights-of-way, it may affect our ability to develop our networks
Under our network buildout strategy, we will initially seek to lease from
established telephone companies and CLECs local fiber trunking capacity
connecting our switch to particular telephone company central offices. In the
future, we may seek to replace this leased trunk capacity with our own fiber
if warranted by traffic volume growth. We cannot assure you that all required
trunking capacity will be available to us on a timely basis or on favorable
terms. If we fail to obtain such leased fiber, we could be delayed in our
ability to penetrate some of our markets or required to make additional
11
<PAGE>
unexpected up-front capital expenditures to install our own fiber. If and when
we seek to install our own fiber, we must obtain local franchises and other
permits, as well as rights-of-way to utilize underground conduit and aerial
pole space and other rights-of-way from entities such as established telephone
companies and other utilities, railroads, long distance companies, state
highway authorities, local governments and transit authorities. We cannot
assure you that we will be able to obtain and maintain the franchises, permits
and rights needed to implement our network buildout on favorable terms. The
failure to enter into and maintain any such required arrangements for a
particular network may affect our ability to develop that network and may have
a material adverse effect on our business, financial condition and results of
operations. See "Business--Service Introduction."
Limitations on Changes in Control--Our certificate of incorporation and by-
laws contain certain provisions that could impede a change of control which
could be beneficial to our stockholders
Our certificate of incorporation and by-laws and applicable provisions of
the Delaware General Corporation Law contain several provisions, including
those described below, that, once effective, could make it more difficult for
a third party to acquire control of us without the approval of our board of
directors, even if a change in control would be beneficial to our
stockholders.
The provisions listed below, except for the classified board, which will be
in effect immediately, will be in effect upon the earlier of the date Morgan
Stanley owns less than 17.5% of our outstanding stock or has given its
consent, which we refer to as the trigger date:
. our board of directors is classified into three classes, each of which,
after an initial transition period, will serve for staggered three-year
terms;
. a director may be removed by our stockholders only for cause;
. our stockholders may take action by written consent instead of by a
meeting only if all stockholders sign the written consent;
. our stockholders must comply with advance notice and other procedures
specified in our bylaws in order to nominate candidates for election to
our board of directors or to place stockholders' proposals on the agenda
for consideration at meetings of the stockholders; and
. business combinations involving one or more persons that own or intend
to own at least 10% of our voting stock, other than Morgan Stanley, must
be approved by the affirmative vote of at least 66 2/3% of our voting
stock, excluding that held by such person or persons, or by a majority
of "continuing directors", as that term is defined in our certificate of
incorporation, and in accordance with the "fair price" provisions
specified in the certificate of incorporation.
For more information about these provisions, see "Description of Capital
Stock."
In addition, our certificate of incorporation provides that we may issue
preferred stock without shareholder approval. Following the trigger date,
preferred stock could be issued by us in connection with a shareholder rights
plan without the consent of Morgan Stanley. The issuance of preferred stock in
connection with a shareholder rights plan would cause substantial dilution to
any person or group that attempts to acquire us on terms not approved in
advance by our board of directors. In addition, Section 203 of the Delaware
General Corporation Law imposes certain restrictions on mergers and other
business combinations between us and any holder of 15% or more of our common
stock. We
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<PAGE>
have expressly elected at this time not to be governed by Section 203. Any
change in that election must be approved by a majority vote of our
stockholders.
Dependence on Key Personnel--We depend on certain key personnel and could be
affected by the loss of their services
We are managed by a small number of key executive officers, most notably
Steve M. Dubnik, our Chairman, President and Chief Executive Officer. We
believe that our success will depend in large part on our ability to attract
and retain qualified management, technical, marketing and sales personnel and
the continued contributions of such management and personnel. Competition for
qualified employees and personnel in the telecommunications industry is
intense and there is a limited number of persons with knowledge of and
expertise in the industry. We do not maintain key person life insurance for
any of our executive officers, other than Mr. Dubnik. Although we have been
successful in attracting and retaining qualified personnel, we cannot assure
you that we will be able to hire or retain necessary personnel in the future.
The loss of services of one or more of these key individuals, particularly Mr.
Dubnik, or the inability to attract and retain additional qualified personnel,
could materially and adversely affect us. In addition, if Mr. Dubnik ceases to
be our Chief Executive Officer and a replacement satisfactory to the lenders
under our credit facility is not hired within 180 days, there will be an event
of default under our credit facility and the lenders may declare all amounts
outstanding under the credit facility immediately due and payable.
Expansion Through Acquisitions, Investments and Strategic Alliances--We may
not have the ability to develop strategic alliances or investments needed to
complement our existing business
We may seek, as part of our growth strategy, to develop strategic alliances
and to make investments or acquire assets or other businesses that will relate
to and complement our existing business. We are unable to predict whether or
when any planned or prospective acquisitions or strategic alliances will occur
or the likelihood of a material transaction being completed on favorable terms
and conditions. Our ability to finance acquisitions and strategic alliances
may be constrained by our degree of leverage at the time of such acquisition.
In addition, our credit facility may significantly limit our ability to make
acquisitions or enter into strategic alliances and to incur indebtedness in
connection with acquisitions and strategic alliances.
We cannot assure you that any acquisition will be made, that we will be
able to obtain financing needed to fund such acquisitions. We currently have
no definitive agreements with respect to any acquisition, although from time
to time we may have discussions with other companies and assess opportunities
on an ongoing basis.
In addition, if we were to proceed with one or more significant strategic
alliances, acquisitions or investments in which the consideration consists of
cash, we could use a substantial portion of our available cash, including
proceeds of this offering, to consummate the strategic alliances, acquisitions
or investments. The financial impact of acquisitions, investments and
strategic alliances could have a material adverse effect on our business,
financial condition and results of operations and could cause substantial
fluctuations in our quarterly and yearly operating results. Furthermore, if we
use our common stock as consideration for acquisitions our shareholders could
experience dilution of their existing shares.
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<PAGE>
Integrating Possible Future Acquisitions and Strategic Alliances--We may not
be able to successfully integrate acquired businesses and operations
Recently we acquired Atlantic Connections, LLC, a local and long distance
service provider, and as part of our business strategy, we may seek to acquire
complementary assets or businesses or develop strategic alliances. Any future
acquisitions or strategic alliances would be accompanied by the risks commonly
encountered in such transactions. Such risks include, among others:
. the difficulty of assimilating the acquired operations and personnel;
. the potential disruption of our ongoing business and diversion of
resources and management time;
. the inability of management to maximize our financial and strategic
position by the successful incorporation of licensed or acquired
technology and rights into our service offerings;
. the possible inability of management to maintain uniform standards,
controls, procedures and policies;
. the risks of entering markets in which we have little or no direct prior
experience; and
. the potential impairment of relationships with employees or clients as a
result of changes in management or otherwise arising out of such
transactions.
We cannot assure you that we will be able to successfully integrate
acquired businesses or assets.
Risks Associated With Year 2000--Our financial condition may be adversely
affected if our systems and those of our suppliers fail because of Year 2000
problems
The commonly referred to Year 2000, or Y2K, problem results from the fact
that many existing computer programs and systems use only two digits to
identify the year in the date field. These programs were designed and
developed without considering the impact of a change in the century
designation. If not corrected, computer applications that use a two-digit
format could fail or create erroneous results in any computer calculation or
other processing involving the year 2000 or a later date. We have identified
two main areas of Y2K risk:
. Computer systems could be disrupted, provide erroneous results, or fail,
causing an interruption or decrease in productivity in our operations;
and
. Computer systems of third parties including equipment suppliers and
other vendors, ILECs, financial institutions, landlords and others could
be disrupted, provide erroneous results, or fail, causing an
interruption or decrease in our ability to continue our operations.
As a new ICP, we have engaged reputable suppliers of equipment and
telecommunications software and other services. For example, we use Compaq(R)
and Dell(R) PCs, Sun(R) Unix-based servers, Lucent(R) switches, Oracle(R)
RDBMS, and Microsoft(R) office products. Software companies we have used to
develop sophisticated systems primarily use known software development tools
and have multiple clients using similar software. In our corporate
headquarters we have off-the-shelf HVAC, security, and other systems installed
pursuant to our specifications. We believe that all of our actual and expected
vendor and supplier companies are well aware of Year 2000 issues. However, we
are in the final testing stages of our key computer systems and equipment to
ensure that they are Y2K compliant.
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<PAGE>
Risks Related to our Industry
Competition--We face a high level of competition in the telecommunications
industry
The telecommunications industry is highly competitive, and one of the
primary purposes of the Telecommunications Act is to foster further
competition. In each of our markets, we compete principally with the
established telephone company serving such market. We currently do not have a
significant market share in any of our markets. The established telephone
companies have long-standing relationships with their clients, financial,
technical and marketing resources substantially greater than ours and the
potential to fund competitive services with cash flows from a variety of
businesses, and currently benefit from existing regulations that favor the
established telephone companies over ICPs and CLECs in some respects.
Furthermore, one large group of established telephone companies, the regional
Bell operating companies recently have been granted, under particular
conditions, pricing flexibility from federal regulators with regard to some
services with which we compete. This may present established telephone
companies with an opportunity to subsidize services that compete with our
services and offer competitive services at lower prices.
It is likely that we will also face competition from other ICPs and
facilities-based CLECs, and many other competitors in some of our markets. We
believe that second and third tier markets will support only a limited number
of competitors and that operations in such markets with multiple competitive
providers are likely to be unprofitable for one or more of such providers.
Prices in both the long distance business and the data transmission
business have declined significantly in recent years and are expected to
continue to decline. We will face competition from large carriers such as AT&T
Corp., MCI WorldCom Corporation and Sprint Corporation as well as from the
regional Bell operating companies, other resellers and companies offering
Internet telephony services.
We expect to experience declining prices and increasing price competition.
We cannot assure you that we will be able to achieve or maintain adequate
market share or margins, or compete effectively, in any of our markets.
Moreover, substantially all of our current and potential competitors have
financial, technical, marketing, personnel and other resources, including
brand name recognition, substantially greater than ours as well as other
competitive advantages over our business, financial condition and results of
operations. Any of the foregoing factors could have a material adverse effect
on us. See "Business--Competition."
Government Regulation--FCC and state regulations may limit the services we can
offer
Our networks and the provision of telecommunications services are subject
to significant regulation at the federal, state and local levels. The costs of
complying with these regulations and the delays in receiving required
regulatory approvals or the enactment of new adverse regulation or regulatory
requirements may have a material adverse effect upon our business, financial
condition and results of our operations.
We cannot assure you that the FCC or state commissions will grant required
authority or refrain from taking action against us if we are found to have
provided services without obtaining the necessary authorizations. If we do not
fully comply with the rules of the FCC or state regulatory agencies, third
parties or regulators could challenge our authority to do business. Such
challenges could cause us to incur substantial legal and administrative
expenses.
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Our Internet operations are not currently subject to direct regulation by
the FCC or any other governmental agency, other than regulations applicable to
businesses generally. However, the FCC has recently indicated that the
regulatory status of some services offered over the Internet may have to be
re-examined. New laws or regulations relating to Internet services, or
existing laws found to apply to them, may have a material adverse effect on
our business, financial condition or results of operations.
The Telecommunications Act remains subject to judicial review and
additional FCC rulemaking, and thus it is difficult to predict what effect the
legislation will have on us and our operations. There are currently many
regulatory actions underway and being contemplated by federal and state
authorities regarding interconnection pricing and other issues that could
result in significant changes to the business conditions in the
telecommunications industry. We cannot assure you that these changes will not
have a material adverse effect on our business, financial condition or results
of operations.
Technological Changes in the Telecommunications Industry--If we are unable to
adapt to technological change our business could be adversely affected
The telecommunications industry is subject to rapid and significant changes
in technology, including continuing developments in DSL technology, which does
not presently have widely accepted standards. We cannot predict the effect of
technological changes on our business. However, 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 or results of
operations could be materially adversely affected. We may also rely on a third
party for access to new technologies.
Long Distance Business--We may fail to achieve acceptable profits on our long
distance business due to high levels of competition, declining prices and low
customer retention rate
The long distance business is extremely competitive, and prices have
declined substantially in recent years and are expected to continue to
decline. In addition, the long distance industry has a low customer retention
rate, as clients frequently change long distance providers in response to the
offering of lower rates or promotional incentives by competitors. We will rely
on other carriers to provide us with a major portion of our long distance
transmission network. Such agreements typically provide for the resale of long
distance services on a per-minute basis and may contain minimum volume
commitments. The negotiation of these agreements involves estimates of future
supply and demand for transmission capacity as well as estimates of the
calling patterns and traffic levels of our future clients. In the event that
we fail to meet such minimum volume commitments, we may be obligated to pay
underutilization charges, and, in the event we underestimate our need for
transmission capacity, we may be required to obtain capacity through more
expensive means. Our failure to achieve acceptable profits on our long
distance business could have a material adverse effect on our business,
financial condition and results of operation.
Risks Related to Data Transmission Business--As a new entrant in the market,
we may initially generate low or negative gross margins
As a new entrant in the data transmission business, we expect to generate
low or negative gross margins and substantial start-up expenses as we begin to
offer data transmission services. The success of our data transmission
business will be dependent upon, among other things, the effectiveness of our
sales personnel in the promotion and sale of our data transmission services,
the acceptance of such services by potential clients, and our ability to hire
and train qualified personnel and further enhance
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<PAGE>
our services in response to future technological changes. We cannot assure you
that we will be successful with respect to these matters. If we are not
successful with respect to these matters, it could have a material adverse
effect on our business, financial condition and results of operations.
Risks Related to this Offering
Control by Large Stockholders--After the offering, private equity funds
managed by Morgan Stanley Dean Witter Capital Partners will continue to
control a significant portion of our common stock and conflicts of interest
may arise between these investors and other stockholders
When this offering is completed, funds managed by Morgan Stanley Dean
Witter Capital Partners, or Morgan Stanley, will beneficially own
approximately 33.9% of our outstanding common stock (or approximately 32.7% if
the U.S. underwriters exercise their over allotment option in full). As a
result, Morgan Stanley will control all matters requiring shareholder
approval, including any determination with respect to mergers or other
business combinations involving us.
We have entered into an agreement with Morgan Stanley and certain other
investors relating to the election of directors. See "Management--Election of
Directors; Voting Agreement." By controlling our board of directors, Morgan
Stanley will have overall control over management of our business, including:
. any determination with respect to our directions and policies (including
the appointment and removal of officers);
. the acquisition or disposition of our assets;
. future issuances of our common stock or other securities; and
. our incurrence of debt.
This control by Morgan Stanley could delay or prevent our acquisition by
other investors. Conflicts might arise in transactions between us and Morgan
Stanley, including the negotiation or enforcement of the terms of any such
transactions. In addition, there are no restrictions on other investments that
may be pursued by Morgan Stanley and conflicts might arise with respect to
future business opportunities.
Lack of Trading Market--A 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. We have applied to the Nasdaq National Market for quotation of our
common stock, but we do not know whether active trading in our common stock
will 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. Among the factors to be considered in determining the
initial public offering price will be:
. our future prospects and the prospects of our industry in general;
. our sales, results of operations and other financial and operating
information 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 ours.
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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.
Impact of Future Sales on Stock Price--Sales of substantial amounts of our
common stock in the public market could depress our stock price
Sales of substantial amounts of our common stock in the public market
following this offering, or the appearance that a large number of our shares
are available for sale, could adversely affect the market price for our common
stock. The number of shares of our common stock available for sale in the
public market will be limited by lock-up agreements. Under these lock-up
agreements our executive officers, directors and principal stockholders, who
will collectively hold 74.32% of our common stock after this offering, or
71.81% if the underwriters exercise their over-allotment option in full, have
agreed not to sell or otherwise dispose of any of their shares for a period of
180 days after the date of this prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated. 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.
After this offering, the holders of 22,723,039 shares of common stock will
have the right to require us to register the sale of their shares, subject to
limitations specified in the registration rights agreement and to the lock-up
agreements described above. The holders of these shares also have the right to
require us to include their shares in any future public offerings of our
equity securities. Following this offering, we intend to file a registration
statement on Form S-8 under the Securities Act to register 1,060,441 shares of
common stock subject to outstanding stock options or reserved for issuance
under our stock incentive plans. The sale of these additional shares into the
public market may further adversely affect the market price of our common
stock.
Risks Regarding Forward-Looking Statements
We have made some statements in this prospectus, including some under
"Prospectus Summary," "Risk Factors," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Business" and elsewhere,
which constitute forward-looking statements. These statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any results, levels of activity, performance or achievements
expressed or implied by any forward-looking statements. These factors include,
among other things, those listed under "Risk Factors" and elsewhere in this
prospectus. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "could," "expects," "intends,"
"plans," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative of these terms or other comparable terminology.
Although we believe that the expectations reflected in forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements.
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USE OF PROCEEDS
We estimate that our net proceeds from the sale of the 7,145,000 shares of
common stock will be approximately $92.0 million, or $106.0 million if the
underwriters exercise their over-allotment option in full, after deducting
estimated underwriting discounts and commissions and estimated offering
expenses of $1.0 million payable by us. This assumes an initial public
offering price of $14.00 per share.
We will use a portion of the net proceeds to repay any outstanding amounts
under our credit facility. Indebtedness under this credit facility as of
November 15, 1999 was approximately $36.7 million, which we incurred to
finance the Atlantic Connections acquisition and for general corporate
purposes. This facility matures on November 3, 2007 and, on November 15, 1999,
bore interest at a weighted average rate of approximately 10.5%. We expect to
use the remainder of the net proceeds for capital expenditures relating to our
planned expansion and working capital and other general corporate purposes.
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 our common stock 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 and to fund future growth.
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CAPITALIZATION
The following table sets forth our capitalization as of September 30, 1999
on:
. an actual basis;
. a pro forma basis to give effect to the acquisition of Atlantic
Connections as of such date; and
. a pro forma, as adjusted basis which further adjusts the pro forma
amounts to give effect to the offering as of such date and the
application of the estimated net proceeds therefrom, assuming an initial
public offering price of $14.00 per share and after deducting estimated
underwriting discounts and commissions and estimated offering expenses
payable by us, as if they had occurred on September 30, 1999.
This table should be read in conjunction with the Consolidated Financial
Statements and notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Use of Proceeds" included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
As of September 30, 1999
---------------------------------
Pro forma,
Actual Pro forma as adjusted
-------- ----------- -----------
(unaudited) (unaudited)
(in thousands, except per share
data)
<S> <C> <C> <C>
Cash and cash equivalents.................... $ 3 $ 230 $ 77,650
======== ======== ========
Long-term debt:
Credit facility............................ $ 5,000 $ 13,266 $ --
Stockholder's equity:
Common Stock, $ 0.01 par value; 47,579,876
shares authorized, actual, 21,952,900
shares issued and outstanding, actual;
47,579,876 shares authorized, pro forma,
21,952,900 shares issued and outstanding,
pro forma; 47,579,876 shares authorized,
pro forma, as adjusted, 29,097,900 shares
issued and outstanding, pro forma,
as adjusted............................... 220 220 291
Additional paid-in capital................. 68,667 68,667 160,626
Deferred compensation...................... (6,025) (6,025) (6,025)
Accumulated deficit........................ (24,442) (24,442) (24,442)
-------- -------- --------
Total stockholder's equity............... 38,420 38,420 130,450
-------- -------- --------
Total capitalization................... $ 43,420 $ 54,698 $130,450
======== ======== ========
</TABLE>
20
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999 was
approximately $27.5 million, or $1.25 per share. Pro forma net tangible book
value per share is equal to our total tangible assets less total liabilities,
divided by the number of shares of our common stock outstanding. After giving
effect to the acquisition of Atlantic Connections and the proceeds of this
offering, assuming an initial public offering price of $14.00 per share and
after deducting estimated underwriting discounts and commissions and estimated
expenses payable by us, our pro forma net tangible book value as of September
30, 1999 would have been approximately $119.5 million, or $4.11 per share.
This represents an immediate increase in pro forma net tangible book value of
$2.86 per share to existing stockholders and an immediate dilution of $9.89
per share to new investors. The following table illustrates this dilution, as
of September 30, 1999:
<TABLE>
<S> <C>
Assumed initial public offering price............................ $14.00
Pro forma net tangible book value per share before this
offering........................................................ $ 1.25
Increase in pro forma net tangible book value per share
attributable to new investors................................... $ 2.86
Pro forma net tangible book value per share after this offering.. $ 4.11
Dilution per share to new investors.............................. $ 9.89
</TABLE>
The following table summarizes on a pro forma basis the difference, giving
effect to additional shares issued or to be issued after September 30, 1999,
between existing stockholders and new investors with respect to the number of
shares of common stock to be purchased, the total consideration paid to Choice
One and the average price per share paid assuming the offering is effective
after January 31, 2000 and prior to March 1, 2000:
<TABLE>
<CAPTION>
Shares purchased Total consideration Average
------------------ -------------------- price
Number Percent Amount Percent per share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders......... 22,723,039 76.1% $ 62,035,000 38.3% $ 2.73
New investors................. 7,145,000 23.9 100,030,000 61.7 14.00
---------- ----- ------------ -----
Total....................... 29,868,039 100.0% $162,065,000 100.0%
========== ===== ============ =====
</TABLE>
The table above assumes no exercise of stock options outstanding at
September 30, 1999. As of September 30, 1999, there were incentive stock
options outstanding to purchase a total of 375,043 shares of common stock at a
weighted average exercise price of $3.25 per share. To the extent any of these
options are exercised, there will be further dilution to new investors.
21
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
The following table sets forth our selected consolidated financial data for
the periods indicated. The consolidated statement of operations data for the
period from inception through December 31, 1998 and as of and for the nine
months ended September 30, 1999 have been derived from our consolidated
financial statements included elsewhere in this prospectus which have been
audited by Arthur Andersen LLP, independent public accountants, as indicated
in their report included elsewhere in this prospectus. The results of our
operations for the periods indicated are not necessarily indicative of the
results of operations in the future.
You should read the selected consolidated financial data set forth below in
conjunction with the Consolidated Financial Statements and notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
22
<PAGE>
<TABLE>
<CAPTION>
Period ended Nine months ended
December 31, 1998 September 30, 1999
----------------- ------------------
(in thousands, except per share
data)
<S> <C> <C>
Statement of Operations Data:
Revenues.................................. $ - $ 947
Operating expenses:
Network costs............................ - 2,577
Selling, general and administrative...... 4,684 12,826
Noncash deferred compensation............ 87 996
Depreciation and amortization............ 36 3,373
------- --------
Total operating expenses................ 4,807 19,772
------- --------
Loss from operations.................... (4,807) (18,825)
Interest and other income (expense)....... 22 (832)
======= ========
Net loss.................................. $(4,785) $(19,657)
======= ========
Net loss per share, basic and diluted..... $ (0.27) $ (0.90)
======= ========
</TABLE>
<TABLE>
<CAPTION>
As of
September 30, 1999
------------------
<S> <C>
Balance Sheet Data:
Cash and cash equivalents.................................... $ 3
Working capital (deficit).................................... (9,582)
Property, plant and equipment, net........................... 50,780
Total assets................................................. 54,180
Long-term debt............................................... 5,000
Stockholder's equity......................................... 38,420
</TABLE>
<TABLE>
<CAPTION>
Period ended Nine months ended
December 31, 1998 September 30, 1999
----------------- ------------------
(in thousands, except per share
data)
<S> <C> <C>
Other Financial Data:
Net cash provided by (used in) operating
activities.............................. $ 6,587 $(18,763)
Net cash used in investing activities.... (21,146) (33,043)
Net cash provided by financing
activities.............................. 16,050 50,318
Capital expenditures..................... 21,146 33,043
EBITDA, as adjusted...................... (4,684) (14,456)
Operating Data:
Lines sold............................... - 12,303
UNE's installed.......................... - 6,060
T-1 channels installed................... - 869
DSL lines installed...................... - 57
Resold lines installed................... - -
-------- --------
Total lines installed.................... - 6,986
Collocations installed................... - 68
Markets in operation..................... - 5
Number of switches deployed.............. - 5
</TABLE>
23
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The unaudited 1998 pro forma condensed combined statement of operations
reflects the combination of the statement of operations of Choice One for the
period from inception (June 2, 1998) through December 31, 1998 and the
statements of operations of Atlantic Connections LLC and its predecessors
(Atlantic Connections, Inc. and Atlantic Connections, Ltd.), or Atlantic
Connections, for the year ended December 31, 1998, as adjusted for the
acquisition, as if the acquisition was consummated on January 1, 1998. The
unaudited 1999 condensed combined nine month pro forma statement of operations
reflects the combination of the statement of operations of Choice One for the
nine months ended September 30, 1999 and the statement of operations of
Atlantic Connections for the nine months ended September 30, 1999, as adjusted
for the acquisition as if the acquisition was consummated on January 1, 1998.
The unaudited pro forma condensed combined balance sheet is presented as if
the acquisition was consummated on September 30, 1999. The unaudited pro forma
statements do not give effect to the up to $2.1 million additional purchase
price payable in cash or, at our option, our common stock in connection with
the acquisition of Atlantic Connections if specified performance criteria are
met in the 12 months following the acquisition. The unaudited pro forma
statements should be read in conjunction with the separate historical
financial statements of Choice One and Atlantic Connections and its
predecessors and the notes thereto, and with the accompanying notes to the pro
forma statements. The pro forma as adjusted condensed combined balance sheet
as of September 30, 1999 gives effect to the offering and the application of
the net proceeds of the offering, assuming an initial offering price of $14.00
per share and after deducting estimated underwriting discounts and commissions
and estimated offering expenses payable by us, as if they had occurred on
September 30, 1999.
The unaudited pro forma statements are based upon currently available
information and upon certain assumptions that Choice One believes are
reasonable under the circumstances. The unaudited pro forma statements do not
purport to represent what Choice One's financial position or results of
operations would actually have been if the transaction in fact had occurred on
such date or at the beginning of the period indicated or to project the
Company's financial position or the results of operations at any future date
or for any future period.
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Year Ended December 31, 1998
<TABLE>
<CAPTION>
Atlantic
Connections
Choice One and its
historical predecessors
from inception pro forma
(June 2, 1998) for the
through year ended
December 31, December 31, Pro forma Pro forma
1998 1998(3) adjustments combined
-------------- ------------ ----------- ----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C>
Revenues................ $ - $ 6,472 $ - $ 6,472
Operating expenses:
Network costs......... - 5,287 - 5,287
Selling, general and
administrative....... 4,684 1,811 - 6,495
Noncash deferred
compensation......... 87 - - 87
Depreciation and
amortization......... 36 610 687 (1) 1,333
---------- ------- ------- ----------
Total operating
expenses........... 4,807 7,708 687 13,202
---------- ------- ------- ----------
Loss from operations.... (4,807) (1,236) (687) (6,730)
Interest income
(expense), net......... 22 (332) (556)(2) (866)
---------- ------- ------- ----------
Net loss................ $ (4,785) $(1,568) $(1,243) $ (7,596)
========== ======= ======= ==========
Net loss per share,
basic and diluted...... $ (0.27) $ (0.42)
========== ==========
Weighted average number
of shares outstanding.. 17,961,046 17,961,046
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations
(1) Reflects an adjustment to depreciation expense related to the decrease in
net tangible assets of Atlantic Connections on the assumption that the
acquisition had taken place on January 1, 1998. These assets have been
restated at their estimated fair market values and depreciated over the
remaining useful lives of the assets. The decrease in depreciation expense
of $66,000, as compared to that recorded by Atlantic Connections, was
included in operating expenses as indicated.
Reflects an increase in amortization expense of $753,000 related to the
amortization of the acquired goodwill and customer base, less the
amortization expense of intangible assets recorded in Atlantic
Connection's pro forma statement of operations. The values of the acquired
goodwill and customer base are based on estimated values and are amortized
using the straight-line method and estimated useful lives of 10 years and
5 years, respectively.
(2) Reflects the additional interest expense of $727,000 incurred on the debt
to finance the acquisition. The overall effective interest rate was 10.75%
per annum.
(3) The Atlantic Connections and its predecessors pro forma statement of
operations for the year ended December 31, 1998 consists of the following,
assuming the acquisitions of its predecessors were consummated on January
1, 1998:
<TABLE>
<CAPTION>
Historical Atlantic
---------------------------------------------------- Connections
Atlantic Atlantic Atlantic and its
Connections, LLC Connections, Inc. Connections, Ltd. predecessors
for the period for the period for the period pro forma
from July 24, from January 1, from January 1, for the year
1998 through 1998 through 1998 through ended
December 31, August 31, August 31, Pro forma December 31,
1998 1998 1998 adjustments 1998
---------------- ----------------- ----------------- ----------- ------------
(in thousands)
<S> <C> <C> <C> <C> <C>
Revenues................ $2,180 $2,029 $2,263 $ - $ 6,472
Operating expenses:
Network costs......... 1,858 1,781 1,648 - 5,287
Selling, general and
administrative....... 600 450 761 - 1,811
Depreciation and
amortization......... 215 27 33 335 (a) 610
------ ------ ------ ----- -------
Total operating
expenses........... 2,673 2,258 2,442 335 7,708
------ ------ ------ ----- -------
Loss from operations.... (493) (229) (179) (335) (1,236)
Interest expense........ (111) (30) (20) (171)(b) (332)
------ ------ ------ ----- -------
Loss from operations
before provision for
(benefit of) income
taxes.................. (604) (259) (199) (506) (1,568)
Income tax provision
(benefit).............. - - (70) 70 (c) -
------ ------ ------ ----- -------
Net loss................ $ (604) $ (259) $ (129) $(576) $(1,568)
====== ====== ====== ===== =======
</TABLE>
- --------
(a) Adjustment to include goodwill amortization for the period from January
1, 1998 to August 31, 1998 related to Atlantic Connections, LLC's
acquisitions of its predecessors, Atlantic Connections, Inc. and Atlantic
Connections, Ltd.
(b) Adjustment to reflect pro forma interest expense for the period from
January 1, 1998 to August 31, 1998 for additional borrowing associated
with the acquisitions.
(c) Adjustment to exclude income tax benefit, which, on a pro forma basis,
would flow through to Atlantic Connections, LLC Unitholders.
26
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
For the Nine Months Ended September 30, 1999
<TABLE>
<CAPTION>
Atlantic
Choice One Connections Pro forma Pro forma
historical historical adjustments combined
----------- ----------- ----------- -----------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C>
Revenues................ $ 947 $6,239 $ - $ 7,186
Operating expenses:
Network costs......... 2,577 4,794 - 7,371
Selling, general and
administrative....... 12,826 1,484 - 14,310
Noncash deferred
compensation......... 996 - - 996
Depreciation and
amortization......... 3,373 466 205 (1) 4,044
----------- ------ ----- -----------
Total operating
expenses........... 19,772 6,744 205 26,721
----------- ------ ----- -----------
Loss from operations.... (18,825) (505) (205) (19,535)
Interest income
(expense), net......... (832) (258) (408)(2) (1,498)
----------- ------ ----- -----------
Net loss................ $ (19,657) $ (763) $(613) $ (21,033)
=========== ====== ===== ===========
Net loss per share,
basic and diluted...... $ (0.90) $ (0.96)
=========== ===========
Weighted average number
of shares outstanding.. 21,952,900 21,952,900
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Statement of Operations
(1) Reflects an adjustment to depreciation expense related to the decrease in
net tangible assets of Atlantic Connections, based on the assumption that
the acquisition had taken place on January 1, 1998. These assets have been
restated at their estimated fair market values and depreciated over the
remaining useful lives of the assets. The decrease in depreciation expense
of $396,000 as compared to that recorded by Atlantic Connections, was
included in operating expenses as indicated.
Reflects an increase in amortization expense of $601,000 related to the
amortization of the acquired goodwill and customer base, less the
amortization expense of intangible assets recorded in Atlantic
Connection's historical statement of operations. The values of the
acquired goodwill and customer base are based on estimated values and are
amortized using the straight-line method and estimated useful lives of 10
years and 5 years, respectively.
(2) Reflects the additional interest expense of $408,000 incurred on the debt
to finance the acquisition. The overall effective interest rate was 10.75%
per annum.
28
<PAGE>
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
As of September 30, 1999
<TABLE>
<CAPTION>
Atlantic
Choice One Connections Pro forma Pro forma Pro forma,
historical historical adjustments combined as adjusted
---------- ----------- ----------- --------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Assets
Current assets:
Cash and cash
equivalents.......... $ 3 $ 227 $ - $ 230 $ 77,650
Accounts receivable,
net.................. 685 952 - 1,637 1,637
Prepaid expenses and
other current
assets............... 490 3 - 493 493
-------- ------- ------ -------- --------
Total current
assets............. 1,178 1,182 - 2,360 79,780
Property, plant and
equipment, net......... 50,780 543 (460)(2) 50,863 50,863
Other assets............ 2,222 2,560 6,130 (1) 10,912 10,912
-------- ------- ------ -------- --------
Total assets........ $ 54,180 $ 4,285 $5,670 $ 64,135 $141,555
======== ======= ====== ======== ========
Liabilities and
Stockholder's Equity
Current liabilities:
Bank overdraft........ $ 1,344 $ - $ - $ 1,344 $ -
Current portion of
long-term debt....... - 318 (318)(4) - -
Accounts payable...... 2,023 1,400 - 3,423 3,423
Accrued expenses...... 7,393 39 250 (3) 7,682 7,682
-------- ------- ------ -------- --------
Total current
liabilities........ 10,760 1,757 (68) 12,449 11,105
-------- ------- ------ -------- --------
Long-term liabilities... 5,000 3,079 5,187 (4) 13,266 -
-------- ------- ------ -------- --------
Stockholder's equity:
Common stock and
additional paid-in
capital.............. 68,887 816 (816)(5) 68,887 160,917
Deferred
compensation......... (6,025) - - (6,025) (6,025)
Accumulated deficit... (24,442) (1,367) 1,367 (5) (24,442) (24,442)
-------- ------- ------ -------- --------
Total stockholder's
equity............. 38,420 (551) (551) 38,420 130,450
-------- ------- ------ -------- --------
Total liabilities
and stockholder's
equity............. $ 54,180 $ 4,285 $5,670 $ 64,135 $141,555
======== ======= ====== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE>
Notes to the Unaudited Pro Forma Condensed Combined Balance Sheet
(1) Reflects the purchase accounting adjustments for the acquisition based
upon the Company's preliminary estimate of the assets and liabilities
assumed. For purchase accounting, Atlantic Connections' assets have been
recorded at their estimated fair market value subject to adjustments
based upon the results of an independent appraisal. The estimated amounts
recorded for assets and liabilities acquired from Atlantic Connections
are not expected to differ materially from the final assigned values.
Purchase accounting adjustments were recorded to reduce property, plant
and equipment by $460,000, to reflect the estimated fair value of the
acquired customer base of $4.3 million, to decrease the recorded value of
intangible assets acquired by $2.6 million, to increase the recorded
excess of purchase cost over fair value of net assets acquired by $4.3
million and to decrease the long-term debt not assumed by $3.3 million.
These adjustments are required to record these assets at their estimated
fair market values. The purchase price is subject to adjustment based on
Atlantic Connections' October 1999 billed revenue and working capital at
October 31, 1999 under the terms of the Purchase Agreement. In addition,
the Purchase Agreement includes an earn-out provision that will require
the Company to pay up to an additional 25 percent of the initial purchase
price in cash or our stock if certain objectives are met. Those
objectives include sales, access line provisioning and customer retention
targets as well as the retention of certain key employees. The additional
purchase price will be paid approximately one year after the purchase
date. The calculation of excess purchase cost over fair value of net
assets acquired is as follows:
<TABLE>
<CAPTION>
(amounts in thousands)
<S> <C>
Cash paid.......................................................... $8,266
Direct acquisition costs........................................... 250
------
Total purchase cost................................................ 8,516
Less: Net book value of Atlantic Connections....................... (2,846)
Less: Adjustment in net assets to fair value....................... (1,325)
------
Excess of purchase cost over fair value of assets acquired and
liabilities assumed (goodwill).................................... $4,345
======
</TABLE>
Reflects the estimated fair value of the acquired customer base of $4.3
million.
Represents the decrease of $2.6 million for the remaining net book value
of the goodwill existing on Atlantic Connections' balance sheet.
(2) Reflects the fair value adjustment to reduce property, plant and
equipment by $460,000.
(3) Reflects the liability for direct acquisition costs of $250,000.
(4) Reflects borrowings of $8.3 million in connection with the acquisition of
Atlantic Connections, the repayment of $3.3 million of debt of Atlantic
Connections and the elimination of $.1 million of Atlantic Connections'
redeemable warrants.
(5) Reflects the elimination of Atlantic Connections' unitholders' equity.
30
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Choice One Overview
We are an integrated communications provider offering broadband data and
voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
Our offerings include high speed data and Internet service, principally
utilizing DSL technology, local exchange service and long distance service. We
seek to become the leading ICP in each of our target markets by offering a
single source for competitively priced, high quality, customized
telecommunications services. A key element of our strategy is to be one of the
first ICPs to provide comprehensive coverage in each of the markets we serve.
We are achieving this market coverage by installing both data and voice
network equipment in multiple incumbent local exchange carrier central
offices, a process known as collocation. We also intend to maximize
utilization of our market network coverage by offering data and voice services
on a wholesale basis to Internet service and other telecommunications
providers. Through our strategy of connecting substantially all of our clients
directly to our own switches, we are able to more efficiently route traffic,
ensure quality service and control costs.
Since our inception on June 2, 1998, our principal activities have
consisted of the following:
. the hiring of management and other key personnel;
. the raising of capital;
. the procurement of governmental authorizations and space in central
offices;
. the acquisition of equipment and facilities;
. the development, acquisition and integration of operations support
systems and other back office systems;
. the negotiation of interconnection agreements; and
. the commencement of operations in the Albany, Buffalo, Manchester,
Pittsburgh, Providence, Rochester, Springfield, Syracuse and Worcester
markets.
Therefore, our revenues during this period are not indicative of revenues
that may be attained in the future. As a result of our development activities,
we have experienced significant operating losses and negative EBITDA to date.
EBITDA, as used in this prospectus, is defined in the Prospectus Summary. See
"Prospectus Summary--Summary Consolidated and Combined Financial and Operating
Data." We do not expect to achieve positive EBITDA in any market while we
emphasize development, construction and expansion of our telecommunications
services business in such market and until we establish a sufficient revenue-
generating client base. We expect to continue to experience increasing
operating losses and negative EBITDA as we expand our operations. We only have
a limited history upon which you can base your investment decision. As a
result of our limited operating history, prospective investors have limited
operating and financial data about us upon which to base an evaluation of our
performance.
Equity Allocation of Common Stock
Institutional investors of Choice One Communications L.L.C., which we refer
to as the investor members, and 25 members of our management, which we refer
to as the management members,
31
<PAGE>
currently own approximately 95.0% and 5.0%, respectively, of the ownership
interests of Choice One Communications L.L.C., the entity that owns all of our
outstanding capital stock. Upon completion of this offering, Choice One
Communications L.L.C. will dissolve and its assets, which consist almost
entirely of such capital stock, will be distributed to the investor members
and the management members. Assuming an initial public offering price of
$14.00 per share, the midpoint of the price range on the cover of this
prospectus, and assuming no drawdowns on the additional equity commitments, if
the initial public offering occurs before March 1, 2000, the equity allocation
of our common stock held by the LLC between the investor members and the
management members will be approximately 69.5% to the investor members and
30.5% to the management members. Under generally accepted accounting
principles, upon consummation of this offering, we will be required to record
the $84.7 million, assuming an initial public offering price of $14.00 per
share, the midpoint of the price range on the cover of this prospectus,
increase in the assets of Choice One Communications L.L.C. allocated to the
management members as an increase in additional paid-in capital, with a
corresponding increase in deferred compensation, of which we will be required
to record $ million as a noncash, non-recurring charge to operating
expense and $ million will be recorded as deferred management ownership
allocation charge. The deferred charge will be amortized at $ ,
$ , $ and $ during 2000, 2001, 2002 and 2003,
respectively, which is based upon the period over which we have the right to
repurchase the securities. If a management member's employment terminates for
any reason, we will have the right to repurchase all unvested securities at
the lesser of the original cost of the securities or fair market value,
provided that the aggregate repurchase price will not be less than the
management member's original cost. The right to repurchase the securities
expires over a 24 to 36-month period after the completion of this offering
depending on the particular management member's vesting schedule.
Choice One Factors Affecting Results of Operations
Revenues
Revenues are generated from the following categories:
. Revenues from DSL and other data services, which will consist primarily
of monthly recurring charges for connections from the end-user to our
facilities;
. Local calling services, which will consist of monthly recurring charges
for basic service, usage charges for local calls, service charges for
features such as call waiting and call forwarding;
. Long distance services, which include a full range of retail long
distance services, including traditional switched and dedicated long
distance, 800/888 calling, international, calling card and operator
services;
. Access charges, which we earn by connecting our clients to their
selected long distance carrier for outbound calls or by delivering
inbound long distance traffic to our local service clients; and
. Reciprocal compensation, which entitles us to bill the established
telephone companies for calls in the same local calling area, placed by
their clients to our clients.
The market for local and long distance services is well established and we
expect revenue growth principally from taking market share away from other
service providers. Similarly, we expect revenue
32
<PAGE>
from access charges that are based on long distance calls made by and to our
customers, to grow as we are able to increase our client base.
The market for high-speed data communications services and Internet access
is rapidly growing and intensely competitive. While many of our competitors
enjoy competitive advantages over us, we are pursuing a significant market
that, we believe, is currently underserved. See "Business--Market
Opportunity." We expect to generate most of our revenues from the sale to end
user clients in the small and medium-sized business market segments, but may
augment this core revenue source by selectively supplying wholesale services,
including equipment collocation and facilities management services, to
information providers, such as audio-text service providers, and Internet
service providers.
We price our services competitively in relation to those of the established
telephone companies and offer combined service discounts designed to give
clients incentives to buy a portfolio of services. While many of our
competitors and potential competitors enjoy competitive advantages over us, we
are pursuing a significant market that, we believe, is currently underserved.
During the past several years, market prices for many telecommunications
services have been declining, which is a trend that we believe will likely
continue. This decline will have a negative effect on our revenue that may not
be offset completely by savings from decreases in our cost of services. As
prices decline for any service, we believe that the total number of users and
their usage will increase. Although pricing will be an important part of our
strategy, we believe that direct relationships with our customers and
consistent, high quality service and customer support will be key to
generating customer loyalty. See "Business--Competition."
Our experience demonstrates that there is significant churn of customers
within the telecommunications industry, and we believe that churn is
especially high when customers are only buying long distance services from a
carrier or when customers are buying resold services. We expect to minimize
churn by providing superior customer care, by offering a competitively priced
portfolio of local, long distance and Internet services, and by focusing on
offering our own facilities based services.
There is uncertainty caused by pending regulatory proceedings surrounding
the payment of reciprocal compensation by the established telephone companies
for calls delivered to Internet service providers. However, the amount of
reciprocal compensation revenue that we receive related to Internet service
providers is not material. See "Regulation--Federal Regulation."
Network Costs
Under our network buildout strategy, we are deploying digital and packet
switching platforms with local and long distance capability and leasing fiber
trunking capacity from the established telephone companies and other CLECs to
connect our switch with our transmission equipment collocated in the
established telephone company's central offices. We will lease high capacity
digital lines and unbundled copper loop lines from the established telephone
companies to connect our clients and other carriers' networks to our network.
We plan to lease capacity or overbuild specific network segments in certain
markets as economically justified by traffic volume growth. In addition, we
expect to increase the capacity of our switches, and may install additional
switches, in a market as demand warrants. We have acquired the rights to two
strands of dark fiber between Springfield and Worcester, and have an option to
purchase the rights to an additional two strands.
We expect switch site lease costs will be a significant part of our ongoing
cost of services. For use of their central offices for collocation,
established telephone companies typically charge both a
33
<PAGE>
start-up fee as well as a monthly recurring fee. The costs to lease high
capacity digital lines and unbundled copper loop lines from the established
telephone companies will vary by company and are regulated by state
authorities. Collocation costs are also expected to be a significant part of
our network development and ongoing cost of services. We will be required to
invest a significant amount of funds to develop the central office collocation
sites and to deploy the transmission and distribution electronics. We have
entered into an agreement with Lucent Technologies, Inc. to purchase $30.0
million of Lucent equipment at a discount to their standard pricing. As of
September 30, 1999, we had purchased $24.6 million of Lucent equipment under
this agreement. We believe that in most of the markets we plan to enter there
are multiple carriers in addition to the established telephone company from
which we could lease trunking capacity. We expect that the costs associated
with these leases will increase with client volume and will be a significant
part of our ongoing cost of services. However, we believe that offering
integrated data and voice services by means of DSL technology will provide us
with a cost advantage over competitors as we will be able to reduce the number
of access lines we will need to lease from the established telephone company
to provide the same amount of service.
In order to enter a market, we must enter into an interconnection agreement
with the established telephone company to make comprehensive calling available
to our clients. Typically these agreements set the cost per minute to be
charged by each party for the calls which have traversed between each
carrier's network. These costs will grow in proportion to our clients'
outbound call volume and are expected to be a major portion of our cost of
services. However, we do expect to generate increased revenue from the
established telephone companies as our clients' inbound calling volume
increases. To the extent our clients' outbound call volume is equivalent to
their inbound call volume, we expect that our interconnection costs paid to
the established telephone companies will be substantially offset by the
interconnection revenues received from the established telephone companies.
We have entered into a resale agreement with Frontier Communications of the
West Inc. to provide us with transmission services. This agreement provides
for the resale of long distance services on a per-minute basis and contains
minimum volume commitments. In the event we fail to meet our minimum volume
commitments, we may be obligated to pay under-utilization charges and in the
event we underestimate our need for transmission capacity, we may be required
to obtain capacity through more expensive means. Transmission capacity costs
will increase as our clients' long distance calling volume increases, and we
expect that these costs will be a significant portion of our cost of long
distance services. As traffic on specific routes increases, however, we may
lease or otherwise acquire fiber optic trunk capacity which would have the
effect of reducing our per unit network costs and increasing our depreciation
and amortization expense.
Selling, General and Administrative Expenses
Our selling, general and administrative expenses include selling and
marketing costs, client care, billing, corporate administration, personnel and
network maintenance.
We employ a large direct sales force in each market we enter. To attract
and retain a highly qualified sales force, we are offering our sales and
client care personnel a compensation package emphasizing commissions and stock
options. In addition to our direct sales force, we may use independent sales
agents in each of our markets to sell our products through indirect channels.
We expect to incur significant selling and marketing costs as we continue to
expand our operations. We also plan to offer sales promotions to win clients,
especially in the first few years as we establish our market presence.
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We have developed a customized information system and procedures for
operations support systems and other back office systems that are required to
enter, schedule, provision and track a client order from point of sale to the
installation and testing of service and that will include or interface with
trouble management, inventory, billing, collection and client care service
systems. Along with the development cost of the systems, we will also incur
ongoing expenses for client care and billing. As our strategy stresses the
importance of personalized client care, we expect that our client care
department will become a larger part of our ongoing administrative expenses.
We also expect billing costs to increase as our number of clients and call
volume increase. We currently outsource our billing under an agreement with
Saville Systems Inc. This agreement provides for the processing of our billing
records and includes minimum monthly transaction fees of between $100,000 and
$130,000 based on the number of calls and access lines billed to customers.
Billing is expected to be a significant part of our ongoing administrative
expenses.
We will incur other costs and expenses, including the costs associated with
the maintenance of our network, administrative overhead, office leases and bad
debt. We expect that these costs will grow significantly as we expand our
operations and that administrative overhead will be a large portion of these
expenses during the start-up phase of our business. However, we expect these
expenses to become smaller as a percentage of our revenue as we build our
client base.
Deferred Compensation
As the estimated fair market value of our stock exceeded the exercise price
of certain options granted, we recognized deferred compensation which is
amortized over the vesting period of the options.
As our estimated fair market value has exceeded the price at which units of
Choice One Communications L.L.C. have been sold to management employees since
the formation of Choice One, we have recognized a deferred compensation charge
of $3.6 million which is being amortized over a four year period from the date
the units were issued. In addition, we have similarly recognized a deferred
compensation expense of $3.5 million in connection with the issuance of
options to management employees, which is being amortized over a four year
period from the date the options were issued.
Depreciation and Amortization
Our depreciation and amortization expense includes depreciation of switch
related equipment, non-recurring charges and equipment collocated in
established telephone company central offices, network infrastructure
equipment, information systems and furniture and fixtures. It also includes
amortization of deferred financing costs related to our credit facility. Our
acquisition of Atlantic Connections will be accounted for using the purchase
method of accounting. The amount of the purchase price in excess of the fair
value of the net assets acquired, $4.3 million, will be amortized over a 10
year period. The value of the customer base acquired from Atlantic
Connections, which management estimates to be approximately $4.3 million, will
be amortized over a five year period. We expect that our depreciation and
amortization expense will increase as we continue to make capital
expenditures, acquire long-term rights in telecommunications facilities and
acquire other businesses.
Income Taxes
We have not generated any taxable income to date and do not expect to
generate taxable income in the next few years. Use of our net operating loss
carryforwards, which begin to expire in 2013, may
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be subject to limitations under Section 382 of the Internal Revenue Code of
1986, as amended. We have recorded a full valuation allowance on the deferred
tax asset, consisting primarily of net operating loss carryforwards, due to
the uncertainty of its realizability.
Choice One Results of Operations
During the period from our inception on June 2, 1998 through December 31,
1998, we were in the development stage of operations and did not generate any
revenue. Our principal activities during 1998 consisted of the following:
. the hiring of management and other key personnel;
. the raising of capital;
. the procurement of governmental authorizations;
. the acquisition of equipment and facilities;
. the development, acquisition and integration of operations support
systems, and other back office systems; and
. the negotiation of interconnection agreements.
During the period from our inception on June 2, 1998 through December 31,
1998, we incurred a net loss of $4.8 million, which was attributable to
selling, general and administrative, or SG&A, expenses of $4.7 million,
noncash deferred compensation of $.1 million and minimal depreciation and
amortization expense.
We became operational in Albany and Buffalo in February 1999, in Pittsburgh
and Syracuse in April 1999, and in Providence in August 1999. We generated $.9
million in revenue for the nine months ended September 30, 1999. For the nine
months ended September 30, 1999, after giving pro forma effect to the
acquisition of Atlantic Connections and the incurrence of debt in connection
therewith, we would have had a net loss of $21.4 million. Our historical
network operating costs, selling, general and administrative expenses, noncash
deferred compensation and depreciation and amortization expense during this
period were $2.6 million, $12.8 million, $1.0 million and $3.4 million,
respectively. We expect these costs and expenses to increase significantly in
future periods as we expand our operations.
Atlantic Connections and Predecessors Overview
In November 1999, we acquired Atlantic Connections, a local and long
distance service provider with operations in Portsmouth, New Hampshire and the
Worcester, Massachusetts metropolitan area for an initial cash purchase price
of approximately $8.3 million plus up to an additional $2.1 million that would
be payable in cash, or at our option, in common stock, if specified criteria
are met in the 12 months following the acquisition. Approximately $3.3 million
of the purchase price was used to repay Atlantic Connections' long-term debt
in full.
Atlantic Connections Results of Operations
Revenues
Total revenues of Atlantic Connections were $6.5 million for 1998 compared
to $5.5 million for 1997, an increase of $1.0 million, or 18.2%. This increase
was the result of growth in sales to existing customers as well as the
addition of new customers. The increase in 1998 was also due in part to the
addition of two new services.
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Total revenues were $5.5 million for 1997 compared to $5.3 million for
1996, an increase of $196,000, or 3.8%. During this period, minutes of use
increased over 14.0%, but were offset by competitive pressure on rates.
Cost of Service
Cost of service was $5.2 million for 1998 compared to $3.7 million for
1997, an increase of $1.5 million, or 40.5%. This increase was primarily due
to the higher cost of local exchange resale and, to a lesser extent, from
inefficiencies resulting from having two network systems while Atlantic
Connections converted traffic in phases from its old to its new network. The
upfront cost of implementing a new service also contributed to the increase in
cost of service for 1998.
Cost of service was $3.7 million for 1997 compared to $3.8 million for
1996, a decrease of approximately $.1 million or 2.6%. The decrease was
primarily attributable to significant reductions in "wholesale" access costs.
This decrease was also in part due to the accounting treatment for various new
network costs related to the installation of new switches, which were
accounted for under general and administrative expenses rather than cost of
service, until placed into service.
Selling, General and Administrative
Selling, general and administrative expenses were $2.0 million for 1998
compared to $1.5 million for 1997, an increase of $543,000, or 35.2%. This
increase was primarily due to expenses associated with sales growth and
additional personnel.
Selling, general and administrative expenses were $1.5 million for 1997
compared to $1.2 million for 1996, an increase of $350,000, or 29.1%. This
increase was primarily attributable to increases in salary expenses associated
with management, inside sales and other personnel, consulting, accounting and
legal fees and expenses directly related to upgrades in Atlantic Connections'
office equipment and switch installation. Additionally, certain expenses
relating to the installation of new switches that would normally have been
applied under cost of service were expensed under general and administrative
for 1997 because the switches were not in service.
Liquidity and Capital Resources
Initial Equity Financing. Our initial equity financing consisted of
approximately $62.1 million contributed by the investor members and the
management members of our parent, Choice One Communications L.L.C. On June 30,
1999, the aggregate amount of capital committed by certain of these members
and new members was increased by approximately $71.3 million to a total
capital commitment of approximately $133.4 million. These additional equity
commitments will expire upon consummation of this offering. We currently do
not anticipate drawing on these additional commitments prior to the
consummation of this offering. If the additional commitments terminate, the
total equity capital committed to the LLC would reduce back to an aggregate of
approximately $62.1 million. See "Certain Relationships and Related
Transactions."
Credit Facility. Our credit facility permits us to borrow up to $150.0
million, subject to various conditions, covenants and restrictions, including
those described below, for the next eight years with maximum borrowing limits
to be reduced starting in 2002 by 5.0% with increasing reductions thereafter
for each year. The $50.0 million term loan portion of the credit facility will
not be available for borrowing by us after November 3, 2000 if these funds
have not been borrowed before that date.
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As of September 30, 1999, $5.0 million was outstanding under the revolving
portion of the credit facility. The credit facility, which is secured by liens
on substantially all of our and our subsidiaries' assets and a pledge of our
subsidiaries' common stock, contains covenants and provisions that restrict
our ability and our subsidiaries' ability to:
. incur additional indebtedness and contingent obligations;
. incur liens and enter into lease transactions;
. make loans, advances and investments;
. effect mergers, liquidations, acquisitions and asset sales;
. make dividends and distributions on, and redemptions and repurchases of
capital stock and other similar payments;
. make exchanges and issuances of capital stock;
. engage in transactions with affiliates;
. make certain accounting changes;
. make amendments, specified payments and prepayments of subordinated
debt;
. amend charter documents; and
. enter into restrictive agreements.
The credit facility also requires the satisfaction of particular financial
covenants. During the stage 1 covenant period, as defined in the credit
facility, these covenants include:
. a continuing test of debt to contributed capital ratio;
. a quarterly test of minimum revenue;
. a quarterly test of the maximum EBITDA losses permitted and minimum
EBITDA required;
. an annual limit on capital expenditures; and
. a quarterly test of the ratio of property, plant and equipment to total
debt.
During the stage 2 covenant period, as defined in the credit facility,
these covenants include:
. a quarterly test of the indebtedness of our operating subsidiaries
relative to their EBITDA;
. a quarterly test of the ratio of EBITDA to fixed charges;
. a quarterly test of the ratio of EBITDA to interest expense;
. an annual limit on capital expenditures; and
. a quarterly test of the total indebtedness of Choice One and its
operating subsidiaries relative to the EBITDA of Choice One and its
operating subsidiaries.
Events of default under the credit facility include various events of
default customary for such type of agreement, such as failure to pay scheduled
payments when due, cross-defaults with and cross-acceleration to other
indebtedness, the occurrence of a change in control, loss of material
communications licenses, and events of bankruptcy, insolvency and
reorganization. In addition, if Mr. Dubnik ceases to be our chief executive
officer and a replacement satisfactory to the lenders is not hired within 180
days, there will be an event of default under our credit facility.
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Cash Flows. We have incurred significant operating and net losses since our
inception. We expect to continue to experience increasing operating losses and
negative EBITDA as we expand our operations and build our client base. As of
September 30, 1999, we had an accumulated deficit of $24.4 million. Net cash
provided by operating activities was approximately $6.6 million for the period
of inception through December 31, 1998 and net cash used in our operating
activities was approximately $18.8 million for the nine months ended September
30, 1999. The net cash used for operating activities during 1999 was primarily
due to net losses and a decrease in current liabilities.
Net cash provided by financing activities was $16.0 million for the period
from inception through December 31, 1998 and $50.3 million for the nine months
ended September 30, 1999. Net cash provided by financing activities for the
period from inception through December 31, 1998 was related to equity
contributions. Net cash provided by financing activities for the nine months
ended September 30, 1999 was related to $7.0 million of borrowings under the
credit facility and bank overdraft, $44.0 million of equity contributions and
$.7 million of payments of financing costs.
Capital Requirements. Capital expenditures were $21.1 million and $33.0
million from the period of inception through December 31, 1998 and during the
nine months ended September 30, 1999, respectively. We expect that our capital
expenditures will be substantially higher in future periods in connection with
the purchase of infrastructure equipment necessary for the development and
expansion of our network and the development of new regions. Net cash used in
our investing activities was $21.1 million for the period of inception through
December 31, 1998 and $33.0 million for the nine months ended September 30,
1999. The net cash used for investing activities was due to capital
expenditures.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of the demand for our services and
regulatory, technological and competitive developments, including additional
market developments and new opportunities in the industry and other factors.
We also expect that we will require additional financing, or require financing
sooner than anticipated, if our development plans or projections change or
prove to be inaccurate or if we alter the schedule or targets of our roll-out
plan. We may also require additional financing in order to take advantage of
unanticipated opportunities, to effect acquisitions of businesses, to develop
new services or to otherwise respond to changing business conditions or
unanticipated competitive pressures. Sources of additional financing may
include commercial bank borrowings, vendor financing or the private or public
sale of equity or debt securities. To expand and develop our business, we will
need a significant amount of cash. Our ability to obtain additional financing
is uncertain.
Quantitative and Qualitative Disclosures about Market Risk
At September 30, 1999, the carrying value of our debt obligations excluding
capital lease obligations was $5.0 million and the fair value of those
obligations was $5.0 million. The weighted average interest rate of our debt
obligations at September 30, 1999 was 10.75%.
We have not, in the past, used in any material respect financial
instruments as hedges against financial and currency risks or for trading.
However, as we expand our operations, we may begin to use various financial
instruments, including derivative financial instruments, in the ordinary
course of business, for purposes other than trading. These instruments could
include letters of credit, guarantees of debt and interest rate swap
agreements. We do not intend to use derivative financial instruments for
speculative purposes. Interest rate swap agreements would be used to reduce
our exposure to risks associated with interest rate fluctuations and, subject
to limitations and conditions, are required by our
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credit facility. By their nature, these instruments would involve risk,
including the risk of nonperformance by counterparties, and our maximum
potential loss may exceed the amount recognized in our balance sheet. We would
attempt to control our exposure to counterparty credit risk through monitoring
procedures and by entering into multiple contracts.
Year 2000
The Year 2000, or Y2K, problem results from the fact that many existing
computer programs are written to handle two digits, rather than four, to
define the applicable year. Accordingly, date-sensitive software or hardware
may not be able to distinguish between the year 1900 and the year 2000, and
programs that perform arithmetic operations, comparisons or sorting of date
fields may begin yielding incorrect results. This could potentially cause a
system failure or miscalculations that could disrupt operations. These Y2K
issues affect virtually all companies and organizations.
State of Readiness
We have developed plans to address the potential risks we face as a result
of the Y2K issue. Generally, we have identified two areas for Y2K review:
internal systems and operations, and external systems and services. As a new
enterprise, we are not burdened internally with legacy systems that are not
Y2K ready. As we develop our network and support systems, we intend to ensure
that all systems will be Y2K ready. We are purchasing our operations support
systems with express specifications and warranties that all systems be Y2K
ready and with remedies if they are not. In addition, we are requiring that
all vendors supplying third party software and hardware to us warrant their
Y2K readiness. However, we cannot assure you that all systems will function
adequately when we reach the year 2000. We are selling our telecommunications
services to companies that will rely upon computerized systems to make
payments for such services, and to interconnect portions of our network and
systems with other companies' networks and systems. These transactions and
interactions potentially will expose us to Y2K problems. We have instituted a
program to contact our external suppliers, vendors and providers to obtain
information about their Y2K readiness and, based on that information, to
assess the extent to which these external information technology and non-
information technology systems, including embedded technology, could cause a
material adverse effect to our operations. Our assessment of our Y2K readiness
will be ongoing as we receive applicable information from suppliers, vendor
and others and as we continue to develop our own operations support system and
become reliant on the systems of additional third parties as a result of the
geographic expansion of our business into additional markets. We may in the
future identify a significant internal or external Y2K issue which, if not
remedied in a timely manner, could have a material adverse effect on our
business, financial condition and results of operations.
Costs to Address Year 2000 Issues
Other than time spent by our internal information technology and other
personnel, we have not yet incurred any significant costs in identifying Y2K
issues. Because no material Y2K issues have yet been identified in connection
with external sources, we cannot reasonably estimate costs that may be
required for remediation or for implementation of contingency plans, but they
will be funded through cash flows generated through investments and
operations. We will expense the assessment and remediation costs. As we gather
information relating to external sources of Y2K issues, we will reevaluate our
ability to estimate costs associated with Y2K issues. We cannot assure you
that as additional Y2K issues are addressed, our costs to remediate such
issues will be consistent with our historical costs.
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Risks of Year 2000 Issues
Since all of our information technology and non-information technology
systems and products relating to our external issues are manufactured or
supplied by third parties outside of our control, we cannot assure you that
each of those third party systems will be Y2K ready. In particular, we will be
dependent upon other ILECs, long distance carriers and others on whose
services we depend for interconnection and completion of off-network calls.
These interconnection arrangements are material to our ability to conduct our
business and failure by any of these providers to be Y2K ready may have a
material adverse effect on our business in the affected market. Moreover,
although we believe we have taken reasonable precautions to purchase Y2K ready
internal systems, we cannot assure you that every vendor will fully comply
with its contractual requirements to us. If some or all of our internal and
external systems fail or are not Y2K ready in a timely manner, there could be
a material adverse effect on our results of operations, financial position or
cash flow.
Because we have not yet identified any material Y2K issues, we cannot
reasonably ascertain the extent of the risks involved if any one system fails
to process date-sensitive calculations accurately. Potential risks may include
the following:
. the inability to process client billing accurately or in a timely
manner;
. the inability to provide accurate financial reporting to management,
auditors, investors and others;
. an interruption in delivery of voice and data services to clients;
. a loss of power to our facilities;
. litigation costs associated with potential suits from clients and
investors;
. delays in implementing other information technology projects as a result
of work by internal personnel on Y2K issues;
. delays in receiving payment or equipment from clients or suppliers as a
result of their systems' failure; and
. the inability to occupy and operate in a facility.
Although we are unable to determine the probability that any such risk will
occur, any one of these risks could have a material adverse effect on our
results of operations, financial position or cash flow.
Contingency Plans
Although we have not made any specific contingency plan, we believe that
our most reasonably likely worst case Y2K scenario would be a loss of power
and/or a failure of our external systems. Our operations facilities and
systems are backed up with auxiliary power generators capable of operating a
significant portion of our equipment and systems for a limited period of time
should power supplies fail. However, due to our reliance on other established
telephone companies for interconnection services, we cannot eliminate, even
for a limited time, the negative impact that disruptions in the established
telephone companies service or the service of other carriers would create.
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Recent Accounting Pronouncements
In June 1998, the financial accounting standards board, or FASB, issued
statement of financial accounting standards, SFAS, No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which was amended by SFAS No.
137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of the Effective Date of FASB Statement No. 133, an amendment of FASB
Statement No. 133," and is effective on a prospective basis for interim
periods and fiscal years beginning January 1, 2001. This Statement establishes
accounting and reporting standards for derivative instruments, including
derivative instruments embedded in other contracts, and for hedging
securities. To the extent we begin to enter into such transactions in the
future, we will adopt the Statement's disclosure requirements in the financial
statements for the year ending December 31, 2001.
In March 1998, the American Institute of Certified Public Accountants, or
AICPA, issued Statement of Position 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal-Use," which requires
the capitalization of particular costs incurred in connection with developing
or obtaining software for internal-use. We adopted the provisions of SOP 98-1
in our financial statements as of January 1, 1999.
In April 1998, the AICPA issued Statement of Position 98-5, "Reporting the
Costs of Start-Up Activities," which requires that costs related to start-up
activities be expensed as incurred. We adopted the provisions of SOP 98-5 in
our financial statements as of January 1, 1999.
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BUSINESS
Choice One Communications
We are an integrated communications provider offering broadband data and
voice telecommunications services primarily to small and medium-sized
businesses in second and third tier markets in the northeastern United States.
Our offerings include high speed data and Internet service, principally
utilizing DSL technology, local exchange service and long distance service. We
seek to become the leading ICP in each of our target markets by offering a
single source for competitively priced, high quality, customized
telecommunications services. A key element of our strategy is to be one of the
first ICPs to provide comprehensive coverage in each of the markets we serve.
We are achieving this market coverage by installing both data and voice
network equipment in multiple established telephone company central offices.
We also intend to maximize utilization of our market network coverage by
offering data and voice services on a wholesale basis to Internet service and
other telecommunications providers. Through our strategy of connecting
substantially all of our clients directly to our own switches, we are able to
more efficiently route traffic, ensure quality service and control costs. As
of November 15, 1999, we had service agreements with 3,150 clients for 21,733
access lines, including 254 DSL lines, of which we had initiated service with
2,459 clients and for 14,999 access lines, including 117 DSL lines.
We currently offer data and voice services in nine markets and intend to
expand into approximately 11 additional markets by the end of the second
quarter 2001. Following completion of our planned expansion to these
approximately 20 markets, we believe our networks will be able to reach
approximately 3.7 million business lines, which constitute more than 75% of
the estimated business lines in these markets, and 5.3 million households.
We divide our target markets into four stages of development:
. Operational. We began providing services and generating client revenues
in the Albany, NY; Buffalo, NY; Manchester, NH; Pittsburgh, PA;
Providence, RI; Rochester, NY; Springfield, MA; Syracuse, NY; and
Worcester, MA markets during the past nine months. Our switching
facilities servicing each of these markets consist of both data and
voice switching platforms.
. Under Construction. We are currently constructing data switching
facilities to offer DSL services in Allentown, PA; Harrisburg, PA; and
Scranton, PA. We expect to be operational in these markets by the end of
the first quarter 2000 and to add voice capabilities within 12 months
after entering these markets.
. In Development. We plan to construct switching facilities consisting of
both voice and data switching platforms in the Hartford, CT and New
Haven, CT markets, which we expect to be operational during the second
quarter 2000.
. Planned. We are in the process of evaluating other second and third tier
cities and intend to expand into approximately six additional markets in
the northeastern United States by the end of the second quarter 2001.
As of November 15, 1999, we had applications accepted to collocate our
network equipment in 223 established telephone company central offices;
completed 94 of these collocations; and had 129 additional collocations in
progress in our operational and under construction markets. We have also
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installed equipment to provide DSL services in 85 of our current collocations
and expect to have DSL services available in all 115 collocations targeted for
completion by the end of 1999.
We have developed a flexible network buildout strategy allowing us to
leverage rapidly evolving telecommunications technology. In each of our first
nine markets, we have deployed or intend to deploy both data and voice
switching platforms. In our Allentown, Harrisburg and Scranton markets, we
will employ a "DSL first" method of market entry by installing a data switch
and initially offering only data services. We will then add voice services
within 12 months after entering such markets. We believe this DSL first
strategy provides for faster time to market and lower initial capital costs,
while preserving flexibility for our future development. We intend to continue
entering new markets using methods tailored to meet the needs of clients in
our target markets and the technology available in those markets. We expect
that our market entry strategy and network architecture will continue to
evolve in order to capitalize on advances in telecommunications technology and
to satisfy the changing needs of our clients.
We have designed and are developing integrated operations support systems
and other back office systems that we believe will provide significant
competitive advantages by enhancing our efficiency and allowing us to support
rapid and sustained growth and provide exceptional client care. We have
automated most of our back office systems and are in the process of
integrating them into a seamless end-to-end system that will synchronize
multiple tasks, including installation, billing and client care. In order to
minimize the time between a client order and service installation we have also
established an on-line and real-time connection of our operations support
systems with Bell Atlantic Corporation. We anticipate establishing similar
connections with other established telephone companies.
In each of our markets, we have a locally based sales force that provides
high quality, personalized client care. In addition to our direct sales force,
we use third party agencies to sell our services. These agencies include
telecommunications equipment vendors, consultants, systems integrators and
cellular phone retailers. Sales agents are paid a monthly commission based on
revenue generated by their client base. As of November 15, 1999, we had 129
persons in our sales and sales support staff and had sales arrangements with
17 third party agencies.
We intend to acquire telecommunications companies in our target market
region to accelerate market penetration and growth. Once acquired, we plan to
expand the range of services offered by the acquired entities to correspond to
the full range of Choice One services. In November 1999, we acquired Atlantic
Connections, LLC, a local and long distance service provider with operations
in Portsmouth, NH and Worcester, MA, for an initial cash purchase price of
approximately $8.3 million plus up to an additional $2.1 million that would be
payable in cash, or at our option, in common stock, if specified performance
criteria are met in the 12 months following the acquisition. Our strategy is
to migrate the approximately 3,100 small and medium-sized business clients of
Atlantic Connections to our switch-based network and to offer a full suite of
Choice One data and voice services to these clients. Many of these clients are
located where we either currently have or plan to provide network based voice
and data services. Our plan is to migrate Atlantic Connections' clients onto
our network when such network is operational. Initially, Atlantic Connections
will maintain its identity in the Worcester, MA and Portsmouth, NH markets as
a Choice One subsidiary. Once a majority of the clients for Atlantic
Connections' services are successfully moved onto our network, we will cease
using the Atlantic Connections brand name. All new sales in these markets will
consist of Choice One products and services. Atlantic Connections has
historically had excellent relationships with its clients as measured by the
rate of retention within their client base. To date, there has been no
material change in the rate of turnover in Atlantic Connections clients as a
result of this acquisition and migration process.
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We were founded in June 1998 by a group of telecommunications executives
led by Steve Dubnik, the former chief operating officer of North American
Operations of ACC Corp. In addition to Mr. Dubnik, members of our group of
founding executives include Kevin Dickens, Senior Vice President, Operations
and Engineering; Mae Squier-Dow, Senior Vice President, Sales, Marketing and
Service; and Philip Yawman, Senior Vice President, Corporate Development, all
of whom were formerly executives at ACC Corp. Mr. Dubnik and this group of
founding executives have hired a management team with extensive experience and
success in the telecommunications industry. Members of our management team
have significant experience in the northeastern markets, having previously
served at such companies as Frontier Corporation, Teleport Communications
Group, Inc., and MFS Communications Company. Our 20 top executives and
managers have an average of 15 years of experience in the telecommunications
industry.
Our approximately $62.1 million of funded equity has been provided by
experienced investors in the telecommunications industry, including Morgan
Stanley Capital Partners III, L.P., Fleet Equity Partners VI, L.P. and Waller-
Sutton Media Partners, L.P., and our management team. Our credit facility
permits us to borrow up to $150.0 million for the next eight years with
maximum borrowing limits to be reduced during the eight year period, subject
to the covenants, restrictions and significant borrowing conditions described
in the credit facility.
Business Strategy
We have an aggressive growth strategy to become the provider of choice
offering one-stop communications solutions to customers in our target markets.
Our future success will depend upon our ability to implement this strategy.
The key elements of our business strategy are to:
Capitalize on Early to Market Advantage
Our goal is to continue to be among the first ICPs in an area to actively
market and provide a bundled package of integrated services to small and
medium-sized businesses. We believe this strategy provides us with a
significant advantage over competitors who enter our markets after us.
Offer Broad Coverage
Once we enter a market, we plan to provide broad coverage by collocating in
multiple locations in order to reach both central business districts and
outlying areas. While other companies often limit their network buildout to
highly concentrated downtown areas, our collocation strategy is to reach 75%
to 80% of the business lines within each market. As a result, we are often the
only competitor to the established telephone company to offer integrated
services to small and medium-sized businesses at many of our collocation
sites.
Lead Competition in Providing DSL Services
We believe we will be one of the first ICPs in each of our markets to
provide dedicated, high speed digital communications services using DSL
technology. DSL technology permits broadband transmissions over existing
copper telephone lines, allowing us to provide high speed services
economically. High speed connectivity is becoming increasingly important to
small and medium-sized businesses due to the dramatic growth in Internet and
electronic business applications.
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Use Our Flexible Network Buildout Strategy to Rapidly and Cost Effectively
Enter New Markets
We have developed a flexible network buildout strategy allowing us to enter
each of our target markets using methods specifically tailored to the client
demand and the technology available in each such market. For instance, in each
of our first nine markets, we have or intend to have both data and voice
switching platforms. In other "DSL first" markets, we are initially installing
DSL equipment only, significantly reducing the time and expense necessary to
complete collocations. We intend to offer voice services in these DSL first
markets within 12 months of entry. By employing this DSL first strategy, we
expect to benefit through faster time to market and lower initial capital
costs, while preserving flexibility for future development.
Target Underserved Clients
We are targeting small and medium-sized businesses primarily in second and
third tier markets in the northeastern United States that we believe are
currently being underserved by the established telephone companies and other
competitors. We are focusing on markets where there is a high concentration of
potential business clients and a demand for the types of services we offer. We
believe we can attract and satisfy clients in these areas by offering a
simplified, comprehensive package of services and a high level of client care.
Offer Bundled Services with a Single Point of Contact
We strive to attract new clients and maximize client retention by offering
bundled services with a single point of contact for sales and service and
convenient, integrated billing. Our clients may bundle DSL, Internet, e-mail,
Web page design, Web server hosting, voice mail and other enhanced services
not generally available from the established telephone companies, or available
only at higher prices along with their traditional local and long distance
services. Our convenient billing system will provide our clients with a
single, easy to understand statement covering all of their services.
Utilize Efficient Automated and Integrated Back Office Systems
Our management team is committed to having efficient operations support
systems and other back office systems that can support rapid and sustained
growth. To realize this objective, we hired a team of engineering and
information technology professionals experienced in the telecommunications
industry. Our systems team is working with key third party vendors, including
Saville Systems Inc., MetaSolv Software Inc. and DSET Corporation, to develop
a seamless end-to-end system that will synchronize multiple tasks, including
installation, billing and client care. Unlike the legacy systems currently
employed by many established telephone companies and CLECs, which require
multiple entries of client information to synchronize multiple tasks, our
system will require only a single entry to transfer client information from
sales to service to billing. Our customized system will also integrate our
back office systems to minimize the time between client order and service
installation and to reduce our costs. We have implemented an electronic
interface, referred to as electronic bonding, linking our operations support
systems directly to Bell Atlantic so that we can switch Bell Atlantic
customers to our network on an automated basis. We anticipate developing
similar bonds with established telephone companies.
Increase Our Market Share by Providing Service-Driven Client Relationships
and a Local Presence
We seek to attract and retain clients by establishing local sales offices
in each of our markets and providing a highly experienced, locally based
account management team which will provide face-to-
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face sales and personalized client care. We are dedicated to building long-
term relationships with our clients, which we believe have not typically
received a satisfying level of local support from the established telephone
companies. Our goal is to respond to client problems and needs within two
hours of notification and to resolve their problems upon their first request.
Our service guarantee provides that if a client is not satisfied with the
quality of our service and we cannot remedy the problem within 30 days, we
will incur all of the costs to switch the client back to its previous
provider. In addition, we are committed to supporting and further developing
the communities in which our clients live and work. Choice One employees live
in these communities and many of them participate in local charities,
organizations and chambers of commerce. We believe that this local presence
builds strong, positive Choice One name recognition within these communities.
Accelerate Growth Through Acquisitions
We intend to accelerate our growth and expand our presence in our target
market region by acquiring telecommunications companies and related businesses
and assets. We seek acquisition targets that offer similar services to ours
which can be integrated into our existing operations and networks. We also
seek acquisition targets which may allow us to offer additional value-added or
other related services. Once we have acquired a company, we intend to
integrate the company by expanding its offered services to the full range of
Choice One services; by centralizing administrative, billing and client care
functions; and by reducing redundant overhead. We currently have no definitive
agreements or commitments relating to any acquisitions.
Leverage Management Experience
Our management team has extensive experience and success in the
telecommunications industry, especially in our target markets. We believe that
our ability to draw upon the collective talent and expertise of our senior
management gives us a competitive advantage in the execution of network
deployment, sales and marketing, service installation, billing and collection,
back office and operations support systems, finance, regulatory affairs and
client care.
Market Opportunity
We operate in both the high speed data and voice markets. We believe that
each of these markets is undergoing dramatic growth.
Overall Market Size and Growth
According to International Data Corporation, or IDC, the overall market of
regulated, switched and unswitched data and voice traffic is estimated to have
generated a total of $212.8 billion in revenues in 1998 and is expected to
grow to $252.2 billion by 2002. The number of switched network access lines is
expected to grow from 187.5 million lines in 1998 to 232.6 million lines by
2002 and CLEC market share by revenue is expected to grow from 2.6% in 1998 to
5.6% by 2002. Due to its rapid growth, estimates of data and Internet services
revenue are not as well established as those relating to traditional voice
traffic communications. However, we believe that a significant market
opportunity exists for providers of data and Internet services.
We believe that the rapid opening of the local market to competition,
accelerated growth rates in local traffic related to increases in Internet
access, and the desire for "one-stop shopping" by small
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and medium-sized businesses and consumers, presents an opportunity for new
entrants to achieve product differentiation and significant penetration into
this very large, established market. We believe success in this environment
will depend primarily on speed-to-market, marketing creativity and a new
entrant's ability to provide competitively priced services rapidly and
accurately, and to issue concise, accurate integrated billing statements.
Growing Market Demand for High-Speed Digital Communications Bandwidth
High-speed connectivity has become important to small and medium-sized
businesses due to the dramatic increase in Internet usage and electronic
business. According to IDC, the number of Internet users worldwide is
estimated to have reached approximately 86.6 million in 1997 and is forecasted
to grow to approximately 398.6 million by 2002. The popularity of the Internet
with consumers has driven the rapid proliferation of the Internet as a
commercial medium, as businesses establish Web sites and corporate intranets
and extranets to expand their client reach and improve their communications
efficiency. It is also estimated by IDC that the value of goods and services
sold worldwide through the Internet will increase from $15.4 billion in 1997
to over $733.6 billion in 2002. Accordingly, to remain competitive, small and
medium-sized businesses increasingly need high-speed Internet connections to
maintain complex Web sites, access critical business information and
communicate with employees, clients and business partners more efficiently.
High-speed digital connections are also becoming increasingly important to
businesses and consumers as more high bandwidth information and applications
become available on the Internet. As businesses continue to increase their use
of the Internet, intranets and extranets, we expect the market for both small
and medium-sized business Internet access to continue to grow rapidly causing
the demand for high-speed digital communications services to also grow
rapidly. We also expect that, as the U.S. economy increasingly relies on the
Internet as a business tool, this growth will draw greater regulatory scrutiny
of this largely unregulated medium.
The high-speed data communications industry is in the early stages of
development and is subject to rapid and significant technological change.
Since the industry is new and because the technologies available for high-
speed data communications services are rapidly evolving, we cannot accurately
predict the rate at which the market for our services will grow, if at all, or
whether emerging technologies will render our services less competitive or
obsolete. Many providers of high-speed data communication services are testing
products from numerous suppliers for various applications, and these suppliers
have not broadly adopted an industry standard. In addition, certain industry
groups are in the process of trying to establish standards, which could limit
the types of technologies we could use. Certain critical issues concerning
commercial use of DSL technology for Internet access, including security,
reliability, ease and cost of access and quality of service, remain unresolved
and may impact the growth of these services.
The markets we face for Internet services are intensely competitive, and we
expect such competition to intensify. We face competition from established
telephone companies, cable modem service providers, competitive
telecommunications companies, traditional and new long distance carriers,
Internet service providers, on-line service providers and wireless and
satellite service providers. Many of these competitors have longer operating
histories, greater name recognition, better strategic relationships and
significantly greater financial, technical or marketing resources than we do.
DSL Market Demand
According to IDC, total DSL line revenue is expected to increase in the
U.S. from $14.5 million in 1998 to $5.7 billion in 2003, for a 229% compounded
annual growth rate. By 2003, IDC estimates
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there will be 12.6 million DSL lines, up from approximately 100,000 DSL lines
in 1998. There are a number of other companies that will offer to provide DSL
and other competing services to customers in our target markets. See "--
Competition--Services Which Compete with our DSL Services."
Expansion of Competitive Local Telecommunications Industry
Until recently, the competitive local telecommunications industry has
generally been limited to providing interstate dedicated access, interstate
switched access and private line services, accounting for only approximately
one-fourth of the total local services market. The Telecommunications Act
opened local services markets to full competition by preempting state and
local laws to the extent that they prevent competitive entry with respect to
the provision of any telecommunications service and imposed a variety of new
duties on established telephone companies in order to promote competition in
local exchange and access services. See "--Government Regulation." The pro-
competitive aspects of the Telecommunications Act have created significant
opportunities for us to grow our business. At the same time, they have also
created greater challenges for us as a multitude of other new competitors
enter the marketplace.
According to the FCC's 1998 Preliminary Statistics of Communications Common
Carriers, established telephone companies in the United States generated
approximately $108 billion in total revenue in 1998. Local exchange services
consist of a number of service components and are defined by specific
regulatory classifications. For 1998, total revenue by service was:
Established Telephone Company Market Revenue 1998 = $108 Billion
[Pie chart showing components of 1998 ILEC market revenue consisting of local
service revenue, network access service revenue, network service revenue and
miscellaneous revenue.]
Source: FCC's 1998 Preliminary Statistics of Communications Common Carriers
Our Targeted Markets
We are targeting second and third tier cities in the northeastern United
States. The U.S. Census Bureau defines second and third tier cities as having
a population between 500,000 and 1.5 million people. Our target markets had an
average of approximately 200,000 business access lines per city based on the
1998 FCC statistics.
Choice One's Telecommunications Services
Our service offerings are tailored to meet the specific needs of small and
medium-sized businesses in our target markets. We offer both bundled and
individual services.
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Bundled Services
Bundled services can be purchased through the following three
ChoiceSelect SM plans:
. Platinum Choice--bundles high speed Internet, local and long distance
services.
. Gold Choice--bundles local and long distance services.
. Silver Choice--bundles high speed Internet and local services.
Our ChoiceSelect SM plans permit customization of services to meet clients'
needs and to save them up to 20% off the price of Bell Atlantic for the same
services.
Individual Services
As an alternative to choosing a ChoiceSelect SM plan, clients can select
one or more individual services. Our clients can choose from the following
services:
Internet Access and DSL High Speed Data Services. With our ChoiceAccess SM
suite of Internet services, we offer a comprehensive solution to our clients'
requirements including Internet access, e-mail, domain name hosting and other
value-added services. We offer Internet access via DSL technology, dedicated
T-1 connections and dial-up. Utilizing DSL technology, we can provide high-
speed data communications and Internet access to our targeted small and
medium-sized business at rates that we believe are very attractive when
compared to the cost and performance of other available data service
offerings.
Our Choice NetJet service, powered by DSL technology, is highlighted by the
following key elements:
. Customizable Bandwidth. We offer our clients speeds ranging from 128kps
to 1.544 mbs. Our clients choose the speed and bandwidth capacity that
meets their needs.
. Always On. Through Choice NetJet, our clients are connected 24 hours a
day, 7 days a week.
. Symmetric Connections. Our service allows for data transmission at the
same speed in both directions.
. Security. Our server is designed to prevent unauthorized access to our
clients' information and enable the safe and secure transmission of
sensitive information and applications.
. No Usage Fees. Clients may use their Choice NetJet connection for any
period of time without per minute usage charges.
Dedicated T-1 Services. We offer ChoicePath SM dedicated T-1 services, as
an integrated low cost solution for dedicated access for bundling
Internet/data, local and long distance services over a single connection.
ChoicePath permits digital connections to be purchased in blocks of 24
circuits or on an individual basis.
Local Calling Services. Our local exchange services are offered through our
ChoiceXchange SM service plan. This service includes dialing parity,
simplified local rates and local number portability to provide our clients
with a seamless transition, listing in white and yellow page directories,
access to 911 and directory assistance. Also available through the service are
enhanced features, such as three-way conference calling, line rollover, call
forwarding, call waiting, caller identification and voice mail. Our voice mail
service, known as ChoiceMail, includes free call forwarding, remote access,
paging
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notification, personalized greetings and password protection. We also
originate and terminate interexchange calls placed or received by our clients.
Long Distance Services. Through our ChoiceOnePlus SM service, we offer a
full range of domestic and international long distance services, including
"1+" outbound calling, six second incremental billing, inbound toll free
service, and such complementary services as calling cards with operator
assistance and conference calling. To provide easy to understand billing to
our clients, we will also offer one rate on any calls within the U.S. Some
companies, such as Bell Atlantic, currently do not offer this service in our
target markets. We will permit our clients to choose only local service, but
we do not intend to market long distance as a stand-alone service.
Other Planned Services
Wholesale Services to Internet Service Providers and Value Added
Resellers. We believe that by rapidly deploying DSL technology throughout our
target markets, we will capitalize on additional product and revenue
opportunities that will enhance usage on our network. These opportunities
include offering DSL enabled services on a wholesale basis to other
telecommunications companies such as Internet service providers and value-
added resellers, that desire to offer consumer Internet access services but do
not have the resources or network facilities to provide these services. This
allows these companies to market and resell our services under their own brand
name while allowing us to leverage our network capacities.
Remote Local Area Network Access Services. We believe that businesses
desire to have their employees access and send e-mail and conduct business
electronically from outside of their offices, creating a demand for high speed
digital communications for remote local area network access. We will pursue
opportunities to provide DSL services to equip employees of targeted
businesses with the ability to work at home and in other remote locations
through remote local area network access.
Virtual Private Network Services. Our virtual private network services will
combine our DSL and dedicated T-1 access services with our virtual private
network equipment to provide clients with high-speed and secure connections to
their corporate local area network and the Internet. This flexible and cost-
effective solution will support both telecommuters and site-to-site
connections. Our virtual private network services will provide our clients
with the convenience of an always-on connection and the high speed and
performance of DSL technology.
Web Hosting. We will offer a variety of Web hosting services to enable our
clients to maintain a high quality, highly reliable Internet presence without
investing capital in data center space, multiple high speed connections or
other capital intensive infrastructure. These services will include dedicated
Web hosting, shared Web hosting, and equipment collocation.
Web and E-Commerce Site Development. Our Web and e-commerce services will
provide our clients with Web-enabled functions such as shopping baskets,
payment processing, inventory management, on-line ordering and customer
service.
Enhanced Internet Applications Services. Our enhanced Internet application
services will include Web-based and Web-managed e-mail services and hosted
collaborative applications such as on-line calendars, on-line meetings,
virtual bulletin boards and document sharing.
Extranets & Electronic Villages. As a compliment to our virtual private
network offerings, we will develop public and private electronic communities
where our clients can share information and transact business with their
colleagues and clients in a secure, reliable and cost effective manner.
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Managed Network Services. Our end to end product solutions will include
design, installation and management of our clients' voice and data networks.
These services will include de-marc extension, channel bank configurations and
deployment, router configuration and deployment, network monitoring and
managed firewalls.
Unified Messaging. Our unified messaging service will allow our clients to
manage all of their voice, fax and e-mail messages over a common platform and
user interface.
Sales and Client Care
In each market that we enter we have a locally based sales force that uses
a consultative selling approach to offer clients a full range of sophisticated
and cost-effective telecommunications solutions. Each of our sales teams is
led by a general manager, who is responsible for the acquisition and retention
of all revenues in that market. Each team includes account executives, service
order coordinators, client development representatives and technical
consultants. Our sales teams use a variety of methods to qualify leads and set
up initial appointments, including telemarketing and building canvassing. As
of November 15, 1999, our sales and sales support staff consisted of 129
persons.
Each member of our sales and sales support team is required to participate
in a training program designed to enhance knowledge of telecommunications,
sales processes and activity management. This program also promotes our
quality client care and personalized local service principles and ensures a
consistent market message in all our territories. Our incentive program is
designed to encourage our sales personnel eventually to call on every
qualified prospective business client in each of our markets. In addition to
our direct sales force, we use several third party agencies to sell our
services.
We assign a client development representative to manage the relationship
with each client and to respond to and support the client's ongoing needs. The
client development representatives focus on identifying the evolving
telecommunications requirements of clients and assisting in "upselling" a
broader array of more comprehensive telecommunications services. We have
designed commission plans and incentive programs to reward and retain our top
performers and to encourage strong client relationships. Our sales force
utilizes the Choice One contact automated sales helper to manage opportunities
and sales activity, share account information with the account team and
generate customized letters and proposals. We plan to integrate the contact
automated sales helper with our other back office systems.
We focus on providing responsive client care, starting with our goal of
responding to problems or concerns a client may have with our service within
two hours. Our service guarantee provides that if a client is not satisfied
with the quality of our service and we cannot remedy the problem within 30
days, we will incur all of the costs to switch the client back to its previous
provider. Our automatic call distribution system enables us to efficiently
manage our client contacts. In addition to basic call distribution features
this system allows for:
. computer telephony integration, allowing access to client information at
the time of a call;
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. task queing, enabling automatic distribution to the next available agent
of a phone call, fax or e-mail; and
. geographic routing, allowing client services representatives to receive
incoming contacts from an assigned geographic area.
We are also developing a Web-enabled system to allow clients to access their
account information and interact with our client care representatives on a
real-time basis over the Internet.
Our Markets
In selecting prospective markets, we estimate market demand for our services
using data gathered from interexchange carriers, the FCC, local sources, site
visits and specific market studies. In addition to market demand, we also
consider the established telephone companies' level of service as well as the
level of penetration within the market by other ICPs.
We currently offer telecommunications services in nine markets and intend to
expand into approximately 11 additional markets in the northeastern United
States by the end of the second quarter 2001.
Our target markets are in four stages of development:
Operational Markets
We are currently providing data and voice services to our clients in the
following nine markets:
<TABLE>
<CAPTION>
Estimated Estimated Initial Choice One
Estimated total business total service lines in Market
Market population(1) access lines(2) households date(3) service(8) Penetration(4)
- ------ ------------- --------------- ---------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Albany, NY.............. 1,028,000 219,000 396,000 February 1999 2,736 1.3%
Buffalo, NY............. 1,231,000 242,000 472,000 February 1999 3,808 1.6
Pittsburgh, PA.......... 2,507,000 512,000 985,000 April 1999 2,037 0.4
Syracuse, NY............ 791,000 166,000 293,000 April 1999 2,327 1.4
Providence, RI.......... 1,509,000 285,000 545,000 August 1999 669 0.2
Manchester, NH.......... 567,000 131,000 354,000 November 1999 3,097 2.4
Rochester, NY........... 1,132,000 220,000 420,000 November 1999 46 0.0
Springfield, MA......... 655,000 119,000 242,000 November 1999 703 0.6
Worcester, MA........... 725,000 134,000 269,000 November 1999 694 0.5
---------- --------- ---------
Total................. 10,150,000 2,028,000 3,981,000
</TABLE>
Markets Under Construction
We are constructing switching facilities in the following three markets:
<TABLE>
<CAPTION>
Estimated Estimated total Estimated total Planned initial
Market population(1) business access lines(2) households service date(5)
- ------ ------------- ----------------------- --------------- ---------------
<S> <C> <C> <C> <C>
Allentown, PA........... 709,000 152,000 264,000 1Q, 2000
Harrisburg, PA.......... 1,112,000(6) 217,000 397,000 1Q, 2000
Scranton, PA............ 671,000 160,000 258,000 1Q, 2000
--------- ------- -------
Total................. 2,494,000 529,000 920,000
</TABLE>
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Markets in Development
We are developing plans to construct switching facilities consisting of
both data and voice switching platforms in the following markets. The business
plans for these markets have been approved by our board of directors and our
anticipated buildout schedule is set forth below.
<TABLE>
<CAPTION>
Estimated Estimated total Estimated total Planned initial
Market population(1) business access lines(2) households service date(5)
- ------ ------------- ------------------------ --------------- ---------------
<S> <C> <C> <C> <C>
Hartford, CT............ 1,086,000 216,000 409,000 2Q, 2000
New Haven, CT........... 985,000(7) 255,000 435,000 2Q, 2000
--------- ------- -------
Total................. 2,071,000 472,000 845,000
</TABLE>
- --------
(1) Source: U.S. Census Bureau Report as of December 31, 1997 based on basic
trading area.
(2) Source: Federal Communications Commission, Statistics of Common Carriers
as of December 31, 1997.
(3) Refers to the first month during which we commenced facilities-based
services in such market.
(4) Based on the number of business access lines installed in the basic
trading area.
(5) Refers to the first quarter during which we expect to commence facilities-
based services in such market, based on our current business plan.
(6) Includes basic trading areas for both Harrisburg, PA and Lancaster, PA.
(7) Includes basic trading areas for both Bridgeport, CT and Stamford, CT.
(8) Lines installed as of November 30, 1999.
Planned Markets
We intend to expand into approximately six markets in other second and
third tier cities in the northeastern United States by the end of the second
quarter 2001. We expect to enter these markets by continuing our strategy of
providing both data and voice services on our own network. The specific
markets we plan to enter have not yet been identified. We review a number of
factors in determining which markets we will enter. These factors include the
economic viability of establishing a network in a particular market, the
services offered by the existing telephone company, prices for such services,
the number of other competitors and the quality and breadth of their services,
the rate of economic growth and geographic density of business locations, the
availability of appropriate office and equipment locations, and the
opportunity to attract and retain sufficient management resources to execute
our business strategy. We evaluate these factors by using data gathered from
other telephone companies, the FCC, local sources, site visits, potential
customer interviews and third party market studies as well as the development
of financial models to reflect our expectations and assumptions for market
share penetration, revenue, expense and capital requirements.
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Customer Lines and Services Installed
The following table shows the number of non-recurring lines installed in
each basic trading area for each quarter. The fourth quarter numbers are
through November 30, 1999. The following table also shows our quarterly growth
from when we enter a market. However, due to our limited operating history,
this performance may not continue in the future.
<TABLE>
<CAPTION>
Estimated total
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter business Market
Market 1999 1999 1999 1999 access lines Penetration
- ------ ----------- ----------- ----------- ----------- --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Albany, NY.............. 229 678 833 496 219,000 1.3%
Buffalo, NY............. 64 854 1,453 1,437 242,000 1.6
Pittsburgh, PA.......... -- 59 948 1,030 512,000 0.4
Syracuse, NY............ -- 442 1,232 653 166,000 1.4
Providence, RI.......... -- -- 197 472 285,000 0.2
Manchester, NH.......... -- -- -- 3,097 131,000 2.4
Rochester, NY........... -- -- -- 46 220,000 0.0
Springfield, MA......... -- -- -- 703 119,000 0.6
Worcester, MA........... -- -- -- 694 134,000 0.5
--- ----- ----- ----- ---------
Total................. 293 2,033 4,663 9,111 2,028,000
</TABLE>
Our market penetration rates for our services have generally increased the
longer we have been operating in a market. In addition, the majority of our
customers have been purchasing more than one service from us. For example, we
are seeing a high demand from our customers to provide both local and long
distance services. In our operational markets, in the aggregate 42% of
revenues we receive is from local services, 31% is from long distance
services, 2% is from data services and 25% is from access services. These
numbers reflect 1999 revenues through November 30, 1999, and may not be
indicative of future performance.
Network Infrastructure
We are a switch-based ICP and have developed a flexible network strategy
allowing us to leverage rapidly evolving telecommunications technology to our
competitive advantage. In each of our operational markets, other than
Worcester, we have installed a dedicated Lucent 5ESS(R) voice switch and
related equipment at a central location. The switches are connected to
established telephone companies networks and long distance and Internet
service provider points-of-presence. In the Worcester market, our network
connects our voice and data concentrators to our Springfield voice switch
which has enabled us to avoid the expense of deploying a voice switch in the
Worcester market.
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We are using networks we have purchased, referred to as fiber optic networks,
for this traffic. In our current under construction markets, we are installing
data switches that will enable us to offer DSL services in Allentown, PA;
Harrisburg, PA and Scranton, PA.
We are also installing voice concentrators, referred to as integrated
digital loop carriers, and related equipment in multiple established telephone
company central offices within each of these markets in order to reach 75% to
80% of the business lines in these markets. In addition, we are installing
data concentrators, referred to as digital subscriber line access modules, in
the same central offices so that we can provide high speed data access using
the existing telephone company network. We will initially lease local network
facilities from the established telephone company and/or one or more
competitive network providers, in order to connect our switch to major
established telephone company central offices. We provide service to each
client by leasing unbundled loops from the established telephone company or T-
1 facilities from the established telephone company or competitive network
provider to connect our access equipment, located in the telephone company
central office, to the client location.
We have ongoing market tests of voice over DSL with customers and
anticipate deployment of this service once we have determined that the
equipment is commercially viable. This will allow us to offer our customers
multiple voice and high-speed data communications over one established
telephone company line. Our network architecture, comprised of both DSL or
data and voice switching technologies will enable us to integrate this traffic
over DSL from the client location to our access equipment, and then to our
regional switching center. At the regional center, this traffic then will be
split into its data and voice components. Data traffic will be switched via a
data switch to its appropriate destination. The voice components will be
switched through the Lucent 5ESS(R), which will be interconnected to the
public switched telephone network.
We are principally leasing our local network facilities. We may choose to
replace leased capacity with our own network as and when we experience
sufficient traffic volume growth. We have acquired the rights to network
capacity with an option to double this capacity to transport our traffic from
Worcester to our voice switch in Springfield. This will allow us to reduce our
costs in Worcester.
In markets that we enter using our DSL first strategy, the network will be
built using data equipment that includes both high speed data concentrators
and switches. Additionally, each location will have connected equipment to
support the future introduction of voice services. These locations will be
connected with a regional data center which aggregates the data traffic and
provides links with various vendor networks as well as our own internal
network.
Rapid and significant changes in technology are expected in the
telecommunications industry. Our future success will depend, in part, on our
ability to anticipate and adapt to technological changes. For example, we are
currently evaluating new switching devices, from leading equipment
manufacturers that are significantly smaller and less expensive than the
switches that we have deployed to date. We believe that this network design
positions us to rapidly implement our future voice switching infrastructure.
Using various combinations of data and voice switching, our network uses a
distributed design that creates network efficiencies, closely correlates
capital costs with traffic volumes, and distributes access/routing elements
closer to our clients. Many switch and product elements are centralized to
serve multiple markets. This design encourages capital efficiencies while
enabling enhanced feature and service functionality.
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Information Systems
We have developed an integration strategy for our operations support
systems and other back-office systems that we believe will provide significant
competitive advantages in terms of efficiency, capacity to process large order
volumes and the ability to deliver exceptional client care. We are developing
a seamless end-to-end system that will synchronize multiple activities. This
system will allow information to be entered once and at the appropriate time
within our sales, client care, trouble management and billing process.
Information will then be shared between the various components of our systems.
We believe that our single entry system is superior to many existing
systems, which generally require multiple entries of client information.
Duplicate information entered into multiple systems can result in billing
problems, service interruptions, and delays in installation. Our single entry
process is less labor intensive and reduces the margin for error. In addition,
the sales to billing interval will be significantly shortened. We expect that
our customized, integrated system will also enable us to support rapid and
sustained growth.
The individual components of our system are as follows:
Order Entry, Process Flow, Network Inventory, Billing and Administration
We have entered into an agreement with MetaSolv Software Inc. to license
its Telecom Business Solution, or TBS, software to manage our back office
operational support system. MetaSolv's software manages our order entry,
installation, network design, inventory and process management and interfaces
with our network providers. This software also allows our sales team to
monitor the status of the order from initiation through service
implementation.
We have entered into an agreement with Saville Systems to utilize its
Convergent Billing Platform AS/400 software. Saville's product enables us to
combine and bill current and future service offerings and present the
information on a single bill for our clients. This system supports client care
functions, including billing inquiries and collection processes. Call detail
records, such as the billing records generated by our voice or data switches
will be automatically processed by the billing services provider in order to
calculate and produce bills in a variety of formats. Clients will be able to
choose specific management reports and access their account information over
the Internet.
We anticipate that during the first quarter of 2000, our MetaSolv system
will be integrated with our Saville Systems' billing and administration system
to ensure data integrity and eliminate redundant data entry. We anticipate
that this integrated software solution will allow us to efficiently provide
multiple products on a single bill and will provide a central point of contact
for handling orders and activities.
Electronic Bonding
Through software that we have licensed from DSET Corporation and have
integrated with our MetaSolv software, we believe that we are one of the first
competitive providers to electronically interface with Bell Atlantic for the
electronic exchange of order information. While most of our competitors
initiate service for a client by sending the established telephone company a
fax or e-mail or by remote data entry, we have implemented an electronic
interface linking our operations support systems directly to the telephone
company system so that we can process orders on an automated basis for our
clients which are switching service from the telephone company. Additionally,
we can confirm
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receipt and installation of service on-line and in real-time. Some telephone
companies are just beginning to develop automated interfaces on a limited
basis. We intend to continue to take a lead role with selected ILECs to create
standards for automation of these interfaces. We anticipate establishing
similar connections with other incumbent local exchange carriers.
Trouble Ticketing
We have created a system that logs information related to and monitors the
resolution of network problems. This system will act as a central repository
for logging client trouble calls, assigning responsibility for addressing the
problem to the appropriate party, and tracking the status of the response to
the calls, including automatically escalating the response process, as
appropriate.
Sales Force Automation and Contact Management
Our sales force utilizes software called contact automated sales helper.
The software assists us in the management of potential customer contacts, the
distribution of lists of potential clients, the preparation of client forecast
materials, the management of the sales process with particular client
prospects and the preparation of proposals, correspondence and order forms.
Service Introduction
Prior to offering services in a market, we must secure certification from
state regulatory commissions. Typically, we must file tariffs, or price lists,
for the services that we will offer. The certification process varies from
state to state; however, the fundamental requirements are largely the same.
State regulators require new entrants to demonstrate that they have secured
adequate financial resources to establish and maintain good client service.
New entrants are also required to show that they have the requisite technical
and managerial ability required to establish and operate a telecommunications
network. Our operating subsidiaries have already received certificates of
authority to provide local exchange and interexchange telecommunications
services in Connecticut, Massachusetts, New Hampshire, New York, Ohio,
Pennsylvania and Rhode Island. Applications for such authority have been filed
in Maine and Vermont. In addition, we have received authority under Section
214 of the Communications Act of 1934 to provide international switched
services.
Before providing local service, we must also negotiate and execute an
interconnection agreement with the established telephone company. While such
agreements can be voluminous and may take months to negotiate, most of the key
interconnection issues have now been thoroughly addressed and regulatory
commissions in most states have ruled on arbitrations between the established
telephone companies and new entrants. New entrants may adopt an
interconnection agreement already entered into by the established telephone
company and another carrier. We will selectively adopt such an approach so
that we can enter markets quickly. At the same time, we will preserve our
right to replace the adopted agreement with a customized interconnection
agreement that can be negotiated once service has already been established. We
have adopted interconnection agreements in Connecticut, Massachusetts, New
Hampshire, New York, Pennsylvania and Rhode Island. Some established telephone
companies, such as Bell Atlantic, have sought to limit the rights of
competitive telecommunications providers to adopt existing interconnection
agreements. We cannot predict whether we will be able to adopt such
interconnection agreements in the future.
While interconnection agreements include key terms and prices for
interconnection circuits, a significant joint implementation effort must be
made with the established telephone company in order to establish
operationally efficient and reliable traffic interchange arrangements.
Interchange
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arrangements must include those between the new entrant's network and the
facilities of other service providers as well as public service agencies.
Examples of traffic interchange and interconnection arrangements utilizing the
established telephone companies network include connectivity to its out-of-
band signaling facilities, interconnectivity to the established telephone
company's operator services and directory assistance personnel, and access
through the established telephone company to the networks of wireless
companies and interexchange carriers.
Regulation
The following summary of regulatory development and legislation, while not
exhaustive, describes the primary present and proposed federal, state, and
local regulation and legislation that is related to the Internet service and
telecommunications industries and would have a material effect on our
business. Existing federal and state regulations are currently subject to
judicial proceedings, legislative hearings and administrative proposals that
could change, in varying degrees, the manner in which our industries operate.
We cannot predict the outcome of these proceedings or their impact upon the
Internet service and telecommunications industries or upon us.
Overview
Our telecommunications services are subject to federal, state and local
regulation. The FCC exercises jurisdiction over all facilities and services of
telecommunications common carriers to the extent those facilities are used to
provide, originate, or terminate interstate or international communications.
State regulatory commissions exercise jurisdiction over facilities and
services to the extent those facilities are used to provide, originate or
terminate intrastate communications. In addition, as a result of the passage
of the Telecommunications Act, state and federal regulators share
responsibility for implementing and enforcing the domestic pro-competitive
policies of the Telecommunications Act. In particular, state regulatory
commissions have substantial oversight over the provision of interconnection
and non-discriminatory network access to established telephone companies.
Local governments often regulate public rights-of-way necessary to install and
operate networks.
Federal Regulation
Internet. Our Internet operations are not currently subject to direct
regulation by the FCC or any other telecommunications regulatory agency,
although they are subject to regulations applicable to businesses generally.
However, the future Internet service provider regulatory status continues to
be uncertain. In an April 1998 report, the FCC concluded that while some
Internet service providers should not be treated as telecommunications
carriers, some services offered over the Internet, such as phone-to-phone
telephony, may be functionally indistinguishable from traditional
telecommunications service offerings, and that their non-regulated status may
have to be re-examined. Moreover, although the FCC has decided not to allow
local telephone companies to impose per-minute access charges on Internet
service providers, and that decision has been upheld by the reviewing court,
further regulatory and legislative consideration of this issue is likely. The
imposition of access charges would affect our costs of serving dial-up clients
and could have a material adverse effect on our business, financial condition
and results of operations. In addition, Congress and other federal entities
have adopted or are considering other legislative and regulatory proposals
that would further regulate the Internet. Various states have adopted and are
considering Internet-related legislation. Increased U.S. regulation of the
Internet may slow its growth or reduce potential revenues, particularly if
other governments follow suit, which may increase the cost of doing business
over the Internet.
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In recent years there have been a number of U.S. and foreign legislative
and other initiatives seeking to control or affect the content of information
provided over the Internet. Some of these initiatives would impose criminal
liability upon persons sending or displaying, in a manner available to minors,
obscene or indecent material or material harmful to minors. Liability also
would be imposed on an entity knowingly permitting facilities under its
control to be used for such activities. These initiatives may decrease demand
for Internet access or chill the development of Internet content.
We believe that, under the 1996 Act, CLECs are entitled to receive
compensation from established telephone companies for delivering traffic bound
for Internet service provider customers of the CLECs. However, some
established telephone companies have disputed payment of compensation for dial
access Internet traffic, arguing that Internet service provider traffic is not
local traffic subject to compensation obligations. Most states have required
established telephone companies to pay this compensation to CLECs. However,
the FCC has determined that dedicated DSL service is an interstate, not local,
service and that at least a substantial portion of dial-up Internet service
provider traffic is also jurisdictionally interstate. The FCC has established
a proceeding to consider an appropriate compensation mechanism for interstate
Internet traffic. In addition, there is a risk that state public utility
commissions that have previously considered this issue and ordered the payment
of reciprocal compensation by the established telephone companies to the CLECs
may be asked by the established telephone companies to revisit their
determinations, or may revisit their determinations on their own motion.
Other Telecommunications Services. We are regulated at the federal level as
a nondominant common carrier subject to minimal regulation under Title II of
the Communications Act of 1934. The Communications Act of 1934 was
substantially amended by the Telecommunications Act of 1996, which was signed
into law on February 8, 1996. This legislation provides for comprehensive
reform of the nation's telecommunications laws and is designed to enhance
competition in the local telecommunications marketplace by:
. removing state and local entry barriers;
. requiring established telephone companies to provide interconnection to
their facilities;
. facilitating the end user's choice to switch service providers from
established telephone companies to competitive providers such as us; and
. requiring access to public rights-of-way.
Under the Telecommunications Act, regional Bell operating companies have
the opportunity to provide long distance services in the same region in which
they offer local service if they comply with market-opening conditions.
Established telephone companies are no longer prohibited from providing
specified cable TV services. In addition, the Telecommunications Act
eliminates particular restrictions on utility holding companies, thus clearing
the way for them to diversify into telecommunications services.
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The Telecommunications Act specifically requires all local exchange
carriers, including established telephone companies, CLECs and ICPs such as
us:
. not to prohibit or unduly restrict resale of their services;
. to provide, to the extent technically feasible, the ability of customers
to retain their telephone number when they change their
telecommunications provider;
. to provide nondiscriminatory access to telephone numbers, operator
services, directory assistance and directory listings;
. to afford access to poles, ducts, conduits and rights-of-way; and
. to establish arrangements by which telephone companies will compensate
each other for exchanging telecommunications traffic.
It also requires every established telephone company to negotiate in good
faith interconnection agreements for the transmission and routing of local
exchange traffic:
. at any technically feasible point within the established telephone
company's network;
. on a level that is at least at parity to that provided by the
established telephone company to itself, its affiliates or any other
party to which the established telephone company provides
interconnection; and
. at rates, terms and conditions that are just, reasonable and
nondiscriminatory.
The Telecommunications Act also established procedures under which a
regional Bell operating company can enter the market for long distance
services within the area where it provides local exchange service (the
Telecommunications Act permitted these companies to enter the out-of region
long distance market immediately upon enactment). Before a regional Bell
operating company can provide in-region long distance services, it must obtain
FCC approval upon showing that it has entered into interconnection agreements
in the states where it seeks authority, that the interconnection agreements
satisfy a 14-point "checklist" of competitive requirements and that such entry
is in the public interest. To date, only Bell Atlantic has been granted such
authority, and only in the state of New York. The provision of in-region long
distance services by the regional Bell operating companies could permit them
to offer "one-stop shopping" of bundled local and long distance services,
thereby eliminating our current marketing advantage.
FCC Rules Implementing the Local Competition Provisions of the
Telecommunications Act
On August 8, 1996, the FCC issued an order which established a framework of
national rules enabling the implementation of many of the local competition
provisions of the Telecommunications Act. The order, and subsequent
iterations, also known as the Local Competition Orders, promulgated rules to
implement Congress' statutory directive concerning the interconnection
obligations of the established telephone companies. A summary of the Local
Competition Orders follows:
Interconnection. Established telephone companies are required to provide
interconnection for telephone exchange or exchange access service, or both, to
any requesting telecommunications carrier at any technically feasible point.
The interconnection must be at least equal in quality to that provided by the
company to itself or subsidiaries, affiliates or any other party to which it
provides interconnection, and must be provided on rates, terms and conditions
that are just, reasonable and nondiscriminatory.
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Access to Unbundled Elements. Established telephone companies are required
to lease portions of their networks to requesting telecommunications carriers
by providing them with nondiscriminatory access to network elements on an
unbundled basis at any technically feasible point, on rates, terms, and
conditions that are just, reasonable, and nondiscriminatory. At a minimum,
established telephone companies must unbundle and provide access to connection
boxes at the customers premises ("network interface devices", local telephone
lines ("local loops"), switching functions, except in certain urban markets,
transmission lines between switches ("interoffice transmission facilities"),
call routing database facilities, and computerized operations support systems.
The FCC recently adopted additional rules that direct established telephone
companies to share their local telephone lines so that competitors could make
use of the high frequency portion of the line. This will enable competitive
carriers like us to use DSL technology to provide high-speed data services
over the same telephone lines simultaneously used by established telephone
companies to provide basic telephone service, a technique referred to as "line
sharing." The short term effect of this order is difficult to predict, as the
FCC left it to the states to determine how this should be done, and what rates
the incumbent local exchange carriers may charge. This process could take some
time, even without considering any appeals of this order that may be filed. In
the long term, however, this rule could have the effect of sharply reducing
our costs of providing DSL service.
Collocation. Established telephone companies are required to provide space
in their switching offices so that requesting telecommunications carriers can
physically "collocate" equipment necessary for interconnection or access to
unbundled network elements at the company's premises, except that the
established telephone company may provide off-site "virtual" collocation, if
it demonstrates to the state regulatory commission that physical collocation
is not practical for technical reasons, or because of space limitations.
Transport and Termination Charges. State regulatory commissions, during
arbitrations, should set symmetrical traffic exchange compensation rates based
on a methodology that considers the current, not historical, costs of
providing a service.
Resale. State commissions are required to identify which marketing,
billing, collection, and other costs will be avoided, or that are avoidable,
by established telephone companies when they provide services on a wholesale
basis and to calculate the portion of the retail rates for those services that
is attributable to the avoided and avoidable costs.
Access to Rights-of-Way. The FCC established procedures designed to
facilitate the negotiation and mutual provision of nondiscriminatory access by
telecommunications carriers and utilities to their poles, ducts, conduits, and
rights-of-way.
Interconnection Agreements. State commissions are required to follow these
national rules when arbitrating interconnection agreements negotiated between
established telephone companies and telecommunications carriers, typically
competitive telecommunications providers like us, that have not been able to
reach a voluntary agreement. These rules do not apply to voluntary agreements.
The Telecommunications Act provides procedures and timetables for negotiation,
arbitration and approval of interconnection agreements.
Other Regulations
In general, the FCC has a policy of encouraging new competitors, such as
us, in the telecommunications industry and preventing anti-competitive
practices. Therefore, the FCC has
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established different levels of regulation of dominant carriers, the
established telephone companies, and nondominant carriers, ICPs and CLECs.
Tariffs. As a nondominant carrier, we may install and operate facilities
for the transmission of domestic interstate communications without the time
and expense of obtaining prior FCC authorization. Services of nondominant
carriers have been subject to relatively limited regulation by the FCC,
primarily filing schedules of rates and terms of service ("tariffs") and
making periodic reports. However, nondominant carriers like us must offer
interstate services on a nondiscriminatory basis, at just and reasonable
rates, and remain subject to FCC complaint procedures.
In October 1996, the FCC adopted the Detariffing Order, which eliminated
the requirement that nondominant interstate carriers like us maintain tariffs
on file with the FCC for domestic interstate services, and provided that,
after a nine-month transition period, relationships between interstate
carriers and their clients would be set by contract, not tariff. These rules
are under appeal in the courts and have not yet taken effect. If the FCC's
Orders become effective, nondominant interstate services providers will no
longer be able to rely on the simple filing of tariffs with the FCC as a means
of providing notice to clients of prices, terms and conditions under which
they offer their interstate services. If we cancel our FCC tariffs as a result
of the FCC's Orders, we will need to implement replacement contracts with each
customer, which could result in substantial administrative and selling
expenses.
International Services. Nondominant carriers such as us also are required
to obtain FCC authorization pursuant to Section 214 of the Communications Act
and file tariffs before providing international communications services. We
have obtained such authority. The FCC has adopted rules for a multi-year
transition to lower international settlements payments by U.S. common
carriers. We believe that these rules are likely to lead to lower rates for
some international services and increased demand for these services, including
capacity on the U.S. facilities, like ours, that provide these services.
Established Telephone Company Price Cap Regulation Reform. In 1991, the FCC
replaced traditional rate of return regulation for large established telephone
companies with price cap regulation. Under price caps, established telephone
companies can change prices for some specified services, including
interconnection services provided to CLECs, only within given parameters. The
FCC has adopted a number of proposals to significantly reduce its regulation
of established telephone company pricing which would greatly enhance the
ability of established telephone companies to compete against us, particularly
by targeting price cuts to particular clients, which could have a material
adverse effect on our ability to compete based on price. Review of these FCC
decisions is currently pending before the District of Columbia Circuit.
Access Charges. The FCC has also made various reforms to the existing rate
structure for charges assessed on long distance carriers for allowing them to
connect to local networks. These reforms are designed to move these "access
charges", over time, to more cost-based rate levels and structures. These
changes will reduce access charges and will shift charges, which had
historically been based on minutes-of-use, to flat-rate, monthly per line
charges on end-user customers rather than long distance carriers. As a result,
the aggregate amount of access charges paid by long distance carriers to
access providers like us may decrease.
At the same time, the FCC, noting the proliferation of fixed monthly
charges on the bills of long distance customers, has recently initiated a
public inquiry on the impact of these charges on consumers
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who make few interstate long distance calls but pay fixed end-user charges
nonetheless. It is possible that this may result in some sort of regulation of
long distance rates. In addition, the FCC is seeking comments on a joint
proposal of several established telephone companies and long distance carriers
to further reduce access charges and create a new universal service fund to
which all telecommunications carriers would contribute. All of these
initiatives could reduce our revenues from access charges and diminish them as
a source of profits.
In October 1998, AT&T initiated a proceeding in which it sought a
declaration from the FCC that AT&T may avoid competitive local exchange
carrier access charges by declining to direct calls to the customers of those
competitive local exchange carriers . In addition, AT&T and Sprint have sent
letters to virtually every competitive local exchange carrier stating that
competitive local exchange carriers access charges for in-bound long distance
calls are unreasonable, and demanding a reduction in rates to a "competitive"
level. If competitive local exchange carriers are unwilling to comply, AT&T
and Sprint threaten to no longer deliver those calls. In many instances, the
long distance providers have outright refused to pay competitive
telecommunications providers their tariffed rate for access services, and in
some cases have refused payment to competitive local exchange carriers
entirely. In July 1999, the FCC issued a decision holding that a competitive
telecommunications provider was entitled to be paid its tariffed rate for
outbound access services provided to AT&T. It did not address the issue of in-
bound service. If long distance providers may in fact refuse to purchase
competitive telecommunications providers switched assess services, competitive
telecommunications provider may be adversely affected. The FCC has requested
comment on this question and on whether the FCC should take steps to limit
competitive local exchange carrier access charges.
Universal Service Reform. On May 8, 1997, the FCC issued an order to
implement the provisions of the Telecommunications Act relating to the
preservation and advancement of "universal telephone service," a long-standing
policy initiative designed to assure that as many people as possible have
access to quality telephone service at affordable rates, particularly in rural
and high-cost areas as well as providing advanced telecommunications services
for schools, health care providers and libraries. All telecommunications
carriers providing interstate telecommunications services, including us, must
contribute to the universal service support fund. These contributions became
due beginning in 1998. Contributions which are calculated as a percentage of
interstate and international revenues vary quarterly and are billed monthly.
We are also eligible to receive universal service support if we elect to
provide specific services supported by the federal universal service support
mechanisms.
In November 1999, the FCC issued an order revising its rules for
calculating the size of the universal service fund. The revised rules shift
more of the costs of universal service to the federal program, and are likely
to increase the overall cost to interstate telecommunications carriers.
Various states are also in the process of implementing their own universal
service programs, which may also increase our overall costs.
Slamming. When an end user decides to choose a local or long distance
telecommunications company for services, that choice is encoded in the client
record. This encoded information is used to route the user's calls so that
billing comes from the desired company. A user may change service providers at
any time, but the FCC regulates the process. Specific customer authentication
procedures must be followed, and when they are not, particularly if the change
is unauthorized or fraudulent, the process is known as "slamming." Slamming is
such a significant problem that it was addressed in
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detail in the Telecommunications Act and by the FCC in recent orders. The FCC
has levied significant fines for slamming. The risk of financial damage and
harm to business reputation from slamming is significant. Even one slamming
complaint could cause extensive litigation expenses for us. The FCC recently
decided to apply its slamming rules, which originally covered only long
distance, to local service.
Payphone Compensation. Section 276 of the Telecommunications Act requires
payphone owners to be compensated for each completed call originated at their
payphones. Although as a competitive telecommunications provider, we currently
are not liable to compensate payphone owners for most calls, as we begin to
provide additional services, our compensation requirements may increase
significantly.
State Regulation. We believe that most, if not all, states in which we
propose to operate will require a registration, certification or other
authorization to offer intrastate services. Many of the states in which we
operate or intend to operate are in the process of addressing issues relating
to the regulation of CLECs. We will also be subject to tariff filing
requirements. In most states, we are required to file tariffs setting forth
the terms, conditions and prices for services that are classified as
intrastate.
We have received, through our operating subsidiaries, certificates of
authority to provide local exchange and interexchange telecommunications
services in Connecticut, Massachusetts, New Hampshire, New York, Ohio,
Pennsylvania and Rhode Island. Applications for such authority are pending in
Maine and Vermont.
In addition to tariff filing requirements, some states also impose
reporting, client service and quality requirements, as well as unbundling and
universal service requirements. In addition, we will be subject to the outcome
of generic proceedings held by state utility commissions to determine new
state regulatory policies. Some states, including some of our target states,
have adopted or have pending proceedings to adopt specific universal service
funding obligations. These state proceedings may result in obligations that
are equal to or more burdensome than the federal universal service
obligations.
We believe that, as the degree of intrastate competition increases, the
states will offer the established telephone companies increasing pricing
flexibility. This flexibility may present the established telephone companies
with an opportunity to subsidize services that compete with our services with
revenues generated from non-competitive services, thereby allowing established
telephone companies to offer competitive services at lower prices. This could
have a material adverse effect on our revenues.
We are also subject to requirements in some states to obtain prior approval
for, or notify the state commission of, specified events such as transfers of
control, sales of assets, corporate reorganizations, issuances of stock or
debt instruments and related transactions.
Local Authorizations. When constructing a network, such as fiber optic
cables, we generally must obtain municipal franchises and other permits. These
rights are typically the subject of non-exclusive agreements of finite
duration and provide for the payment of fees or the provision of services to
the municipality. In addition, we must secure rights-of-way, pole attachments
and other access rights, which are typically provided under non-exclusive
multi-year agreements that generally contain
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renewal options. In some municipalities we will be required to pay license or
franchise fees based on a percentage of gross revenues or on a per linear foot
basis, as well as post-performance bonds or letters of credit.
Competition
We operate in a highly competitive environment and currently do not have a
significant market share in any of our markets. Most of our actual and
potential competitors have substantially greater financial, technical,
marketing and other resources, including brand name recognition, than we do.
Also, the continuing trend toward business alliances in the telecommunications
industry, and the increasingly reduced regulatory and technological barriers
to entry in the data and Internet services markets, could give rise to
significant new competition. We believe that the principal competitive factors
affecting our business will be pricing levels and clear pricing policies,
client service, accurate billing and, to a lesser extent, variety of services.
Our ability to compete effectively will depend upon our ability to provide
high quality market-driven services at prices generally equal to or below
those charged by our competitors. To maintain our competitive posture, we
believe that we must be in a position to reduce our prices in order to meet
reductions in rates, if any, by others.
Established Telephone Companies
In each of our target markets, we will compete principally with the
established telephone company serving that area, such as Bell Atlantic,
Frontier, SNET and Ameritech. Established telephone companies are the
established providers of dedicated and local telephone services to the
majority of telephone subscribers within their respective service areas. In
addition, established telephone companies generally have long-standing
relationships with their clients and with federal and state regulatory
authorities and have financial, technical and marketing resources
substantially greater than we do, and the potential to subsidize competitive
services from a variety of businesses.
While recent regulatory initiatives provide increased competitive
opportunities to voice, data, and Internet-service providers such as us, they
also provide the established telephone companies with increased pricing
flexibility for their private line, special access, and switched access
services. With respect to competitive access services, the fees to connect to
an established telephone companies' facilities, the FCC recently decided to
increase established telephone company pricing flexibility and deregulation
for such services, either automatically or after specified criteria are met.
If the established telephone companies are allowed additional flexibility to
offer discounts to large clients, engage in aggressive volume and term
discount pricing practices, and/or charge competitors with excessive fees for
interconnection to their local networks, the potential income of ICPs and
CLECs, could be adversely affected.
Data/Internet Services Providers
The Internet services market is highly competitive, and we expect that
competition will continue to intensify. Our competitors in this market will
include Internet service providers, other telecommunications companies, online
services providers and Internet software providers. In addition, we may also
face competition from companies providing DSL services. Many of these
competitors have greater financial, technological and marketing resources than
those available to us.
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Competitive Telecommunications Providers
We also face competition from other current and potential market entrants,
including long distance carriers seeking to enter, reenter or expand entry
into the local exchange market such as AT&T and MCI WorldCom, and from
resellers of local exchange services and competitive access providers. We also
face competition from other CLECs with overlap in our targeted markets, such
as Adelphia Business Solutions, Inc. and Time Warner Telecom. Even the ILECs,
particularly the regional Bell operating companies, have established
independent CLEC subsidiaries to compete with their former Bell System cousins
in local competition. Some of these competitors have significantly greater
financial resources than we do. For example, AT&T, MCI WorldCom, and Sprint
(historically only long distance carriers), have each begun to offer local
telecommunications services in major U.S. markets using their own facilities
or by resale of the other providers' services. In addition, a continuing trend
toward consolidation of telecommunications companies and the formation of
strategic alliances within the telecommunications industry, as well as the
development of new technologies, could give rise to significant new
competitors. For example, the merger of WorldCom, Inc. with MCI, Global
Crossing's recent purchase of Frontier Corp., SBC's merger with Ameritech,
Qwest's agreement to buy US WEST, MCI WorldCom's agreement to buy Sprint Corp.
and AT&T's acquisition of Teleport Communications Group, Inc. and Tele-
Communications Inc. are examples of these competitive alliances. Such combined
entities may provide a "bundled package" of telecommunications products (e.g.,
local, long distance, and Internet telephony) that directly competes with the
products we offer. These types of consolidations and strategic alliances could
put us at a competitive disadvantage.
Fixed Wireless Companies
We also face competition from companies using radio and microwave spectrum
instead of physical wiring, known as fixed wireless services. These companies
utilize various wireless communications systems, and unlicensed wireless radio
services. The FCC has issued, or is in the process of issuing, licenses for
these services to provide broadband integrated telecommunications services on
a point-to-point and/or point-to-multi-point basis. Some of these service
providers, such as WinStar, Advanced Radio Telecom and Teligent, have already
raised substantial capital and have commenced building their wide-area
networks in many top-50 urban areas. Upon entering into appropriate
interconnection agreements with established telephone companies, these service
providers are expected to provide integrated voice and data services to small
and medium-sized businesses. Several equipment manufacturers have developed
still other low data-rate transmission devices (e.g., infrared) that may
provide non-regulated competition to us.
The FCC has authorized mobile cellular personal communications services and
other commercial mobile radio services, providers to offer wireless services
to fixed locations. Previously, cellular providers could provide service to
fixed locations only on an ancillary or incidental basis. This authority to
provide fixed as well as mobile services will enable these commercial
providers to offer "wireless" local loop service and other services to high
density fixed locations, such as office and apartment buildings, in direct
competition with us and other providers of traditional telephone service.
Other Competitors
Other companies that currently offer, or are capable of offering, local
switched services include: cable television companies, electric utilities,
microwave carriers, and large business clients who build private networks.
These entities, upon entering into appropriate interconnection agreements or
resale agreements with established telephone companies, could offer single
source local and long distance
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services like those that we offer. We also expect to increasingly face
competition from companies offering long distance data and voice services over
the Internet. Such companies could enjoy a significant cost advantage because
they do not currently pay carrier access charges or universal service fees.
In addition, regional Bell operating companies may soon begin offering
single source local and long distance services. Currently, regional Bell
operating companies cannot provide long-distance service that originates (or
in some cases terminates) in one of its in-region states until the regional
Bell operating company has satisfied statutory conditions in that state, and
has received the approval of the FCC. To date, only one of the regional Bell
operating companies, Bell Atlantic, has received FCC approval to provide long
distance service and only in the state of New York. The FCC's decision is
being appealed in federal court, but Bell Atlantic may still offer long
distance service in the meantime. If the FCC decision withstands the appeal,
we expect that more regional Bell operating companies will soon begin to
satisfy the statutory conditions and obtain FCC approval to provide such
services. In particular, we believe that SBC Corporation may be the next to
obtain long distance authority in one or more of the states in its region in
the near future. Once the regional Bell operating companies are allowed to
offer in-region long distance services, they will undoubtedly offer single-
source local and long distance service, which will give rise to increased
competition to us. In the spring of 1998, four of the regional Bell operating
companies petitioned the FCC to be relieved of some particular regulatory
requirements in connection with their provision of high-speed data services,
including obligations to unbundle high-speed data loops and to resell such
services. In October 1998, the FCC ruled that high-speed services are
telecommunications services subject to the unbundling and resale obligations
of the Telecommunications Act. However, the FCC has initiated a proceeding to
determine whether regional Bell operating companies can create separate
affiliates for their high-speed data services that would be free from these
obligations.
Services Which Compete With Our DSL Services.
The established telephone companies represent the dominant competition in
all our target markets. These companies have an established brand name,
possess sufficient capital to deploy DSL equipment rapidly, have their own
telephone wires and can bundle digital data services with their existing
analog voice services to achieve economics of scale in serving customers.
Cable modem service providers such as Excite@Home and Road Runner are
deploying high-speed Internet services over cable networks. Where deployed,
these networks provide similar and in some cases higher-speed Internet access
than we provide. We believe the cable modem service providers face a number of
challenges that providers of DSL service do not face. For example, different
regions within a metropolitan area may be served by different cable modem
service providers, making it more difficult to offer the blanket coverage
required by potential business customers. Also, much of the current cable
infrastructure in the U.S. must be upgraded to support cable modems, a process
which we believe is significantly more expensive and time-consuming than the
deployment of DSL-based networks.
Many competitive telecommunications companies such as NorthPoint
Communications Group, Inc., Rhythms NetConnections Inc. and Network Access
Solutions Corporation offer high-speed digital services. In addition, long
distance carriers, such as AT&T Corp., Sprint Corporation, MCI WORLD COM, Inc.
and Qwest Communications International Inc., have deployed large-scale
Internet access networks, and have high brand recognition. Internet services
providers, such as Netcom On-Line Communication Services, Inc. and PSINet,
Inc. also provide Internet access to residential and business customers,
generally at lower speeds than we offer. To the extent we are not able to
recruit Internet
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service providers as customers for our service, Internet service providers
could become competitive DSL service providers.
On-line service providers include companies such as AOL, and MSN (a
subsidiary of Microsoft Corp.) that provide, over the Internet and on
proprietary online services, content and applications ranging from news and
sports to consumer video conferencing. Many of these on-line service providers
have developed their own access networks for modem connections. If these on-
line service providers were to extend their access networks to DSL or other
high-speed service technologies, they would become competitors of ours.
Wireless and satellite data service providers are developing wireless and
satellite-based Internet connectivity. We may face competition from
terrestrial wireless services. Companies such asTeligent, Inc., Advanced Radio
Telecom Corp. and WinStar Communications Inc. hold microwave licenses to
provide voice, data and videoconferencing services.
We also may face competition from satellite-based systems. Motorola, Inc,
Hughes Communications Satellite Services, Inc., a subsidiary of General Motors
Corporation, Teledesic LLC and others have planned global satellite networks
which can be used to provide broadband voice and data services, and the FCC
has authorized several of these applicants to operate their proposed networks.
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 seven 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 November 15, 1999, we had approximately 368 employees. We believe
that our future success will depend on our continued ability to attract and
retain highly skilled and qualified employees. None of our employees are
currently represented by collective bargaining agreements. We believe that we
enjoy good relationships with our employees.
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Legal Proceedings
We are not party to any pending legal proceedings that we believe would,
individually or in the aggregate, have a material adverse effect on our
financial condition or results of operations.
Facilities
We are headquartered in Rochester, New York and lease offices and space in
a number of locations, primarily for sales offices and network equipment
installations. The table below lists our leased facilities as of November 15,
1999:
<TABLE>
<CAPTION>
Approximate
Location Lease Expiration Square Footage
-------- ----------------- --------------
<S> <C> <C>
Albany, NY.................................. October 2008(1) 4,500
Albany, NY.................................. October 2003(2) 3,725
Buffalo, NY................................. October 2008(3) 7,000
Manchester, NH.............................. October 2009(3) 11,413
Pittsburgh, PA.............................. February 2009(3) 12,200
Portsmouth, NH.............................. April 2000(5) 1,078
Portsmouth, NH.............................. April 2004(5) 2,520
Providence, RI.............................. March 2009(3) 9,335
Rochester, NY............................... January 2009(4) 32,000
Rochester, NY............................... December 2009(3) 11,390
Springfield, MA............................. September 2009(3) 7,450
Syracuse, NY................................ December 2008(3) 9,850
Worcester, MA............................... September 2009(3) 4,446
Worcester, MA............................... September 2001(5) 1,000
</TABLE>
- --------
(1) Lease of network equipment facilities only.
(2) Lease of office space only.
(3) Lease of both office space and network equipment facilities.
(4) Lease of our principal executive offices.
(5) Atlantic Connections lease of office space.
We believe that our leased facilities are adequate to meet our current
needs and that additional facilities are available to meet our development and
expansion needs in existing and projected target markets.
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MANAGEMENT
The following sets forth information concerning our directors, executive
officers and other key personnel, including their ages, as of November 15,
1999.
<TABLE>
<CAPTION>
Name Age Title
---- --- -----
<C> <C> <S>
Steve M. Dubnik(1)...... 36 Chairman of the Board, President and Chief
Executive Officer, Director
Kevin S. Dickens........ 36 Senior Vice President, Operations and
Engineering
Ajay Sabherwal.......... 33 Senior Vice President, Finance and Chief
Financial Officer
Mae H. Squier-Dow....... 38 Senior Vice President, Sales, Marketing and
Service
Philip H. Yawman........ 34 Senior Vice President, Corporate Development
Robert Bailey........... 53 Vice President, Convergent Network Systems
Joseph A. Calzone....... 36 Vice President, Engineering and Network
Operations
Linda S. Chapman........ 36 Vice President, Human Resources
James C. Currie......... 52 Vice President, Operations
Elizabeth A. Ellis...... 41 Vice President, Information Technology
David A. Fitts.......... 34 Vice President, Product Marketing
Robert J. Merrill....... 43 Vice President, Business Development
Michelle C. Paroda...... 36 Vice President, Client Services
Joseph M. Schaal........ 33 Vice President, Application Services and
Strategy
Kim Robert Scovill...... 46 Vice President, Regulatory Affairs and General
Counsel
John J. Zimmer.......... 41 Vice President, Finance and Controller
Paul Cissel............. 42 Vice President, Sales, New England
Michael A. D'Angelo..... 34 Vice President, Sales, Western Region
Daniel K. Iles.......... 38 Regional Vice President of Sales, Western
Region
Eric Peterson........... 36 Regional Vice President of Sales, New England
John B. Ehrenkranz(1)... 34 Director
Bruce M. Hernandez(1)... 39 Director
Michael M. Janson....... 51 Director
Robert M. Van Degna(1).. 55 Director
</TABLE>
- --------
(1) Member of the Board's Executive Committee
Steve M. Dubnik, our Chairman of the Board, President, Chief Executive
Officer and Founder, has worked in the telecommunications industry for 15
years. Prior to founding Choice One in June 1998, Mr. Dubnik served in various
capacities with ACC Corp., including as the President and Chief Operating
Officer of North American Operations of ACC from November 1996 to April 1998
and as Chairman of the Board of Directors of ACC TelEnterprises Ltd. from July
1994 to April 1998. From December 1997 to April 1998, he also jointly
performed the functions of Chief Executive Officer of ACC. Prior to joining
ACC, Mr. Dubnik served as President, Mid-Atlantic Region, of RCI Long Distance
(now Frontier Corporation) from 1992 through June 1994. For more than five
years prior thereto, he held various senior positions with Rochester Telephone
Corporation (now Frontier Corporation) in engineering, operations, information
technology and sales.
Kevin S. Dickens, our Senior Vice President, Operations and Engineering
since July 1998, has worked in the telecommunications industry for 11 years.
Prior to joining us, Mr. Dickens was President and Chief Executive Officer of
ACC Corp.'s Canadian subsidiary, ACC TelEnterprises Ltd., from May 1997 to
June 1998. Prior thereto, Mr. Dickens was Vice President of Network Planning
and Optimization at Frontier Corporation, from September 1996 to May 1997,
with responsibility for Frontier's long distance network. Prior thereto, Mr.
Dickens was a Senior Director of Advanced
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Technology and a Senior Director of Engineering at Frontier Corporation since
September 1994. Mr. Dickens has also worked in various positions in
engineering and technology development, business unit management, marketing
and sales.
Ajay Sabherwal, our Senior Vice President, Finance and Chief Financial
Officer since September 1999, has worked both directly in the
telecommunications industry and as an equity analyst covering the
telecommunications industry for over 10 years. Mr. Sabherwal was most recently
executive director of institutional equity research for Toronto-based CIBC
World Markets from June 1996 to September 1999. Prior to joining CIBC World
Markets as a senior research analyst in June of 1996, Mr. Sabherwal was the
telecommunications analyst for BZW (Barclays de Zoete Wedd) Canada and its
successor company from November 1993 until June 1996. Mr. Sabherwal has also
held management positions at Unitel Communications (now AT&T Canada), Deloitte
and Touche Management Consultants, and CNCP Telecommunications in the areas of
new product development and launch, planning, managing vendor relationships
and budgeting.
Mae H. Squier-Dow, our Senior Vice President, Sales, Marketing and Service
since June 1998, has worked in the telecommunications industry for 15 years.
Ms. Squier-Dow served as President of ACC Telecom, a U.S. subsidiary of ACC
Corp., from June 1996 to May 1998, and in several positions at ACC Long
Distance U.K. Ltd., including as Commercial Director from April 1995 to June
1996, and as Director of Client Relations and Marketing, Vice President of
International Planning and Operations Director from October 1993 to April
1995. Ms. Squier-Dow also served as Vice President of Client Relations at ACC
Corp. from March 1992 to October 1993 and as its Director of Client Relations
from January 1991 to March 1992.
Philip H. Yawman, our Senior Vice President, Corporate Development since
July 1998, has worked in the telecommunications industry for 11 years. Prior
to joining us, Mr. Yawman was Vice President of Investor Relations and
Corporate Communications at ACC Corp. from April 1997 to January 1998. Mr.
Yawman also served in various positions at Frontier Corporation from July 1989
to April 1997, including as head of investor relations activities and in
several product management positions.
Robert Bailey, our Vice President of Convergent Network Systems since
September 1999, is responsible for evaluating and selecting the technology to
be deployed by Choice One in the next generation of switching systems
architecture, including the evolution from circuit switching systems to packet
and ATM-based infrastructure. Most recently, he was Vice President and Chief
Technology Officer for the Upstate Cellular Network (Frontier Cellular), a
joint venture of Bell Atlantic Mobile and Frontier Corporation, from January
1985 until April 1999, where he was responsible for engineering and operations
of a cellular network that covered 5.5 million population units in upstate New
York. Previously, Mr. Bailey held a number of key positions at Frontier
Corporation, including Vice President of Strategic Technologies, and President
of Frontier Cellular, Frontier Network Systems and Frontier's long distance
network. Prior to entering the deregulated business units in 1985, he held a
number of senior positions in operations and engineering at Frontier's
predecessor regulated company, Rochester Telephone.
Joseph A. Calzone, our Vice President, Engineering and Network Operations
since July 1998, has worked in the telecommunications industry for 13 years.
Prior to joining us, Mr. Calzone held various key management positions at
Citizens Communications from October 1995 to May 1998, most recently as head
of the National Sales and Services organization and as Vice President of Long
Distance Engineering and Operations. Prior thereto, Mr. Calzone was employed
by Frontier
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Corporation for 10 years, where he held various positions such as Director of
Carrier Services and Sales, Director of Strategic Accounts and Manager of
Traffic Engineering and Switching.
Linda S. Chapman, our Vice President, Human Resources since August 1998,
was the Director of Human Resources of ACC Corp.'s U.S. subsidiary, ACC
Telecom, from June 1997 to July 1998. Prior thereto, Ms. Chapman held various
management positions with MCI from March 1994 to May 1997 and worked in the
Lodging division of Marriott International from October 1986 to February 1994.
James C. Currie, our Vice President, Operations was at Citizens
Communications from 1994 until he came to Choice One in June 1999. At Citizens
he was in a number of executive positions including Director of Long Distance
Operations, Director of Network Provisioning, Senior Director--Business Call
Centers and Sales Engineering, Vice President of Eastern Region Operations and
Vice President of Carrier Access Sales. Prior to joining Citizens, Mr.
Currie's experience includes over 20 years of operations and engineering
experience with New York Telephone, CONTEL as well as with GTE.
Elizabeth A. Ellis, our Vice President, Information Technology since July
1998, has worked in the information technology field for over 18 years,
including the past five years in the telecommunications industry. Prior to
joining us in July 1998, Ms. Ellis was Commercial Director for ACC Telecom's
subsidiaries in the United Kingdom and Germany from August 1994 to June 1998
where she was responsible for all aspects of network, operations, client
service, telemarketing and information technology. Prior thereto, Ms. Ellis
was employed at Wytecom, Inc. from March 1992 to August 1994.
David A. Fitts, our Vice President, Product Marketing since July 1998, has
worked in the telecommunications industry for 11 years. Prior to joining us,
Mr. Fitts was a Senior Manager responsible for Marketing Communications and
Internet Product Management at RCN Corporation from January to July 1998.
Prior thereto, Mr. Fitts was Marketing Manager at Time Warner Communications
from May 1995 to January 1998 and was Senior Product Manager at Teleport
Communications Group from November 1993 to May 1995.
Robert J. Merrill, our Vice President, Product Development since September
1998, has worked in the telecommunications industry for over 21 years. Prior
to joining us, Mr. Merrill was the Vice President of Marketing and Product
Development for Frontier Communication's Carrier Services Group, from January
to September 1998 and the Director of Product Development (Wholesale) from
June 1997 to January 1998. Prior thereto, Mr. Merrill was at Rochester
Telephone as the Director of Marketing and Product Development from April 1995
to June 1997 and as the General Manager of Visions Long Distance from June
1993 to April 1995. Prior thereto, Mr. Merrill worked in a variety of areas
including marketing and product development, regulatory affairs, engineering,
network operations, sales, finance and business development for GTE, AT&T and
NECA for over 15 years.
Michelle C. Paroda, our Vice President, Client Services since July 1998,
has worked in the telecommunications industry for 15 years. Prior to joining
us, Ms. Paroda had been employed in a variety of positions by Frontier
Corporation since 1984, most recently as Vice President of Client Service.
Joseph M. Schaal, our Vice President, Application Services and Strategy
since July 1998, has worked in the telecommunications industry for 10 years.
Prior to joining us, Mr. Schaal held various positions at Frontier Corporation
in project management, business planning, financial management, operations and
software development at Frontier Corporation from January 1995 to February
1997, most recently as its Director of Application and Product Development
from March 1997 to May 1998.
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Kim Robert Scovill, our Vice President, Regulatory Affairs and General
Counsel since December 1998, has worked in the telecommunications industry for
over 26 years. Mr. Scovill began his career in 1972 as a founding faculty
member of Ohio University's Center of Telecommunications Management. Mr.
Scovill served as a senior administrator and Administrative Law Judge at the
Public Utilities Commission of Ohio from May 1982 to August 1986. Mr. Scovill
also served as the Manager of Corporate Issues at Cincinnati Bell Telephone
from May 1986 to March 1990, where he managed the introduction of such
telecommunications innovations as cellular calling party pays and Kentucky's
deaf relay service. From January 1991 to February 1998, Mr. Scovill was Vice
President of Worthington Voice Services, a telecommunications and e-commerce
company. From February 1998 to December 1998, Mr. Scovill was Vice President
and General Counsel of Omnicall, a South Carolina-based CLEC.
John J. Zimmer, our Vice President, Finance and Controller since August
1998, is a certified public accountant and has worked in the
telecommunications industry for eight years. Prior to joining us, Mr. Zimmer
was employed by ACC Corp., as Vice President and Treasurer from January 1997
to July 1998, as Vice President of Finance from September 1994 to January
1997, and as Controller from March 1991 through August 1994. Prior thereto,
Mr. Zimmer was an Audit and Accounting Manager with Arthur Andersen & Co.
Paul Cissel, our Vice President, Sales, New England Region, since November
1999, has worked in both the telecommunications and electronics industries for
over 19 years. Mr. Cissel was President of Atlantic Connections when Choice
One acquired it in November 1999. Prior to joining Atlantic Connections in
September 1998, Mr. Cissel was the Senior Vice President of Sales and
Marketing for Phoenix Network from November 1993 to November 1996.
Michael A. D'Angelo, our Vice President of Sales, Western Region, since
September 1998, has worked in the telecommunications industry for over 12
years. Prior to joining us, Mr. D'Angelo was the Director of Sales, Southeast
Regional Manager at ICG Communications from November 1997 to September 1998.
Prior thereto, Mr. D'Angelo was Regional Sales Manager for Citizens
Communications from January 1995 to November 1997, Territory Manager for MFS
Telecom Communications from August 1994 to January 1995, and Major Account
Manager and Account Executive for Rochester Telephone from March 1987 to
February 1994.
Daniel K. Iles, our Regional Vice President of Sales, Western Region, since
July 1998, has worked in the telecommunications industry for 13 years. Prior
to joining us, Mr. Iles was the Director of Sales for Intermedia Corporation
from March 1997 to July 1998. Prior thereto, Mr. Iles was employed by Frontier
Corporation, as Director of Sales from October 1995 to March 1997 and as
Regional Manager-Upstate New York from November 1990 to October 1995.
Eric Peterson, our Regional Vice President of Sales, New England Region,
since November 1999. Prior to joining Choice One, Mr. Peterson held a similar
position with HarvardNet from December 1998 to August 1999. He served as the
Vice President of Sales and Marketing for FaxNet, a startup company, from 1996
until 1998. From 1991 to 1996, Mr. Peterson held a series of positions with
Allnet Communications, where he helped to establish the Allnet Wholesale
Division. His telecom career began at First Phone in Boston where he was
Director of Sales from 1988 to 1991.
John B. Ehrenkranz, was elected to our Board of Directors in July 1998 and
is a Principal of Morgan Stanley & Co. Incorporated where he has been employed
since 1987. Mr. Ehrenkranz is also a Principal of Morgan Stanley Capital
Partners III, Inc., the corporate general partner of certain
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MSDWCP funds. Mr. Ehrenkranz also currently serves on the Board of Directors
of Allegiance Telecom, Inc., as well as other privately held companies.
Bruce M. Hernandez, was elected to our Board of Directors in July 1998 and
is a Principal and Chief Executive Officer of Waller Sutton Media Partners,
L.P., where he has been employed since 1997. Mr. Hernandez previously served
as Chief Financial Officer of Horizon Cellular from 1993 to 1997.
Michael M. Janson, was elected to our Board of Directors in July 1998 and
is a Managing Director of Morgan Stanley & Co. Incorporated where he has been
employed since 1987. Mr. Janson is also a Managing Director of Morgan Stanley
Capital Partners III, Inc., the corporate general partner of certain MSDWCP
funds. Mr. Janson also currently serves on the Board of Directors of Silgan
Holdings, Inc., as well as other privately held companies.
Robert M. Van Degna, was elected to our Board of Directors in July 1998 and
is a Managing Director of Fleet Equity Partners, an investment firm affiliated
with Fleet Boston Financial Corp. Mr. Van Degna joined Fleet Financial Group
in 1971 and held a variety of lending and management positions until he
organized Fleet Equity Partners in 1982. Mr. Van Degna served on the Board of
Directors of ACC Corp. from 1995 to 1998 and he was Chairman of the Board when
ACC merged with Teleport Communications Group. Mr. Van Degna also currently
serves on the Board of Preferred Networks, Inc., as well as other privately
held companies.
Each of our officers serves at the pleasure of the board of directors.
Election of Directors; Composition of Board; Voting Agreement
Pursuant to our certificate of incorporation and an agreement among our
current stockholders, known as the transaction agreement, the initial size of
our board is established at seven directors. The Board size may be changed by
action of the board but may not be less than the total number of directors
permitted to be designated by the parties to the transaction agreement.
The composition of the board pursuant to the transaction agreement is as
follows:
. Morgan Stanley is entitled to designate the majority of our board so
long as it continues to hold 75% or more of the stock initially issued
to it;
. Morgan Stanley is entitled to designate 1/3 of the board so long as it
holds at least 50%;
. Morgan Stanley is entitled to designate two directors so long as it
holds at least 25%; and
. Morgan Stanley is entitled to designate one director if it holds at
least 10%. Fleet and Waller-Sutton are each entitled to designate one
director so long as each continues to hold, respectively, 50% and 75%,
of the stock initially issued to them. Our chief executive officer is
also designated as a director. Within three months of this offering, at
least one outside director will be designated to the board.
The stockholders who are parties to the transaction agreement have agreed
to vote all of their shares to give effect to the board composition described
above.
Our board is divided into three classes serving staggered terms. After an
initial transition period following the offering, directors in each class will
be elected to serve for three-year terms and until their successors are
elected and have qualified. Each year, the directors of one class will stand
for election as their terms of office expire. Prior to the date Morgan Stanley
owns less than 17.5% of our
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outstanding stock or otherwise consents, our directors may be removed without
cause by our stockholders. After that date, our directors may only be removed
by our stockholders for cause. is a director with a term of office
expiring on the date of our annual meeting of stockholders in 2000; Messrs.
Jansen and Ehrenkranz are directors with terms of office expiring on the date
of our annual meeting of stockholders in 2001; and Messrs. Dubnik, Van Degna
and Hernandez are directors with terms of office expiring on the date of our
annual meeting of stockholders in 2002. The composition of the board of
directors of each of our subsidiaries will be the same as our board.
The quorum for board action requires the presence of at least four
directors with at least one director present who has been designated by Morgan
Stanley and one director present who has been designated by either Fleet or
Waller-Sutton. Any vacancy on the board may be required to be filled as the
first order of business at a meeting following the event creating a vacancy.
Committees of the Board of Directors
The board of directors currently has five committees: an executive
committee; an employee option plan administration committee; a compensation
committee; an audit committee; and a pricing committee.
The executive committee has the authority to act as a liaison between the
board and executive management and exercise such powers as shall be delegated
to it from time to time by the board. Pursuant to our certificate of
incorporation and the transaction agreement, the executive committee will be
comprised of our chief executive officer and may be comprised of three other
representatives. One member may be designated by each of Morgan Stanley, the
Fleet Entities and Waller-Sutton so long as that investor is entitled to
designate a director to the board. The current members of the executive
committee are Messrs. Dubnik, Ehrenkranz, Hernandez and Van Degna.
The employee option plan administration committee administers our 1998
Employee Stock Option Plan. The Committee consists of Messrs. Ehrenkranz,
Hernandez and Van Degna. See "--Stock Plan--1998 Employee Stock Option Plan."
The compensation committee reviews and recommends the compensation
arrangements for management, including salaries, bonus plans and options
granted outside of the 1998 Employee Stock Option Plan. The current members of
the compensation committee are Messrs. Ehrenkranz, Hernandez and Van Degna.
The audit committee, among other things, recommends the firm to be
appointed as independent accountants to audit our financial statements,
discusses the scope and results of the audit with the independent accountants,
reviews with management and the independent accountants our interim and year-
end operating results, assesses the adequacy of our internal accounting
controls and audit procedures and reviews the non-audit services to be
performed by the independent accountants. The audit committee is currently
comprised of Messrs. Ehrenkranz, Hernandez and Janson.
The pricing committee has the authority to:
. negotiate the pricing and other terms applicable to the engagement of an
affiliate of Morgan Stanley as our financial advisor or as lead manager
or lead arranger for any underwritten offering or capital markets
activities;
. select and engage one or more co-managers or co-arrangers for any such
underwritten offering or capital markets activities and to negotiate the
terms of such engagement; and
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. exercise such other powers as shall be delegated to it from time to time
by the Board.
Morgan Stanley's designee will generally abstain from voting on matters
relating to such engagement of an affiliate of Morgan Stanley, but is expected
to participate in discussions pertaining thereto. Pursuant to our certificate
of incorporation and the transaction agreement, the pricing committee will be
comprised of our chief executive officer and may be comprised of three other
representatives. One member may be designated by each of Morgan Stanley, Fleet
and Waller-Sutton so long as that investor is entitled to designate a director
to the board. The current members of the pricing committee are Messrs. Dubnik,
Ehrenkranz, Hernandez and Van Degna.
Compensation of Directors
We will reimburse the members of our board of directors for their
reasonable out-of-pocket expenses incurred in connection with attending board
or committee meetings and related activities. Additionally, we are obligated
to maintain our present level of directors' and officers' liability insurance.
Members of our board of directors currently receive no other compensation for
services provided as a Director or as a member of any board committee. Non-
employee directors of Choice One and our subsidiaries are entitled to
participate in our 1999 Directors' Stock Incentive Plan.
Executive Compensation
The following table sets forth compensation paid during the period from
June 1998 to December 31, 1998, and the period from January 1, 1999 through
December 15, 1999 to our chief executive officer and the other four most
highly paid executive officers of Choice One whose annual salary and bonus, on
a prorated basis, exceeded $100,000 for all services rendered to us during
such period.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term
Annual Compensation Compensation
-------------------------- ---------------- All Other
Name and Principal Restricted Stock Compensation
Position Year Salary($) Bonus($) Awards ($)(5) ($)(6)
- ------------------ ---- --------- -------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Steve M. Dubnik......... 1998(1) $75,385 $14,000 -- $1,777
President and Chief
Executive Officer 1999 137,200 7,368 -- 4,116
Kevin S. Dickens........ 1998(2) 65,000 13,000 -- 1,650
Sr. Vice President,
Operations and
Engineering 1999 127,400 7,368 -- 3,822
Mae Squier-Dow.......... 1998(1) 70,000 13,000 -- 1,650
Sr. Vice President, 1999 127,400 7,368 -- 3,822
Sales, Marketing and
Service
Philip Yawman........... 1998(3) 60,000 23,000 -- 1,650
Sr. Vice President,
Corporate Development 1999 127,000 7,368 -- 3,810
Ajay Sabherwal..........
Sr. Vice President-- 1999(4) 31,200 37,267 39,485 780
Finance and Chief
Financial Officer
</TABLE>
- --------
(1) Mr. Dubnik and Ms. Squier-Dow joined us on June 15, 1998 and the
compensation disclosed is for the period from that date through December
15, 1998.
(2) Mr. Dickens joined us on July 1, 1998 and the compensation disclosed is
for the period from that date through December 15, 1998.
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<PAGE>
(3) Mr. Yawman joined us on July 13, 1998 and the compensation disclosed is
for the period from that date through December 15, 1998.
(4) Mr. Sabherwal joined us on September 20, 1999 and the compensation
disclosed is from that date through December 15, 1999.
(5) Except as noted, none of these executive officers received personal
benefits in excess of the lesser of $50,000 or 10% of such individuals
reported salary and bonus for 1999 or 1998. The amounts in this column for
1999 for Mr. Sabherwal include the following--$39,485 for value of the
Class B Units in Choice One Communications L.L.C. that exceed the amount
paid for these units.
(6) Reflects our matching contributions made under our 401(k) plan on behalf
of such executive officer.
Stock Plans
1998 Employee Stock Option Plan
On August 12, 1998, our stockholders approved the 1998 Employee Stock
Option Plan, under which we may issue stock options exercisable for shares of
our common stock to our employees and employees of our subsidiaries who did
not own Class B Units of Choice One Communications L.L.C. which, prior to this
offering, was our sole shareholder. The employee option plan is administered
by a committee, of our board of directors, and must consist of at least two
outside directors. The committee is authorized under the employee option plan
to select employees eligible for participation in the plan and determine the
terms and conditions of the awards under the plan. As of December 15, 1999, we
have issued an aggregate of 1,060,441 shares of common stock for issuance
under the plan and have granted options to acquire an aggregate of 600,061
shares of our common stock under the plan.
Options granted under the employee option plan may be either incentive
stock options or such other forms of non-qualified stock options, as the
committee may determine. Only incentive stock options have been granted under
the plan as of June 30, 1999. Incentive stock options are intended to qualify
as "incentive stock options" within the meaning of Section 422 of the Internal
Revenue Code of 1986 as amended, the Code. The exercise price of an incentive
stock option granted to an individual who owns shares possessing more than 10%
of the total combined voting power of all classes of our stock will be at
least 110% of the fair market value of a share of common stock on the date of
grant. The exercise price of an incentive stock option granted to an
individual other than a 10% owner and of a non-qualified stock options will be
at least 100% of the fair market value of a share of common stock on the date
of grant.
Options granted under the employee option plan may be subject to time
vesting and other restrictions at the sole discretion of the committee.
Subject to limitations and exceptions, the right to exercise an option
generally will terminate at the earlier of:
(1) the first date on which the initial grantee of such option is not
employed by us for any reason other than termination without cause,
death or permanent disability or
(2) the expiration date of the option.
If the holder of an option dies or suffers a permanent disability while still
employed by us, any option may be exercised by the participant, or in the
event of the participant's death, by the participant's personal
representative, any time prior to the earlier of the expiration date of the
option or the expiration of three months after the date of termination, but
only if and to the extent that the employee was entitled to exercise the
option at the date of such termination. If the holder of an option is
terminated without cause, or resigns we will, upon
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the recommendation of the chief executive officer, repurchase the vested
shares of the participant at fair market value, provided the participant
executes and delivers a covenant not to compete within 10 days of termination.
In the event of a change of control of Choice One, vesting will be
accelerated by one year, or an amount of options will vest immediately such
that 50% of a participant's options are vested, whichever is greater; and each
participant holding an exercisable option shall have the right, subject to
restrictions and qualifications, to exercise the option in full, or to
exercise the option for an amount of cash equal to the difference between the
fair market value on the date of surrender and the option price. A change of
control shall occur upon the happening of any of the following:
. the sale, lease, exchange or transfer of all or substantially all of our
assets;
. our consolidation or merger with another corporation in which we are not
the surviving corporation, or pursuant to which any shares of our common
stock are to be converted into cash, securities or other property;
. the consummation of a liquidation or dissolution of us;
. any person becomes the beneficial owner, directly or indirectly, of 30%
or more of our then outstanding common stock; or
. the board of directors as of August 12, 1998, which is known as the
incumbent board, ceases to constitute at least a majority of the board,
except that any person who becomes a director thereafter by the approval
of at least three quarters of the directors comprising the incumbent
board, shall be considered a member of the incumbent board.
1999 Directors' Stock Incentive Plan
On November 18, 1999, our stockholders approved the 1999 Directors' Stock
Incentive Plan, under which we may issue non-qualified stock options to
purchase shares of our common stock to our non-employee directors. Options may
be granted under the directors' stock incentive plan with respect to an
aggregate of 530,220 shares of our common stock. The directors' stock
incentive plan is administered by our board of directors.
Under the 1999 director stock option plan, we 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
finalized with an exercise price equal to the initial public offering price.
In addition, we intend to grant 5,000 shares of our common stock to each non-
employee director on February 1 of each year for the next two years. Each
option granted to the directors under the plan will be fully vested and
exercisable on the date of grant.
In the event of a change in control as defined in the directors' stock
incentive plan, all options under this plan shall vest and become exercisable
unless our board of directors directs otherwise in a resolution adopted prior
to the change in control. Under specified circumstances following a change in
control, holders of options may surrender them in exchange for cash in an
amount equal to the difference between the exercise price of such option and
the fair market value of our common stock on the date of surrender. If a
holder does not exercise that right, such holder may exercise the option at
any time during the term of such option.
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401(k) Plan
We have adopted a tax-qualified employee savings and retirement plan, or
401(k) plan, covering all of our full-time employees. Pursuant to the 401(k)
Plan, employees may elect to reduce their current compensation up to the
statutorily prescribed annual limit and have the amount of such reduction
contributed to the 401(k) plan. The 401(k) plan is intended to qualify under
Section 401 of the Code so that contributions by employees to the 401(k) plan
and income earned on plan contributions are not taxable to employees until
withdrawn from the 401(k) plan. The trustees under the 401(k) plan, at the
direction of each participant, invest such participant's assets in the 401(k)
plan in selected investment options.
Executive Agreements
Steve M. Dubnik Executive Agreement
In July 1998, in connection with Steve M. Dubnik's purchase of Class B
Units of Choice One Communications L.L.C., we entered into an executive
purchase agreement with Choice One Communications L.L.C., and Mr. Dubnik.
Vesting. Pursuant to Mr. Dubnik's executive agreement, the Choice One
Communications L.L.C. securities purchased by Mr. Dubnik as well as any of our
securities distributed with respect to his purchase of the Choice One
Communications L.L.C. securities, are subject to vesting over a four-year
period, with 20% vesting on the date of grant and 20% vesting on each of the
first four anniversaries thereof. We will accelerate vesting by one year upon
the consummation of our initial public offering, 100% in the event of Mr.
Dubnik's death or disability, and 100% upon a sale of Choice One where at
least 50% of the consideration for such sale is cash or marketable securities.
We will cease vesting and none of Mr. Dubnik's unvested securities will vest
after the date on which Mr. Dubnik's employment with us and our subsidiaries
terminates for any reason, unless we terminate his employment without cause or
Mr. Dubnik terminates for good reason.
Repurchase of Securities. If Mr. Dubnik's employment is terminated for any
reason other than a termination by us without cause or by Mr. Dubnik for good
reason, Mr. Dubnik's executive agreement provides that we or our assignees and
Choice One Communications L.L.C. will have the right to repurchase all of
Mr. Dubnik's unvested executive securities at the lesser of fair market value
and original cost.
Restrictions on Transfer, Holdback and "Drag Along" Agreement. Pursuant to
Mr. Dubnik's executive agreement, Mr. Dubnik's executive securities are
subject to various restrictions on transferability, holdback periods in the
event of a public offering of our securities and provisions requiring the
holder of such shares to approve and, if requested by us, sell its shares in
any sale of Choice One that is approved by the board.
Terms of Employment. We may terminate Mr. Dubnik's employment at any time
and for any reason. Mr. Dubnik is not entitled to receive any severance
payments upon any such termination, other than payments in consideration of
the noncompetition and nonsolicitation agreements discussed below.
Noncompetition and Nonsolicitation Agreements. Mr. Dubnik's executive
agreement provides that, during the noncompete period defined below, Mr.
Dubnik may not solicit or attempt to induce any of our employees, officers or
consultants, or any employees, officers or consultants of our subsidiaries, to
leave our employ. Mr. Dubnik may also not attempt to induce any of our
clients,
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suppliers, licensees or other business relations to cease doing business with
us, nor in any other way interfere with our relationships with our employees,
clients, suppliers, licensees and other business relations. In addition,
pursuant to Mr. Dubnik's executive agreement, during the noncompete period,
Mr. Dubnik may not participate in any business engaged in the provision of
telecommunications services in any of the covered states. As used in Mr.
Dubnik's executive agreement, the noncompete period means the period
commencing on July 8, 1998 and continuing until the later of July 8, 2002 the
second anniversary of the date of termination of his employment. However, the
noncompete period shall end if at any time we cease to pay Mr. Dubnik his base
salary and medical benefits in existence at the time of termination reduced by
any salary or benefits Mr. Dubnik receives as a result of other employment. As
used in Mr. Dubnik's executive agreement, covered state means:
. Connecticut, Delaware, Illinois, Indiana, Maine, Massachusetts,
Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode
Island and Vermont;
. any market for which, as of the date of termination of employment, we
have a business plan which has been approved by the Board of Directors;
and
. any state in which we have taken substantial steps in preparing a
business plan, to be approved by the board of directors within a limited
period of time, to conduct business.
Kevin S. Dickens Executive Agreement
In July 1998, in connection with Kevin S. Dickens' purchase of Class B
Units of Choice One Communications L.L.C., we entered into an executive
purchase agreement with Mr. Dickens, which is substantially similar to Mr.
Dubnik's executive agreement except that the Choice One Communications L.L.C.
securities purchased by Mr. Dickens pursuant to his executive agreement as
well as any securities distributed from Choice One Communications L.L.C.
securities, are subject to vesting over a four-year period, with 20% vesting
on the date of grant and 20% vesting on each of the first four anniversaries
thereof. We will cease vesting and none of Mr. Dickens' executive securities
will vest after the date on which Mr. Dickens's employment with us and our
subsidiaries terminates for any reason. However, if we terminate his
employment without cause or Mr. Dickens terminates for good reason, his
securities will continue to vest until the next anniversary thereof and
vesting will continue such that at least 50% of his securities become vested
so long as he commits no covenant breach.
Ajay Sabherwal Executive Agreement
In August 1999, in connection with his purchase of Class B Units of Choice
One Communications L.L.C., Mr. Sabherwal entered into an executive purchase
agreement containing terms substantially similar to those contained in Mr.
Dickens' executive agreement.
Mae Squier-Dow Executive Agreement
In July 1998, in connection with her purchase of Class B Units of Choice
One Communications L.L.C., Ms. Squier-Dow entered into an executive purchase
agreement containing terms substantially similar to those contained in Mr.
Dickens' executive agreement.
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Philip Yawman Executive Agreement
In July 1998, in connection with his purchase of Class B units of Choice
One Communications L.L.C., Mr. Yawman entered into an executive purchase
agreement containing terms substantially similar to those contained in Mr.
Dickens' executive agreement.
Executive Agreements Entered into by Other Management Members
Each of Robert Bailey, Joseph Calzone, Paul Cissel, Linda Chapman, James
Currie, Michael D'Angelo, Scott Deverell, Elizabeth Ellis, Nancy Farrell,
David Fitts, Pamela Huber-Hauck, Daniel Iles, Robert Merrill, Kenneth
Okolowicz, Michelle Paroda, Eric Peterson, Joseph Schaal, Kim Robert Scovill,
Carla Vaccaro and John Zimmer has entered into an executive purchase agreement
in a form substantially similar to Mr. Dickens' executive agreement, except
with respect to the following terms:
Vesting. Pursuant to these agreements, the Choice One Communications L.L.C.
securities purchased by a management member as well as any of our securities
distributed from Choice One Communications L.L.C. securities are subject to
vesting over a four-year period, with 25% vesting on each of the first four
anniversaries of the grant date. We will accelerate vesting by one year upon
the consummation of our initial public offering, 100% in the event of the
management member's death or disability, and 100% upon a sale of Choice One
where at least 50% of the consideration for such sale is cash or marketable
securities. We will cease vesting and unvested executive securities will not
vest after the date on which the management member's employment with us and
our subsidiaries terminates for any reason.
Repurchase of Securities. If the management member's employment is
terminated for any reason, the agreements provide that Choice One
Communications L.L.C. and Choice One or their respective assignees will have
the right to repurchase all unvested executive securities at the lesser of
fair market value and original cost, provided that the aggregate repurchase
price for the securities will not be less than the original cost of the
securities repurchased.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transaction and Purchase Agreements
In July 1998, each of the following entities and individuals, known as the
investor members, and each of the management members entered into a
transaction agreement and related agreements pursuant to which they committed
to purchase an aggregate of approximately $62.1 million in ownership interests
of Choice One Communications L.L.C.:
. Morgan Stanley Capital Partners III, L.P., Morgan Stanley Capital
Investors, L.P., and MSCP III 982 Investors, L.P., collectively referred
to as MSDWCP invested approximately $41.7 million or 67.2%;
. Fleet Venture Resources, Inc., Fleet Equity Partners VI, L.P., Chisholm
Partners III, L.P. and Kennedy Plaza Partners, collectively referred to
as the Fleet Entities invested $10.0 million or 16.1%;
. Waller-Sutton Media Partners, L.P. invested $5.0 million or 8.0%;
. First Union Capital Partners invested $1.0 million or 1.6%;
. General Electric Capital invested $1.0 million or 1.6%; and
. Royce J. Holland invested $250,000 or 0.4%.
Each of the investor members has entered into an investor purchase
agreement and made a capital contribution to Choice One Communications L.L.C.,
which then issued Class A Units to each investor member as consideration for
the member's capital contribution.
In addition, the management members have purchased an ownership interest in
Choice One Communications L.L.C. Each of the management members has entered
into a purchase agreement and made a capital contribution to Choice One
Communications L.L.C., which then issued Class B Units to each management
member as consideration for the Member's capital contribution.
On June 30, 1999, the members of Choice One Communications L.L.C. entered
into an amendment to the transaction agreement. This amendment increases the
aggregate amount of capital contributions committed by some of the investor
members, including certain new members, by approximately $71.3 million to a
total capital commitment of $133.4 million. In addition, each of the investor
members entered into or amended its purchase agreement to reflect its pro rata
portion of such $71.3 commitment to Choice One Communications L.L.C. The
additional approximately $71.3 million commitments terminate upon completion
of this offering. In consideration for this commitment, the equity allocation
to investor members will vary based on the length of time during which they
are committed to make or make available the additional equity commitments
through April 2000. If the commitments terminate, then the total capital
committed to Choice One Communications L.L.C. would be approximately $62.1
million. Upon liquidation of the Choice One Communications L.L.C., the
membership interests will convert into our common stock.
Certain provisions of the transaction agreement will continue in effect
following completion of this offering, including the following:
. an agreement among the investor members and management members to vote
their shares:
(i) for the election to the Board of a specified number of designees of
Morgan Stanley, reducing as Morgan Stanley's ownership declines; one
designee of each Fleet and Waller-Sutton,
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until the designating party's ownership falls below a specified threshold;
our chief executive officer; and at least one outside director, and
(ii) to ensure the composition of the executive committee and pricing
committee are as described above, so long as, in the case of a designee to
such committee of an investor member, the investor member is entitled to
designate at least one director to the board. See "Management--Election of
Directors";
. so long as Morgan Stanley's ownership is above a specified level, Morgan
Stanley will have the right to select our lead manager for capital
markets activities and financial adviser for advisory assignments;
. business plans and budgets will continue to be subject to board approval
pursuant to specified procedures; and
. all members will be required to sell their shares in any sale of the
company approved by the Board.
Limited Liability Company Operating Agreement
In July 1998, the investor members and the management members, collectively
known as the LLC members, entered into a limited liability company agreement
which relates to the management of Choice One Communications L.L.C.
Upon consummation of this offering, Choice One Communications L.L.C. will
dissolve and distribute its assets, which consist almost entirely of our
stock, to each of the LLC members in accordance with the agreement. The LLC
agreement provides that the equity allocation between the investor members,
which own all the Class A Units of Choice One Communications L.L.C., and the
management members, which own all the Class B Units of Choice One
Communications L.L.C., will range from 95.0%/5.0% to 68.1%/31.9% based upon
the initial public offering price of our common stock. The management members
will receive the full 31.9% allocation if the value of the common stock
distributable to the investor members based on the initial public offering
price exceeds certain hurdle rate thresholds specified in the LLC agreement
for the return on the equity invested by the investor members. However, the
maximum amount allocable to the management members would be reduced to not
less than % based on the amount of committed investor member equity undrawn
and the length of time of such equity commitment. Based on an assumed initial
public offering price of $14.00, the mid point of the range set forth on the
cover page hereto, and assuming no drawdowns on the additional equity
commitments with an initial public offering occurring before March 1, 2000,
the allocation would be 30.5% to the management members and 69.5% to the
investor members.
Registration Rights Agreement
We are a party to a registration rights agreement dated as of July 8, 1998
with the investor members and the management members of Choice One
Communications L.L.C. This agreement requires us to register our securities
held by the LLC members, subject to specified conditions and limitations, and
will continue in effect after this offering. Upon consummation of this
offering, holders of a majority of the equity held by investor members are
entitled to demand three registrations on Form S-1 and unlimited registrations
on Form S-3. After one registration of this kind has been effected, holders of
a majority of the equity held by management members may demand one
registration on Form S-3. After one registration has been effected, investor
members holding 20% of the outstanding registrable securities, or two out of
the three largest investor holders can demand three registrations on
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Form S-1, minus any Form S-1 registration effected at the demand of a majority
of investor members, and unlimited registrations on Form S-3. In addition, all
LLC members are entitled to include their shares on primary or secondary
registered public offerings of our securities. Subject to limitations, we are
required to bear all registration expenses, including the cost of no more than
one independent legal counsel for all selling holders of registrable shares
and other expenses in connection with these registrations, other than
underwriting discounts and commissions, and must provide appropriate
indemnification to the LLC members.
Transactions with Affiliates
On August 19, 1999, we loaned $186,000 to Ajay Sabherwal, our Senior Vice
President, Finance and Chief Financial Officer. This loan bears interest at a
rate of 5.96%. Mr. Sabherwal will repay the loan in five annual installments,
the first of which was made on August 31, 1999. The loan is secured by a
pledge from Mr. Sabherwal of 186,336 Class B Units of Choice One
Communications L.L.C. owned by Mr. Sabherwal and all after acquired Class B
Units.
We have elected not to be governed by Section 203 of the Delaware General
Corporation Law. Section 203 prohibits a publicly-held Delaware corporation
from engaging in a business combination involving an interested stockholder or
its affiliates for a period of three years after the date of the transaction
in which the person became an interested stockholder. See "Description of
Capital Stock--Certificate of Incorporation, By-Laws and Statutory Provisions
Affecting Stockholders."
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Prior to this offering, our outstanding equity securities consisted of
common stock held by Choice One Communications L.L.C. In addition, we have
reserved common stock for issuance under options granted under the 1998
Employee Stock Option Plan. The following table sets forth information
regarding the beneficial ownership of our outstanding common stock, after
giving effect to the LLC dissolution, allocation of equity among LLC members,
assuming an initial public offering price of $14.00 per share and as adjusted
for this offering, by: (i) each of our directors and the executive officers,
(ii) all directors and executive officers as a group and (iii) each owner of
more than 5% of our equity securities, referred to as the 5% owners. Except as
set forth below, the business address of each stockholder, officer or director
listed below is c/o Choice One Communications Inc., 100 Chestnut Street,
Rochester, New York 14604.
<TABLE>
<CAPTION>
Shares Shares
Beneficially Owned Beneficially Owned
Prior to Offering After Offering(2)
------------------ ------------------
Name and Address of Beneficial Owner(1) Number Percent Number Percent
- --------------------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Directors and Executive Officers
Steve M. Dubnik (3)(4).................. 2,193,323 9.36% 2,193,323 7.17%
Kevin S. Dickens (3)(5)................. 1,096,659 4.68 1,096,659 3.59
Ajay Sabherwal(3)....................... 438,668 1.87 438,668 1.43
Mae Squier-Dow (3)...................... 1,096,659 4.68 1,096,659 3.59
Philip Yawman (3)(6).................... 657,998 2.81 657,998 2.15
John B. Ehrenkranz (7).................. -- -- -- --
Bruce M. Hernandez (8).................. -- -- -- --
Michael M. Janson (9)................... -- -- -- --
Robert M. Van Degna (10)................ -- -- -- --
All directors and executive officers as
a group (24 persons)................... 7,051,542 30.1 7,051,542 23.1
5% Owners
MSDWCP Entities (11).................... 10,361,534 44.2 10,361,534 33.9
Fleet Entities (12)..................... 2,481,805 10.6 2,481,805 8.1
Waller-Sutton Media Partners, L.P.
(13)................................... 1,240,902 5.3 1,240,902 4.1
</TABLE>
- --------
* Denotes less than one percent.
(1) The persons named in the table have sole voting and dispositive power
with respect to all shares of our common stock shown as beneficially
owned by them, subject to the information contained in the notes to the
table and to community property laws, where applicable.
(2) Assumes no exercise of U.S. underwriter's over-allotment option and does
not give effect to purchases, if any, by such persons in the equity
offering.
(3) The shares of common stock owned by Mr. Dubnik, Mr. Dickens, Ms. Squier-
Dow and Mr. Yawman are subject to vesting, with 20% of such shares of
common stock vested on July 8, 1998, and an additional 20% vesting on
each of July 8, 1999, 2000, 2001 and 2002. The shares of common stock
owned by Mr. Sabherwal are subject to vesting, with 20% of such shares
vested on August 19, 1999, and an additional 20% vesting on each of
August 19, 2000, 2001, 2002 and 2003. The shares of common stock owned by
other management members vest 25% on each of the first four anniversaries
of that management member's grant date.
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(4) Includes 706,254 shares of common stock held by the Dubnik Family Limited
Partnership, of which Mr. Dubnik is sole general partner. Mr. Dubnik
disclaims any beneficial ownership of these shares of common stock.
(5) Includes 353,126 shares of common stock held by the Dickens Family
Limited Partnership, of which Mr. Dickens is sole general partner. Mr.
Dickens disclaims any beneficial ownership of these shares of common
stock.
(6) Includes 548,330 shares of common stock held by P.H.Y. Associates, L.P.
of which Mr. Yawman is the sole stockholder of the sole general partner.
Mr. Yawman disclaims any beneficial ownership of these shares of common
stock.
(7) Mr. Ehrenkranz is a principal of Morgan Stanley & Co. Incorporated and of
Morgan Stanley Capital Partners III, Inc., the corporate general partner
of each of the MSDWCP Entities. Mr. Ehrenkranz's ownership does not
include options to purchase 10,000 shares of common stock to be granted
after the offering at a price equal to the initial public offering price
and such options will be fully vested and immediately exercisable.
(8) Mr. Hernandez is Chief Executive Officer of Waller-Sutton Media, L.L.C.,
general partner of Waller Sutton Media Partners, L.P. Mr. Hernandez's
ownership does not include options to purchase 10,000 shares of common
stock to be granted after the offering at a price equal to the initial
public offering price and such options will be fully vested and
immediately exercisable.
(9) Mr. Janson is a managing director of Morgan Stanley & Co. Incorporated
and a director of Morgan Stanley Capital Partners III, Inc., the
corporate general partner of each of the MSDWCP Entities. Mr. Janson's
ownership does not include options to purchase 10,000 shares of common
stock to be granted after the offering at a price equal to the initial
public offering price and such options will be fully vested and
immediately exercisable.
(10) Mr. Van Degna is Chairman & Chief Executive Officer of Fleet Growth
Resources II, Inc., the general partner of Fleet Equity Partners VI,
L.P., Chairman and CEO of Silverado III Inc., the general partner of
Silverado III, LP, the general partner of Chisholm Partners III LP;
Chairman and CEO of Fleet Venture Resources, Inc. and a general partner
of Kennedy Plaza Partners. Mr. Van Degna's ownership does not include
options to purchase 10,000 shares of common stock to be granted after the
offering at a price equal to the initial public offering price and such
options will be fully vested and immediately exercisable.
(11) These LLC units are owned by Morgan Stanley Capital Partners III, L.P.
and related private equity funds, and Morgan Stanley Dean Witter Capital
Partners IV, L.P. and related a private equity fund. Their address is c/o
Morgan Stanley Dean Witter Capital Partners, 1221 Avenue of the Americas,
New York, New York 10020.
(12) These LLC units are owned by Fleet Equity Partners VI, L.P., Fleet
Venture Resources, Inc., Chisholm Partners III, L.P. and Kennedy Plaza
Partners. Their address is c/o Fleet Equity Partners, 50 Kennedy Plaza,
12th Floor, Providence, Rhode Island, 02903.
(13) These LLC units are owned by Waller-Sutton Media Partners L.P. Its
address is One Rockefeller Plaza, Suite 3300, New York, New York 10020.
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DESCRIPTION OF CAPITAL STOCK
General Matters
Our total authorized capital stock consists of 47,579,876 shares of common
stock, par value $.01 per share and 5,000,000 shares of preferred stock par
value $.01 per share. Upon completion of this offering, 30,575,000 shares of
common stock will be issued and outstanding and no shares of preferred stock
will be issued.
Common Stock
The holders of outstanding shares of our common stock are entitled to
receive dividends out of assets legally available therefor at such time and in
such amounts as the board of directors may from time to time determine subject
to the prior rights of the holders of any preferred stock. The shares of
common stock are not convertible and the holders have no preemptive or
subscription rights to purchase any of our securities. Upon our liquidation,
dissolution or winding up, the holders of common stock are entitled to
receive, pro rata, our assets which are legally available for distribution,
after payment of all debts and other liabilities and subject to the rights of
any holders of preferred stock. Each outstanding share of common stock is
entitled to one vote on all matters submitted to a vote of stockholders. There
is no cumulative voting.
We have applied to have our common stock approved for listing on the Nasdaq
National Market under the symbol "CWON."
Preferred Stock
Our board of directors may, without further action by our stockholders,
from time to time, issue shares of preferred stock. In addition, the board
may, at the time of issuance, determine the rights, preferences and
limitations of each series of preferred stock. Satisfaction of any dividend
preferences of outstanding shares of preferred stock would reduce the amount
of funds available for the payment of dividends on shares of common stock.
Holders of shares of preferred stock may be entitled to receive a preference
payment in the event of any liquidation, dissolution or winding-up of Choice
One before any payment is made to the holders of shares of common stock. Under
some circumstances, the issuances of shares of preferred stock may make a
merger, tender offer or proxy contest or the assumption of control by a holder
of a large block of our securities or the removal of incumbent management more
difficult. Upon the vote of a majority of the directors then in office, our
board of directors, without stockholder approval, may issue shares of
preferred stock with voting and conversion rights which could adversely affect
the holders of shares of common stock. Prior to the date Morgan Stanley owns
less than 17.5% of our outstanding stock or has given its consent, the board
may not issue preferred stock in connection with a shareholder rights plan
without Morgan Stanley's written approval. After that date, our board may
issue preferred stock in connection with a shareholder rights plan without the
consent of our stockholders. Upon completion of this offering, there will be
no shares of preferred stock outstanding, and we have no present intention to
issue any shares of preferred stock.
Certificate of Incorporation, By-laws and Statutory Provisions Affecting
Stockholders
Our Certificate of Incorporation provides for the board of directors to be
divided into three classes, as nearly equal in number as possible, serving
staggered terms. Approximately one-third of the board of directors will be
elected each year. See "Management." Prior to the date Morgan Stanley
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owns less than 17.5% of our outstanding stock or has given its consent, our
directors may be removed with or without cause. After the date, our directors
may only be removed for cause. Accordingly, the provision for a classified
board could prevent a party who acquires control of a majority of the
outstanding voting stock following that date from obtaining control of the
board of directors until the second annual stockholders meeting following the
date the acquiror obtains the controlling stock interest. The classified board
provision could have the effect of discouraging a potential acquiror from
making a tender offer or otherwise attempting to obtain control of us without
obtaining the approval of our board of directors and could increase the
likelihood that incumbent directors will retain their positions.
Our by-laws provide that, in accordance with our certificate of
incorporation, the initial number of directors will be seven. The number of
directors may be fixed from time to time pursuant to resolution adopted by a
majority of the board, but will not be less than the total number of directors
designated by parties to the transaction agreement. See "Management." The
majority vote of the remaining directors is required to fill vacancies on the
board and to establish committees of the board, fill committee memberships and
adopt, rescind or amend resolutions which establish policies with respect to
the categories of matters that must be presented to our board, or a committee
of our board, prior to taking action.
Our certificate of incorporation provides that after the date Morgan
Stanley owns less than 17.5% of our outstanding stock or has given its
consent, stockholder action can be taken in lieu of a meeting only by
unanimous written consent and that, except as otherwise required by law,
special meetings of the stockholders can only be called pursuant to a
resolution adopted by a majority of the board of directors or by our chairman
of the board.
Our by-laws, following the date Morgan Stanley owns less than 17.5% of our
outstanding stock or has given its consent, establish advance notice and other
procedures for stockholder proposals to be brought before an annual meeting of
our stockholders, including proposed nominations of persons for election to
the board of directors. Stockholders at an annual meeting may only consider
proposals or nominations specified in the notice of meeting or brought before
the meeting by or at the direction of the board of directors or by a
stockholder who was a stockholder of record on the record date for the
meeting, who is entitled to vote at the meeting and who has given to our
Secretary timely written notice, in proper form, of the stockholder's
intention to bring that business before the meeting. Although our by-laws do
not give the board of directors the power to approve or disapprove stockholder
nominations of candidates or proposals regarding other business to be
conducted at a special or annual meeting, our by-laws may have the effect of
precluding the conduct of particular types of business at a meeting if the
proper procedures are not followed or may discourage or defer a potential
acquiror from conducting a solicitation of proxies to elect its own slate of
directors or otherwise attempting to obtain control of Choice One.
Our certificate of incorporation also contains a fair price provision that
after the date Morgan Stanley owns less than 17.5% of our outstanding stock or
has given its consent, applies to certain business combination transactions
involving any person or group that is or has announced or publicly disclosed a
plan or intention to become the beneficial owner of at least 10% of our
outstanding voting stock, other than Morgan Stanley, which we refer to as an
interested stockholder. This fair price provision requires the affirmative
vote of the holders of at least 66 2/3% of the voting stock, excluding stock
owned by the interested stockholder, to approve such business combination
transactions between the interested stockholder and us or our subsidiaries, or
approve any agreement or other arrangement providing for such business
combination transactions, including:
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. any merger or consolidation;
. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition or other arrangement with or for the benefit of the
interested stockholder involving our assets or the assets of our
subsidiaries having a fair market value of $10.0 million or more or
constituting more than 5% of the value of the entity in question;
. the adoption of any plan or proposal for our liquidation or dissolution
or any change to or exchange of our capital stock; and
. certain recapitalizations or reclassifications of our securities.
This voting requirement will not apply to certain transactions, including
any transaction involving the payment of consideration to holders of our
outstanding capital stock, in which the following conditions, among others,
are met:
. the consideration to be received by the holders of each class of our
capital stock is at least equal to the greater of:
(i) the highest per share price paid for shares of such class by the
interested stockholder in the two years prior to the proposed business
combination or in the transaction in which it became an interested
stockholder, whichever is higher; or
(ii) the fair market value of the shares of such class on the date of
the announcement of the proposed business combination or the date on which
it became an interested stockholder; and
. the consideration is in the same form and amount as that paid by the
interested stockholder in connection with its acquisition of such class
of capital stock, or any transaction approved by a majority of our
continuing directors, as such term is defined in our certificate of
incorporation.
The above provision could have the effect of delaying or preventing a
change in control in a transaction or series of transactions that did not
satisfy the "fair price" criteria. The "fair price" provisions of our
certificate of incorporation may be amended by the affirmative vote of the
holders of at least 66 2/3% of the voting stock, excluding the interested
stockholder, unless such amendment is unanimously recommended by the board of
directors, a majority of whom are continuing directors.
Our by-laws may be altered or repealed and new by-laws adopted by a
majority of the whole board of directors or by the holders of a majority of
the voting stock.
We have expressly elected at this time not to be governed by Section 203 of
the Delaware General Corporations Law. Section 203 prohibits a publicly held
Delaware corporation from engaging in a business combination with an
interested stockholder, meaning generally a stockholder acquiring 15% or more
of our outstanding voting stock, for a period of three years after the time
the stockholder becomes an interested stockholder unless:
. prior to such time, our board approved the business combination or the
transaction which resulted in the stockholder becoming an interested
stockholder;
. upon consummation of the transaction which resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of our voting outstanding at the time the transaction
commenced; or
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. at or subsequent to such time, the business combination is approved by
our board and authorized by holders of 66 2/3% of our voting stock that
is not owned by the interested stockholder.
Any change in the above Section 203 election must be approved by a majority
vote of our stockholders.
The effect of electing not to be governed by Section 203 is that the
provisions of Delaware law, which may render it more difficult or may
discourage any attempt to acquire Choice One without approval of our board,
are not available to Choice One.
Limitations on Liability and Indemnification of Officers and Directors
Our certificate of incorporation limits the liability of our directors to
the fullest extent permitted by the Delaware General Corporation Law. In
addition, our certificate of incorporation provides that we will indemnify our
directors and officers to the fullest extent permitted by such law. We believe
that these provisions are necessary to attract and retain qualified directors
and officers.
Registration Rights
We are a party to a registration rights agreement dated as of July 8, 1998
with the investor members and the management members of Choice One
Communications L.L.C. See "Certain Relationships and Related Transactions--
Registration Rights Agreement."
Stock Transfer Agent
The transfer agent and registrar for the common stock is
, New York, New York.
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UNITED STATES FEDERAL TAX CONSIDERATIONS
FOR NON-U.S. HOLDERS OF COMMON STOCK
The following is a summary of the material United States federal income and
estate tax consequences of the ownership and disposition of Choice One common
stock applicable to non-U.S. holders, as defined below, of such common stock.
You are a "non-U.S. holder" for United States federal income tax purposes if
you are a beneficial owner of Choice One common stock and are any of the
following:
. A nonresident alien individual as to the United States
. A corporation, or other entity treated as a corporation under the United
States Internal Revenue Code of 1986 and the Treasury Regulations
thereunder, that is not created or organized under the laws of the
United States or of any state
. A partnership or other entity treated as a partnership under the United
States Internal Revenue Code of 1986 and the Treasury Regulations
thereunder, that is not created or organized under the laws of the
United States or of any state
. An estate that is not subject to United States federal income tax on a
net income basis in respect of income or gain on the common stock
. A trust if either its administration is not subject to the primary
supervision of a United States court or with respect to which no United
States persons, as defined in the United States Internal Revenue Code of
1986, have authority to control all substantial decisions of the trust.
If you are an individual who is not a United States citizen, you should be
aware that the rules for determining whether you are a nonresident alien
individual as to the United States, and thus subject to United States federal
income and estate taxation as described below, or a resident alien individual,
and thus subject to United States federal income and estate taxation in the
same manner as a United States citizen, are highly complex. You may be a
resident alien individual as to the United States for United States federal
income tax purposes for any year if any of the following apply:
. You are a lawful permanent resident of the United States at any time
during the year
. You have elected to be treated as a resident alien individual under the
provisions of the United States Internal Revenue Code of 1986
. You are physically present in the United States for at least 31 days
during the year and a number of other conditions are satisfied.
You should consult your own tax advisors regarding your status as a non-
U.S. holder of our common stock.
This discussion does not consider the specific facts and circumstances that
may be relevant to a particular holder in light of such holder's personal
investment or tax position. In addition, it does not address the treatment of
holders of our common stock under the laws of any state, local or non-United
States taxing jurisdiction.
This discussion is based on the federal tax laws of the United States,
including the Internal Revenue Code of 1986, the treasury regulations
promulgated thereunder, rulings and pronouncements of the United States
Internal Revenue Service and judicial decisions now in effect, all of which
are subject to change at any time. Any of these changes may be applied
retroactively in a manner that
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could cause the tax consequences to vary substantially from the consequences
described below, possibly having an adverse effect on a beneficial owner of
our common stock.
You are urged to consult with your own tax advisors with regard to the
application of the federal income and estate tax laws to your particular
situation, as well as the applicability and effect of any state, local or non-
United States tax laws to which you may be subject.
Dividends
If you are a non-U.S. holder of our common stock, dividends paid to you are
subject to withholding of United States federal income tax at a 30% rate or at
a lower rate if so specified in an applicable income tax treaty. If, however,
the dividends you receive are effectively connected with the conduct of a
trade or business in the United States by you or by a partnership that holds
the common stock and of which you are a partner (and the dividends are
attributable to a permanent establishment that is maintained by you or the
partnership in the United States, if this further requirement must be met
under the terms of an applicable income tax treaty as a condition for
subjecting you to United States federal income taxation on a net income basis
on such dividends), then such "effectively connected" dividends generally are
not subject to withholding tax, provided that you satisfy a number of
certification requirements. Instead, such effectively connected dividends are
taxed on a net income basis at the same graduated rates applicable to United
States citizens and resident alien individuals and United States corporations.
In general, you will not be considered to be engaged in a trade or business in
the United States solely as a result of your ownership of Choice One common
stock.
Effectively connected dividends received by a non-U.S. holder that is a
corporation may, in some circumstances, be subject to an additional "branch
profits tax" at a 30% rate or at a lower rate if so specified in an applicable
income tax treaty.
Under currently effective United States treasury regulations, dividends
paid to an address in a foreign country are presumed to be paid to a resident
of that country, unless the payor has actual knowledge to the contrary, for
purposes of the 30% withholding tax discussed above. Under current
interpretations of these United States treasury regulations, this presumption
that dividends paid to an address in a foreign country are paid to a resident
of that country, unless the payor has actual knowledge to the contrary, also
applies for purposes of determining whether a lower rate of withholding tax
applies under an applicable income tax treaty.
Under newly issued United States treasury regulations, which will generally
apply to dividends paid after December 31, 2000 which we refer to as the final
withholding regulations, if you claim the benefit of a lower rate of
withholding tax under an applicable income tax treaty, you must satisfy a
number of certification requirements. In addition, in the case of our common
stock held by a foreign partnership, the certification requirements generally
will apply to the partners of the partnership, and the partnership itself will
have to provide some information, including a United States taxpayer
identification number. The final withholding regulations also provide look-
through rules for tiered partnerships.
If you are eligible for a reduced rate of United States withholding tax
under an applicable income tax treaty, you may obtain a refund of any excess
amounts withheld by filing a refund claim with the Internal Revenue Service.
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Gain on Disposition of Common Stock
If you are a non-U.S. holder, you generally will not be subject to United
States federal income tax on any gain recognized on a sale or other
disposition of our common stock unless:
. The gain is effectively connected with the conduct of a trade or
business in the United States by you or by a partnership that holds the
common stock and of which you are a partner, and the gain is
attributable to a permanent establishment maintained by you or the
partnership in the United States, if this further requirement must be
met under the terms of an applicable income tax treaty as a condition
for subjecting you to United States federal income taxation on a net
income basis on gain from the sale or other disposition of the common
stock;
. You are an individual and you or a partnership of which you are a
partner holds the common stock as a capital asset, and you are present
in the United States for 183 or more days during the year of the sale or
other disposition and several other conditions are satisfied;
. You are an individual who is a former citizen or long-term resident
alien of the United States and are subject to tax pursuant to the
provisions of the United States federal income tax laws applicable to
United States expatriates; or
. Choice One is or has been a "United States real property holding
corporation" for United States federal income tax purposes and you held,
directly or indirectly, at any time during the five-year period ending
on the date of the sale or other disposition, more than 5% of our total
outstanding common stock of Choice One, and you are not eligible for any
exemption under an applicable income tax treaty.
We have not been, are not and do not anticipate becoming a "United States
real property holding corporation" for United States federal income tax
purposes.
Effectively connected gains are taxed on a net income basis at the same
graduated rates applicable to United States citizens and resident alien
individuals and United States corporations. Effectively connected gains
recognized by a non-U.S. holder that is a corporation may, in some
circumstances, be subject to an additional "branch profits tax" at a 30% rate
or at a lower rate if so specified in an applicable income tax treaty.
Federal Estate Taxes
Choice One common stock owned by an individual non-U.S. holder at the time
of death will be included in the holder's gross estate for United States
federal estate tax purposes and thus may be subject to United States federal
estate tax, at graduated rates of up to 55%, unless an applicable estate tax
treaty provides otherwise.
Information Reporting and Backup Withholding Tax
In general, United States information reporting requirements and backup
withholding tax will not apply to dividends paid to you if you are either:
. Subject to the 30% withholding tax discussed above
or
. Not subject to the 30% withholding tax because an applicable income tax
treaty reduces or eliminates the withholding tax
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although dividend payments to you will be reported to the Internal Revenue
Service for purposes of the withholding tax. See "--Dividends." If you do not
meet either of these requirements for exemption and you fail to provide
necessary information, including your United States taxpayer identification
number, or otherwise establish your status as an "exempt recipient," you may
be subject to backup withholding of United States federal income tax at a rate
of 31% on dividends paid to you with respect to your Choice One common stock.
Under current law, we may generally treat dividends paid to a payee with an
address outside the United States as exempt from backup withholding tax and
information reporting requirements unless we have actual knowledge that the
payee is a United States person. However, under the final withholding
regulations, dividends paid after December 31, 2000 will generally be subject
to backup withholding and information reporting unless a number of
certification requirements are met. See "--Dividends" for the rules applicable
to foreign partnerships under the final withholding regulations.
United States information reporting requirements and backup withholding tax
generally will not apply to a payment of the proceeds of a sale or other
disposition of our common stock made outside the United States through an
office outside the United States of a non-U.S. broker. However, United States
information reporting requirements, but not backup withholding tax, will apply
to a payment of the proceeds of a sale or other disposition of common stock
made outside the United States through an office outside the United States of
a broker that:
. Is a United States person
. Is a non-United States person who derives 50% or more of its gross
income for a specified period preceding the year of the sale or other
disposition from the conduct of a trade or business in the United States
. Is a "controlled foreign corporation" as to the United States for United
States federal income tax purposes
or
. With respect to payments made after December 31, 2000, is a foreign
partnership, if at any time during its tax year:
. one or more of its partners are United States persons, as defined in
applicable treasury regulations, who in the aggregate hold more than 50%
of the income or capital interests in the partnership
or
. the foreign partnership is engaged in the conduct of a trade or business
in the United States
unless that broker has documentary evidence in its records that the holder or
beneficial owner of the common stock disposed of is a non-U.S. holder (and the
broker has no actual knowledge to the contrary), or the payee otherwise
establishes its entitlement to an exemption.
Payment of the proceeds of a sale or other disposition of our common stock
through a United States office of a broker is subject to both United States
information reporting requirements and backup withholding tax at the rate of
31% unless the non-U.S. holder certifies as to its non-U.S. status under
penalties of perjury or otherwise establishes its entitlement to an exemption.
Backup withholding is not an additional tax. A non-U.S. holder generally
may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing a refund claim with the Internal Revenue Service.
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SHARES ELIGIBLE FOR FUTURE SALE
If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, in the public market
following this offering, the market price of our common stock could decline.
These sales also might make it more difficult for us to sell equity or equity-
related securities in the future at a time and price that we deem appropriate.
Upon completion of this offering, we will have outstanding an aggregate of
29,868,039 shares of our common stock, assuming no exercise of the
underwriters' over-allotment option and no exercise of outstanding options or
warrants. Of these shares, all of the shares sold in this offering will be
freely tradeable without restriction or further registration under the
Securities Act, unless such shares are purchased by "affiliates" as that term
is defined in Rule 144 under the Securities Act. This leaves 22,723,039 shares
eligible for sale in the public market as follows:
<TABLE>
<CAPTION>
Number of
Shares Date
--------- ----
<S> <C>
22,010,203 After 180 days from the date of this
prospectus (subject, in some cases,
to volume limitations).
712,836 At various times after 180 days from
the date of this prospectus.
</TABLE>
Rule 144
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this prospectus, a person who has beneficially owned shares of our
common stock for at least one year would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of:
. 1% of the number of shares of our common stock then outstanding, which
will equal approximately 298,680 shares immediately after this offering;
or
. the average weekly trading volume of our common stock on the Nasdaq
National Market during the four calendar weeks preceding the filing of a
notice on Form 144 with respect to that sale.
Sales under Rule 144 are also subject to manner of sale provisions and
notice requirements and to the availability of current public information
about us.
Rule 144(k)
Under Rule 144(k), a person who is not deemed to have been one of our
affiliates at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years,
including the holding period of any prior owner other than an affiliate, is
entitled to sell those shares without complying with the manner of sale,
public information, volume limitation or notice provisions of Rule 144.
Registration Rights
Upon completion of this offering, holders of 22,723,039 shares of our
common stock will have the right to demand registration under the Securities
Act of 1933 at our expense of all or a portion of the shares of common stock
they own. See "Certain Relationships and Related Transactions--Registration
Rights Agreement."
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Lock-Up Agreements
All of our officers, directors and stockholders have entered into lock-up
agreements under which they agreed not to transfer or dispose of, directly or
indirectly, any shares of our common stock or any securities convertible into
or exercisable or exchangeable for shares of our common stock, for a period of
180 days after the date of this prospectus without the prior written consent
of Morgan Stanley & Co. Incorporated on behalf of the underwriters, subject to
limited exceptions. For more information, see "Underwriters."
Rule 701
In general, under Rule 701 of the Securities Act as currently in effect,
any of our employees, consultants or advisors who purchases shares of our
common stock from us in connection with a compensatory stock or option plan or
other written agreement is eligible to resell those shares 90 days after the
effective date of this offering in reliance on Rule 144, but without
compliance with some of the restrictions, including the holding period,
contained in Rule 144.
Following this offering, we intend to file a registration statement on Form
S-8 under the Securities Act covering approximately 1,060,441 shares of common
stock issued or issuable upon the exercise of stock options, subject to
outstanding options or reserved for issuance under the 1999 Stock Plan.
Accordingly, shares registered under such registration statement will, subject
to Rule 144 provisions applicable to affiliates, be available for sale in the
open market, except to the extent that such shares are subject to vesting
restrictions or the contractual restrictions described above. See
"Management--Stock Plans."
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UNDERWRITERS
We intend to offer our common stock in the United States through a number
of U.S. underwriters as well as elsewhere through international managers.
Under the terms and subject to the conditions of the underwriting agreement
dated the date of this prospectus, the U.S. underwriters named below, for whom
Morgan Stanley & Co. Incorporated, Lehman Brothers Inc., Warburg Dillon Read
LLC, First Union Securities, Inc. and CIBC World Markets are acting as U.S.
representatives, and the international underwriters named below, for whom
Morgan Stanley & Co. International Limited, Lehman Brothers International
(Europe), UBS AG, acting through its division Warburg Dillon Read, First Union
Securities, Inc. and CIBC World Markets are acting as international
representatives, have severally agreed to purchase, and we have severally
agreed to sell to them the respective number of shares of our common stock set
forth opposite the names of the underwriters below:
<TABLE>
<CAPTION>
Number of
Name Shares
---- ---------
<S> <C>
U.S. underwriters:
Morgan Stanley & Co. Incorporated................................
Lehman Brothers Inc..............................................
Warburg Dillon Read LLC..........................................
First Union Securities, Inc......................................
CIBC World Markets...............................................
Subtotal....................................................... 5,716,000
---------
International underwriters:
Morgan Stanley & Co. International Limited.......................
Lehman Brothers International (Europe)...........................
UBS AG, acting through its division Warburg Dillon Read..........
First Union Securities, Inc......................................
CIBC World Markets...............................................
Subtotal....................................................... 1,429,000
---------
Total........................................................ 7,145,000
=========
</TABLE>
The U.S. underwriters and the international underwriters, and the U.S.
representatives and the international representatives, are collectively
referred to as the underwriters and the representatives, respectively. The
underwriting agreement provides that the obligations of the several
underwriters to pay for and accept delivery of the shares of our common stock
offered hereby are subject to the approval of specified legal matters by their
counsel and to other conditions. The underwriters are obligated to purchase
all of the shares of our common stock except those covered by the U.S.
underwriters' over-allotment option described below if any are purchased.
The underwriters initially propose to offer part of the shares directly to
the public at the public offering price set forth on the cover page of this
prospectus. The underwriters may also offer the shares to securities dealers
at a price that represents a concession not in excess of $ a share under the
public offering price. Any underwriter may allow and dealers may allow, a
concession not in excess of $ a share to other underwriters or to securities
dealers. After the initial offering of the shares, the offering price and
other selling terms may from time to time be changed by the representatives.
We have 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 1,071,750
additional shares at the public offering price set forth on the cover page of
this prospectus, less underwriting discounts and commissions. The U.S.
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underwriters may exercise this option solely for the purpose of covering over-
allotments, if any, made in connection with the offering of the shares offered
pursuant to this prospectus. To the extent this option is exercised, each U.S.
underwriter will become obligated, subject to specified conditions, to
purchase about the same percentage of additional shares as the number set
forth next to the U.S. underwriter's name in the preceding table bears to the
total number of shares 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 for this offering would be $ , the total
underwriters' discounts and commissions would be $ and total proceeds to
Choice One would be $ .
The underwriters have informed us that they do not intend sales to
discretionary accounts to exceed five percent of the total number of shares
offered by them.
At our request, the underwriters will reserve up to 357,250 shares offered
hereby for sale at the initial public offering price to certain of our
employees and other persons, generally in the United States. The number of
shares available for sale to the general public will be reduced to the extent
these individuals purchase the 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 in this prospectus.
We have applied for listing of our common stock on the Nasdaq National
Market under the symbol "CWON."
We estimate that expenses of the offering will total $1,000,000.
Each of Choice One and our directors, executive officers and current
stockholders 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 transaction described above is to be settled
by delivery of shares of common stock or other securities, in cash or
otherwise; or
. file a registration statement, in the case of Choice One, other than a
registration statement on Form S-8 covering shares of common stock
subject to outstanding options or options to be issued under our stock
option plans
The restrictions described in the previous paragraph do not apply to some
circumstances, including:
. the sale of the shares to the underwriters;
. the issuance by Choice One of shares of common stock upon the exercise
of an option or warrant or the conversion of a security outstanding on
the date of this prospectus of which the underwriters have been advised
in writing; or
. transactions by any person other than Choice One relating to shares of
common stock or other securities acquired in open market or other
transactions after the completion of the offering.
99
<PAGE>
In order to facilitate the offering, the underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
shares of common stock. Specifically, the underwriters may agree to sell, or
allot, more shares than the shares of our common stock we have agreed to sell
to them. This over-allotment would create a short position in our common stock
for the underwriters' account. To cover any 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 the common stock in the offering, if the syndicate repurchases
previously distributed common stock in transactions to cover syndicate short
positions, in stabilization transactions or otherwise. The underwriters have
reserved the right to reclaim selling concessions in order to encourage
underwriters and dealers to distribute the common stock for investment, rather
than for short-term profit taking. Increasing the proportion of the offering
held for investment may reduce the supply of common stock available for short-
term trading. 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.
From time to time, some of the underwriters have provided, and may continue
to provide, investment banking and financial advisory services to us. In
addition, First Union Investors, Inc., an affiliate of First Union Securities,
Inc., one of the underwriters, is the administrative agent and a lender under
our credit facility and CIBC Inc., an affiliate of CIBC World Markets, one of
the underwriters, is the documentation agent and a lender under our credit
facility.
Because it is expected that more than 10% of the net proceeds of the
offering may be paid to affiliates of the underwriters, the offering is being
conducted in accordance with Rule 2710(c)(8) of the Conduct Rules of the
National Association of Securities Dealers, Inc. (the "NASD"). The rules of
the NASD provide that no NASD member shall participate in such an offering
unless the initial public offering price of the common stock is no higher than
that recommended by a qualified independent underwriter as defined by the
NASD. Lehman Brothers Inc. has agreed to serve in that capacity in connection
with the offering and has performed due diligence investigations and reviewed
and participated in the preparation of this prospectus. Lehman Brothers Inc.
will not receive compensation in connection with its services as qualified
independent underwriter.
Upon consummation of this offering, affiliates of Morgan Stanley & Co.
Incorporated, First Union Securities, Inc. and CIBC World Markets will be
shareholders of the Company and affiliates of Morgan Stanley & Co.
Incorporated have representatives on the Company's board of directors. See
"Management," "Certain Relationships and Related Transactions" and "Security
Ownership of Certain Beneficial Owners and Management."
We have agreed with the underwriters to indemnify each other against a
variety of liabilities, including liabilities under the Securities Act of
1933.
We are offering to sell shares of common stock and seeking offers to buy
shares of common stock only in jurisdictions where offers and sales are
permitted. 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 the
United States.
100
<PAGE>
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 Choice One and the underwriters. Among the factors to be considered in
determining the initial public offering price will be the future prospects of
Choice One and its industry in general, sales, earnings and other financial
and operating information of Choice One in recent periods, and the price-
earnings ratios, price-sales ratios, market prices of securities and other
financial and operating information of companies engaged in activities similar
to those of Choice One. 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.
101
<PAGE>
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed
upon for us by our counsel, Nixon Peabody LLP, Rochester, New York. Various
regulatory matters in connection with this offering are being passed upon for
us by Swidler Berlin Shereff Friedman, LLP, Washington, D.C. Various legal
matters in connection with this offering will be passed upon for the
underwriters by Davis Polk & Wardwell, New York, New York.
EXPERTS
The audited consolidated financial statements of Choice One Communications
Inc. included in this prospectus and elsewhere in the registration statement
have been audited by Arthur Andersen LLP, independent public accountants, as
indicated in their report with respect thereto, and are included herein in
reliance upon the authority of said firm as experts in giving said report.
The financial statements of Atlantic Connections, Inc. and Atlantic
Connections, Ltd. at December 31, 1997 and for the year then ended and at
August 31, 1998 and for the eight months then ended and the consolidated
financial statements of Atlantic Connections, L.L.C. at December 31, 1998 and
for the period from July 24, 1998 (date of inception) to December 31, 1998,
appearing in this prospectus and registration statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their reports thereon
appearing elsewhere herein. The financial statements referred to above are
included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We have not previously been subject to the reporting requirements of the
Securities Exchange Act of 1934. We have filed with the SEC a registration
statement on Form S-1 under the Securities Act with respect to the offer and
sale of common stock pursuant to this prospectus. This prospectus, filed as a
part of the Registration Statement, does not contain all of the information
set forth in the Registration Statement or the exhibits and schedules thereto
as permitted by the rules and regulations of the SEC. Statements made in this
prospectus concerning the contents of any contract, agreement or other
document filed as an exhibit to the Registration Statement are summaries of
the terms of such contracts, agreements or documents and are not necessarily
complete. Reference is made to each such exhibit for a more complete
description of the matters involved and such statements shall be deemed
qualified in their entirety by such reference. The Registration Statement and
the exhibits and schedules thereto filed with the SEC may be inspected,
without charge, and copies may be obtained at prescribed rates, at the public
reference facility maintained by the SEC at Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the regional offices of the SEC located at
7 World Trade Center, 13th Floor, New York, New York 10048 and CitiCorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60621-2511. The
Registration Statement and other information filed by us with the SEC are also
available at the SEC's World Wide Web site on the internet at
http://www.sec.gov.
As a result of the offering, Choice One and its stockholders will become
subject to the proxy solicitation rules, annual and periodic reporting
requirements, restrictions of stock purchases and sales by affiliates and
other requirements of the Exchange Act. We will furnish our stockholders with
annual reports containing audited financial statements certified by
independent auditors and quarterly reports containing unaudited financial
statements for the first three quarters of each fiscal year.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
Report of Independent Public Accountants................................. F-2
Consolidated Balance Sheets as of September 30, 1999 and December 31,
1998.................................................................... F-3
Consolidated Statements of Operations for the nine months ended September
30, 1999 and the period from inception (June 2, 1998) through December
31, 1998................................................................ F-4
Consolidated Statements of Stockholder's Equity for the nine months ended
September 30, 1999 and the period from inception (June 2, 1998) through
December 31, 1998....................................................... F-5
Consolidated Statements of Cash Flows for the nine months ended September
30, 1999 and the period from inception (June 2, 1998) through December
31, 1998................................................................ F-6
Notes to Consolidated Financial Statements............................... F-7
ATLANTIC CONNECTIONS, LLC
Report of Independent Auditors........................................... F-19
Consolidated Balance Sheets as of December 31, 1998 and September 30,
1999 (Unaudited)........................................................ F-20
Consolidated Statements of Operations for the period from July 24, 1998
(date of inception) to December 31, 1998 and for the nine months ended
September 30, 1999 (Unaudited).......................................... F-21
Consolidated Statements of Cash Flows for the period from July 24, 1998
(date of inception) to December 31, 1998 and for the nine months ended
September 30, 1999 (Unaudited).......................................... F-23
Notes to Consolidated Financial Statements............................... F-24
ATLANTIC CONNECTIONS, INC.
Report of Independent Auditors........................................... F-30
Balance Sheets as of December 31, 1997 and August 31, 1998............... F-31
Statements of Operations for the year ended December 31, 1997 and the
eight months ended August 31, 1998...................................... F-32
Statements of Stockholders' Deficit for the year ended December 31, 1997
and the eight months ended August 31, 1998.............................. F-33
Statements of Cash Flows for the year ended December 31, 1997 and the
eight months ended August 31, 1998...................................... F-34
Notes to Financial Statements............................................ F-35
ATLANTIC CONNECTIONS, LTD.
Report of Independent Auditors........................................... F-38
Balance Sheets as of December 31, 1997 and August 31, 1998............... F-39
Statements of Operations for the year ended December 31, 1997 and the
eight months ended August 31, 1998...................................... F-40
Statements of Stockholders' Deficit for the year ended December 31, 1997
and the eight months ended August 31, 1998.............................. F-41
Statements of Cash Flows for the year ended December 31, 1997 and the
eight months ended August 31, 1998...................................... F-42
Notes to Financial Statements............................................ F-43
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Choice One Communications Inc.:
We have audited the accompanying consolidated balance sheets of Choice One
Communications Inc. (a Delaware corporation) and subsidiaries as of September
30, 1999 and December 31, 1998 and the related consolidated statements of
operations, stockholder's equity, and cash flows for the nine months ended
September 30, 1999 and the period from inception (June 2, 1998) through
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Choice One Communications
Inc. and subsidiaries as of September 30, 1999 and December 31, 1998, and the
results of their operations and their cash flows for the nine months ended
September 30, 1999 and the period from inception (June 2, 1998) through
December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
Rochester, New York
November 8, 1999
F-2
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of September 30, 1999 and December 31, 1998
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....................... $ 3 $ 1,491
Accounts receivable, net........................ 685 -
Prepaid expenses and other current assets....... 490 144
-------- -------
Total current assets.......................... 1,178 1,635
-------- -------
PROPERTY, PLANT AND EQUIPMENT:
Property, plant, and equipment.................. 54,189 21,146
Less--Accumulated depreciation.................. (3,409) (36)
-------- -------
Total property, plant, and equipment.......... 50,780 21,110
-------- -------
OTHER ASSETS...................................... 2,222 1,727
-------- -------
Total assets.................................. $ 54,180 $24,472
======== =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Bank overdraft.................................. $ 1,344 $ -
Accounts payable................................ 2,023 1,630
Accrued expenses................................ 7,393 9,712
-------- -------
Total current liabilities..................... 10,760 11,342
-------- -------
LONG-TERM DEBT.................................... 5,000 -
-------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $0.01 par value, 134,604 and
63,000 shares authorized, 62,105 and 60,000
shares issued and outstanding as of September
30, 1999 and December 31, 1998, respectively... 1 1
Additional paid-in capital...................... 68,886 18,692
Deferred compensation........................... (6,025) (778)
Accumulated deficit............................. (24,442) (4,785)
-------- -------
Total stockholder's equity.................... 38,420 13,130
-------- -------
Total liabilities and stockholder's equity.... $ 54,180 $24,472
======== =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these balance sheets.
F-3
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended September 30, 1999 and
the Period from Inception (June 2, 1998) through December 31, 1998
(Amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Period from inception
Nine Months Ended (June 2, 1998) through
September 30, December 31,
1999 1998
----------------- ----------------------
<S> <C> <C>
Revenues.............................. $ 947 $ -
Operating Expenses:
Network costs....................... 2,577 -
Selling, general and
administrative..................... 12,826 4,684
Noncash deferred compensation....... 996 87
Depreciation and amortization....... 3,373 36
-------- -------
Total operating expenses.......... 19,772 4,807
-------- -------
Loss from operations............ (18,825) (4,807)
-------- -------
Interest Income/(Expense):
Interest income..................... 66 138
Interest expense.................... (898) (116)
-------- -------
Interest income/(expense), net.... (832) 22
-------- -------
Net Loss.............................. $(19,657) $(4,785)
======== =======
Net Loss Per Share, basic and
diluted.............................. $(316.51) $(94.17)
======== =======
Weighted Average Number of Shares
Outstanding,
basic and diluted.................... 62,105 50,812
======== =======
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-4
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
For the Nine Months Ended September 30, 1999 and
the Period from Inception (June 2, 1998) through December 31, 1998
(Amounts in thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional
------------- Paid-In Deferred Accumulated
Shares Amount Capital Compensation Deficit Total
------ ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, June 2, 1998
(date of inception).... - $- $ - $ - $ - $ -
Issuance of common
stock................ 60,000 1 17,827 - - 17,828
Deferred
compensation......... - - 865 (865) - -
Amortization of
deferred
compensation......... - - - 87 - 87
Net loss and
comprehensive loss... - - - - (4,785) (4,785)
------ --- ------- ------- -------- --------
BALANCE, December 31,
1998................... 60,000 1 18,692 (778) (4,785) 13,130
Capital contributions
and
issuance of common
stock................ 2,105 - 43,951 - - 43,951
Deferred
compensation......... - - 6,243 (6,243) - -
Amortization of
deferred
compensation......... - - - 996 - 996
Net loss and
comprehensive loss... - - - - (19,657) (19,657)
------ --- ------- ------- -------- --------
BALANCE, September 30,
1999................... 62,105 $ 1 $68,886 $(6,025) $(24,442) $ 38,420
====== === ======= ======= ======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-5
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1999 and the Period from Inception
(June 2, 1998) through December 31, 1998
(Amounts in thousands)
<TABLE>
<CAPTION>
Period from
inception
(June 2, 1998)
Nine Months Ended through
September 30, December 31,
1999 1998
----------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss...................................... $(19,657) $ (4,785)
Adjustments to reconcile net loss to net
cash (used in) provided by operating
activities:
Depreciation and amortization............. 3,373 36
Amortization of deferred financing costs.. 161 51
Deferred compensation..................... 996 87
Changes in assets and liabilities:
Accounts receivable, net................ (685) -
Prepaid expenses and other current
assets................................. (346) (144)
Accounts payable........................ (286) 1,630
Accrued expenses........................ (2,319) 9,712
-------- --------
Net cash (used in) provided by
operating activities................. (18,763) 6,587
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures.......................... (33,043) (21,146)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt................... 33,000 -
Principal payments of long-term debt.......... (28,000) -
Proceeds from capital contributions and
issuance of common stock..................... 43,951 17,828
Payments of financing costs................... (656) (1,778)
Bank overdraft................................ 2,023 -
-------- --------
Net cash provided by financing
activities........................... 50,318 16,050
-------- --------
NET (DECREASE) INCREASE IN CASH AND CASH
EQUIVALENTS (1,488) 1,491
CASH AND CASH EQUIVALENTS, beginning of
period....................................... 1,491 -
-------- --------
CASH AND CASH EQUIVALENTS, end of period...... $ 3 $ 1,491
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Interest paid............................... $ 736 $ 65
======== ========
Income taxes paid........................... $ 10 $ -
======== ========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these financial statements.
F-6
<PAGE>
CHOICE ONE COMMUNICATIONS INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999 and December 31, 1998
(All amounts in thousands, except share and per share data)
1. Description of Business
Choice One Communications Inc. and subsidiaries ("Choice One" or the
"Company"), an integrated communications provider ("ICP"), was incorporated
under the laws of the State of Delaware on June 2, 1998. Choice One is a
wholly owned subsidiary of Choice One Communications L.L.C. ("Choice One
LLC").
The Company is an ICP offering broadband data and voice telecommunications
services primarily to small and medium-sized businesses in second and third
tier markets in the northeastern United States. The Company's services include
high speed data and Internet service, principally utilizing digital subscriber
line or DSL technology, local exchange service and long distance service. The
Company seeks to become the leading ICP in each target market by offering a
single source for competitively priced, high quality, customized
telecommunications services.
2. Summary of Significant Accounting Policies
Development Stage Company
Until February 1999, the Company was in the development stage, as defined
by Statement of Financial Accounting Standards ("SFAS") No. 7, Accounting and
Reporting by Development Stage Enterprises. The Company's principal activities
included developing its business plans; procuring governmental authorizations;
raising capital; hiring management and other key personnel; developing,
acquiring and integrating operations support systems ("OSS") and other back
office systems; acquiring equipment and facilities; and negotiating
interconnection agreements. Accordingly, the Company has incurred operating
losses and operating cash flow deficits.
The Company's success will be affected by the problems, expenses, and
delays encountered in connection with the formation of any new business, and
the competitive environment in which the Company intends to operate. The
Company's performance will further be affected by its ability to access
potential markets; secure financing or raise additional capital; implement
expanded interconnection and collocation with incumbent local exchange carrier
("ILEC") facilities; lease adequate trunking capacity from ILECs or
competitive local exchange carriers; purchase and install switches in
additional markets; implement its anticipated services; manage future growth;
implement efficient OSS and other back office systems; develop a sufficient
customer base; attract, retain and motivate qualified personnel; develop
strategic alliances or investments needed to complement existing business; and
achieve acceptable profits on long distance business due to high levels of
competition, declining prices and low customer retention rates. The Company's
networks and the provisions of telecommunications services are subject to
significant regulation at the federal, state and local levels. Delays in
receiving required regulatory approvals or the enactment of new adverse
regulation or regulatory requirements may have a material adverse effect upon
the Company. The telecommunications industry is subject to rapid and
significant changes in technology and is highly competitive. Although
management believes that the Company will be able to successfully mitigate
these risks, there can be no assurance that the Company will be able to do so
or that the Company will ever operate profitably.
F-7
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Expenses are expected to exceed revenues in each location in which the
Company offers service until a sufficient customer base is established. It is
anticipated that obtaining a sufficient customer base will take a number of
years, and positive cash flows from operations are not expected in the near
future.
Principles of Consolidation
The consolidated financial statements include all accounts of Choice One
and all of its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Cash and Cash Equivalents
Cash and cash equivalents are highly liquid investments with original
maturities of three months or less. The cost of the cash equivalents
approximates fair market value.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost and include office
furniture and equipment, computer equipment and software, switch equipment,
construction-in-progress of switches and leasehold improvements. For financial
reporting purposes, depreciation and amortization are computed using the
straight-line method over the following estimated useful lives:
<TABLE>
<S> <C>
Computer equipment and software................................. 3-5 years
Switch equipment................................................ 10 years
Office furniture and equipment.................................. 3-5 years
</TABLE>
Leasehold improvements are amortized using the straight-line method over
the shorter of the estimated life of the asset or the related lease term.
Betterments, renewals and extraordinary repairs that extend the life of the
asset are capitalized; other repairs and maintenance are expensed as incurred.
Other Assets
Other assets primarily consist of deferred financing costs. Deferred
financing costs are amortized on a straight-line basis, which approximates the
effective interest rate method, over the life of the related debt (eight
years).
The Company reviews its long-lived assets in accordance with SFAS No. 121,
Accounting for the Impairment of Long-lived Assets and Long-lived Assets to be
Disposed of, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. If such
events or changes in circumstances are present, a loss is recognized if the
carrying value of the asset is in excess of the sum of the undiscounted cash
flows expected to result from the use of the asset and its eventual
disposition. An impairment loss is measured as the amount by which the
carrying amount of the asset exceeds the fair value of the asset.
Income Taxes
Income taxes are accounted for in accordance with SFAS No. 109, Accounting
for Income Taxes. SFAS No. 109 requires an asset and liability method of
accounting for income taxes. Under the asset
F-8
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and liability method, deferred tax assets and liabilities are recognized for
temporary differences between financial statement and income tax bases of
assets and liabilities. Deferred tax assets and liabilities are measured using
the tax rates and laws that are currently in effect. In addition, the amount
of any future tax benefits is reduced by a valuation allowance until it is
more likely than not that such benefits will be realized.
Deferred Compensation
The Company recognizes deferred compensation for the difference between the
estimated fair market value of the Company's stock and the price at which
units of Choice One LLC have been sold to management employees since the
formation of the Company or the exercise price of certain options granted. The
deferred compensation charge is amortized over the period in which the
employee earns the right to sell the stock at market value or, in the case of
options, over the vesting period.
Derivatives
The Company has limited involvement with derivative financial instruments
and does not use them for trading purposes. The Company uses derivative
instruments solely to reduce the financial impact of interest rate changes on
its Credit Agreement (See Note 6). The Company's Credit Agreement requires the
Company to enter into hedging agreements with respect to interest rate
exposure with an aggregate notional principal amount equal to 50.0 percent of
the outstanding borrowings once at least 50.0 percent of the aggregate
commitment has been utilized.
The differentials to be received or paid under these agreements will be
recognized as an adjustment to interest expense in the Consolidated Statements
of Operations. Gains and losses on termination of interest rate swaps will be
recognized when terminated in conjunction with the retirement of the
associated debt. At September 30, 1999 and December 31, 1998, the Company was
not a party to any derivative financial instrument agreements.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133
establishes accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities. SFAS No.
133 requires that every derivative be recorded as either an asset or liability
in the balance sheet and measured at its fair value. SFAS No. 133 also
requires that changes in the derivative's fair market value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and
losses to offset related results on the hedged item in the income statement,
and requires that a company formally document, designate, and assess the
effectiveness of transactions that receive hedge accounting. The Company is
required to adopt SFAS No. 133, as amended by SFAS No. 137, Accounting for
Derivative Instruments and Hedging Activities--Deferral of the Effective Date
of FASB Statement No. 133, an amendment of FASB Statement No. 133, on a
prospective basis for interim periods and fiscal years beginning January 1,
2001. The Company has not yet determined the effect of adopting SFAS No. 133.
Fair Value of Financial Instruments
The Fair Value of Financial Instruments are accounted for in accordance
with SFAS No. 107, Disclosures about Fair Value of Financial Instruments. SFAS
No. 107 requires that the Company
F-9
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
disclose the fair value of its financial instruments for which it is
practicable to estimate fair value. The carrying amounts of cash and cash
equivalents, prepaid expenses and other current assets, accounts payable and
amounts included in accruals meeting the definition of a financial instrument
approximate fair value because of the short-term maturity of these
instruments. Based on borrowing rates currently available to the Company for
loans with similar terms and maturities, long-term debt approximates fair
value.
Recognition of the Cost of Start-up Activities
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position No. 98-5, Reporting on the Costs of Start-up
Activities ("SOP 98-5"). SOP 98-5 requires start-up activities and
organization costs to be expensed as incurred and start-up costs to be
capitalized prior to the adoption of SOP 98-5 be reported as the cumulative
effect of a change in accounting principle. The Company expensed all such
costs as incurred in accordance with SOP 98-5.
Net Loss per Common Share
The Company calculates net loss per share under the provisions of the SFAS
No. 128, Earnings per Share. SFAS No. 128 requires dual presentation of basic
and diluted earnings per share ("EPS") on the face of the income statement.
Basic EPS is based on the weighted average number of common shares
outstanding. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or
converted into common stock. No reconciliation of basic and diluted is needed,
as the effect of dilutive securities would be anti-dilutive. The Company had
options to purchase 1,061 and 560 shares outstanding at September 30, 1999 and
December 31, 1998, respectively, that were not included in the calculation of
diluted loss per share because the effect would be antidilutive.
Comprehensive Income
During 1998 the Company adopted SFAS No. 130, "Reporting Comprehensive
Income," which requires comprehensive income and its components to be
presented in the financial statements. During 1998 and 1999, comprehensive
loss was the same as net loss.
Revenue Recognition
Revenue is recognized in the month in which service is provided. Deferred
revenue represents advance billings for services not yet provided. Such
revenue is deferred and recognized in the month in which service is provided.
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 these assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-10
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Property, Plant and Equipment
Property, plant and equipment, at cost consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Computer equipment and software................ $ 9,420 $ 6,088
Switch equipment............................... 31,280 7,080
Office furniture and equipment................. 2,290 217
Leasehold improvements......................... 839 150
Construction in progress....................... 10,360 7,611
------- -------
$54,189 $21,146
======= =======
</TABLE>
Depreciation expense for the nine months ended September 30, 1999 and for
the period from inception (June 2, 1998) through December 31, 1998 amounted to
$3,373 and $36, respectively. No depreciation expense was recorded in 1998 on
the switch equipment costs. Depreciation of the switch equipment began once
the switches were placed in service in 1999. Construction in progress costs
relate to projects to acquire, install and make operational switch equipment.
Direct labor costs incurred in connection with the installation and
construction of certain equipment is capitalized until such equipment becomes
operational. These costs are then amortized over the life of the related
asset. Capitalized labor included in property, plant and equipment was $3,275
and $617 at September 30, 1999 and December 31, 1998, respectively.
4. Other Assets
Other assets consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Deferred financing costs....................... $2,284 $1,628
Other assets................................... 150 150
------ ------
2,434 1,778
Less--Accumulated amortization................. (212) (51)
------ ------
$2,222 $1,727
====== ======
</TABLE>
5. Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
------------- ------------
<S> <C> <C>
Accrued switch equipment costs............... $3,127 $4,611
Accrued network costs........................ 1,742 -
Accrued payroll and employee related
benefits.................................... 1,413 936
Accrued software costs....................... 755 3,760
Other expenses............................... 356 405
------ ------
$7,393 $9,712
====== ======
</TABLE>
F-11
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
6. Long-Term Debt
In October 1998, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, entered into an agreement for a revolving credit
facility with three financial institutions (the "Credit Agreement"). The
Credit Agreement, which terminates on September 30, 2006, provides the Company
with a maximum credit facility of $60.0 million. The Credit Agreement will be
used to finance capital expenditures and to provide working capital.
Borrowings under the Credit Agreement are secured by substantially all of the
assets of the Company and bear interest, at the Company's option, at either
the LIBOR rate or the base rate (the higher of the prime interest rate or the
federal funds rate plus 0.5 percent), with additional percentage points added
based on the Company's leverage ratio, as defined in the Credit Agreement. In
addition, the Company is also required to pay a commitment fee of 0.375
percent to 0.50 percent per annum based on the Company's leverage ratio.
As of September 30, 1999, $5.0 million principal amount of borrowings was
outstanding under the Credit Agreement, which bore interest at a weighted
average rate of 10.75 percent. The Company had no long-term debt outstanding
as of December 31, 1998.
The Credit Agreement contains certain covenants including maximum debt to
capital ratio, minimum revenue amounts, maximum EBITDA losses, maximum capital
expenditure levels, maximum leverage ratio, maximum fixed charge coverage
ratio and minimum interest coverage ratio, all as defined in the agreement.
The Company was in compliance with all of these covenants and ratios, except
for the minimum revenue covenant, as of September 30, 1999. During November
1999, the Company amended the Credit Agreement to, among other things, modify
the covenants, including the minimum revenue covenant (See Note 12).
The Credit Agreement also requires the Company to enter into hedging
agreements with respect to interest rate exposure with an aggregate notional
principal amount equal to 50 percent of the outstanding borrowings once at
least 50 percent of the aggregate commitment has been utilized.
The aggregate commitment under the Credit Agreement is reduced by 1.25
percent per quarter commencing on December 31, 2001 until September 30, 2002,
by 2.50 percent per quarter commencing on December 31, 2002 until September
30, 2003, by 6.25 percent per quarter commencing on December 31, 2003 until
September 30, 2004, and by 7.50 percent per quarter commencing on December 31,
2004 until termination of the loan on September 30, 2006.
7. Stockholder's Equity
Capitalization
In July 1998, the Investor Members and the Management Members (collectively
the "Members") entered into a Limited Liability Company agreement (the "LLC
agreement") in order to govern the affairs of Choice One LLC, which presently
holds all of the outstanding shares of the Company's Common Stock. Choice One
LLC has two outstanding classes of Units. Class A Units are held by the
Investor Members (95 percent) and Class B Units are held by the Management
Members (5 percent). The rights of the two classes of Units will differ upon,
among other events, the consummation of a Public Offering by the Company.
F-12
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 30, 1999, the Members entered into an agreement amending the LLC
Agreement. The amendment increases the amount of capital contributions
committed by the Members as a whole by approximately $71.3 million to a total
capital commitment of approximately $133.4 million. In addition, the existing
Investor Purchase Agreements were amended such that certain Investor Members
increased their pro rata commitment to Choice One LLC on the same terms as
those included in the previous commitments. These commitments providing for
additional equity contributions expire on January 1, 2001 or upon the
completion of a successful debt or equity offering as defined in the
agreement. If the commitments terminate, the total capital committed to the
LLC would reduce back to an aggregate of approximately $62.1 million.
Choice One LLC has agreed to make contributions as necessary to fund the
Company's expansion into fourteen markets. In order to obtain funds, the
Company submitted proposals to Choice One LLC detailing the funds necessary to
build out the Company's business in these markets. Through September 30, 1999,
Choice One LLC has approved the proposals for fourteen markets. As of
September 30, 1999 and December 31, 1998, Choice One LLC has contributed a
total of approximately $62.1 million and $17.8 million, respectively, to the
Company.
Stock Option Plan
On August 12, 1998, the Company's stockholder approved the 1998 Employee
Stock Option Plan (the "Plan"). Options may be granted under the Plan only to
key employees who do not own Class B Units of Choice One LLC. The persons to
whom options are granted, the number of shares granted to each and the period
over which the options become exercisable are determined by the Employee
Option Plan Administrative Committee. The options granted have a term of ten
years and vest at equal rates over a four-year period. The total number of
shares available in the Plan is 3,000.
The Company accounts for stock based compensation issued to its employees
in accordance with APB Opinion No. 25, Accounting for Stock Issued to
Employees, and has elected to adopt the "disclosure-only" provisions of SFAS
No. 123, Accounting for Stock Based Compensation. Had compensation cost for
the Plan been determined based on the fair value of the options at the grant
dates for awards under the plan consistent with the method prescribed in SFAS
No. 123, the Company's net loss would have increased to the pro forma amount
indicated below for the nine months ended September 30, 1999 and the period
from inception (June 2, 1998) through December 31, 1998.
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
Net loss as reported................................... $(19,657) $(4,785)
Net loss pro forma..................................... $(19,856) $(4,812)
</TABLE>
Net loss per share-basic and diluted:
<TABLE>
<CAPTION>
1999 1998
-------- -------
<S> <C> <C>
As reported............................................ $(316.51) $(94.17)
Pro forma.............................................. $(319.72) $(94.71)
</TABLE>
For purposes of the pro forma disclosure above, the fair value of each
option grant is estimated on the date of the grant using the Black-Scholes
option pricing model and the minimum value method permitted by SFAS No. 123
for entities not publicly traded with the following weighted-average
assumptions used for grants in 1999 and 1998:
F-13
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Dividend yield.................................. 0 percent 0 percent
Risk-free interest rate......................... 5.12 percent 4.99 percent
Expected life................................... 7 years 7 years
</TABLE>
The weighted average grant date fair value of options granted during the
nine months ended September 30, 1999 and the period from inception (June 2,
1998) through December 31, 1998 was $6,706 and $2,013, respectively.
SFAS No. 123 has only been applied to options granted beginning August 12,
1998. As a result, the pro forma compensation expense may not be
representative of that to be expected in future years.
The following is a summary of the activity in the Company's Plan during the
nine months ended September 30, 1999 and the period from inception (June 2,
1998) through December 31, 1998:
<TABLE>
<CAPTION>
September 30, 1999 December 31, 1998
------------------------ -----------------------
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
------ ---------------- ------ ----------------
<S> <C> <C> <C> <C>
Options outstanding,
beginning of period..... 560 $1,000 - $ -
Options granted.......... 732 1,220 560 1,000
Options forfeited........ (231) 1,014 - -
----- ---
Options outstanding, end
of period............... 1,061 1,149 560 1,000
===== ===
</TABLE>
The weighted-average remaining contractual life of options outstanding was
9.3 years, with exercise prices ranging from $1,000 to $1,417, as of September
30, 1999. None of the options granted were exercisable at September 30, 1999
or December 31, 1998. During October 1999, the Company granted options for 258
shares with an exercise price of $2,667 per share.
As the estimated fair market value of the Company's stock exceeded the
exercise price of certain options granted, the Company has recognized total
gross deferred compensation expense of $3,547 and $445 at September 30, 1999
and December 31, 1998, respectively, of which $436 and $45 has been amortized
to expense during the nine months ended September 30, 1999 and the period from
inception (June 2, 1998) through December 31, 1998, respectively. The deferred
compensation is amortized to expense over the vesting period of the options.
The Company's certificate of incorporation provides that it may issue
preferred stock without shareholder approval. Under certain circumstances, as
defined in the certificate of incorporation and by-laws, preferred stock could
be issued by the Company in connection with a shareholder rights plan. The
issuance of preferred stock in connection with a shareholder rights plan could
cause substantial dilution to any person or group that attempts to acquire the
Company on terms not approved in advance by the Company's Board of Directors.
8. Income Taxes
The Company had approximately $18,475 and $150 of net operating loss
carryforwards for federal income tax purposes at September 30, 1999 and
December 31, 1998, respectively. The net operating loss carryforwards will
expire in the years 2019 and 2018, respectively, if not previously
F-14
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
utilized. The Company has recorded a valuation allowance equal to the net
deferred tax assets at September 30, 1999 and December 31, 1998, due to the
uncertainty of future operating results. The valuation allowance will be
reduced at such time as management believes it is more likely than not that
the net deferred tax assets will be realized. Any reductions in the valuation
allowance will reduce future income tax provisions.
The deferred tax asset is comprised of the following at September 30, 1999
and December 31, 1998:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Start-up and other capitalized costs.................... $ 1,646 $ 1,538
Net operating loss carryforwards........................ 6,282 50
Less: valuation allowance............................... (7,928) (1,588)
------- -------
Net deferred tax asset.................................. $ - $ -
======= =======
</TABLE>
Under existing tax law, all operating expenses incurred prior to a company
commencing its principal operations are capitalized and amortized over a 60-
month period for tax purposes.
9. Commitments and Contingencies
Operating Lease Agreements
The Company leases office space and certain other equipment under various
operating leases that expire through 2009. At September 30, 1999, the minimum
aggregate payments under noncancelable leases are as follows for the years
ending September 30:
<TABLE>
<S> <C>
2000........................................... $ 1,655
2001........................................... 1,709
2002........................................... 1,713
2003........................................... 1,682
2004........................................... 1,635
Thereafter..................................... 7,783
-------
$16,177
=======
</TABLE>
Rent expense for the six months ended September 30, 1999 and for the period
from inception (June 2, 1998) through December 31, 1998 was approximately $716
and $186, respectively.
401(k) Plan
The Company provides a defined contribution 401(k) plan to substantially
all of its employees meeting certain service and eligibility requirements. The
Company pays a monthly matching contribution equal to 50 percent of the
employees' contributions up to a maximum of 6 percent of their eligible
compensation. Plan expenses were approximately $121 and $32 during the nine
months ended September 30, 1999 and for the period from inception (June 2,
1998) through December 31, 1998, respectively.
F-15
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Annual Incentive Plan
During 1998, the Company's Board of Directors approved the 1998/99 Bonus
Plan (the "Bonus Plan"). All full-time noncommissioned Choice One employees
are eligible to participate in the Bonus Plan. The total amount included in
operations for these incentive bonuses was approximately $343 and $538 during
the nine months ended September 30, 1999 and for the period from inception
(June 2, 1998) through December 31, 1998, respectively.
Other Agreements
In 1999, the Company entered into a sponsorship agreement with Buffalo
Bills, Inc. Under the sponsorship agreement, the Company obtained certain
marketing and signage rights related to Ralph Wilson Stadium and the Buffalo
Bills, a National Football League team, and became the exclusive
telecommunications provider of Ralph Wilson Stadium during the 1999 through
2003 seasons. The agreement requires the Company to pay a total of $2.4
million during the period from September 30, 1999 through June 30, 2004.
In 1998, the Company entered into a three-year general agreement with
Lucent Technologies, Inc. ("Lucent") establishing terms and conditions for the
purchase of Lucent products, services and licensed materials. The agreement
requires the Company to purchase a minimum of $30.0 million of Lucent
products, services and licensed materials. If the Company fails to purchase
the minimum requirements, an additional price premium is charged.
In 1998, the Company entered into a capacity agreement with Frontier
Communications of the West Inc. from which the Company will purchase dedicated
circuit capacity for the transport of its long distance traffic. The agreement
contains certain minimum circuit term and commitment charges depending on the
specific circuits selected.
In 1998, the Company entered into a service bureau agreement with Saville
Systems Inc. to process the Company's billing records. The agreement contains
minimum monthly transaction fees.
10. Related Parties
The Company is a majority owned subsidiary of Choice One LLC. As of
September 30, 1999, and December 31, 1998, Choice One LLC has made aggregate
capital contributions to the Company of approximately $62.1 million and $17.8
million, respectively. Choice One LLC may continue to make additional capital
contributions to the Company as discussed in Note 7 to these financial
statements, but no such contributions will be required after the Company
consummates an initial public offering of its stock. Certain investors in
Choice One LLC are also employees of the Company. Upon an initial public
offering by the Company, a sale of the Company or liquidation or dissolution
of the Company, Choice One LLC will dissolve and its assets (which are
expected to consist almost entirely of capital stock of the Company) will be
distributed to the institutional investors and employee investors of Choice
One LLC in accordance with an allocation formula calculated immediately prior
to such dissolution. The Company will account for any increase in the
allocation of assets to the employee investors in Choice One LLC in accordance
with generally accepted accounting principles and SEC regulations in effect at
the time of such increase, and this will result in a charge to the Company's
earnings (see Note 12).
F-16
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As the estimated fair market value of the Company has exceeded the price at
which units of Choice One LLC have been sold to management employees since the
formation of the Company, the Company has recognized total gross deferred
compensation of $3,561 and $420 at September 30, 1999 and December 31, 1998,
respectively, of which $560 and $42 has been amortized to expense at September
30, 1999 and December 31, 1998, respectively. The deferred compensation charge
is amortized based upon the period over which the Company has the right to
repurchase the securities (at the lower of fair market value or the price paid
by the employee) in the event the management employee's employment with the
Company is terminated, which expires over a four year period from the date of
issuance.
11. Significant Customer Information
The Company has recorded revenues and expenses from reciprocal compensation
and access agreements with ILECs and inter exchange carriers. Revenues from
two customers (one ILEC and one inter exchange carrier) represented
approximately 19 percent of total revenues during the nine months ended
September 30, 1999.
12. Subsequent Events
Public Stock Offering
The Company will seek to raise approximately $100 million of gross proceeds
in an initial public offering of Common Stock (the "Equity Offering").
The Investor Members and Management Members currently own 95.0 percent and
5.0 percent, respectively, of the ownership interests of Choice One LLC, an
entity that owns substantially all of the Company's outstanding capital stock.
If the Equity Offering is consummated, Choice One LLC will dissolve and its
assets (which consist almost entirely of such capital stock) will be
distributed to the Investor Members and the Management Members in accordance
with the LLC Agreement. The LLC Agreement provides that the Equity Allocation
between the Investor Members and the Management Members will range between
95.0 percent/5.0 percent and 66.7 percent/33.3 percent based upon the
valuation of the Company's Common Stock implied by the Equity Offering. Based
upon the current valuation of the Company's Common Stock implied by the Equity
Offering, excluding the effect of options, the Equity Allocation will be 68.1
percent to the Investor Members and 31.9 percent to the Management Members.
The Management Members will receive the full 31.9% allocation if the value of
the common stock distributable to the Investor Members based on the initial
public offering price exceeds certain hurdle rate thresholds specified in the
LLC Agreement for the return on the equity invested by the Investor Members.
However, the maximum amount allocable to the Management Members could be
reduced based on the amount of committed Investor Member equity undrawn and
the length of time of such equity commitment. Under generally accepted
accounting principles, upon the consummation of the Equity Offering, the
Company will be required to record the increase (based upon the valuation of
the Common Stock implied by the Equity Offering) in the assets of Choice One
LLC allocated to the Management Members as an increase in additional paid-in
capital, a portion of which will be recorded as a noncash, nonrecurring charge
to operating expense and a portion of which will be recorded as a deferred
management ownership allocation charge. The deferred charge will be amortized
over 1999, 2000, 2001 and 2002, which is the period over which the Company has
the right
F-17
<PAGE>
CHOICE ONE COMMUNICATIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
to repurchase the securities (at the lower of fair market value or the price
paid by the employee) in the event the management employee's employment with
the Company is terminated.
Long-Term Debt
In November 1999, the Company, as a guarantor, and the Company's
subsidiaries, as borrowers, amended and restated the Credit Agreement (the
"Amended Agreement"). The Amended Agreement, which terminates on November 3,
2007, provides the Company with a maximum revolving credit facility of $100.0
million and a delayed draw term loan of $50.0 million. The Amended Agreement
will be used to finance the purchase of Atlantic Connections L.L.C., capital
expenditures and to provide working capital. Borrowings under the Amended
Agreement are secured by substantially all of the assets of the Company and
bear interest, at the Company's option, at either the LIBOR rate or the base
rate (the higher of the prime interest rate or the federal funds rate plus 0.5
percent), with additional percentage points added based on the Company's
leverage ratio, as defined in the agreement. In addition, the Company is also
required to pay a commitment fee of 0.75 percent to 1.50 percent per annum
based on the Company's utilization of the Amended Agreement.
The Amended Agreement revised certain covenants including maximum debt to
capital ratio, minimum revenue amounts, maximum EBITDA losses, maximum capital
expenditure levels, minimum ratio of fixed assets to total debt, maximum
leverage ratio, maximum fixed charge coverage ratio, and minimum interest
coverage ratio, all as defined in the Amended Agreement.
The Amended Agreement also requires the Company to enter into hedging
agreements with respect to interest rate exposure with an aggregate notional
principal amount equal to 50 percent of the outstanding borrowings once at
least 50 percent of the aggregate commitment has been utilized.
The aggregate commitment under the Amended Agreement is reduced by 1.25
percent per quarter commencing on December 31, 2002 until September 30, 2003,
by 2.50 percent per quarter commencing on December 31, 2003 until September
30, 2004, by 6.25 percent per quarter commencing on December 31, 2004 until
September 30, 2005, and by 7.50 percent per quarter commencing on December 31,
2005 until termination of the loan on November 3, 2007.
In addition, any unused portion of the term loan commitment will expire on
November 3, 2000.
Acquisition
In November 1999, the Company purchased all of the outstanding units of
Atlantic Connections, L.L.C. ("Atlantic"). The purchase price was
approximately $8.3 million and is subject to adjustment based on Atlantic's
October billed revenue and working capital at October 31, 1999 under the terms
of the Purchase Agreement. In addition, the Purchase Agreement includes an
earn-out provision that will require the Company to pay up to an additional 25
percent of the initial purchase price if certain objectives are met. Those
objectives include sales, access line provisioning and customer retention
targets as well as the retention of certain key employees. The additional
purchase price will be paid approximately one year after the purchase date.
The transaction will be accounted for as a purchase, with the purchase price
allocated based upon the fair value of the assets acquired and liabilities
assumed with any excess reflected as goodwill.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Unitholders
Atlantic Connections, LLC
We have audited the accompanying consolidated balance sheet of Atlantic
Connections, LLC as of December 31, 1998, and the related consolidated
statements of operations, unitholders' equity, and cash flows for the period
from July 24, 1998 (date of inception) to December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Atlantic
Connections, LLC at December 31, 1998, and the results of its operations and
its cash flows for the period from July 24, 1998 (date of inception) to
December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
June 4, 1999, except for
Note 9, as to which the date
is November 3, 1999
F-19
<PAGE>
ATLANTIC CONNECTIONS, LLC
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents......................... $ 100,585 $ 227,485
Accounts receivable, less allowance for doubtful
amounts of $120,357 at December 31, 1998 and
$159,099 at September 30, 1999 (Unaudited)....... 547,937 755,157
Unbilled receivables.............................. 150,872 197,192
Note receivable from former owners................ 186,693 -
Prepaid expenses and other assets................. 7,530 2,500
---------- ----------
Total current assets............................ 993,617 1,182,334
Property and equipment:
Switching equipment, including equipment under
capital leases................................... 549,621 568,417
Computer equipment................................ 16,965 56,770
Office equipment.................................. 38,299 38,497
Vehicles.......................................... 6,025 6,025
---------- ----------
610,910 669,709
Less accumulated depreciation and amortization.... (46,360) (127,080)
---------- ----------
564,550 542,629
Other assets........................................ - 9,775
Intangible assets, net of accumulated amortization
of $168,481 at December 31, 1998 and $545,808 at
September 30, 1999 (Unaudited)..................... 2,927,873 2,550,546
---------- ----------
Total assets.................................... $4,486,040 $4,285,284
========== ==========
Liabilities and unitholders' equity (deficit)
Current liabilities:
Line-of-credit.................................... - $ 200,000
Accounts payable.................................. $ 857,677 1,399,684
Accrued expenses.................................. 126,788 39,431
Current portion of capital lease obligations...... 82,568 66,787
Current portion of long-term borrowings........... 52,263 51,341
---------- ----------
Total current liabilities....................... 1,119,296 1,757,243
Long-term borrowings and capital lease obligations,
less current portions.............................. 3,087,677 3,012,006
Redeemable warrants................................ 66,600 66,600
Unitholders' equity (deficit):
Common units, no par value: 500,000 units
authorized; 71,000 issued and outstanding........ 816,666 816,666
Accumulated deficit............................... (604,199) (1,367,231)
---------- ----------
Total unitholders' equity (deficit)............. 212,467 (550,565)
---------- ----------
Total liabilities and unitholders' equity
(deficit)...................................... $4,486,040 $4,285,284
========== ==========
</TABLE>
See accompanying notes.
F-20
<PAGE>
ATLANTIC CONNECTIONS, LLC
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the period from
July 24, 1998
(date of inception)
to December 31, Nine Months ended
1998 September 30, 1999
------------------- ------------------
(Unaudited)
<S> <C> <C>
Net revenues............................. $2,180,277 $6,239,057
Cost of revenues......................... 1,857,775 4,794,064
---------- ----------
Gross profit............................. 322,502 1,444,993
Operating expenses:
Sales and marketing.................... 90,878 302,140
General and administrative............. 724,274 1,647,427
---------- ----------
815,152 1,949,567
---------- ----------
Loss from operations..................... (492,650) (504,574)
Interest expense......................... 111,549 258,458
---------- ----------
Net loss................................. $ (604,199) $ (763,032)
========== ==========
</TABLE>
See accompanying notes.
F-21
<PAGE>
ATLANTIC CONNECTIONS, LLC
CONSOLIDATED STATEMENTS OF UNITHOLDERS' EQUITY (DEFICIT)
For the period from July 24, 1998 (date of inception)
to December 31, 1998 and the Nine Months ended
September 30, 1999 (Unaudited)
<TABLE>
<CAPTION>
Common Total
--------------- Accumulated Unitholders'
Units Amount Deficit Equity (Deficit)
------ -------- ----------- ----------------
<S> <C> <C> <C> <C>
Issuance of common units for
cash........................... 71,000 $816,666 - $ 816,666
Net loss........................ - - $ (604,199) (604,199)
------ -------- ----------- ---------
Balance at December 31, 1998.... 71,000 816,666 (604,199) 212,467
Net loss (Unaudited)............ - - (763,032) (763,032)
------ -------- ----------- ---------
Balance at September 30, 1999
(Unaudited).................... 71,000 $816,666 $(1,367,231) $(550,565)
====== ======== =========== =========
</TABLE>
See accompanying notes.
F-22
<PAGE>
ATLANTIC CONNECTIONS, LLC
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the period from
July 24, 1998
(date of inception)
to December 31, Nine Months ended
1998 September 30, 1999
------------------- ------------------
(Unaudited)
<S> <C> <C>
Operating activities
Net loss............................... $ (604,199) $(763,032)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization........ 214,841 466,039
Provision for allowance for doubtful
amounts............................. 31,549 60,000
Changes in operating assets and
liabilities:
Accounts receivable................ 36,252 (267,220)
Unbilled receivables............... 5,295 (46,320)
Prepaid expenses and other current
assets............................ 8,525 5,030
Other assets....................... - (9,775)
Accounts payable................... (229,566) 542,007
Accrued expenses................... 61,616 (87,357)
----------- ---------
Net cash used in operating activities.. (475,687) (100,628)
Investing activities
Purchase of property and equipment..... (51,356) (58,800)
Note receivable from former owners..... (186,693) 186,693
Cash paid for acquired assets,
including acquisition costs........... (1,268,393) -
----------- ---------
Net cash (used in) provided by
investing activities.................. (1,506,442) 127,893
Financing activities
Proceeds from sale of units............ 816,666 -
Proceeds of senior notes payable and
redeemable warrants................... 1,500,000 -
Proceeds from line-of-credit........... - 200,000
Payments on long-term debt............. (206,550) (39,296)
Payments on capital lease obligations.. (27,402) (61,069)
----------- ---------
Net cash provided by financing
activities............................ 2,082,714 99,635
----------- ---------
Increase in cash and cash equivalents.. 100,585 126,900
Cash and cash equivalents at the
beginning of period................... - 100,585
----------- ---------
Cash and cash equivalents at the end of
period................................ $ 100,585 $ 227,485
=========== =========
Supplemental Disclosures of Cash Flow
Information
Cash paid for interest................. $ 91,643 $ 260,271
Noncash investing and financing
activities:
Long-term debt issued or assumed in
connection with acquisitions........ 1,754,958 -
Capital lease obligations assumed in
acquisitions........................ 269,986 -
</TABLE>
See accompanying notes.
F-23
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of Business and Organization
Atlantic Connections, LLC (the Company) is a limited liability company
incorporated in the state of Massachusetts on July 24, 1998. The term of the
Company may continue until June 1, 2048 and can be extended prior to the
expiration date. The Company is a local telecommunications carrier with
locations in Portsmouth, NH and Worcester, MA, and is an integrated
communications provider offering local, long distance, data and private line
services to small and medium-sized businesses in the Northeastern United
States.
The liability of each member of the Company is limited to such member's
respective capital contribution.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Atlantic Connections, Ltd. (See Note 3). All
intercompany amounts have been eliminated in consolidation.
Advertising Cost
The Company expenses advertising costs as incurred.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of
three months or less at the date of purchase to be cash equivalents.
Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of risk are cash and cash equivalents and accounts and unbilled
receivables. The risk with respect to cash and cash equivalents is minimized
by the Company's policy of investing in financial instruments with short-term
term maturities issued by highly-rated financial institutions. The risk with
respect to accounts and unbilled receivables is minimized by the large number
of the Company's customers. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations.
Customers are located throughout the New England area.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." Under SFAS 121, the carrying value of long-lived assets are reviewed if
the facts and circumstances suggest they may be impaired. If this review
indicates that the affected assets may not be recoverable, as determined based
upon a projection of undiscounted operating cash flows, the carrying value of
the affected assets would be reduced to fair value.
F-24
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Intangible Assets
Intangible assets result from acquisitions and principally consist of the
excess of the acquisition cost over the fair value of the identifiable
tangible and intangible assets of the businesses acquired, or goodwill, and
amounts attributable to non-compete agreements. Goodwill is amortized on a
straight-line basis over its expected life, seven years. The non-compete
agreements are amortized on a straight-line basis over the term of the
agreement, three years.
2. Significant Accounting Policies
Amortization expense was $168,481 and $377,327 for the period July 24, 1998
to December 31, 1998 and the nine months ended September 30, 1999 (Unaudited),
respectively.
Property and Equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful life of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital
leases amounted to $352,525 at December 31, 1998 and $314,754 at September 30,
1999 (Unaudited).
Depreciation expense was $46,360 and $80,719 for the period July 24, 1998
to December 31, 1998 and the nine months ended September 30, 1999 (Unaudited),
respectively. Amortization of equipment under capital leases is included with
depreciation in the accompanying financial statements.
Revenue Recognition
Revenue is recognized in the month in which the service is provided.
Unbilled Receivables
Unbilled receivables represent services rendered to customers prior to the
balance sheet date but unbilled at that date based on the customer's cycle
date of billing.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
Comprehensive Income
The Company has no elements of comprehensive income (loss) and,
accordingly, comprehensive income (loss) is the same as net income (loss) for
the period from July 24, 1998 to December 31, 1998 and the nine months ended
September 30, 1999.
Interim Financial Information (Unaudited)
The interim financial information at September 30, 1999 and for the nine
months ended September 30, 1999, all of which is unaudited, was prepared by
the Company on a basis consistent
F-25
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
with the audited financial statements. In management's opinion, such
information reflects all adjustments which are of a normal recurring nature
and which are necessary to present fairly the results of the periods
presented.
3. Accrued Expenses
Accrued expenses consist of the following:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Salaries....................................... $ 67,080 $20,598
Professional fees.............................. 36,524 -
Interest....................................... 23,184 18,833
-------- -------
$126,788 $39,431
======== =======
</TABLE>
4. Acquisitions
On September 8, 1998, the Company acquired substantially all of the
business assets and assumed substantially all of the liabilities of Atlantic
Connections, Inc. (ACI) and acquired the stock of Atlantic Connections, Ltd.
(ACL), effective as of September 1, 1998. ACI and ACL were related through
common stockholders and management. The acquisitions were accounted for as
purchases and the results of operations of ACI and ACL are included in the
accompanying consolidated financial statements from the effective date of the
acquisitions.
The total purchase price was approximately $4,443,000, including
acquisition costs, and was paid in cash, notes issued to the former owners and
liabilities assumed. The purchase price was allocated approximately as
follows:
<TABLE>
<S> <C>
Current assets, principally accounts receivable and
unbilled receivables...................................... $ 788,000
Fixed assets............................................... 559,000
Intangibles, including non-compete agreement and goodwill.. 3,096,000
-----------
$ 4,443,000
===========
A reconciliation to cash paid for the acquired assets is as
follows:
Total purchase price....................................... $ 4,443,000
Less current liabilities and long-term debt assumed or
issued.................................................... (3,175,000)
-----------
Cash used to acquire assets................................ $ 1,268,000
===========
</TABLE>
Subsequent to the acquisition, certain post closing adjustments were made
in accordance with the arrangements between the former owners and the Company.
The resulting adjustments resulted in a note receivable due from the former
owners at December 31, 1998 of $186,693.
The pro forma unaudited results of operations for the year ended December
31, 1998, assuming the purchase of ACI and ACL had consummated as of January
1, 1998, follows:
<TABLE>
<S> <C>
Net Revenues............................... $6,473,000
Net Loss................................... (1,568,000)
</TABLE>
F-26
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Borrowings
Long-Term Debt
A summary of the Company's long-term debt, including capital leases, at
December 31, 1998 and September 30, 1999 (Unaudited) is as follows:
<TABLE>
<CAPTION>
1998 1999
---------- ----------
(Unaudited)
<S> <C> <C>
Note payable to former owners, 8% interest;
interest only for the first twenty-four months.
Payments of principal and interest of $5,353 for
months twenty-five through eighty-five. Due in
full October 2005. Secured by substantially all
business assets.................................. $ 241,343 $ 241,343
Note payable to former owners, 8% interest;
interest only for the first twenty-four months.
Principal and interest payments of $16,201 per
month for months twenty-five through eighty-five.
Due in full October 2005. Secured by
substantially all business assets of the
Company.......................................... 713,287 713,287
Note payable to former owners, 8% interest with
monthly principal and interest payments of $8,091
through April 15, 2007. Secured by substantially
all business assets of the Company............... 591,894 552,597
Senior notes payable to venture capital firm; 12%
interest; face amount $1,400,000, due in full
March 31, 2005. Interest due quarterly; quarterly
principal payments of $75,000 begin June 30,
2000............................................. $1,333,400 $1,341,392
Senior note payable to venture capital firm; 12%
interest; convertible into units of the Company
equal to 15% of the fully diluted equity of the
Company; due March 31, 2005...................... 100,000 100,000
Various capital lease obligations; interest rates
ranging from 7% to 9%............................ 242,584 181,515
---------- ----------
3,222,508 3,130,134
Less current portions:
Capital lease obligations......................... (82,568) (66,787)
Long-term borrowings.............................. (52,263) (51,341)
---------- ----------
$3,087,677 $3,012,006
========== ==========
</TABLE>
The senior notes payable to venture capital firm above are senior in
priority to other borrowings of the Company, except those, if any, in
connection with the line-of-credit to a bank described below. The senior notes
payable require the Company to comply with various financial covenants
including maintenance of minimum working capital, minimum capital and
limitations on the ratio of senior indebtedness to capital, as defined. At
December 31, 1998, the Company was not in compliance with certain of the
covenants and the venture capital firm waived the events of noncompliance
through December 31, 1998.
At September 30, 1999, the Company was not in compliance with certain of
the covenants. Such events of non-compliance were cured by the acquisition
described in Note 9.
F-27
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Borrowings
In connection with the senior notes payable, the Company issued a
redeemable warrant exchangeable into 10% of the fully diluted equity of the
Company. The estimated fair value of the redeemable warrant of $66,600 at
September 8, 1998 has been reduced from the face of the senior notes payable.
The resulting discount will be amortized to interest expense over the term of
the senior notes payable. Amortization expense was $7,992 for the nine months
ended September 30, 1999 (Unaudited).
Line-of-Credit
On April 30, 1999, the Company obtained two credit facilities with a bank.
The line-of-credit is a $500,000 facility to support working capital. The
second facility is a $100,000 equipment line-of-credit to acquire equipment.
The unused portion of the facilities expires May 31, 2000, with the working
capital line-of-credit renewable at the Bank's discretion. Interest is at the
prime rate plus 2.0% and is paid monthly in arrears. No amounts were
outstanding under these facilities at December 31, 1998 and $200,000 was
outstanding under these facilities at September 30, 1999 (Unaudited).
Aggregate maturities of long-term debt as of December 31, 1998 for the next
five years are as follows:
<TABLE>
<S> <C>
Years ended December 31:
1999...................................... $ 52,263
2000...................................... 324,294
2001...................................... 543,958
2002...................................... 564,206
2003...................................... 586,136
Thereafter................................ 975,667
----------
$3,046,524
==========
</TABLE>
6. Leases
Future minimum lease payments under noncancelable operating and capital
leases as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- --------
<S> <C> <C>
1999................................................. $35,266 $106,187
2000................................................. 19,230 76,562
2001................................................. 12,205 61,822
2002................................................. - 43,276
2003................................................. - 4,153
------- --------
66,701 292,000
Less amounts representing interest................... - (49,416)
------- --------
$66,701 $242,584
======= ========
</TABLE>
Rent expense was $14,261 and $35,901 in the period from July 24, 1998 to
December 31, 1998 and the nine months ended September 30, 1999 (Unaudited).
F-28
<PAGE>
ATLANTIC CONNECTIONS, LLC
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In June 1999, the Company entered into a five year noncancelable operating
lease for a new office facility. The Company has a one time renewal option for
either a one, three or five year extension. The minimum annual lease payments
are approximately $38,000.
7. Unitholders' Equity
Issuance of Common Units
During the period July 24, 1998 to December 31, 1998, the Company
authorized 500,000 units designated as no par value common units and issued
71,000 units in exchange for $816,666 in cash.
Warrants
In connection with the senior notes payable (see Note 5), the Company
issued a warrant to purchase an equity interest in the Company equivalent to
10% of the fully diluted equity ownership. The warrants are immediately
exercisable and expire September 8, 2008. Up to 5% of the warrants may be
earned back by the Company at the rate of up to 1% for each year the Company
meets or exceeds certain EBITDA targets and for each year the Company makes
principal payments in accordance with the warrant agreement. The warrants are
redeemable by the Company, at the option of the investor, beginning any time
after the sixth year and, accordingly, are classified outside of equity.
At December 31, 1998, the Company has reserved 10,000 units for exercise of
the warrants and 15,000 units for conversion of the convertible senior notes
payable.
8. Income Taxes
Since the Company is a limited liability company, all taxes are paid by the
unitholders of the Company as the Company is treated as a pass-through entity
for federal and state income tax purposes. Accordingly, there is no tax
provision or benefit recorded for the period from July 24, 1998 to December
31, 1998 and the nine months ended September 30, 1999.
9. Subsequent Event
On November 3, 1999, Choice One Communications, Inc. acquired all of the
outstanding units of Atlantic Connections, LLC in an acquisition to be
accounted for as a purchase business combination. The acquisition was
effective from November 1, 1999.
10. Year 2000 Issue (Unaudited)
The Company has completed a significant portion of its assessment of Year
2000 issues with regard to its computer systems and other aspects of its
operations dependent upon automation or computerized operation. The Company
believes that the Year 2000 issue will not pose significant operational
problems for its computer systems or other critically dependent equipment and
that all required modifications or conversions to comply with Year 2000
requirements will be fully completed by the end of 1999. In the opinion of
management, the total costs of addressing the Year 2000 issue will not have a
material impact on the Company's financial position or results of operations.
Notwithstanding the foregoing, the Company is unable to assess at this time
whether unrelated entities with whom the Company conducts business may be
adversely affected by their own Year 2000 issues which could adversely affect
the Company.
F-29
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Atlantic Connections, Inc.
We have audited the accompanying balance sheets of Atlantic Connections,
Inc. as of December 31, 1997 and August 31, 1998, and the related statements
of operations, stockholders' deficit, and cash flows for the year ended
December 31, 1997 and the eight months ended August 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic Connections, Inc.
at December 31, 1997 and August 31, 1998, and the results of its operations
and its cash flows for the year ended December 31, 1997 and the eight months
ended August 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
November 10, 1999
F-30
<PAGE>
ATLANTIC CONNECTIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, August
1997 31, 1998
------------ ---------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, less allowance for doubtful
amounts of $10,000 at December 31, 1997 and $22,802
at August 31, 1998.................................. $ 232,026 $ 265,759
Unbilled receivables................................. 34,394 43,426
Prepaid expenses and other assets.................... 11,720 -
--------- ---------
Total current assets............................... 278,140 309,185
Property and equipment:
Switching equipment, including equipment under
capital leases...................................... 186,732 187,360
Office equipment..................................... - 13,400
--------- ---------
186,732 200,760
Less accumulated depreciation and amortization....... (95,848) (122,950)
--------- ---------
90,884 77,810
--------- ---------
Total assets....................................... $ 369,024 $ 386,995
========= =========
Liabilities and Stockholders' deficit
Current liabilities:
Cash overdraft....................................... $ 143,977 $ 32,183
Accounts payable..................................... 283,165 645,929
Accrued expenses..................................... 21,221 46,926
Current portion of capital lease obligations......... 17,547 5,670
Current portion of note payable to affiliate......... 29,607 29,607
Current portion of long-term borrowings.............. 9,365 3,205
--------- ---------
Total current liabilities.......................... 504,882 763,520
Capital lease obligations.............................. 70,653 77,534
Note payable to affiliate, less current portion........ 177,460 189,460
Long-term borrowings, less current portion............. 115,284 115,284
Stockholders' deficit:
Common stock, no par value: 300 shares authorized,
issued and outstanding.............................. 166,900 166,900
Less: Treasury stock, at cost; 47 shares............. (130,490) (130,490)
Accumulated deficit.................................. (535,665) (795,213)
--------- ---------
Total stockholders' deficit........................ (499,255) (758,803)
--------- ---------
Total liabilities and stockholders' deficit........ $ 369,024 $ 386,995
========= =========
</TABLE>
See accompanying notes.
F-31
<PAGE>
ATLANTIC CONNECTIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues......................................... $2,150,397 $2,028,891
Cost of revenues..................................... 1,613,424 1,781,367
---------- ----------
Gross profit......................................... 536,973 247,524
Operating expenses:
Selling, general and administrative................ 588,690 476,772
---------- ----------
Loss from operations................................. (51,717) (229,248)
Interest expense..................................... 30,160 30,300
---------- ----------
Net loss............................................. $ (81,877) $ (259,548)
========== ==========
</TABLE>
See accompanying notes.
F-32
<PAGE>
ATLANTIC CONNECTIONS, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Year ended December 31, 1997
and the eight months ended August 31, 1998
<TABLE>
<CAPTION>
Common Treasury Total
--------------- ---------------- Accumulated Stockholders'
Shares Amount Shares Amount Deficit Deficit
------ -------- ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 300 $166,900 $(428,669) $(261,769)
Purchase of treasury
stock.................. (47) $(130,490) (130,490)
Dividends paid.......... (25,119) (25,119)
Net loss................ (81,877) (81,877)
--- -------- --- --------- --------- ---------
Balance at December 31,
1997................... 300 166,900 (47) (130,490) (535,665) (499,255)
Net loss................ (259,548) (259,548)
--- -------- --- --------- --------- ---------
Balance at August 31,
1998................... 300 $166,900 (47) $(130,490) $(795,213) $(758,803)
=== ======== === ========= ========= =========
</TABLE>
See accompanying notes.
F-33
<PAGE>
ATLANTIC CONNECTIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Operating activities
Net loss............................................ $(81,877) $(259,548)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation and amortization..................... 30,129 27,102
Provision for allowance for doubtful amounts...... 10,000 12,802
Changes in operating assets and liabilities:
Accounts receivable............................. (91,724) (46,535)
Unbilled receivables............................ (4,986) (9,032)
Prepaid expenses and other assets............... (11,720) 11,720
Accounts payable................................ 50,043 353,607
Accrued expenses................................ 21,221 34,862
-------- ---------
Net cash (used in) provided by operating
activities......................................... 78,914 124,978
Investing activities
Purchase of property and equipment.................. - (14,028)
-------- ---------
Net cash used in investing activities............... - (14,028)
Financing activities
Proceeds of notes payable to affiliate.............. 55,506 12,000
Payments on long-term borrowings.................... (38,715) (6,160)
Dividends paid...................................... (25,119)
Payments on capital lease obligations............... - (4,996)
Proceeds (payments) of cash overdraft............... 87,242 (111,794)
-------- ---------
Net cash (used in) provided by financing
activities......................................... 78,914 (110,950)
Increase in cash and cash equivalents............... - -
Cash and cash equivalents at the beginning of
period............................................. - -
-------- ---------
Cash and cash equivalents at the end of period...... $ - $ -
======== =========
Supplemental Disclosures of Cash Flow Information
Cash paid for interest.............................. $ 20,204 $ 8,586
Noncash investing and financing activities:
Long-term debt issued to purchase treasury stock.. 130,490 -
Capital lease obligations assumed................. 101,074 -
</TABLE>
See accompanying notes.
F-34
<PAGE>
ATLANTIC CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Organization
Atlantic Connections, Inc. (the Company) was incorporated in the state of
Massachusetts on May 31, 1991. The Company is a local telecommunications
carrier located in Worcester, MA and is an integrated communications provider
offering local, long distance, data and private line services to small and
medium-sized businesses in the Northeastern United States.
2. Significant Accounting Policies
Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of risk are cash, accounts receivables and unbilled
receivables. The risk with respect to cash is minimized by the Company's
policy of investing in financial instruments with short-term term maturities
issued by highly-rated financial institutions. The risk with respect to
accounts receivable and unbilled receivables is minimized by the large number
of the Company's customers. The Company performs periodic credit evaluations
of its customers' financial condition and generally does not require
collateral. Credit losses have been within management's expectations.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." Under SFAS 121, the carrying value of long-lived assets are reviewed if
the facts and circumstances suggest they may be impaired. If this review
indicates that the affected assets may not be recoverable, as determined based
upon a projection of undiscounted operating cash flows, the carrying value of
the affected assets would be reduced to fair value.
Property and Equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful lives of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital
leases amounted to $80,859 at December 31, 1997 and $69,448 at August 31,
1998.
Depreciation expense was $30,129 for the year ended December 31, 1997 and
$27,102 for the eight months ended August 31, 1998. Amortization of equipment
under capital leases is included with depreciation in the accompanying
financial statements.
Income Taxes
No provision has been made for federal income taxes as each shareholder is
individually liable for federal income taxes under the provisions of
Subchapter S of the Federal Income Tax Code. The Company determined
Massachusetts state income taxes at the applicable corporate statutory rate
using the liability method as required under the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes." Because
of the Company's net loss position for 1998 and 1997, no state tax provision
was recognized.
Revenue Recognition
Revenue is recognized in the month in which the service is provided.
F-35
<PAGE>
ATLANTIC CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Unbilled Receivables
Unbilled receivables represent services rendered to customers prior to
December 31, 1997 and August 31, 1998 but unbilled at that date based on the
customer's cycle date of billing.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. Related Party
The Company has a note payable to a related party, Atlantic Connections,
Ltd., and relates to advances for working capital and the sharing of certain
costs, such as salaries. The Company and Atlantic Connections, Ltd. are
related through common management and some common stockholders. Total amount
due as of December 31, 1997 and August 31, 1998 is $207,067 and $237,383,
respectively. No amounts have been re-paid and the remaining balance is due in
full September 1, 2000. As of August 31, 1998 amounts representing interest on
the outstanding principal is $18,316.
4. Financing Arrangements
Long-Term Debt
A summary of the Company's long-term debt, including capital leases, at
December 31, 1997 and August 31, 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Note payable to former owner, 8% interest. Payments of
principal and interest of $1,583 per month for 60 months
and due in full by April 15, 2007......................... $124,649 $118,489
Note payable to affiliate, 10.5% interest with monthly
principal and interest payments of $2,062 through
September 1, 2000......................................... 207,067 219,067
Capital lease obligation, 9% interest. Principal and
interest payments of $2,057 per month for 60 months and
due in full April 2002.................................... 88,200 83,204
-------- --------
419,916 420,760
Less current portions:..................................... (56,519) (38,482)
-------- --------
$363,397 $382,278
======== ========
</TABLE>
Aggregate maturities of note payables for the next five years are as
follows:
<TABLE>
<S> <C>
Four months ending December 31, 1998............................ $ 32,812
Year ending December 31, 1999................................... 27,436
Year ending December 31, 2000................................... 157,151
Year ending December 31, 2001................................... 11,896
Year ending December 31, 2002................................... 12,884
Year ending December 31, 2003................................... 95,377
--------
$337,556
========
</TABLE>
F-36
<PAGE>
ATLANTIC CONNECTIONS, INC.
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. Financing Arrangements
Leases
Future minimum lease payments under noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- -------
<S> <C> <C>
Four months ended December 31, 1998.................... $ 4,500 $ 8,228
Year ending December 31, 1999.......................... 13,500 24,682
Year ending December 31, 2000.......................... 13,500 24,682
Year ending December 31, 2001.......................... 10,125 24,682
Year ending December 31, 2002.......................... - 8,228
------- -------
41,625 90,502
Less amounts representing interest..................... - (7,298)
------- -------
$41,625 $83,204
======= =======
</TABLE>
Rent expense was $17,912 for the year ending December 31, 1997 and $12,449
for the eight months ended August 31, 1998.
5. Subsequent Event
On September 8, 1998, substantially all of the Company's assets were
acquired by Atlantic Connections, LLC. Atlantic Connections, LLC also assumed
substantially all of the Company's liabilities. The transaction had an
effective date of September 1, 1998.
6. Year 2000 Issue (Unaudited)
The Company has completed a significant portion of its assessment of Year
2000 issues with regard to its computer systems and other aspects of its
operations dependent upon automation or computerized operation. The Company
believes that the Year 2000 issue will not pose significant operational
problems for its computer systems or other critically dependent equipment and
that all required modifications or conversions to comply with Year 2000
requirements will be fully completed by the end of 1999. In the opinion of
management, the total costs of addressing the Year 2000 issue will not have a
material impact on the Company's financial position or results of operations.
Notwithstanding the foregoing, the Company is unable to assess at this time
whether unrelated entities with whom the Company conducts business may be
adversely affected by their own Year 2000 issues which could adversely affect
the Company.
F-37
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
Atlantic Connections, Ltd.
We have audited the accompanying balance sheets of Atlantic Connections,
Ltd. as of December 31, 1997 and August 31, 1998, and the related statements
of operations, stockholders' deficit, and cash flows for the year ended
December 31, 1997 and the eight months ended August 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Atlantic Connections, Ltd.
at December 31, 1997 and August 31, 1998, and the results of its operations
and its cash flows for the year ended December 31, 1997 and the eight months
ended August 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Boston, Massachusetts
November 10, 1999
F-38
<PAGE>
ATLANTIC CONNECTIONS, LTD.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, August 31,
1997 1998
------------ ----------
<S> <C> <C>
Assets
Current assets:
Accounts receivable, less allowance for doubtful
amounts of $40,000 at December 31, 1997 and $45,390
at August 31, 1998 $ 277,980 $ 290,777
Note receivable from affiliate...................... 29,607 29,607
Unbilled receivables................................ 113,224 107,854
Prepaid expenses and other assets................... 1,482 4,875
--------- ----------
Total current assets.............................. 422,293 433,113
Property and equipment:
Switching equipment, including equipment under
capital leases..................................... 361,956 489,975
Office equipment.................................... 40,143 41,304
Vehicles............................................ 14,095 12,946
--------- ----------
416,194 544,225
Less accumulated depreciation and amortization...... (308,123) (341,695)
--------- ----------
108,071 202,530
Note receivable from affiliate........................ 177,460 207,776
Other assets.......................................... 10,000 180
--------- ----------
Total assets...................................... $ 717,824 $ 843,599
========= ==========
Liabilities and stockholders' deficit
Current liabilities:
Cash overdraft...................................... $ 273,058 $ 212,759
Line-of-credit...................................... 75,000 75,000
Accounts payable.................................... 60,390 232,342
Accrued expenses.................................... 63,251 250,381
Income tax payable.................................. 104,170 118,005
Deferred taxes...................................... 114,388 -
Current portion of capital lease obligations........ 17,547 19,909
Current portion of long term borrowings............. 166,213 123,514
--------- ----------
Total current liabilities......................... 874,017 1,031,910
Capital lease obligations............................. 70,653 166,874
Long-term borrowings, less current portion............ 481,045 481,045
Stockholders' deficit:
Class A common stock, no par value: 200 shares
authorized; 170 shares issued and outstanding...... 123,000 123,000
Class B common stock, no par value: 400 shares
authorized; 341 shares issued and outstanding...... 7,008 7,008
Less: Treasury stock, at cost; 170 shares........... (541,579) (541,579)
Accumulated deficit................................. (296,320) (424,659)
--------- ----------
Total stockholders' deficit........................... (707,891) (836,230)
--------- ----------
Total liabilities and stockholders' deficit........... $ 717,824 $ 843,599
========= ==========
</TABLE>
See accompanying notes.
F-39
<PAGE>
ATLANTIC CONNECTIONS, LTD.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Net revenues......................................... $3,385,666 $2,263,422
Cost of revenues..................................... 2,105,777 1,647,620
---------- ----------
Gross profit......................................... 1,279,889 615,802
Operating expenses:
Selling, general and administrative................ 954,803 794,874
---------- ----------
Income (loss) from operations........................ 325,086 (179,072)
Interest expense..................................... 53,263 19,597
---------- ----------
Income (loss) before income tax...................... 271,823 (198,669)
Tax provision (benefit).............................. 181,317 (70,330)
---------- ----------
Net income (loss).................................... $ 90,506 $ (128,339)
========== ==========
</TABLE>
See accompanying notes.
F-40
<PAGE>
ATLANTIC CONNECTIONS, LTD.
STATEMENTS OF STOCKHOLDERS' DEFICIT
Year ended December 31, 1997
and eight months ended August 31, 1998
<TABLE>
<CAPTION>
Class A Class B
Common Common Treasury Total
--------------- ------------- ---------------- Accumulated Stockholders'
Shares Amount Shares Amount Shares Amount Deficit Deficit
------ -------- ------ ------ ------ --------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31,
1996................... 170 $123,000 341 $7,008 $(286,826) $(156,818)
Purchase of treasury
stock.................. (170) $(541,579) (541,579)
Dividends paid.......... (100,000) (100,000)
Net income.............. 90,506 90,506
--- -------- --- ------ ---- --------- --------- ---------
Balance at December 31,
1997................... 170 123,000 341 7,008 (170) (541,579) (296,320) (707,891)
Net loss................ (128,339) (128,339)
--- -------- --- ------ ---- --------- --------- ---------
Balance at August 31,
1998................... 170 $123,000 341 $7,008 (170) $(541,579) $(424,659) $(836,230)
=== ======== === ====== ==== ========= ========= =========
</TABLE>
See accompanying notes.
F-41
<PAGE>
ATLANTIC CONNECTIONS, LTD.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Eight months
Year ended ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Operating activities
Net income (loss)................................... $ 90,506 $(128,339)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Depreciation...................................... 32,065 33,474
Provision for allowance for doubtful amounts...... 40,000 5,390
Deferred taxes.................................... 100,715 (114,388)
Changes in operating assets and liabilities:
Accounts receivable............................. 2,630 (18,187)
Unbilled receivables............................ 7,515 5,370
Prepaid expenses and other assets............... 1,561 (3,393)
Other assets.................................... (10,000) 9,820
Accounts payable................................ (379,653) 171,952
Accrued expenses................................ (2,676) 187,130
Income taxes payable............................ 78,963 13,835
-------- ---------
Net cash (used in) provided by operating
activities......................................... (38,374) 162,664
Investing activities
Purchase of property and equipment.................. (21,424) (10,151)
-------- ---------
Net cash used in investing activities............... (21,424) (10,151)
Financing activities
Proceeds of notes payable........................... 140,000 -
Dividends paid...................................... (100,000) -
Advances to affiliate............................... (101,183) (30,316)
Payments on long-term borrowings.................... (139,065) (42,699)
Payments on capital lease obligations............... (13,300) (19,199)
Proceeds (payments) of cash overdraft............... 273,058 (60,299)
-------- ---------
Net cash (used in) provided by financing
activities......................................... 59,510 (152,513)
Decrease in cash and cash equivalents............... (288) -
Cash and cash equivalents at the beginning of
period............................................. 288 -
-------- ---------
Cash and cash equivalents at the end of period...... $ - $ -
======== =========
Supplemental Disclosures of Cash Flow Information
Cash paid for interest.............................. $ 54,868 $ 41,359
Cash paid for taxes................................. 1,639 9,273
Noncash investing and financing activities:
Long-term debt issued to purchase treasury stock.. 541,579 -
Capital lease obligations assumed................. 101,500 117,782
</TABLE>
See accompanying notes.
F-42
<PAGE>
ATLANTIC CONNECTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS
1. Nature of Business and Organization
Atlantic Connections, Ltd. (the Company) was incorporated in the state of
New Hampshire on April 29, 1988. The Company is a local telecommunications
carrier located in Portsmouth, NH and is an integrated communications provider
offering local, long distance, data and private line services to small and
medium-sized businesses in the Northeastern United States.
2. Significant Accounting Policies
Concentrations of Credit Risk
The financial instruments that potentially subject the Company to
concentrations of risk are cash, accounts receivables and unbilled
receivables. The risk with respect to cash is minimized by the Company's
policy of investing in financial instruments with short-term term maturities
issued by highly-rated financial institutions. The risk with respect to
accounts and unbilled receivables is minimized by the large number of the
Company's customers. The Company performs periodic credit evaluations of its
customers' financial condition and generally does not require collateral.
Credit losses have been within management's expectations. Customers are
located throughout the New England area.
Impairment of Long-Lived Assets
The Company has adopted Statement of Financial Accounting Standards (SFAS)
No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed
Of." Under SFAS 121, the carrying value of long-lived assets are reviewed if
the facts and circumstances suggest they may be impaired. If this review
indicates that the affected assets may not be recoverable, as determined based
upon a projection of undiscounted operating cash flows, the carrying value of
the affected assets would be reduced to fair value.
Property and Equipment
Property and equipment are stated at cost and are being depreciated using
the straight-line method over the estimated useful life of three to seven
years. Leasehold improvements are being amortized over the shorter of their
useful lives or the remaining life of the lease. Equipment under capital
leases amounted to $80,859 at December 31, 1997 and $180,787 at August 31,
1998.
Depreciation expense was $32,065 for the year ended December 31, 1997 and
$33,475 for the eight months ended August 31, 1998. Amortization of equipment
under capital leases is included with depreciation in the accompanying
financial statements.
Income Taxes
The Company provides for income taxes under the liability method prescribed
by Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes. Under this method, deferred tax assets and liabilities are determined
based on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the year in which
the difference is expected to reverse. Valuation allowances are established
when necessary to reduce deferred tax assets to the amounts expected to be
realized.
F-43
<PAGE>
ATLANTIC CONNECTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Revenue Recognition
Revenue is recognized in the month in which the service is provided.
Unbilled Receivables
Unbilled receivables represent services rendered to customers prior to
December 31, 1997 and August 31, 1998 but unbilled at that date based on the
customer's cycle date of billing.
2. Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
3. Related Party
The Company has a note receivable from a related party, Atlantic
Connections, Inc., and relates to advances for working capital and the sharing
of certain costs, such as salaries. The Company and Atlantic Connections, Inc.
are related through common management and some common stockholders. Total
amount due as of December 31, 1997 and August 31, 1998 is $207,067 and
$237,383, respectively. No amounts have been re-paid and the remaining balance
is due in full September 1, 2000.
4. Financing Arrangements
Long-Term Debt
A summary of the Company's long-term debt, including capital leases, at
December 31, 1997 and August 31, 1998 is as follows:
<TABLE>
<CAPTION>
1997 1998
--------- ---------
<S> <C> <C>
Note payable to bank, 10% interest. Payments of
principal and interest of $2,975 per month for 60
months and due in full by April 16, 2002. Note
contains a subjective acceleration clause; amount
is classified as current.......................... $ 124,601 $ 109,270
Note payable to former owner, 8% interest. Payments
of principal and interest of $6,508 due on April
15, 2007.......................................... 517,852 492,830
Note payable to bank, 8.9% interest with 36 monthly
principal and interest payments of $321 through
April, 1999....................................... 4,805 2,459
Various capital lease obligations; interest rates
ranging from 7% to 9%............................. 88,200 186,783
--------- ---------
735,458 791,342
Less current portion............................... (183,760) (143,423)
--------- ---------
$ 551,698 $ 647,919
========= =========
</TABLE>
F-44
<PAGE>
ATLANTIC CONNECTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
Aggregate maturities of long-term debt for the next five years are as
follows:
<TABLE>
<S> <C>
Four months ended December 31, 1998............................. $ 22,656
Year ending December 31, 1999................................... 69,251
Year ending December 31, 2000................................... 74,245
Year ending December 31, 2001................................... 81,051
Year ending December 31, 2002................................... 64,013
Thereafter...................................................... 293,343
--------
$604,559
========
</TABLE>
Line-of-Credit
The Company has a credit facility with a bank. The line-of-credit is a
$75,000 facility to support working capital. The unused portion of the
facility expires May 31, 1999. Interest is at the prime rate plus 1.5% and is
paid monthly in arrears. $75,000 was outstanding under this facility at
December 31, 1997 and August 31, 1998.
5. Leases
Future minimum lease payments under noncancelable operating and capital
leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
Leases Leases
--------- --------
<S> <C> <C>
Four months ended December 31, 1998.................... $ 6,199 $ 27,169
Year ending December 31, 1999.......................... 19,270 81,505
Year ending December 31, 2000.......................... 3,234 51,928
Year ending December 31, 2001.......................... - 37,140
Year ending December 31, 2002.......................... - 24,839
------- --------
28,703 222,581
Less amounts representing interest..................... - (35,798)
------- --------
$28,703 $186,783
======= ========
</TABLE>
Rent expense was $16,172 for the year ended December 31, 1997 and $10,713
for the eight months ended August 31, 1998.
F-45
<PAGE>
ATLANTIC CONNECTIONS, LTD.
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. Income Taxes
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------ ------------
<S> <C> <C>
Current:
Federal........................................ $ 68,829 $ 36,072
State.......................................... 11,773 7,986
-------- ---------
80,602 44,058
-------- ---------
Deferred:
Federal........................................ 82,876 (93,655)
State.......................................... 17,839 (20,733)
-------- ---------
100,715 (114,388)
-------- ---------
Total (benefit) expense........................ $181,317 $ (70,330)
======== =========
</TABLE>
Deferred income taxes arise principally from temporary differences related
to a change from the accrual to cash method of accounting for tax purposes.
The components of the Company's deferred income taxes are as follows:
<TABLE>
<CAPTION>
December 31, August 31,
1997 1998
------------ ----------
<S> <C> <C>
Deferred tax liabilities:
Adjustment of accrual to cash basis.............. $(113,562) $ 19,823
Fixed assets differences......................... (826) (16,022)
--------- --------
Total deferred tax liabilities................. (114,388) 3,801
Deferred tax assets:
Less valuation allowance......................... - 3,801
--------- --------
Net deferred tax liability..................... $(114,388) $ -
========= ========
</TABLE>
6. Income Taxes
The difference between the provision (benefit) for income taxes and the
amount computed by applying the statutory federal income tax rate is as
follows:
<TABLE>
<CAPTION>
Eight Months
Year Ended Ended
December 31, August 31,
1997 1998
------------- --------------
<S> <C> <C> <C> <C>
Federal taxes at statutory rates................. $ 92,420 34.0% $(67,547) 34.0%
Add/(deduct):
Change in valuation allowance.................. 3,801 (1.9)
State income taxes, net of federal benefit..... 12,802 4.7 (8,413) 4.2
Effect of graduated rates...................... 781 0.3 - -
Additional taxes due to IRS examination........ 71,508 26.3 - -
Other.......................................... 3,806 1.4 1,829 (.9)
-------- ---- -------- ----
$181,317 66.7% $(70,330) 35.4%
======== ==== ======== ====
</TABLE>
F-46
<PAGE>
7. Subsequent Event
On September 8, 1998, Atlantic Connections, LLC acquired 100% of the
outstanding stock of the Company. The transaction had an effective date of
September 1, 1998.
8. Year 2000 Issue (Unaudited)
The Company has completed a significant portion of its assessment of Year
2000 issues with regard to its computer systems and other aspects of its
operations dependent upon automation or computerized operation. The Company
believes that the Year 2000 issue will not pose significant operational
problems for its computer systems or other critically dependent equipment and
that all required modifications or conversions to comply with Year 2000
requirements will be fully completed by the end of 1999. In the opinion of
management, the total costs of addressing the Year 2000 issue will not have a
material impact on the Company's financial position or results of operations.
Notwithstanding the foregoing, the Company is unable to assess at this time
whether unrelated entities with whom the Company conducts business may be
adversely affected by their own Year 2000 issues which could adversely affect
the Company.
F-47
<PAGE>
[Choice One Communications Inc. Logo]
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the expenses, other than the underwriting
discounts and commissions, paid or payable by the Registrant in connection
with the distribution of the securities being registered. All expenses of the
offering will be paid by the Registrant. All amounts are estimates except the
SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<S> <C>
SEC Registration Fee.......................................... $ 32,539
NASD Filing Fee............................................... 12,826
Nasdaq National Market Listing Fee............................ 95,000
Printing Costs................................................ 150,000
Legal Fees and Expenses....................................... 250,000
Accounting Fees and Expenses.................................. 350,000
Blue Sky Fees and Expenses.................................... 10,000
Transfer Agent and Registrar Fees............................. 5,000
Miscellaneous................................................. 94,635
----------
Total....................................................... $1,000,000
==========
</TABLE>
- --------
* To be provided by amendment
Item 14. Indemnification of Directors and Officers
General Corporation Law
The Company is incorporated under the laws of the State of Delaware.
Section 145 ("Section 145") of the General Corporation Law of the State of
Delaware, as the same exists or may hereafter be amended (the "General
Corporation Law"), inter alia, provides that a Delaware corporation may
indemnify any persons who were, are or are threatened to be made, parties to
any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or
in the right of such corporation), by reason of the fact that such person is
or was an officer, director, employee or agent of such corporation, or is or
was serving at the request of such corporation as a director, officer employee
or agent of another corporation or enterprise. The indemnity may include
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding, provided such person acted in good faith and
in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, with respect to any criminal action or
proceeding, had no reasonable cause to believe that his conduct was illegal. A
Delaware corporation may indemnify any persons who are, were or are threatened
to be made, a party to any threatened, pending or completed action or suit by
or in the right of the corporation by reasons of the fact that such person was
a director, officer, employee or agent of such corporation, or is or was
serving at the request of such corporation as a director, officer, employee or
agent of another corporation or enterprise. The indemnity may include expenses
(including attorneys' fees) actually and reasonably incurred by such person in
connection with the defense or settlement of such action or suit, provided
such person acted in good faith and in a manner he reasonably believed to be
in or not opposed to the corporation's best interests, provided that no
indemnification is permitted without judicial approval if the officer,
director, employee or agent is adjudged to be liable to the corporation. Where
an officer, director, employee or
II-1
<PAGE>
agent is successful on the merits or otherwise in the defense of any action
referred to above, the corporation must indemnify him against the expenses
which such officer or director has actually and reasonably incurred.
Section 145 further authorizes a corporation to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee
or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation
or enterprise, against any liability asserted against him and incurred by him
in any such capacity, arising out of his status as such, whether or not the
corporation would otherwise have the power to indemnify him under Section 145.
Certificate of Incorporation and By-laws
The Company's Certificate of Incorporation and by-laws provides for the
indemnification of officers and directors to the fullest extent permitted by
the General Corporation Law.
All of the Company's directors and officers are covered by insurance
policies maintained by it against certain liabilities for actions taken in
their capacities as such, including liabilities under the Securities Act of
1933, as amended.
Item 15. Recent Sales of Unregistered Securities
Since its inception, the Company has issued the following securities
without registration under the Securities Act (the number of shares set forth
below does not give effect to the proposed stock split of the Company's common
stock referred to in the prospectus).
On July 8, 1998, in connection with the Company's formation, the Company
issued 60,000 shares of common stock to Choice One Communications L.L.C. for
consideration of $6.0 million. The stock issued in this transaction was
subject to transfer restrictions which were noted on the stock certificate.
This transaction is exempt from registration under the Securities Act pursuant
to Section 4(2) of the Securities Act, along with Rule 506 of the accompanying
regulations of the Securities Act, as transactions not involving any public
offering. On June 30, 1999, the Company issued additional shares of common
stock to Choice One Communications L.L.C. to correct an underissuance of
shares in connection with the issuance on July 8, 1998 at the same price as
the original issuance. The stock issued in this transaction was subject to
transfer restrictions which were noted on the stock certificate. This
transaction is exempt from registration under the Securities Act pursuant to
Section 4(2) of the Securities Act, along with Rule 506 of the accompanying
regulations of the Securities Act, as transactions not involving any public
offering.
On August 12, 1998 the Company reserved 3,000 shares of common stock of
Choice One Communications for the Employee Stock Option Plan of the Company.
On August 12, 1998, the Company issued options to purchase 405 shares of
common stock of the Company at an exercise price of $1,000 per share. On
October 16, 1998 the Company issued options to purchase 154.5 shares of common
stock of the Company at an exercise price of $1,000 per share. On January 21,
1999 the Company issued options to purchase 346.50 shares of common stock of
the Company at an exercise price of $1,000 per share. On April 15, 1999, the
Company issued options to purchase 138.75 shares of common stock of the
Company at an exercise price of $1,416.67 per share. On July 15, 1999 the
Company issued options to purchase 241.35 shares of common stock at an
exercise price of $1,416.67 per share. On October 21, 1999, the Company issued
options to purchase 247.53 shares of common stock at an exercise price of
$2,666.64 per share. A total of 231.00 options have been forfeited and
II-2
<PAGE>
returned to the plan. As of November 15, 1999, options to acquire an aggregate
of 1,308.33 shares were outstanding under Choice One's 1998 Employee Stock
Option Plan and none has vested and none were exerciseable. None of the
options granted under this paragraph require any registration, because they do
not involve the sale of a security and thus are exempt from registration under
the Securities Act.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.1 Amended and Restated Certificate of Incorporation of the Registrant*
3.2 Amended and Restated By-laws of the Registrant*
4.1 Form of Certificate for the Registrant's Common Stock*
5.1 Opinion of Nixon Peabody LLP*
10.1 1998 Management Stock Incentive Plan of the Registrant (November 1999
Restatement)
10.2 1999 Directors' Stock Incentive Plan of the Registrant
10.3 Transaction Agreement, dated as of July 8, 1998, among Choice One
Communications Inc. Choice One Communications L.L.C. and holders of
Investor Equity and Management Equity+
10.4 Amendment No. 1 dated as of December 18, 1998 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity+
10.5 Amendment No. 2 dated as of February 18, 1999 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity+
10.6 Amendment No. 3 dated as of May 14, 1999 to Transaction Agreement, dated
as of July 8, 1998, among Choice One Communications Inc. Choice One
Communications L.L.C. and holders of Investor Equity and Management
Equity+
10.7 Amendment No. 4 dated as of June 30, 1999 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity+
10.8 Amendment No. 5 dated as of June 30, 1999 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity+
10.9 Amendment No. 6 dated as of November 18, 1999 to Transaction Agreement,
dated as of July 8, 1998, among Choice One Communications Inc. Choice
One Communications L.L.C. and holders of Investor Equity and Management
Equity+
10.10 Registration Rights Agreement dated as of July 8, 1998, among Choice One
Communications Inc., the Investor Holders and the Management Holders+
10.11 Amendment No. 1 dated as of February 18, 1999 to Registration Rights
Agreement dated as of July 8, 1998, among Choice One Communications
Inc., the Investor Holders and the Management Holders+
10.12 Amendment No. 2 dated as of June 30, 1999 to Registration Rights
Agreement dated as of July 8, 1998, among Choice One Communications
Inc., the Investor Holders and the Management Holders+
10.13 Amendment No. 3 dated as of June 30, 1999 to Registration Rights
Agreement dated as of July 8, 1998, among Choice One Communications
Inc., the Investor Holders and the Management Holders+
</TABLE>
II-3
<PAGE>
<TABLE>
<C> <S>
10.14 Form of Executive Purchase Agreement dated July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Certain Executives of
the Registrant+
10.15 Executive Purchase Agreement dated as of July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Steve M. Dubnik+
10.16 Executive Purchase Agreement dated as of July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Mae Squier-Dow+
10.17 Executive Purchase Agreement dated as of July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Philip Yawman+
10.18 Executive Purchase Agreement dated as of July 8, 1998 among the
Registrant, Choice One Communications L.L.C. and Kevin Dickens+
10.19 Executive Purchase Agreement dated as of August 19, 1999 among the
Registrant, Choice One Communications L.L.C. and Ajay Sabherwal+
10.20 Amended and Restated Credit Agreement dated as of November 3, 1999 among
the Registrant, as Guarantor, subsidiaries of the Registrant, as
Borrowers, First Union Investors, Inc., as Administrative Agent, General
Electric Capital Corporation, as Syndication Agent, and CIBC, Inc. as
Documentation Agent, and the lenders thereto+
10.21 Lease between the Registrant and Bendersen-Rochester Associates, LLC
dated October 14, 1998, as amended+
10.22 Unit Purchase Agreement dated as of October 21, 1999 Among the
Registrant, Atlantic Connections L.L.C., ACL Telecommunications, LTD.,
Paul Cissel, Antonio Lopez, Jr. and North Atlantic Venture Fund II,
L.P.+
10.23 General Agreement between the Registrant and Lucent Technologies
effective as of July 17, 1998
10.24 Service Bureau Agreement between the Registrant and Saville Systems Inc.
effective September 30, 1998
21.1 Subsidiaries of the Registrant+
23.1 Consent of Nixon Peabody LLP (included in Exhibit 5.1)*
23.2 Consent of Arthur Andersen LLP, independent auditors
23.3 Consent of Ernst & Young LLP, independent auditors
23.4 Consent of International Data Corporation
24.1 Power of Attorney (included on the signature page hereto)+
27.1 Financial Data Schedule for the year ended December 31, 1998+
</TABLE>
- --------
*To be filed by amendment.
+Previously filed
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
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, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
II-4
<PAGE>
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.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the 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 the purpose of determining any liability under the 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on form S-1 and has duly caused this Amendment No. 1
to the Registration Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Rochester, State of New York, on the
3rd day of January, 2000.
Choice One Communications Inc.
By:
/s/ John J. Zimmer
----------------------------------
John J. Zimmer
Vice President-Finance
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
* Chairman, President and January 3, 2000
___________________________________________ Chief Executive Officer
Steve M. Dubnik (Principal Executive
Officer)
* Senior Vice President, January 3, 2000
___________________________________________ Finance and Chief
Ajay Sabherwal Financial Officer
(Principal Financial and
Accounting Officer)
* Director January 3, 2000
___________________________________________
John B. Ehrenkranz
* Director January 3, 2000
___________________________________________
Bruce M. Hernandez
* Director January 3, 2000
___________________________________________
Michael M. Janson
* Director January 3, 2000
___________________________________________
Robert M. Van Degna
</TABLE>
/s/ John J. Zimmer
By:
- -------------------------------------
John J. Zimmer
Attorney-in-Fact
II-6
<PAGE>
EXHIBIT 1.1
_______________ Shares
CHOICE ONE COMMUNICATIONS, INC.
Common Stock $.01 Par Value
UNDERWRITING AGREEMENT
__________, 2000
<PAGE>
_____________, 2000
Morgan Stanley & Co. Incorporated
Lehman Brothers Inc.
Warburg Dillon Read LLC
First Union Securities, Inc.
CIBC World Markets
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, New York 10036
Morgan Stanley & Co. International Limited
Lehman Brothers International (Europe)
UBS AG, acting through its division Warburg Dillon Read
First Union Securities, Inc.
CIBC World Markets
c/o Morgan Stanley & Co. International Limited
25 Cabot Square
Canary Wharf
London E14 4QA
England
Dear Sirs and Mesdames:
Choice One Communications, Inc., a Delaware corporation (the "Company"),
proposes to issue and sell to the several Underwriters (as defined below)
________________ shares of its common stock, par value $.01 per share (the "Firm
Shares").
It is understood that, subject to the conditions hereinafter stated,
____________ 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 __________ 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
<PAGE>
United States and Canadian Persons. Morgan Stanley & Co. Incorporated, Lehman
Brothers Inc. ("Lehman Brothers"), Warburg Dillon Read LLC, First Union
Securities, Inc. and CIBC World Markets shall act as representatives (the "U.S.
Representatives") of the several U.S. Underwriters, and Morgan Stanley & Co.
International Limited, Lehman Brothers International (Europe), UBS AG, acting
through its division Warburg Dillon Read, First Union Securities, Inc. and CIBC
World Markets 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 __________ 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 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.
2
<PAGE>
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.
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 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, 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 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 State of Delaware, 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
3
<PAGE>
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.
(d) Each significant subsidiary of the Company (as such term is
defined in Rule 1-02(w) of Regulation S-X under the Securities Act) 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; all of the issued shares of capital
stock of each 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
non-assessable.
(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 non-assessable, 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 by-laws 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,
4
<PAGE>
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) Neither the Company nor any of its subsidiaries is in violation
of its charter or by-laws or in default in the performance or observance of
any material obligation, agreement, covenant or condition contained in any
material bond, debenture, note or other evidence of indebtedness, or in any
material lease, contract, indenture, deed of trust, loan agreement, joint
venture or other agreement or instrument to which the Company or any of its
subsidiaries is a party or by which it or any of its subsidiaries or its
properties may be bound; and neither the Company nor any of its
subsidiaries is in material violation of any law, order, rule, regulation,
writ, injunction, judgment or decree of any court, government of
governmental agency or body, domestic or foreign, having jurisdiction over
the Company or any of its subsidiaries or over its properties.
(k) 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).
(l) There are no 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 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
Registration Statement that are not described or filed as required.
(m) 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.
(n) The Company is not and, after giving effect to the offering and
sale of the Shares and the application of the proceeds thereof as
5
<PAGE>
described in the Prospectus, will not be an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended.
(o) The Company and its subsidiaries 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"), have received all permits, licenses or other
approvals required of them under applicable Environmental Laws to conduct
their respective businesses and 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.
(p) There are no costs or liabilities associated with Environmental
Laws (including, without limitation, any capital or operating expenditures
required for clean-up, 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.
(q) Except as described in the Prospectus, there are no contracts,
agreements or understandings between the Company and any person granting
such person the right to require the Company to file a registration
statement under the 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) The Company has complied with all provisions of Section 517.075,
Florida Statutes relating to doing business with the Government of Cuba or
with any person or affiliate located in Cuba.
(s) The Company and each of its subsidiaries (i) have all necessary
licenses, consents, authorizations, approvals, orders, certificates and
permits of and from, and have made all declarations and filings with, all
federal, state, local and other governmental, administrative and regulatory
authorities, all self-regulatory organizations and all courts and other
tribunals, to own, lease, license and use its properties and assets and to
conduct its business in the manner described in the Prospectus, except
6
<PAGE>
to the extent that the failure to obtain such licenses, consents,
authorizations, approvals, orders, certificates and permits or make such
declarations and filings would not have a material adverse effect on the
Company and its subsidiaries, taken as a whole and (ii) have not received
any notice of proceedings relating to revocation or modification of any
such license, consent, authorization, approval, order, certificate 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.
(t) 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 existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(u) The Company and each of its subsidiaries have good and valid
title to all real property and good and valid title to all personal
property owned by them which is material to the business of the Company and
its subsidiaries, taken as a whole, in each case free and clear of all
liens, encumbrances and defects, except such as are described in the
Prospectus and such other liens as do not materially affect the value of
such property and do not interfere with the use made and proposed to be
made of such property by the Company and its subsidiaries; 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 or contemplated
by the Prospectus.
(v) 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
7
<PAGE>
any notice or 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.
(w) No material labor dispute with the employees of the Company or
any of its subsidiaries exists or, to the knowledge of the 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.
(x) The Company and each of its subsidiaries are insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as are 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 has any 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 or contemplated by the Prospectus.
(y) All licenses issued by the Federal Communications Commission (the
"FCC") required for the operation of the business of the Company and its
subsidiaries (the "FCC Licenses") are in full force and effect, other than
those the failure of which to obtain would not, singly or in the aggregate,
have a material adverse effect on the Company and its subsidiaries taken as
a whole, and there are no pending modifications, amendments or revocation
proceedings which would materially adversely affect the operations of the
Company and its subsidiaries. All fees due and payable to governmental
authorities pursuant to the rules governing such FCC Licenses have been
paid and no event has occurred with respect to the FCC Licenses held by the
Company and its subsidiaries which, with the giving of notice or the lapse
of time or both, would constitute grounds for revocation thereof. Each of
the Company and its subsidiaries is in compliance in all material respects
with the terms of such FCC Licenses, as applicable, and there is no
condition, event or occurrence existing, nor is there any proceeding being
conducted of which the Company has received notice, nor, to the Company's
knowledge, is there any proceeding threatened, by any governmental
authority, which would cause the
8
<PAGE>
termination, suspension, cancellation or nonrenewal of any of such FCC
Licenses, or the imposition of any penalty or fine by any regulatory
authority. No registrations, filings, applications, notices, transfers,
consents, approvals, audits, qualifications, waivers or other action of any
kind is required by virtue of the execution and delivery of this Agreement
or of the consummation of the transactions contemplated hereby, other than
as previously obtained from the FCC (i) to avoid the loss of any asset,
property or right pursuant to the terms thereof, or the violation or breach
of any applicable law thereto or (ii) to enable the Company or any of its
subsidiaries to hold and enjoy the same after the Closing Date (as defined
herein) in the conduct of its business as conducted prior to the Closing
Date.
(z) The Company has reviewed 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 all material respects in the Registration Statement or
Prospectus and (B) the Year 2000 Problem will have a material adverse
effect on the Company and its subsidiaries, taken as a whole; and (ii) the
Company reasonably believes, after due inquiry, that the suppliers,
vendors, customers or other material third parties used or served by the
Company and such subsidiaries are addressing or will address the Year 2000
Problem in a timely manner, except to the extent that a failure to address
the Year 2000 Problem by any supplier, vendor, customer or material third
party would not have a material adverse effect on the Company and its
subsidiaries, taken as a whole, or as otherwise described in the
Registration Statement or Prospectus.
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
9
<PAGE>
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 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 __________
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 hereof solely for the purpose of covering over-
allotments 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,
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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, or (iii) file a registration statement
other than a registration statement on Form S-8 covering the shares of common
stock subject to outstanding options or options to be issued under the Company's
stock option plans. The restrictions contained in the foregoing sentence shall
not apply to (A) the Shares to be sold hereunder or (B) the issuance by the
Company of shares of Common Stock upon the exercise 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.
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 ____________, 2000 or
at such other time on the same or such other date, not later than _________,
2000 as shall be designated in writing by you. The time and date of such payment
are hereinafter referred to as the "Closing Date."
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 or at such other time on the same or on such other date, in any event
not later than _______, 2000 as shall be designated in writing by the U.S.
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Representatives. The time and date of such payment are hereinafter referred to
as the "Option Closing Date."
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.
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.
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(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed, on behalf of the Company,
by an executive officer of the Company, to the effect set forth in Section
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 Nixon Peabody LLP, outside counsel for the Company, dated the
Closing Date, to the effect that:
(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 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;
(ii) each significant subsidiary of the Company (as such term
is defined in Rule 1-02(w) of Regulation S-X under the Securities Act)
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;
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(iii) the authorized capital stock of the Company conforms in
all material respects 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 non-assessable;
(v) all of the issued shares of capital stock of each
subsidiary of the Company have been duly and validly authorized and
issued, are fully paid and non-assessable and are owned of record
directly or indirectly by the Company, to such counsel's knowledge,
free and clear of all adverse claims, except as described in the
Registration Statement or Prospectus and except for the liens securing
obligations under the Amended and Restated Credit Agreement dated as
of November 3, 1999 to which the Company is a party and related
agreements;
(vi) 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 non-assessable, and, to the knowledge
of such counsel, the issuance of such Shares will not be subject to
any preemptive or similar rights;
(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 contravene any provision of applicable law or the certificate
of incorporation or by-laws of the Company or, to such counsel's
knowledge, any agreement or other instrument binding upon the Company
or any of its subsidiaries that is 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 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;
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(ix) such counsel has considered the statements in the
Prospectus under the captions "Certain Relationships and Related
Transactions" and "Description of Capital Stock"and in the
Registration Statement in Items 14 and 15, relating to legal matters,
documents or proceedings, and in the opinion of such counsel, such
statements fairly summarize in all material respects such matters,
documents or proceedings;
(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 to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to
the Registration Statement that are not described or filed as
required;
(xi) to the knowledge of such counsel, 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 Considerations for Non-U.S. Holders of Common
Stock," insofar as such statements constitute a summary of the United
States federal tax laws referred to therein, are accurate and fairly
summarize in all material respects the United States federal tax laws
referred to therein; and
(xiii) such counsel has no reason to believe that the
Registration Statement and Prospectus (except for the financial
statements and notes thereto and schedules and other financial,
accounting, numerical or statistical information or data included
therein, as to which such counsel need not express any belief) do not
comply as to form in all material respects with the requirements of
the Securities Act and the applicable rules and regulations of the
Commission thereunder.
Such counsel shall also state that, although such counsel has not
undertaken to determine independently, and therefore does not assume, except as
expressly indicated in paragraphs (ix) and (xii) above, any responsibility,
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explicitly or implicitly, for the accuracy, completeness or fairness of the
statements contained in the Registration Statement and in the Prospectus, such
counsel has participated in the preparation of the Registration Statement and
Prospectus. Based upon and subject to the foregoing, and the other customary
qualifications and limitations contained in such counsel's letter, nothing has
come to such counsel's attention which causes such counsel to believe that
(except for financial statements and notes thereto and schedules and other
financial, accounting, numerical or statistical information or data included
therein, as to which such counsel need not express any belief) the Registration
Statement and the prospectus included therein at the time the Registration
Statement became effective contained an 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 or that the Prospectus as of its date
and as of the Closing Date contained or 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.
(d) The Underwriters shall have received on the Closing Date an opinion of
Swidler Berlin Shereff Friedman, LLP, regulatory counsel for the Company, dated
the Closing Date, to the effect that:
(i) (A) the execution and delivery of this Agreement and the
consummation of the transactions contemplated thereby do not violate
(1) the Communications Act of 1934, as amended by the
Telecommunications Act of 1996, (2) any federal communications law
applicable to the Company and/or its subsidiaries, (3) any state
communications law applicable to the Company and/or its subsidiaries,
and (4) to the best of our knowledge, any decree from any court; and
(B) no authorization of the FCC or any Public Utilities Commission
("PUC") that has not already been received from or prior filing that
has not already been made with, such agency is necessary for the
execution and delivery of this Agreement by the Company and the
consummation of the transactions contemplated hereby in accordance
with the terms hereof, except where the failure to obtain such
authorization or make such filing would not have a material adverse
effect on the Company and its subsidiaries, taken as a whole;
(ii) to the best of our knowledge: (1) each of the Company and
its subsidiaries has made all reports and filings, and paid all fees,
required by the FCC and the PUCs, and has all certificates, orders,
permits, licenses, authorizations, consents, and approvals of and
from, and has made all filings and registrations,
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with the FCC and the PUCs necessary to own, lease, license and use its
properties and assets and to conduct its business in the manner
described in the Prospectus; and (2) none of the Company or any of its
subsidiaries has received any notice of proceedings relating to the
violation, revocation or modification of any such certificates,
orders, permits, licenses, authorizations, consents, or approvals, or
the qualification or rejection of any such filing or registration, the
effect of which, singly or in the aggregate, would have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
(iii) to the best of our knowledge, neither the Company nor any
of its subsidiaries is in violation of, or in default under, any
provision of Federal Communications Law or State Communications Law,
the effect of which, singly or in the aggregate, would have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
(iv) to the best of our knowledge after due inquiry: (1) no
adverse judgment, decree or order of the FCC or any PUC has been
issued against the Company or any of its subsidiaries and (2) no
litigation, proceeding (other than certification applications
initiated by the Company or its subsidiaries), inquiry or
investigation has been commenced or threatened against the Company or
any of its subsidiaries before or by the FCC or any PUC which, if
decided adversely to the Company's interest, would have a material
adverse effect on the Company and its subsidiaries, taken as a whole;
and
(v) the statements in the Prospectus under the captions "Risk
Factors -- Difficulties in Implementation of Local and Enhanced
Services -- We may need to rely on the established local telephone
companies to implement successfully our switched and enhanced
services," "Risk Factors -- Competition -- We face a high level of
competition in the telecommunications industry," "Risk Factors --
Government Regulation -- FCC and state regulations may limit the
services we can offer," "Business -- Regulation," and "Business --
Competition," exclusive of cross references therein to other sections
of the Prospectus, to the extent that they discuss international and
U.S. federal, state, and local statutes, regulations and proceedings
with respect to telecommunications regulatory matters, fairly
summarize the matters referred to therein.
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(e) The Underwriters shall have received on the Closing Date an
opinion of Davis Polk & Wardwell, counsel for the Underwriters, dated the
Closing Date, covering the matters referred to in Sections5(c)(vi),
5(c)(vii), 5(c)(ix) (but only as to the statements in the Prospectus under
"Underwriters") and 5(c)(xiii) above (including the paragraph immediately
following 5(c)(xiii).
With respect to Section 5(c)(xiii) above (including the paragraph
immediately following 5(c)(xiii)), Nixon Peabody LLP and Davis Polk &
Wardwell may state that their opinion and belief are based upon their
participation in the preparation of the Registration Statement and
Prospectus and any amendments or supplements thereto and review and
discussion of the contents thereof, but are without independent check or
verification, except as specified. Nixon Peabody LLP and Davis Polk &
Wardwell need not express any opinion or belief with respect to matters
governed by or related to (i) federal, state, local or foreign
communications law or the rules, regulations or policies of the FCC
thereunder or with respect thereto, or (ii) any laws other than the federal
laws of the United States of America, the laws of the State of New York or
the General Corporation Law of the State of Delaware.
The opinions of Nixon Peabody LLP and Swidler Berlin Shereff Friedman,
LLP described in Sections and 5(d) 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 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 each of Arthur Andersen LLP and Ernst & Young 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 letters
delivered on the Closing Date shall use a "cut-off date" not earlier than
the date hereof.
(g) The "lock-up" agreements, each substantially in the form of
Exhibit A hereto, between you and certain shareholders, 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.
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(h) 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, 6 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 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 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
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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 March 31, 2001 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
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 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., including reasonable fees and disbursements of counsel
incurred on behalf of or disbursements by Lehman Brothers in its capacity
as "qualified independent underwriter", (v) all 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
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incident to listing 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, and
(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 10 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) In connection with the Directed Share Program, to ensure that the
Directed Shares will be restricted to the extent required by the National
Association of Securities Dealers, Inc. (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
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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 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 provided, however, that
the foregoing indemnity agreement with respect to any preliminary prospectus
shall not inure to the benefit of any Underwriter from whom the person asserting
any such losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 6(a) hereof.
The Company also agrees to indemnify and hold harmless Lehman Brothers and
each person, if any, who controls Lehman Brothers within the meaning of either
Section 15 of the Act, or Section 20 of the Exchange Act, from and against any
and all losses, claims, damages, liabilities and judgments incurred as a result
of Lehman Brothers' participation as a "qualified independent underwriter"
within the meaning of Rule 2720 of the National Association of Securities
Dealers' Conduct Rules in connection with the offering of the shares, except for
any losses, claims, damages, liabilities, and judgements resulting from Lehman
Brothers', or such controlling person's, bad faith or gross negligence.
(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 indemnity from the Company to such Underwriter,
but only with reference to information relating to such Underwriter furnished to
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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 & Co. Incorporated, 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). Notwithstanding anything contained
herein to the contrary, if indemnity may be sought pursuant to Section 7(a)
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 Lehman Brothers in its capacity as a
"qualified independent underwriter" and all persons, if any, who control Lehman
Brothers within the meaning of either Section 15 of the act or Section 20 of the
Exchange Act. 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 indemnified party for fees and expenses of
counsel as contemplated by the second and third sentences of this paragraph, the
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<PAGE>
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.
(d) To the extent the indemnification provided for in Section 7(a) or 7(b)
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. 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 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.
24
<PAGE>
(e) 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, 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. 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.
(f) The indemnity and contribution provisions contained in this Section 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 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.
8. Directed Share Program Indemnification. (a) The Company agrees to
indemnify and hold harmless Morgan Stanley and its affiliates, and each person,
if any, who controls Morgan Stanley or its affiliates 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 any 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 Directed Shares that the Participant agreed to
purchase; or (iii) related
25
<PAGE>
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 Morgan Stanley Entities.
(b) 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 8(a), the Morgan Stanley Entity seeing
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 Morgan Stanley Entity 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 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 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.
26
<PAGE>
(c) To the extent the indemnification provided for in Section 8(a) 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 the 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
Morgan Stanley Entities on the other hand from the offering of the Directed
Shares or (ii) if the allocation provided by clause 8(c)(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 8(c)(i) above but also the
relative fault of the Company on the one hand and of the Morgan Stanley Entities
on the other hand in connection with any 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 Entities 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 or the omission or alleged omission to state 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.
(g) The Company and the Morgan Stanley Entities agree that it would not be
just or equitable if contribution pursuant to this Section 8 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 8(c). 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 the Morgan Stanley
Entities in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 8, 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
27
<PAGE>
the amount of any damages that such Morgan Stanley Entity has otherwise been
required to pay. The remedies provided for in this Section 8 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.
(e) The indemnity and contribution provisions contained in this Section 8
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 Morgan Stanley Entity or the Company, its officers or directors or any
person controlling the Company and (iii) acceptance of and payment for any of
the Directed Shares.
9. 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 9(a)(i) through 9(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.
10. 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
28
<PAGE>
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 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 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.
11. 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.
12. Applicable Law. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of New York.
29
<PAGE>
13. 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,
CHOICE ONE COMMUNICATIONS, INC.
By:_____________________________
Name:
Title:
30
<PAGE>
Accepted as of the date hereof
MORGAN STANLEY & CO. INCORPORATED
LEHMAN BROTHERS INC.
WARBURG DILLON READ LLC
FIRST UNION SECURITIES, INC.
CIBC WORLD MARKETS
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
LEHMAN BROTHERS INTERNATIONAL (EUROPE)
UBS AG, ACTING THROUGH ITS DIVISION WARBURG DILLON READ
FIRST UNION SECURITIES INC.
CIBC WORLD MARKETS
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:
31
<PAGE>
SCHEDULE I
U.S. UNDERWRITERS
Number of Firm Shares To Be
Underwriter Purchased
---------------------------------------- ---------------------------
Morgan Stanley & Co. Incorporated.....
Lehman Brothers Inc...................
Warburg Dillon Read LLC...............
First Union Securities, Inc...........
CIBC World Markets....................
_____________________________
Total U.S. Firm Shares..........
=============================
<PAGE>
SCHEDULE II
INTERNATIONAL UNDERWRITERS
Number of Firm Shares To Be
Underwriter Purchased
- ------------------------------------------------- --------------------------
Morgan Stanley & Co. International Limited......
Lehman Brothers International (Europe)..........
UBS AG, acting through its division Warburg
Dillon Read.....................................
First Union Securities, Inc.....................
CIBC World Markets..............................
__________________________
Total International Firm Shares
==========================
<PAGE>
EXHIBIT A
[FORM OF LOCK-UP LETTER]
____________, 1999
Morgan Stanley & Co. Incorporated
Lehman Brothers Inc.
Warburg Dillon Read LLC
First Union Securities, Inc.
CIBC World Markets
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Morgan Stanley & Co. International Limited
Lehman Brothers International (Europe)
UBS AG, acting through its division Warburg Dillon Read
First Union Securities, Inc.
CIBC World Markets
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 Choice
One Communications, 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
<PAGE>
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 the 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 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
2
<PAGE>
EXHIBIT 10.1
-------------
CHOICE ONE COMMUNICATIONS INC.
1998 EMPLOYEE STOCK OPTION PLAN
(November 1999 Restatement)
1. BACKGROUND AND PURPOSE
Choice One Communications Inc. (the "Corporation") hereby continues,
amends and restates the Choice One Communications Inc. 1998 Employee Stock
Option Plan (the "Plan"). The purpose of this Plan is to enable the Corporation
to attract and retain key employees and provide them with an incentive to
maintain and enhance the Corporation's long-term performance record. It is
intended that this purpose will best be achieved by granting eligible employees
incentive stock options ("ISOs") and non-qualified stock options ("NQSOs") under
this Plan pursuant to the rules set forth in Sections 83, 162(m), 421 and 422 of
the Internal Revenue Code of 1986, as amended (the "Code").
2. ADMINISTRATION
The Plan shall be administered by a Committee of the Corporation's
Board of Directors (the "Committee"). This Committee shall consist of at least
two members of the Corporation's Board of Directors each of whom shall, unless
the Board determines otherwise, be outside directors and none of whom during the
one-year period prior to commencement of service on the Committee, or during
such service, has been granted or awarded any equity security or derivative
security of the Corporation pursuant to the Plan or, except as permitted by Rule
16b-3 (c)(2)(i), or any successor provision, promulgated pursuant to the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), any other plan
of the Corporation or any of its affiliates. Subject to the provisions of the
Plan, the Committee shall possess the authority, in its discretion, (a) to
determine the key employees of the Corporation to whom, and the time or times at
which, ISOs and/or NQSOs (collectively referred to as "options") shall be
granted; (b) to determine at the time of grant whether an option will be an ISO,
a NQSO, or a combination of both and the number of shares to be subject to each
option; (c) to prescribe the form of the option agreements and any appropriate
terms and conditions applicable to the options and to make any amendments to
such agreements or options; (d) to interpret the Plan; (e) to make and amend
rules and regulations relating to the Plan; and (f) to make all other
determinations necessary or advisable for the administration of the Plan. The
Committee's determinations shall be conclusive and binding. No member of the
Committee shall be liable for any action taken or decision made in good faith
relating to the Plan or any option granted hereunder.
3. ELIGIBLE EMPLOYEES
Options may be granted under the Plan only to key employees of the
Corporation and its subsidiaries (which shall include all corporations of which
at least fifty percent of the voting stock is owned by the Corporation directly
or through one or more corporations at least fifty percent of the voting stock
of which is so owned) who have the capability of making a substantial
contribution to the success of the Corporation and its subsidiaries.
4. SHARES AVAILABLE
The total number of shares of the Corporation's Common Stock (par
value of $0.01 per share) available in the aggregate for options under this Plan
is 3,000. Shares to be
<PAGE>
-2-
granted may be authorized and unissued shares or may be treasury shares. If an
option expires, terminates or is canceled without being exercised or becoming
vested, new options may thereafter be granted under the Plan covering such
shares unless Rule 16b-3 provides otherwise. No option may be granted more than
10 years after the effective date of the Plan.
The total number of shares with respect to which ISO and NQSO awards
in the aggregate may be granted to any one employee may not exceed 1500 shares
per calendar year (subject to substitution or adjustment as provided in Section
9).
5. TERMS AND CONDITIONS OF ISOS
Each ISO granted under the Plan shall be evidenced by an ISO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform with this Plan and contain the following terms and
conditions:
(a) Exercise Price. The exercise price under each option shall be
--------------
equal to or greater than the fair market value of the Common Stock at
the time such option is granted. If an option is granted to an
employee who at the time of grant owns stock possessing more than ten
percent of the total combined voting power of all classes of stock of
the Corporation (a "10-percent Shareholder"), the purchase price shall
be at least 110 percent of the fair market value of the stock subject
to the option.
(b) Duration of Option. Each option by its terms shall not be
------------------
exercisable after the expiration of ten years from the date such
option is granted. In the case of an option granted to a 10-percent
Shareholder, the option by its terms shall not be exercisable after
the expiration of five years from the date such option is granted.
Any option that remains unexercised after the latest date it could
have been exercised under any provision of this Plan shall be
forfeited as of such date.
(c) Options Nontransferable. Each option by its terms shall not be
-----------------------
transferable by the participant otherwise than by will or the laws of
descent and distribution, and shall be exercisable, during the
participant's lifetime, only by the participant, the participant's
guardian or the participant's legal representative.
(d) Exercise Terms. Each option granted under the Plan shall become
--------------
exercisable at such time and upon the attainment of such goals as may
be specified by the Committee at the time of grant, which conditions
may vary from one grant to another. Options may be partially
exercised from time to time during the period extending from the time
they first become exercisable until the tenth anniversary (fifth
anniversary for a 10-percent Shareholder) of the date of grant.
No outstanding option may be exercised by any person if the
employee to whom the option is granted is, or at any time after the
date of grant has been, in competition with the Corporation. The
Committee has the sole discretion to determine whether an employee's
actions constitute competition with the Corporation or an affiliated
company. The Committee may impose such other terms and conditions on
the exercise of options as it deems appropriate to serve the purposes
for which this Plan has been established.
No outstanding option may be exercised at any time prior to a
"public offering" of the Corporation's shares. Public offering for
purposes of this Plan means any underwritten sale of the Corporation's
Common Stock pursuant to an effective registration statement under the
Securities Act filed with the Securities
<PAGE>
-3-
and Exchange Commission on Form S-1 (or a successor form adopted by
the Securities and Exchange Commission). Any issuance of Common Stock
or rights to acquire Common Stock to employees of the Corporation
pursuant to this or any other incentive or compensation plan shall not
be considered a Public Offering.
(e) Maximum Value of ISO Shares. No ISO shall be granted to an
---------------------------
employee under this Plan or any other ISO plan of the Corporation or
its subsidiaries to purchase shares as to which the aggregate fair
market value (determined as of the date of grant) of the Common Stock
which first become exercisable by the employee in any calendar year
exceeds $100,000.
(f) Payment of Exercise Price. An option shall be exercised upon
-------------------------
written notice to the Corporation accompanied by payment in full for
the shares being acquired. The payment shall be made in cash, by
check or, if the option agreement so permits, by delivery of shares of
Common Stock of the Corporation beneficially owned by the participant,
duly assigned to the Corporation with the assignment guaranteed by a
bank, trust company or member firm of the New York Stock Exchange, or
by a combination of the foregoing. Any such shares so delivered shall
be deemed to have a value per share equal to the fair market value of
the shares on such date.
Subject to the approval of the Board of Directors upon
recommendation by the Committee, in respect of the exercise of
options, the Corporation may loan to the employee a sum equal to an
amount which is not in excess of 100% of the purchase price of the
shares so purchased upon exercise, such loan to be evidenced by the
execution and delivery of a promissory note. Interest shall be paid
on the unpaid balance of the promissory note at such times and at such
rate as shall be determined by the Board of Directors. Such
promissory note shall be secured by the pledge to the Corporation of
shares having an aggregate purchase price on the date of exercise
equal to or greater than the principal amount of such note. An
optionee shall have, as to such pledged shares, all rights of
ownership, including the right to vote such shares and to receive
dividends paid on such shares, subject to the security interest of the
Corporation. Such shares shall not be released by the Corporation
from the pledge unless the proportionate amount of the note secured
thereby has been repaid to the Corporation. All notes executed
hereunder shall be payable at such times and in such amounts and shall
contain such other terms as shall be specified by the Board of
Directors, provided, however, that such terms shall conform to
requirements contained in any applicable regulations which are issued
by any governmental authority.
6. TERMS AND CONDITIONS FOR NQSOS
Each NQSO granted under the Plan shall be evidenced by a NQSO option
agreement in such form as the Committee shall approve from time to time, which
agreement shall conform to this Plan and contain the same terms and conditions
as the ISO option agreement except that the 10-percent Shareholder restrictions
in Sections 5(a) and 5(b) and the maximum value of share rules of Section 5(e)
shall not apply to NQSO grants. To the extent an option initially designated as
an ISO exceeds the value limit of Section 5(e), it shall be deemed a NQSO and
shall otherwise remain in full force and effect.
7. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Corporation shall not be required to deliver any certificate upon
the grant, vesting or exercise of any option until it has been furnished with
such opinion, representation or
<PAGE>
-4-
other document as it may reasonably deem necessary to ensure compliance with
any law or regulation of the Securities and Exchange Commission or any other
governmental authority having jurisdiction under this Plan. Certificates
delivered upon such grant, vesting or exercise may bear a legend restricting
transfer absent such compliance. Further, the participant is not permitted to
vest or to exercise any option prior to a Public Offering (as Public Offering is
defined in section 5(e) of this Agreement). Each option shall be subject to the
requirement that, if at any time the Committee shall determine, in its
discretion, that the 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 regulatory body, is
necessary or desirable as a condition of, or in connection with, the granting of
such options or the issue or purchase of shares thereunder, such options may not
vest or be exercised in whole or in part unless such listing, registration,
qualification, consent or approval shall have been effected or obtained free of
any conditions not acceptable to the Committee in the exercise of its reasonable
judgment.
8. IMPACT OF TERMINATION OF EMPLOYMENT
(a) If the employment of a participant terminates by reason of death
or disability (as determined by the Committee), any option may be exercised by
the participant or, in the event of the participant's death, by the
participant's personal representative any time prior to the earlier of the
expiration date of the option or the expiration of three months after the date
of termination, but only if, and to the extent that, the participant was
entitled to exercise the option at the date of such termination.
(b) If the employment of a participant terminates on account of
retirement, all of the participant's outstanding options shall become
immediately vested and these options together with previously vested but
unexercised options may be exercised prior to the earlier of the expiration date
of the option or the expiration of one year from the date of retirement. For
this purpose, "retirement" means any voluntary termination of employment after
reaching age 60. If an option is exercised more than three months following
termination of employment, it shall be treated as an NQSO even if it would have
been treated as an ISO if exercised within three months of retirement.
(c) Upon termination of a participant's employment for "cause," any
vested option may not be exercised after termination of employment. For
purposes of this Section 8, "cause" shall mean (i) the participant's theft or
embezzlement, or attempted theft or embezzlement, of money or property of the
Corporation, the participant's perpetration or attempted perpetration of fraud,
or the participant's participation in a fraud or attempted fraud, on the
Corporation or the participant's unauthorized appropriation of, or attempt to
misappropriate, any tangible or intangible assets or property of the
Corporation; (ii) any act or acts of disloyalty, misconduct or moral turpitude
by the participant which the Board determines in good faith has been or is
likely to be demonstrably injurious to the interest, property, operations,
business or reputation of the Corporation, or the participant's conviction of a
crime other than minor traffic violations or other similar minor offenses, (iii)
the participant's repeated intentional refusal or willful failure (other than by
reason of disability as determined in Section 8(a)) to carry out reasonable
instructions by his superiors, or (iv) the participant's breach of any
confidentiality agreement with the Corporation.
(d) Upon termination of a participant's employment for any reason
other than retirement, death or disability or for cause after a Public Offering
has occurred, any vested option that was exercisable immediately preceding
termination may be exercised at any time prior to the earlier of the expiration
date of the option or the expiration of three months after the date of such
termination.
<PAGE>
-5-
(e) If, prior to a Public Offering, the employment of a participant
is terminated without cause or a participant resigns from the Corporation, the
Corporation, upon the recommendation of the Chief Executive Officer, shall
repurchase the vested shares of the participant at fair market value, provided
the participant executes and delivers a covenant not to compete within 10 days
of termination in the form as attached at Exhibit A hereof.
(f) Unless otherwise determined by the Committee, an authorized leave
of absence shall not constitute a termination of employment for purposes of this
Plan. For purposes of this Agreement, Public Offering has the meaning ascribed
to it in Section 5 (d) of this Plan.
(g) If the employment of a participant terminates for any reason
other than disability, retirement or death, any unpaid balance remaining on any
promissory note used in the purchase of stock shall become due and payable upon
not less than three months' notice from the Corporation, which notice may be
given at any time after such termination; provided, however, that such unpaid
balance on such promissory note shall become due and payable five years from the
date of such termination, unless the note has an earlier due date. In the case
of termination due to death, any unpaid balance remaining on such note on the
date of death shall become due and payable one year from such date.
(h) An option that remains unexercised after the latest date it could
have been exercised under any of the foregoing provisions shall be forfeited.
9. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Corporation by
reason of any stock dividend, stock split, recapitalization, reorganization,
merger, consolidation, split-up, combination, or exchange of shares, or of any
similar change affecting the Common Stock, the number and kind of shares
authorized under Section 4, the number and kind of shares which thereafter are
subject to an option under the Plan and the number and kind of unexercised
options set forth in options under outstanding agreements and the price per
share shall be adjusted automatically consistent with such change to prevent
substantial dilution or enlargement of the rights granted to, or available for,
participants in the Plan.
10. WITHHOLDING TAXES
A participant's benefits under the terms of this Plan shall be subject
to such federal, state and local income and employment tax withholdings as
benefits of this type are normally subject. Whenever the Corporation proposes
or is required to issue or transfer shares of Common Stock under the Plan, the
Corporation shall have the right to require the recipient to remit to the
Corporation an amount sufficient to satisfy any federal, state and/or local
income and employment withholding tax requirements prior to the delivery of any
certificate or certificates for such shares or to take any other appropriate
action to satisfy such withholding requirements. Notwithstanding the foregoing,
subject to such rules as the Committee may promulgate and compliance with any
requirements under Rule 16b-3, the recipient may satisfy such obligation in
whole or in part by electing to have the Corporation withhold shares of Common
Stock from the shares to which the recipient is otherwise entitled.
<PAGE>
-6-
11. NO EMPLOYMENT RIGHTS
The Plan and any options granted under the Plan shall not confer upon
any participant any right with respect to continuance as an employee of the
Corporation or any subsidiary, nor shall they interfere in any way with the
right of the Corporation or any subsidiary to terminate the participant's
position as an employee at any time.
12. RIGHTS AS A SHAREHOLDER
The recipient of any option under the Plan shall have no rights as a
shareholder with respect thereto unless and until certificates for the
underlying shares of Common Stock are issued to the recipient.
13. STOCKHOLDERS AGREEMENT
The Board, in its discretion, may require that as a condition to a
participant's exercise of any option, the participant must enter into a
Shareholders Agreement with the Corporation in form and substance as acceptable
to the Board.
14. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the Committee or
by the shareholders of the Corporation, except that the Committee may not,
without approval of a majority of the shareholders present in person or by
proxy, materially increase the benefits accruing to participants under the Plan,
materially increase the maximum number of shares as to which options may be
granted under the Plan, change the minimum exercise price of options, change the
class of eligible persons, extend the period for which options may be granted or
exercised, or withdraw the authority to administer the Plan from the Committee
or a committee of the Committee consisting solely of outside directors unless
the Board determines that inside directors may serve on the Committee.
Notwithstanding the foregoing, to the extent permitted by law, the Committee may
amend the Plan without the approval of shareholders, to the extent it deems
necessary to cause the Plan to comply with Securities and Exchange Commission
Rule 16b-3 or any successor rule, as it may be amended from time to time or as
otherwise permitted under Rule 16b-3 promulgated under the Exchange Act and the
Code. Except as required by law, no amendment, modification, or termination of
the Plan may, without the written consent of a participant to whom any option
shall theretofore have been granted, adversely affect the rights of such
participant under such option.
15. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in the event of a
change in control of the Corporation (as defined in subsection (c) below), (i)
the vesting schedule of each option holder shall be accelerated by one year; or
(ii) a minimum of 50% of all of a participant's options (meaning all options
ever granted and not canceled including those already vested), starting with the
options granted under the earliest options grant to the participant, shall
become immediately vested, whichever is greater.
(b) In the event of a change in control each participant holding an
exercisable option (i) shall have the right at any time thereafter during the
term of such option to exercise the option in full notwithstanding that a Public
Offering of the Corporation's shares has not occurred except that, as to a
change of control by merger, the exercise price and number of shares of the
acquiring corporation issuable upon exercise shall be divided and multiplied,
respectively by the exchange ratio in effect, and (ii) may, subject to Committee
approval and after written notice to the Corporation within 60 days after the
change in control, or, if the participant is an officer
<PAGE>
-7-
subject to Section 16 of the Exchange Act and to the extent required to exempt
the transaction under Rule 16b-3, during the period beginning on the third
business day and ending on the twelfth business day following the first release
for publication by the Corporation after such change of control of a quarterly
or annual summary statement of earnings, which release occurs at least six
months following grant of the option, whichever period is longer, receive, in
exchange for the surrender of the option or any portion thereof to the extent
the option is then exercisable in accordance with clause (i), an amount of cash
equal to the difference between the fair market value (as determined by the
Committee) on the date of surrender of the Common Stock covered by the option or
portion thereof which is so surrendered and the option price of such Common
Stock under the option.
(c) For purposes of this section, "change in control" means:
(1) there shall be consummated
(i) any consolidation or merger of the Corporation in which the
Corporation is not the continuing or surviving corporation or pursuant
to which any shares of the Corporation's common stock are to be
converted into cash, securities or other property, provided that the
consolidation or merger is not with a corporation which was a wholly-
owned subsidiary of the Corporation immediately before the
consolidation or merger; or
(ii) any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially all, of
the assets of the Corporation (other than to one or more directly or
indirectly wholly-owned subsidiaries of the Corporation); or
(2) the shareholders of the Corporation approve any plan or proposal for
the liquidation or dissolution of the Corporation; or
(3) any person (as such term is used in Sections 13(d) and 14(d) of the
Exchange Act) shall become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act), directly or indirectly, of 30% or more of
the Corporation's then outstanding common stock, provided that such person
shall not be a wholly-owned subsidiary of the Corporation immediately
before it becomes such 30% beneficial owner; or
(4) individuals who constitute the Corporation's Board of Directors on the
date hereof (the "Incumbent Board") cease for any reason to constitute at
least a majority thereof, provided that any person becoming a director
subsequent to the date hereof whose election, or nomination for election by
the Corporation's shareholders, was approved by a vote of at least three
quarters of the directors comprising the Incumbent Board (either by a
specific vote or by approval of the proxy statement of the Corporation in
which such person is named as a nominee for director, without objection to
such nomination) shall be, for purposes of this clause (4), considered as
though such person were, and shall be deemed to be, a member of the
Incumbent Board.
16. EFFECTIVE DATE
The effective date of the Plan is August 12, 1998. The effective date
of this restatement is the date of shareholder approval as noted below.
<PAGE>
-8-
17. DEFINITIONS
Any terms or provisions used herein which are defined in Sections 83,
162(m), 421, or 422 of the Internal Revenue Code as amended, or the regulations
thereunder or corresponding provisions of subsequent laws and regulations in
effect at the time options are made hereunder, shall have the meanings as
therein defined.
18. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal
Revenue Code that relate to options, this Plan and any option agreement adopted
pursuant to it shall be construed under the laws of the State of Delaware.
Dated as of December 16, 1999
CHOICE ONE COMMUNICATIONS INC.
By: /S/ Steve M. Dubnik
-------------------------------
Steve Dubnik
President and CEO
Date of Shareholder Approval: December 16, 1999
<PAGE>
EXHIBIT 10.2
------------
CHOICE ONE COMMUNICATIONS INC.
1999 DIRECTORS' STOCK INCENTIVE PLAN
Choice One Communications Inc., a Delaware corporation, hereby
establishes the Choice One Communications Inc. 1999 Directors' Stock Incentive
Plan (the "Plan") as follows:
1. PURPOSE
The purpose of the Plan is to enable Choice One Communications Inc.
(the "Company") to attract and retain outside directors and provide them with an
incentive to maintain and enhance the Company's long-term performance record. It
is intended that this purpose will best be achieved by granting eligible
directors non-qualified stock options ("options") under this Plan pursuant to
the rules set forth in Section 83 of the Internal Revenue Code, as amended from
time to time.
2. ADMINISTRATION
The Plan shall be administered by the Company's Board of Directors
(the "Board"). Subject to the provisions of the Plan, the Board shall possess
the authority, in its discretion, (a) to prescribe the form of the stock option
agreements, including any appropriate terms and conditions applicable to the
options, and to make any amendments to such agreements or options; (b) to
interpret the Plan; (c) to make and amend rules and regulations relating to the
Plan; and (d) to make all other determinations necessary or advisable for the
administration of the Plan. The Board's determinations shall be conclusive and
binding. No member of the Board shall be liable for any action taken or decision
made in good faith relating to the Plan or any option granted hereunder.
3. ELIGIBLE DIRECTORS
Members of the Board of Directors of the Company who are not also
employees of the Company or its subsidiaries are eligible to participate in this
Plan.
4. SHARES AVAILABLE
An aggregate of 1500 shares of the Common Stock (par value $0.01 per
share) of the Company (subject to substitution or adjustment as provided in
Section 8 hereof) shall be available for the grant of options under the Plan.
Such shares may be authorized and unissued shares. If an option expires,
terminates or is cancelled without being exercised, new options may thereafter
be granted covering such shares. No options may be granted more than ten years
after the effective date of the Plan.
5. TERMS AND CONDITIONS OF OPTIONS
Each option granted under the Plan shall be evidenced by an option
agreement in such form as the Board shall approve from time to time, which
agreement shall conform with this Plan and contain the following terms and
conditions:
(a) Number of Shares. As soon as administratively practicable on or
----------------
following the shareholder approval of this Plan, and following the
date of each annual
<PAGE>
-2-
meeting of shareholders thereafter, each newly-elected or continuing
eligible director of the Company shall receive an option to purchase
100 shares of the Company's Common Stock. An eligible director of the
Company who begins Board service on a date other than the date of an
annual meeting of shareholders shall receive a pro rata grant to cover
the partial year remaining to the date of the next annual meeting of
shareholders. The number of shares subject to such option shall be
multiplied by a fraction (not to exceed 1.0), the numerator of which
is the number of full or partial months in the period commencing on
the first day of the month following the new Board member's
appointment and ending on the next annual meeting of shareholders and
the denominator of which is twelve. Any fractional share shall be
rounded up to the next highest whole number of shares.
(b) Exercise Price. The exercise price of each option shall equal
--------------
the fair market value of the Common Stock at the time such option is
granted.
(c) Duration of Option. Each option by its terms shall not be
------------------
exercisable after the expiration of ten years from the date such
option is granted.
(d) Options Nontransferable. Each option by its terms shall not be
-----------------------
transferable by the participant otherwise than by will or the laws of
descent and distribution, and shall be exercisable, during the
participant's lifetime, only by the participant, the participant's
guardian or the participant's legal representative.
(e) Exercise Terms. Each option granted under the Plan shall become
--------------
exercisable pursuant to a vesting schedule set forth in the option
agreement. Options may be partially exercised from time to time
during the period extending from the time they first become
exercisable until the tenth anniversary of the date of grant.
(f) Payment of Exercise Price. An option shall be exercised upon
-------------------------
written notice to the Company accompanied by payment in full for the
shares being acquired. The payment shall be made in cash, by check or,
if the option agreement so permits, by delivery of shares of Common
Stock of the Company registered in the name of the participant, duly
assigned to the Company with the assignment guaranteed by a bank,
trust company or member firm of the New York Stock Exchange, or by a
combination of the foregoing. Any such shares so delivered shall be
deemed to have a value per share equal to the fair market value of the
shares on such date. For this purpose, fair market value shall equal
the closing price of the Company's Common Stock on the listing
exchange on the date the option is exercised, or, if there was no
trading in such stock on the date of such exercise, the closing price
on the last preceding day on which there was such trading.
6. GENERAL RESTRICTION ON ISSUANCE OF STOCK CERTIFICATES
The Company shall not be required to deliver any certificate upon the
grant of any option, the exercise of an option or the satisfaction of any
condition with respect to any option until it has been furnished with such
opinion, representation or other document as it may reasonably deem necessary to
insure compliance with any law or regulation of the Securities and Exchange
Commission or any other governmental authority having jurisdiction under this
Plan. Certificates delivered upon such grant, exercise or satisfaction of any
condition may bear a legend restricting transfer absent such compliance. Each
option shall be subject to the requirement that, if at any time the Board shall
determine, in its discretion, that the 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 regulatory
body,
<PAGE>
-3-
is necessary or desirable as a condition of, or in connection with, the granting
of such option or the issue or purchase of shares thereunder, such option may
not be granted or exercised in whole or in part unless such listing,
registration, qualification, consent or approval shall have been effected or
obtained free of any conditions not acceptable to the Board of Directors in the
exercise of its reasonable judgment.
7. TERMINATION OF EMPLOYMENT
If a director dies, either before or after termination as a director,
resigns from the Board as a result of a conflict of interest or is removed from
the Board for cause, any option may be exercised by the director or by the
director's personal representative, as the case may be, at any time prior to the
earlier of the expiration date of the option or the first anniversary of the
director's date of death, resignation or removal but only if, and to the extent
that, the director was entitled to exercise the option at the date of death,
resignation or removal. If a director's employment as a director terminates for
any reason other than death, resignation due to a conflict or removal for cause,
option rights shall continue to vest in accordance with the terms of the option
agreement without regard to the termination of employment and may be exercised
by the director pursuant to the terms of that agreement.
8. ADJUSTMENT OF SHARES
In the event of any change in the Common Stock of the Company by
reason of any stock dividend, stock split, recapitalization, reorganization,
merger, consolidation, split-up, combination, or exchange of shares, or rights
offering to purchase Common Stock at a price substantially below fair market
value, or of any similar change affecting the Common Stock, the number and kind
of shares authorized under Section 4, the number and kind of shares which
thereafter are subject to an option under the Plan and the number and kind of
shares set forth in options under outstanding agreements and the price per share
shall be adjusted automatically consistent with such change to prevent
substantial dilution or enlargement of the rights granted to, or available for,
participants in the Plan.
9. NO EMPLOYMENT RIGHTS
The Plan and any options granted under the Plan shall not confer upon
any director any right with respect to continuance as a director of the Company,
nor shall they interfere in any way with any right the Company may have to
terminate the director's position as a director at any time.
10. RIGHTS AS A SHAREOWNER
The recipient of any option under the Plan shall have no rights as a
shareowner with respect thereto unless and until certificates for shares of
Common Stock are issued to the recipient.
11. AMENDMENT AND DISCONTINUANCE
This Plan may be amended, modified or terminated by the shareholders
of the Company or by the Company's Board of Directors, provided that Plan
provisions relating to the amount, price and timing of options may not be
amended more than once every six months other than to comport with changes in
the Internal Revenue Code or the regulations thereunder and provided further
that the Board may not, without approval of the shareowners, materially increase
the benefits accruing to participants under the Plan, increase the maximum
number of shares as to which options may be granted under the Plan, change the
minimum exercise price, change the class of eligible persons, extend the period
for which options may be granted or exercised, or withdraw the authority to
administer the Plan from the Board or a Committee of the Board. Notwithstanding
the foregoing, to the extent permitted by law, the Board may amend the
<PAGE>
-4-
Plan without the approval of shareowners, to the extent it deems necessary to
cause the Plan to comply with Securities and Exchange Commission Rule 16b-3 or
any successor rule, as it may be amended from time to time. Except as required
by law, no amendment, modification, or termination of the Plan may, without the
written consent of a director to whom any option shall theretofore have been
granted, adversely affect the rights of such director under such option.
12. CHANGE IN CONTROL
(a) Notwithstanding other provisions of the Plan, in the event of a
change in control of the Company (as defined in subsection (c) below), all of a
participant's options shall become immediately vested and exercisable unless
directed otherwise by a resolution of the Board adopted prior to and
specifically relating to the occurrence of such change in control.
(b) In the event of a change in control each participant holding an
exercisable option (i) shall have the right at any time thereafter during the
term of such option to exercise the option in full notwithstanding any
limitation or restriction in any option agreement or in the Plan, and (ii) may,
subject to Board approval and after written notice to the Company within 60 days
after the change in control, or during the period beginning on the third
business day and ending the twelfth business day following the first release for
publication by the Company after such change of control of a quarterly or annual
summary statement of earnings, which release occurs at least six months
following grant of the option, whichever period is longer, receive, in exchange
for the surrender of the option or any portion thereof to the extent the option
is then exercisable in accordance with clause (i), an amount of cash equal to
the difference between the fair market value (as determined by the Board) on the
date of surrender of the Common Stock covered by the option or portion thereof
which is so surrendered and the option price of such Common Stock under the
option.
(c) For purposes of this section "change in control" means:
1) there shall be consummated
i. any consolidation or merger of the Company in which the Company
is not the continuing or surviving corporation or pursuant to
which any shares of the Company's common stock are to be
converted into cash, securities or other property, provided that
the consolidation or merger is not with a corporation which was a
wholly-owned subsidiary of the Company immediately before the
consolidation or merger; or
ii. any sale, lease, exchange or other transfer (in one transaction
or a series of related transactions) of all, or substantially
all, of the assets of the Company; or
2) the shareholders of the Company approve any plan or proposal for
the liquidation or dissolution of the Company; or
3) any person (as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
shall become the beneficial owner (within the meaning of Rule 13d-3 under
the Exchange Act), directly or indirectly, of 30% or more of the Company's
then outstanding common stock, provided that such person shall not be a
wholly-owned subsidiary of the Company immediately before it becomes such
30% beneficial owner; or
4) individuals who constitute the Board on the date hereof (the
"Incumbent Board") cease for any reason to constitute at least a majority
thereof, provided that any person becoming a director subsequent to the
date hereof whose election, or nomination for election by the Company's
shareowners, was approved by a vote of at least three
<PAGE>
-5-
quarters of the directors comprising the Incumbent Board (either by a
specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director, without objection to such
nomination) shall be, for purposes of this clause (d), considered as though
such person were a member of the Incumbent Board.
13. EFFECTIVE DATE
The effective date of the Plan shall be the date this Plan is approved
by the affirmative vote of the owners of a majority of the Company's outstanding
shares of Common Stock.
14. DEFINITIONS
Any terms or provisions used herein which are defined in Section 83 of
the Internal Revenue Code as amended, or the regulations thereunder or
corresponding provisions of subsequent laws and regulations in effect at the
time options are made hereunder, shall have the meanings as therein defined.
15. GOVERNING LAW
To the extent not inconsistent with the provisions of the Internal
Revenue Code that relate to non-qualified stock options, this Plan and any
agreement adopted pursuant to it shall be construed under the laws of the State
of New York.
Dated: December 16, 1999 CHOICE ONE COMMUNICATIONS INC.
By: /s/ Steve M. Dubnik
-------------------
Title: Chairman and Chief Executive Officer
------------------------------------
Date of Shareholder Approval: December 16, 1999
<PAGE>
Exhibit 10.23
GENERAL AGREEMENT
BETWEEN
CHOICE ONE COMMUNICATION INC.
AND
LUCENT TECHNOLOGIES INC.
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
<C> <S> <C>
ARTICLE I GENERAL TERMS AND CONDITIONS.......................................................................... 1
1.1 DEFINITIONS:....................................................................................... 1
1.2 TERM OF AGREEMENT:................................................................................. 3
1.3 SCOPE:............................................................................................. 3
1.4 CUSTOMER RESPONSIBILITY:........................................................................... 4
1.5 ORDERS:............................................................................................ 4
1.6 CHANGES IN CUSTOMER'S ORDERS:...................................................................... 5
1.7 CHANGES IN PRODUCTS:............................................................................... 5
1.8 PRICES:............................................................................................ 5
1.9 INVOICES AND TERMS OF PAYMENT:..................................................................... 6
1.10 PURCHASE MONEY SECURITY INTEREST:.................................................................. 7
1.11 TAXES:............................................................................................. 8
1.12 TRANSPORTATION AND PACKING:........................................................................ 8
1.13 TITLE AND RISK OF LOSS:............................................................................ 8
1.14 WARRANTY:.......................................................................................... 9
1.15 INFRINGEMENT:......................................................................................11
1.16 CUSTOMER'S REMEDIES:...............................................................................12
1.17 INSURANCE:.........................................................................................13
1.18 USE OF INFORMATION:................................................................................13
1.19 DOCUMENTATION:.....................................................................................13
1.20 NOTICES:...........................................................................................14
1.21 FORCE MAJEURE:.....................................................................................14
1.22 ASSIGNMENT:........................................................................................14
1.23 TERMINATION OF AGREEMENT FOR BREACH:...............................................................15
1.24 ARBITRATION:.......................................................................................15
1.25 NON-SOLICITATION:..................................................................................16
1.26 INDEPENDENT CONTRACTOR:............................................................................16
1.27 RELEASES VOID:.....................................................................................16
1.28 PUBLICITY:.........................................................................................16
1.29 CONFIDENTIALITY OF AGREEMENT:......................................................................16
1.30 AMENDMENTS:........................................................................................16
1.31 SEVERABILITY:......................................................................................17
1.32 WAIVER:............................................................................................17
1.33 SURVIVAL:..........................................................................................17
1.34 SECTION HEADINGS:..................................................................................17
1.35 CHOICE OF LAW:.....................................................................................17
1.36 AMBIGUITIES:.......................................................................................17
ARTICLE II PROVISIONS APPLICABLE TO LICENSED MATERIALS..........................................................17
2.1 LICENSE FOR LICENSED MATERIALS:....................................................................17
2.2 CHANGES IN LICENSED MATERIALS:.....................................................................18
2.3 CANCELLATION OF LICENSE:...........................................................................18
2.4 OPTIONAL SOFTWARE FEATURES:........................................................................18
</TABLE>
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<PAGE>
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<TABLE>
<CAPTION>
<C> <S> <C>
2.5 ADDITIONAL RIGHTS IN LICENSED MATERIALS:...........................................................19
2.6 INSTALLATION OF SOFTWARE:..........................................................................19
2.7 SOFTWARE ACCEPTANCE:...............................................................................19
2.8 MODIFICATIONS BY CUSTOMER TO USER CONTROLLED MODULES:..............................................20
2.9 ADDITIONAL SOFTWARE RIGHTS FOR 5ESS(R)SWITCH LICENSED MATERIALS....................................20
ARTICLE III PROVISIONS APPLICABLE TO ENGINEERING, INSTALLATION AND OTHER SERVICES................................21
3.1 SITE REQUIREMENTS:.................................................................................21
3.2 ADDITIONAL ITEMS TO BE PROVIDED BY CUSTOMER:.......................................................22
3.3 ITEMS TO BE FURNISHED BY SELLER....................................................................25
3.3.1 ENGINEERING:....................................................................................25
3.3.2 INSTALLATION:...................................................................................26
3.4 ACCEPTANCE.........................................................................................29
3.5 WORK OR SERVICES PERFORMED BY OTHERS:..............................................................29
ARTICLE IV ENTIRE AGREEMENT......................................................................................29
4.1 ENTIRE AGREEMENT...................................................................................29
</TABLE>
<PAGE>
The mailing, delivery or negotiation of this Agreement by Lucent or its
agent or attorney shall not be deemed an offer by Lucent to enter into any
transaction or to enter into any other relationship, whether on the terms
contained herein or on any other terms. This Agreement shall not be binding upon
Lucent, nor shall Lucent have any obligations or liabilities or Customer any
rights with respect thereto, or with respect to the transactions contemplated by
the Agreement, unless and until the Agreement has been approved by the executive
officers and/or Board of Directors of Lucent and Lucent has executed and
delivered this Agreement. Until such execution and delivery of this Agreement,
Lucent may terminate all negotiation and discussion of the subject matter
hereof, without cause and for any reason, without recourse or liability.
<PAGE>
This General Agreement Number LNM980612RMCO (hereinafter "General
Agreement" or "Agreement") is made effective as of the 17th day of July, 1998
("Effective Date") by and between Choice One Communication Inc., a Delaware
corporation, with offices located at 333 West Commercial Street, Suite 2500,
Inc., a Delaware corporation, acting through its Global Service Providers Group,
with offices located at 600 Mountain Avenue, Murray Hill, New Jersey 07974
(hereinafter "Seller").
WHEREAS, Seller desires to supply to Customer and Customer desires to
procure from Seller the products and services described herein, pursuant to the
terms and conditions contained herein.
NOW, THEREFORE, in consideration of the mutual promises herein
contained and other good and valuable consideration, the receipt and sufficiency
of which is hereby acknowledged, the parties intending to be lawfully bound
agree as follows:
ARTICLE I
GENERAL TERMS AND CONDITIONS
1.1 DEFINITIONS:
For the purpose of this Agreement, the following definitions will
apply:
(a) "Affiliate" of a corporation means its Subsidiaries, any company of
which it is a Subsidiary, and other Subsidiaries of such company.
(b) "Bill and Hold Products" means Products, Licensed Materials, and/or
parts thereof, which the Customer requests and Seller agrees to inventory or
warehouse, at a price mutually agreed to by the parties, until final delivery to
the Customer.
(c) "Customer Price List" means Seller's published "Ordering and Price
Guides" or other price notification releases furnished by Seller for the purpose
of communicating Seller's prices or pricing related information to Customer,
however, this does not include firm price quotations.
(d) "Cutover" means the verification by Seller and Customer of actual
usage over the installed Products. This function occurs after Turnover and is
not performed by Seller unless specifically requested by Customer and is usually
covered under a separate Professional Services Agreement.
(e) "Delivery Date" means the date required under this Agreement by
which all deliverables ordered by Customer are to be delivered to the
destination specified in the order.
(f) "Designated Processor" means the Product for which licenses to Use
Licensed Materials are granted.
<PAGE>
- 2 -
(g) "Firmware" means a combination of (1) hardware and (2) Software
represented by a pattern of bits contained in such Hardware.
(h) "Fit" means physical size or mounting arrangement (e.g., electrical
or mechanical connections).
(i) "Form means physical shape.
(j) "Function" means the operation the Product performs.
(k) "Hazardous Materials" means material designated as a "hazardous
chemical substance or mixture" pursuant to Section 6 of the Toxic Substance
Control Act; a "hazardous material" as defined in the Hazardous Materials
Transportation Act (49 U.S.C. 1801, et seq.); "hazardous substance" as defined
in the Occupational Safety and Health Act Hazard Communication Standard (29 CFR
1910.1200) or as defined in the Comprehensive Governmental Response,
Compensation and Liability Act, 42 U.S.C. 9601(14), or other pollutant or
contaminant.
(l) "Installation Complete Date," means the date on which OS Software
or transmission systems Software is installed by Seller at the location
specified in the order and determined by Seller to be ready for Use by Customer.
(m) "Licensed Materials" means the Software and Related Documentation
for which licenses are granted by Seller under this Agreement; no Source Code
versions of Software are included in Licensed Materials.
(n) "OS Software" means the object code Software, for operations
systems, embodied in any medium, including firmware.
(o) "Product" means equipment hardware, and parts thereof, but the term
does not mean Software whether or not such Software is part of Firmware.
(p) "Related Documentation" means materials useful in connection with
Software such as, but not limited to, flowcharts, logic diagrams and listings,
program descriptions and Specifications.
(q) "Services" means any engineering, installation or repair services
to be performed by Seller under this Agreement, but the term "Services" does not
include any services provided by the Professional Services Division of Seller's
Network Systems Group unless otherwise expressly agreed to in writing by the
parties.
(r) "Software" means a computer program consisting of a set of logical
instructions and tables of information that guide the functioning of a
processor. Such program may be contained in any medium whatsoever, including
hardware containing a pattern of bits, representing such program. However, the
term "Software" does not mean or include such medium.
<PAGE>
- 3 -
(s) "Source Code" means any version of Software incorporating
high-level or assembly language that generally is not directly executable by a
processor.
(t) "Specifications" means Sellers or its vendor's technical
specifications for particular Products or Software furnished hereunder.
(u) "Statement of Work" (SOW) means the detailed description of the
actual Services to be performed which includes the expected completion dates of
such Services as shown in Exhibit 1.
(v) "Subsidiary" means any corporation in which Customer owns more than
fifty percent (50%) of the eligible voting stock; such corporation shall be
deemed to be a Subsidiary of such Customer only as long as such ownership or
control exists.
(w) "Turnover" means, with respect to Products and Software to be
installed by Seller, the point at which Seller has completed the installation
and notifies Customer that the installation is completed and that Seller has
confirmed that the installed Product and/or Software comply with Seller's
Specifications. This term does not mean Cutover which is separately defined
herein.
(x) "Use," with respect to Licensed Materials means loading the
Licensed Materials, or any portion thereof, into a Designated Processor for
execution of the instructions and tables contained in such Licensed Materials.
1.2 TERM OF AGREEMENT:
The term of this Agreement shall commence on the Effective Date and
shall continue in effect thereafter for a period of three (3) years ("Term").
This Agreement may be extended as. mutually agreed to in writing by the parties.
1.3 SCOPE:
(a) The terms and conditions of this Agreement shall apply to all
transactions occurring during the Term whereby Products, Licensed Materials or
Services are provided by Sellers Global Service Providers Group (formerly
Network Systems Group) to Customer. Purchase orders placed under this General
Agreement for Seller's 5ESS(R)-2000 Switching Systems Products, Transmission
Systems Products and related Licensed Materials shall be governed by the terms
set forth in Appendix A attached hereto and made a part hereof. Except as
expressly stated in this Agreement, this Agreement shall not apply to any
products, licensed materials or services offered for supply by any other group
(e.g., Microelectronics, Business Communications Systems) within Lucent. By
placing orders with Seller, including change and/or addition orders, or using
any Products, Licensed Materials, or Services provided hereunder, Customer
agrees to be bound to the terms of this Agreement. Customer understands and
agrees that all Products, Licensed Materials, or Services furnished by Seller to
Customer pursuant to this Agreement shall be for Customers own internal use in
the United States only. Products, Licensed Materials or Services furnished under
this Agreement are not: being supplied for resale and shall not be resold by
Customer.
<PAGE>
- 4 -
(b) All firm price quotes made by Seller to Customer shall incorporate
the terms and conditions of this Agreement. Any conflicting terms and conditions
of a firm price quote, signed by an authorized representative of Seller and
Customer and dated after the effective date of this Agreement, will supersede
the comparable terms of this Agreement.
1.4 CUSTOMER RESPONSIBILITY:
Customer shall, at no charge to Seller, provide Seller with such
technical information, data, technical support or assistance as may reasonably
be required by Seller to fulfill its obligations under this Agreement, any
subordinate agreement or order. If Customer fails to provide the technical
information, data, support or assistance, Seller shall be discharged from any
such obligation.
1.5 ORDERS:
(a) All orders submitted by Customer for Products, Licensed Materials,
and Services shall incorporate and be subject to the terms and conditions of
this Agreement. Any order submitted pursuant to a firm price quotation shall
include such firm price quotation number. All orders, including electronic
orders, shall contain the information as detailed below:
(i) Complete and correct ship to and bill to address;
(ii) The quantity and type of Products, Licensed Materials, and
Services being ordered;
(iii) The price;
(iv) The requested Delivery Date in accordance with Seller's
standard interval for the Products, Licensed Materials, and
Services being ordered. In the event a non-standard interval
has been mutually agreed to by the parties, reference to the
specific document agreeing to the interval needs to be
included;
(v) The requested completion date in accordance with Sellers
standard interval for the Products, Licensed Materials, and
Services being ordered;
(vi) Reference to this Agreement;
(vii) If an order is for Bill and Hold Products, the phrase "Bill
and Hold" must be clearly and conspicuously stated, in the
order.
The requested Delivery Date of any order must be in accordance with
Sellers published standard order intervals in effect on the date of receipt of
order by Seller. Seller reserves the right to change such standard order
intervals without notification to Customer but only with respect to future
orders. Such change shall not affect orders accepted by Seller prior to the
change to the standard order intervals. Electronic orders shall be binding on
Customer notwithstanding the absence of a signature. All orders are subject to
acceptance by Seller. Seller reserves the right to place any order on hold,
delay shipment, and/or reject any order due to, but not limited to the breach or
default by Customer of its obligations under this Agreement or Customer's
insufficient credit limits. Terms and conditions on Customer's purchase order
which are inconsistent with the provisions of this Agreement and any pre-printed
terms and conditions on Customer's purchase order shall be ineffective, void and
of no force and effect. Orders shall be sent to the following address:
<PAGE>
- 5 -
Lucent Technologies Inc.
Customer Service
6701 Roswell Road
Building D - 3rd Floor
Atlanta, GA 30328-2501
(b) if an order is for Bill and Hold Products, the phrase "Bill and
Hold" must clearly and conspicuously appear on the order. In the event Customer
orders Bill and Hold Products, Seller will defer final shipment of such
Product(s) until the final ship date indicated on the purchase order or such
final ship date as is mutually agreed between the parties provided that in no
event shall Seller be obligated to hold Bill and Hold Products longer than one
(1) year from the date of the applicable purchase order. Customer agrees to pay
to Seller a monthly stocking fee for any Bill and Hold Products held beyond the
final ship date indicated on the purchase order or otherwise mutually agreed to
date.
1.6 CHANGES IN CUSTOMER'S ORDERS:
Changes by Customer to an order which has been previously accepted by
Seller (a "Change Order") are subject to acceptance by Seller. Change Orders
shall be treated as a separate order and shall follow Seller's change order
process. In the event Seller accepts a Change Order and such change affects
Seller's ability to meet its obligations under the original order, any price (or
discount, if applicable), shipment date or Services completion date quoted by
Seller with respect to such original order is subject to change. Seller will
provide to Customer written quotations and expected completion dates for any
requested Change Orders.
1.7 CHANGES IN PRODUCTS:
Prior to shipment, Seller may at any time make changes in Products.
Seller may modify the Product(s) drawings and Specifications or substitute
Products of later design. Seller agrees that such modifications or substitutions
will not impact upon Form, Fit, or Function under normal and proper use of the
ordered Product as provided in Sellers Specifications. With respect to changes,
modifications, and substitutions that do impact the Form, Fit, or Function of
the ordered Product, Seller shall notify Customer in writing thirty (30) days
prior to the date the changes become effective. In the event the Customer
objects to the change, Customer shall notify Seller within thirty (30) days from
the date of notice. Upon receipt of notice, Seller shall not furnish modified
Products to Customer on any orders in process.
1.8 PRICES:
(a) To the extent Customers order is subject to a firm price quotation
made by Seller, prices, fees, and charges (hereinafter "Prices) shall be as set
forth in Sellers firm price quotation.
(b) Except as expressly stated in this Agreement, in all other cases
Prices shall be those contained in Sellers Customer Price Lists. The applicable
Customer Price Li st shall be the issue that is in effect on the date of
Seller's receipt of the order. The requested Delivery Date of such order must be
in accordance with Sellers published shipping or planning interval or thirty
(30) days from the date of order receipt, whichever is longer. Prices for
Products and license fees for Licensed Materials to be shipped, or Services to
be performed beyond the published
<PAGE>
- 6 -
shipping interval will be based upon the date required for order entry by Seller
in accordance with Customers requested date. and applying the Price from the
Customer Price List as of that date.
(c) Seller may amend its Prices, other than those subject to firm price
quotations and, except when applicable Prices are adjusted for changes in raw
material prices, Seller agrees to provide thirty (30) days written notice of any
increase in Prices contained in Sellers Customer Price Lists. When Prices
contained in Sellers Customer Price Lists are adjusted for changes in raw
material prices, Sellers new Prices will be revised effective the first day of
any given month. The basis for raw material adjustments will be provided to
Customer upon request.
1.9 INVOICES AND TERMS OF PAYMENT:
(a) Payment for Products, Licensed Materials and Services (including
transportation charges and taxes, if applicable) will be due in accordance with
the payment schedule described below. Upon acceptance of the purchase order and
initial payment required below, Seller will commence the order fulfillment
process. Seller shall notify Customer when the Products and/or Licensed
Materials are ready for shipment. Upon such notification, Customer shall arrange
the electronic transfer of funds for the second payment in accordance with
subsection (c) below. Upon receipt of the second scheduled payment, Seller will
release the shipment for delivery to Customer. Seller will provide Customer a
"record only" invoice after receipt of the second payment. Such invoice will
reflect the amount due and payments received through the date of the invoice. If
Seller is responsible for installation, the final payment will be invoiced upon
Turnover or as soon thereafter as practical. For furnish only orders the third
and final payments will be invoiced upon shipment or as soon as practical
thereafter. In either case the payment is due for receipt by Seller within
thirty (30) days of the date of the invoice.
With respect to the payment for Products, Licensed Materials and
Services specified in this General Agreement, in the event that Customer enters
into a loan agreement with a third party lender to finance the procurement of
the Products, Licensed Materials and Services, under this Agreement, the "Loan
Agreement" between Customer and lender may authorize lender to pay proceeds
directly to Seller. Seller agrees to accept payment from lender in satisfaction
of Customer's payment obligation hereunder; however, that the Terms of Payment
set forth in this Section shall be complied with in full.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Payment Milestone Schedule Percent of Total Amount of Purchase Order Due
- ----------------------------------------------------------------------------------------------------------------------
To Accompany Purchase Order (Initial Payment) 15%
- ----------------------------------------------------------------------------------------------------------------------
Prior to Shipment of Products (Second Payment) 40%
- ----------------------------------------------------------------------------------------------------------------------
Due to Seller within thirty (30) days of Shipment of 30%
Products (Third Payment)
- ----------------------------------------------------------------------------------------------------------------------
Due to Seller within thirty (30) days of date of invoice 15%
(Final Payment)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- 7 -
(b) For Products, Licensed Materials and Services (including
transportation charges and taxes, if applicable) that are not required to be
paid in advance, Seller will invoice Customer, all amounts due for Products and
Licensed Materials upon shipment and all amounts due for Services, upon
completion of Services or, in either event, as soon as practical thereafter
Customer shall pay such invoiced amounts for receipt by Lucent within thirty
(30) days of the invoice date. Bill and Hold Products will be invoiced by Seller
upon the earlier of (i) completion of assembly at Seller's facility or (ii) upon
stocking at Customer's designated location. Such invoice will serve as Seller's
notification that Bill and Hold Products are complete and ready to be released
by Customer for final shipment. A sample invoice is provided in Exhibit 2 for
informational purposes only.
(c) Customer shall pay all amounts due Seller hereunder using
Electronic Funds Transfer ("EFT") whether amounts have been invoiced by Seller
or are due as advance payments. EFT payments by Customer shall be made to the
following account of Seller or such other account as is subsequently designated
by Seller in writing and, concurrent with the EFT payment, Customer shall fax a
copy of the remittal to Seller's Manager Cash Operations at 770-750-4288.
Chase Manhattan Bank
New York, New York
Account Name: Lucent Technologies Inc.
ACCT. 910144-9099
ABA 021000021
(d) If Customer fails to pay any invoiced amount when due, the invoiced
amount will be subject to a late payment charge at the rate of one and one half
percent (1-1/2%) per month, or portion thereof, of the amount due (but not to
exceed the maximum lawful rate). Customer agrees to pay Sellers attorneys fees
and other costs incurred by Seller in the collection of any amounts invoiced
hereunder.
(e) Customer agrees to review all invoices furnished by Seller
hereunder upon receipt and, notify Seller of any billing discrepancies within
ten (10) days of receipt of the applicable invoice. Such inquiries can be
directed to Seller in writing or by telephone. Inquiries shall be made to the
telephone number or, if in writing, to the address identified on the invoice.
1.10 PURCHASE MONEY SECURITY INTEREST:
(a) Seller reserves and Customer agrees that Seller shall have a
purchase money security interest in all Products and Licensed Materials
heretofore supplied or hereafter supplied to Customer by Seller under this
Agreement until any and all payments and charges due Seller under this Agreement
including, without limitation, shipping and installation charges, are paid in
full. Seller shall have the right, at any time during the Term and without
notice to Customer, to file in any state or local jurisdiction such financing
statements (e.g., UCC-1 financing statements) as Seller deems necessary to
perfect its purchase money security interest hereunder. Upon request by Seller,
Customer hereby agrees to execute all documents necessary to secure Sellers
purchase money security interest including without limitation, UCC-1 or such
other documents Seller deems reasonably necessary. Notwithstanding the foregoing
obligation of
<PAGE>
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Customer to execute, Customer hereby irrevocably appoints Seller as its
attorney-in-fact for purposes of executing and filing such financing statements
and such other documents prepared by Seller or its designated agent for purposes
of perfecting Sellers security interest hereunder. Customer also agrees that
this Agreement may be filed by Seller in any state or local jurisdiction as a
financing statement (or as other evidence of the Seller's purchase money
security interest).
(b) In addition to any other remedy available to Seller as provided
herein, by common law and by statute, Seller may exercise its right to reclaim
all Products and Licensed Materials sold to Customer pursuant to UCC-702 or such
other applicable provision as it may exist from state to state, upon discovery
of Customers insolvency, provided Seller demands in writing reclamation of such
goods before ten (10) days after receipt of such goods by Customer, or if such
ten (10) day period expires after the commencement of a bankruptcy case, before
twenty (20) days after receipt of such goods by the Customer.
1.11 TAXES:
Customer shall be liable for all taxes and related charges, however
designated, imposed upon or based upon the provision, sale, license or Use of
Products, Licensed Materials or Services levied upon the sale, excluding taxes
on Seller's net income, unless Customer provides Seller with a valid tax exempt
certificate. Seller's failure to collect taxes in accordance herewith shall not
be deemed to be an authorization to resell Products or Services or sublicense
Licensed Materials.
1.12 TRANSPORTATION AND PACKING:
Seller, in accordance with its normal practices, shall arrange for
prepaid transportation to destinations in. the contiguous United States and
shall invoice transportation charges to Customer. Premium transportation will be
used only at Customer's request. Seller shall pack Products for delivery in the
contiguous United States, in accordance with its standard practices for domestic
shipments. Where, in order to meet Customer's requests, Seller packs Products in
other than its normal manner or for destinations outside the contiguous United
States, Customer shall pay the additional charges for such packing and
transportation.
1.13 TITLE AND RISK OF LOSS:
Title to Products only and risk of loss to Products and Licensed
Materials shall pass to Customer upon delivery to the Customer. Title to all
Licensed Materials (whether or not part of Firmware) furnished by Seller, and
all copies thereof made by Customer, including translations, compilations and
partial copies are, and shall remain, the property of Seller. Title to Products
only and risk of loss for Products and Licensed Material for Bill and Hold
Products shall pass to Customer upon stocking at Seller's facility or Customers
designated location, whichever occurs earlier. Customer shall notify Seller
promptly of any claim with respect to loss which occurs while Seller has the
risk of loss and shall cooperate in every reasonable way to facilitate the
settlement of any claim. For purposes of this section, "delivery" shall mean the
point at which Seller or Seller's supplier or agent turns over possession of the
Product or Licensed Materials to Customer, Customer's employee, Customer's
designated carrier, Customer's warehouse, or other Customers agent and not
necessarily the final destination shown on the order.
<PAGE>
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1.14 WARRANTY:
(a) Seller warrants to Customer only, that during the applicable
Warranty Periods set forth below (i) Sellers manufactured Products (exclusive of
Software) will be free from defects in material and workmanship and will conform
to Seller's Specifications for such Products; (ii) Software developed by Seller
will be free from those defects which materially affect performance in
accordance with Sellers Specifications; and (iii) Services will be performed in
a workmanlike manner and in accordance with good usage and accepted practices in
the community in which Services are provided. With respect to Products or
Software or partial assembly of Products furnished by Seller but neither
manufactured by Seller nor purchased by Seller pursuant to its procurement
Specifications ("Vendor Items"), Seller, to the extent permitted, does hereby
assign to Customer the warranties given to Seller by its vendor(s) of such
Vendor Items.
(b) For purposes of this Agreement the term "Warranty Period" means the
period of time listed below which, unless otherwise stated, commences on date of
shipment or, if installed by Seller the earliest of either: (i) acceptance by
Customer; or (ii) thirty (30) days from the date Seller submits its notice of
completion of its installation; or (iii) the date Customer first Outs Products
and/or Licensed Materials into service. For Bill and Hold Products the warranty
will commence upon the date of stocking at Sellers facility or Customer's
designated location. The Warranty Period for any Product or Software (or part
thereof) repaired or replaced under this Section 1.14 is the period listed in
the right column below or the unexpired portion of the new Product Warranty
Period, whichever is longer.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
SELLERS MANUFACTURED PRODUCTS AND SOFTWARE
WARRANTY PERIOD
- ----------------------------------------------------------------------------------------------------------------------
Base Period New Product Repaired Product or Part
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Switching Systems Products 24 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
Central Office Power Equipment:
- ----------------------------------------------------------------------------------------------------------------------
Associated with Switching Systems 24 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
Not Associated with Switching Systems 12 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
Transmission Systems Products:
- ----------------------------------------------------------------------------------------------------------------------
DACS-IV 2000 60 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
FT-2000 OC-48 60 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
DDM-2000 OC-3/OC-12 60 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
DDM-2000 FIBER REACH 60 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
SLC 2000 Access System 60 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
SLC 2000 MSDT 60 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
SLC Series 5 (System and Plug In) 60 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
Other Transmission Products (i.e., DDM Plus Repeater 24 Months 6 Months
Cases)
- ----------------------------------------------------------------------------------------------------------------------
Network Cable Systems Products 12 Months 3 Months
- ----------------------------------------------------------------------------------------------------------------------
All Other Products 2 Months 2 Months
- ----------------------------------------------------------------------------------------------------------------------
Software:
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
- 10 -
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Switching System Software 12 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
Transmission Systems Software 12 Months 6 Months
- ----------------------------------------------------------------------------------------------------------------------
Operations Systems Software 3 Months 1 Month
- ----------------------------------------------------------------------------------------------------------------------
All Other Software 3 Months 1 Month
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
(c) If, under normal and proper use, a defect or non-conformity appears
in Sellers manufactured Products or Software during the applicable Warranty
Period and Customer promptly notifies Seller in writing of such defect or
non-conformance and follows Seller's instructions regarding return of defective
or non-conforming Product or Software, Seller, at its option, will either
repair, replace or correct the same without charge at its manufacturing or
repair facility or provide a refund or credit based on the original purchase
price or license fee. If engineering or installation Services prove not to be
performed as warranted within a six (6) month period commencing on the date of
completion of the Services, Seller, at its option, either will correct the
defect or non-conforming Services or render a full or pro-rated refund or credit
based on the original charges for the Services. No Product or Software will be
accepted for repair or replacement without the written authorization of and in
accordance with instructions of Seller. Removal and reinstallation expenses as
well as transportation expenses associated with returning such Product or
Software to Seller shall be borne by Customer. Seller shall pay the costs of
transportation of the repaired or replacing Product or Software to any United
States destination designated by Customer. If Seller determines that returned
Product or Software is not defective, Customer shall pay Sellers costs of
handling, inspecting, testing and transportation and, if applicable travel and
related expenses. In repairing or replacing any Product, part of Product, or
Software medium under this warranty, Seller may use either new, remanufactured,
reconditioned, refurbished or functionally equivalent Products or parts.
Replaced Products or parts shall become Seller's property.
(d) With respect to Seller's manufactured Products which Seller has
ascertained are not readily returnable for repair, Seller, at its option, with
concurrence from Customer, may elect to repair or replace the Products at
Customer's site. Customer's concurrence shall not be unreasonably withheld. If a
visit to Customer's site is necessary, reasonable prior notification will be
given when access is required. Customer, at its expense, shall make the Products
accessible for repair or replacement and shall restore the site after Seller has
completed its repairs or replacement.
(e) Seller makes no warranty with respect to defective conditions or
non-conformities resulting from any of the following: Customers modifications,
misuse, neglect, accident or abuse; improper wiring, repairing, splicing,
alteration, installation, storage or maintenance; use in a manner not in
accordance with Sellers or its vendor's Specifications, or operating
instructions or failure of Customer to apply previously applicable Seller's
modifications or corrections. In addition, Seller makes no warranty with respect
to Products which have had their serial numbers or month and year of manufacture
removed, altered and with respect to expendable items, including, without
limitation, fuses, light bulbs, motor brushes and the like. No warranty is made
that Software will run uninterrupted or error free, and in addition Seller makes
no warranty with respect to defects related to Customer's data base errors.
(f) THE FOREGOING WARRANTIES ARE EXCLUSIVE AND ARE IN LIEU OF ALL OTHER
EXPRESS AND IMPLIED WARRANTIES, INCLUDING BUT NOT LIMITED
<PAGE>
- 11 -
TO WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
CUSTOMER'S SOLE AND EXCLUSIVE REMEDY SHALL BE SELLER'S OBLIGATION TO REPAIR,
REPLACE, CREDIT, OR REFUND AS SET FORTH ABOVE IN THIS WARRANTY.
1.15 INFRINGEMENT:
(a) In the event of any claim, action, proceeding or suit by a third
party against Customer alleging an infringement of any United States patent,
United States copyright, or United States trademark, or a violation in the
United States of any trade secret or proprietary rights by reason of the use, in
accordance with Sellers Specifications, of any Product or Licensed Materials
furnished by Seller to Customer under this Agreement, Seller, at its expense,
will defend Customer, subject to the conditions and exceptions stated below.
Seller will reimburse Customer for any cost, expense or attorneys' fees,
incurred at Seller's written request or authorization, and will indemnify
Customer against any liability assessed against Customer by final judgment on
account of such infringement or violation arising out of such use.
(b) If Customer's use shall be enjoined or in Seller's opinion is
likely to be enjoined, Seller will, at its expense and at its option, either (1)
replace the enjoined Product or Licensed Materials furnished pursuant to this
Agreement with a suitable substitute free of any infringement; (2) modify it so
that it will be free of the infringement; or (3) procure for Customer a license
or other right to use it. If none of the foregoing options are practical, Seller
will remove the enjoined Product or Licensed Materials and refund to Customer
any amounts paid to Seller therefor less a reasonable charge for any actual
period of use by Customer.
(c) Customer shall give Seller prompt written notice of all such
claims, actions, proceedings or suits alleging infringement or violation and
Seller shall have full and complete authority to assume the sole defense
thereof, including appeals, and to settle same. Customer shall, upon Seller's
request and at Sellers expense, furnish all information and assistance available
to Customer and cooperate in every reasonable way to facilitate the defense
and/or settlement of any such claim, action, proceeding or suit.
(d) No undertaking of Seller under this section shall extend to any
such alleged infringement or violation to the extent that it: (1) arises from
adherence to design modifications, specifications, drawings, or written
instructions which Seller is directed by Customer to follow, but only if such
alleged infringement or violation does not reside in corresponding commercial
Product or Licensed Materials of Seller's design or selection; or (2) arises
from adherence to instructions to apply Customers trademark, trade name or other
company identification; or (3) resides in a product or licensed materials which
are not of Seller's origin and which are furnished by Customer to Seller for use
under this Agreement; or (4) relates to uses of Product or Licensed Materials
provided by Seller in combinations with other Product or Licensed Materials,
furnished either by Seller or others, which combination was not installed,
recommended or otherwise approved by Seller. In the foregoing cases numbered (1)
through (4), Customer will defend and save Seller harmless, subject to the same
terms and conditions and exceptions stated above, with respect to the Seller's
rights and obligations under this section.
<PAGE>
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(e) The liability of Seller and Customer with respect to any and all
claims, actions, proceedings or suits by third parties alleging infringement of
patents, trademarks or copyrights or violation of trade secrets or proprietary
rights because of, or in connection with, any Products or Licensed Materials
furnished pursuant to this Agreement shall be limited to the specific
undertakings contained in this section.
1.16 CUSTOMER'S REMEDIES:
(a) CUSTOMER'S EXCLUSIVE REMEDIES AND THE ENTIRE LIABILITY OF SELLER,
ITS AFFILIATES AND THEIR EMPLOYEES, AND AGENTS, AND ITS SUPPLIERS FOR ANY CLAIM,
LOSS, DAMAGE, OR EXPENSE OF CUSTOMER OR ANY OTHER ENTITY ARISING OUT OF THIS
AGREEMENT, OR THE USE OR PERFORMANCE OF ANY PRODUCT, LICENSED MATERIALS, OR
SERVICES, WHETHER IN AN ACTION FOR OR ARISING OUT OF BREACH OF CONTRACT, TORT,
INCLUDING NEGLIGENCE, INDEMNITY, OR STRICT LIABILITY, SHALL BE AS FOLLOWS:
1) FOR INFRINGEMENT - THE REMEDY SET FORTH IN THE "INFRINGEMENT'
SECTION;
2) FOR THE NON-PERFORMANCE OF PRODUCTS, SOFTWARE, AND SERVICES DURING
THE WARRANTY PERIOD - THE REMEDY SET FORTH IN THE APPLICABLE WARRANTY SECTION;
3) FOR TANGIBLE PROPERTY DAMAGE AND PERSONAL INJURY CAUSED BY SELLER'S
NEGLIGENCE - THE AMOUNT OF THE PROVEN DIRECT DAMAGES;
4) FOR EVERYTHING OTHER THAN AS SET FORTH ABOVE - THE AMOUNT OF THE
PROVEN DIRECT DAMAGES NOT TO EXCEED $100,000 PER OCCURRENCE INCLUDING AWARDED
COUNSEL FEES AND COSTS.
(b) NOTWITHSTANDING ANY OTHER PROVISION OF THIS AGREEMENT, SELLER, ITS
AFFILIATES AND THEIR EMPLOYEES, AND AGENTS, AND ITS SUPPLIERS SHALL NOT BE
LIABLE FOR ANY INCIDENTAL, INDIRECT, OR CONSEQUENTIAL DAMAGES OR LOST PROFITS,
REVENUES OR SAVINGS ARISING OUT OF THIS AGREEMENT, OR THE USE OR PERFORMANCE OF
ANY PRODUCT, LICENSED MATERIALS, OR SERVICES, WHETHER IN AN ACTION FOR OR
ARISING OUT OF BREACH OF CONTRACT, TORT, INCLUDING NEGLIGENCE, OR STRICT
LIABILITY. THIS SECTION 1.16(B), SHALL SURVIVE FAILURE OF AN EXCLUSIVE OR
LIMITED REMEDY.
(c) CUSTOMER SHALL GIVE SELLER PROMPT WRITTEN NOTICE OF ANY CLAIM. ANY
ACTION OR PROCEEDING AGAINST SELLER MUST BE BROUGHT WITHIN TWENTY-FOUR (24)
MONTHS AFTER THE CAUSE OF ACTION ACCRUES.
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1.17 INSURANCE:
Both parties shall maintain during the term of this Agreement the
following insurance coverage as well as other insurance required by law in the
jurisdictions where the work is performed: (1) Workers' Compensation and related
insurance as required by law; (2) employers liability insurance with a limit of
at least five hundred thousand ($500,000) dollars for each occurrence; (3)
Commercial General Liability (CGL) insurance with a limit of at least one
million dollars ($1,000,000) dollars per occurrence; and (4) automobile
liability insurance with a limit of at least one million ($1,000,000) dollars
for bodily injury, including death, to any one person. Each party shall furnish
prior to the start of work, if requested by the other, certificates of the
insurance required by this clause. Each party shall notify the other in writing
at least thirty (30) days prior to cancellation of or any material change in the
policy. Notwithstanding the above, Seller shall have the option where permitted
by law to self-retain any or all of the foregoing risks.
1.18 USE OF INFORMATION:
All technical and business information in whatever form recorded which
bears a legend or notice restricting its use, copying, or dissemination or, if
not in tangible form, is described as being proprietary or confidential at the
time of disclosure and is subsequently summarized in a writing so marked and
delivered to the receiving party within thirty (30) days of disclosure to the
receiving party (all hereinafter designated "Information") shall remain the
property of the furnishing party. The furnishing party grants the receiving
party the right to use such Information only for purposes expressly permitted in
this section. Such Information (1) shall not be reproduced or copied, in whole
or part, except for use as authorized in this Agreement; and (2) shall, together
with any full or partial copies thereof, be returned or destroyed when no longer
needed. Moreover, when Seller is the receiving party, Seller shall use such
Information only for the purpose of performing under this Agreement, and when
Customer is the receiving party, Customer shall use such Information only (1) to
order; (2) to evaluate Sellers Products, Licensed Materials and Services; or (3)
to install, operate and maintain the particular Products and Licensed Materials
for which it was originally furnished. Unless the furnishing party consents in
writing, such Information, except for that part, if any, which is known to the
receiving party free of any confidential obligation, or which becomes generally
known to the public through acts not attributable to the receiving party, shall
be held in confidence by the receiving party. The receiving party may disclose
such Information to other persons, upon the furnishing party's prior written
authorization, but solely to perform acts which this section expressly
authorizes the receiving party to perform itself and further provided such other
person agrees in writing (a copy of which writing will be provided to the
furnishing party at its request) to the same conditions respecting use of
Information contained in this section and to any other reasonable conditions
requested by the furnishing party.
1.19 DOCUMENTATION:
Seller shall furnish to Customer, at no additional charge, one (1) copy
of the documentation for Products and/or one (1) copy of the Related
Documentation for Software licensed to Customer. Such documentation shall be
that which is customarily provided by Seller to its Customers at no additional
charge. Such documentation shall be sufficient to enable
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Customer to operate and maintain such Products and Software in accordance with
Seller's Specifications. Such documentation shall be provided either prior to,
included with, or shortly after shipment of Products and/or Software from Seller
to Customer. Additional copies of such documentation are available at prices set
forth in Seller's Customer Price Lists.
1.20 NOTICES:
(a) Any notice, demand or other communication (other than an order)
required, or which may be given, under this Agreement shall, unless specifically
otherwise provided in this Agreement, be in writing and shall be given or made
by nationally recognized overnight courier service, confirmed facsimile, or
certified mail, return receipt requested and shall be addressed to the
respective parties as follows:
If to Seller:
Lucent Technologies Inc.
Global Commercial Markets
5440 Millstream Road, E2N32
I-85 & Mt. Hope Church Road
McLeansville, North Carolina 27301
Attn: Contract Manager
If to Customer:
Choice One Communication Inc.
333 West Commercial St., Suite 2500
East Rochester, NY 14445
Attn: Kevin Dickens, SVP Engineering and Operations
(b) Any such notice shall be effective upon receipt. Each party may
change its designated representative who is to receive communications and
notices and/or the applicable address for such communications and notices by
giving notice thereof to the other party provided herein.
1.21 FORCE MAJEURE:
Except for payment obligations, neither party shall be held responsible
for any delay or failure in performance to the extent that such delay or failure
is caused by fires, strikes, embargoes, explosions, earthquakes, floods, wars,
water, the elements, labor disputes, government requirements, civil or military
authorities, acts of God or by the public enemy, inability to secure raw
materials or transportation facilities, acts or omissions of carriers or
suppliers, or other causes beyond its control whether or not similar to the
foregoing.
1.22 ASSIGNMENT:
Except as provided in this section, neither party shall assign this
Agreement or any right or interest under this Agreement, nor delegate any work
or obligation to be performed under this Agreement, (an "assignment') without
the other party's prior written consent. Any attempted
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assignment in contravention of this shall be void and ineffective. Nothing shall
preclude a party from employing a subcontractor in carrying out its obligations
under this Agreement. A party's use of such subcontractor shall not release the
party from its obligations under this Agreement. Notwithstanding the foregoing,
Seller has the right to assign this Agreement and to assign its rights and
delegate its duties under this Agreement, in whole or in part, at any time and
without Customer's consent, to any present or future subsidiary or "Affiliate"
of Seller or to any combination of the foregoing. Such assignment or delegation
shall release Seller from any further obligation or liability thereon. Seller
shall give Customer prompt written notice of the assignment. For the purposes of
this section, the term "Agreement" includes this Agreement, any subordinate
agreement placed under this Agreement and any order placed under this Agreement
or subordinated agreement.
1.23 TERMINATION OF AGREEMENT FOR BREACH:
In the event either party is in material breach or default of the terms
of this Agreement and such breach or default continues for a period of ten (10)
days with respect to payment obligations or thirty (30) days with respect to any
other obligations after the receipt of written notice from the other party, then
the party not in breach or default shall have the right to terminate this
Agreement without any charge, obligation or liability except for Products or
Licensed Materials already delivered and Services already performed. The party
not in breach or default shall provide full cooperation to the other party in
every reasonable way to facilitate the, remedy of the breach or default
hereunder within the applicable cure period. Notwithstanding the foregoing, if
the nature of the material breach or default is such that it is not a payment
obligation and it is incapable of cure within the foregoing thirty (30) day
period, then the thirty (30) day cure period may be extended for a reasonable
period of time (in no event to exceed an additional thirty (30) days), provided
that the party in breach or default is proceeding diligently and in good faith
to effectuate a cure.
1.24 ARBITRATION:
If a dispute arises out of or relates to this Agreement, or its breach,
the parties agree to escalate such dispute to their respective senior executives
for good faith negotiations seeking a mutually agreeable resolution. This demand
for escalation shall be in writing and notice shall be served in accordance with
the notice provision of this Agreement. If the dispute is not resolved through
such escalation within fifteen (15) days after the date of escalation, either
party shall have the right to submit the dispute to a sole mediator selected by
the parties or, at any time at the option of a party, to mediation by the
American Arbitration Association (AAN). If not thus resolved, it shall be
referred to a sole arbitrator selected by the parties within thirty (30) days of
the mediation or, in the absence of such selection, to AAA arbitration which
shall be governed by the United States Arbitration Act, and judgment on the
award may be entered in any court having jurisdiction. The arbitrator may
determine issues of arbitrability, but may not award punitive damages or limit,
expand or otherwise modify the terms of this Agreement. The parties, their
representatives, other participants and the mediator and arbitrator shall hold
the existence, content and result of mediation and arbitration in confidence,
except as such disclosure may be necessary for the purpose of recording or
otherwise acting upon the arbitrator's award.
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1.25 NON-SOLICITATION:
During the term of this Agreement and for a period of one (1) year from
the termination of this Agreement or a Statement of Work, the parties agree not
to employ, make an offer of employment to, or enter into a consulting
relationship with any employee, subcontractors or consultant of the other party
who is directly involved with the delivery of Services under this Agreement,
except upon the prior written consent of the affected party.
1.26 INDEPENDENT CONTRACTOR:
All work performed by either party under this Agreement shall, be
performed as an independent contractor and not as an agent of the other, and no
persons furnished by the performing party shall be considered the employees or
agents of the other.
1.27 RELEASES VOID:
Neither party shall require releases or waivers of any personal rights
from representatives or employees of the other in connection with visits to its
premises, nor shall such parties plead such releases or waivers in any action or
proceeding.
1.28 PUBLICITY:
Neither party shall issue or release for publication any articles,
advertising, or publicity material relating to Products, Licensed Materials, or
Services under this Agreement or mentioning or implying the name, trademarks,
logos, trade name, service mark or other company identification of the other
party or any of its Affiliates or any of its personnel without the prior written
consent of the other party.
1.29 CONFIDENTIALITY OF AGREEMENT:
Notwithstanding the obligations contained in Section 1.17 (Use of
Information) of this Agreement the parties shall keep all provisions of this
Agreement and any order submitted hereunder (including, without limitation,
prices and pricing related information) confidential except as reasonably
necessary for performance by the parties hereunder and except to the extent
disclosure may be required by applicable laws or regulations, in which latter
case, the party required to make such disclosure shall promptly inform the other
prior to such disclosure in sufficient time to enable such other party to make
known any objections it may have to such disclosure. The disclosing party shall
take all reasonable steps and exercise all reasonable efforts directed by Seller
to secure a protective order, seek confidential treatment, or otherwise assure
that this Agreement and/or any order will be withheld from the public record.
1.30 AMENDMENTS:
Any supplement, modification or waiver of any provision of this
Agreement must be in writing and signed by authorized representatives of both
parties.
<PAGE>
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1.31 SEVERABILITY:
If any portion of this Agreement is found to be invalid or
unenforceable, the parties agree that the remaining portions shall remain in
effect. The parties further agree that in the event such invalid or
unenforceable portion is an essential part of this Agreement, they will
immediately begin negotiations for a replacement.
1.32 WAIVER:
If either party fails to enforce any right or remedy available under
this Agreement, that failure shall not be construed as a waiver of any right or
remedy with respect to any other breach or failure by the other party.
1.33 SURVIVAL:
The fights and obligations of the parties which by their nature would
continue beyond the termination, cancellation, or expiration of this Agreement,
shall survive such termination, cancellation or expiration.
1.34 SECTION HEADINGS:
The section headings in this Agreement are inserted for convenience
only and are not intended to affect the meaning or interpretation of this
Agreement.
1.35 CHOICE OF LAW:
The construction and interpretation of, and the rights and obligations
of the parties pursuant to this Agreement, shall be governed by the laws of the
State of New York without regard to its conflict of laws. provision.
1.36 AMBIGUITIES:
The parties represent that they are sophisticated businesses with
access to their own legal, financial and business advisors and that each party
has had the opportunity to consult with advisors of their own choosing before
entering into this Agreement. The parties therefore acknowledge and agree that
the rule of law that ambiguities are construed against the drafter shall not
apply to the interpretation of this Agreement.
ARTICLE II
PROVISIONS APPLICABLE TO LICENSED MATERIALS
2.1 LICENSE FOR LICENSED MATERIALS:
(a) Upon delivery of Licensed Materials pursuant to this Agreement,
Seller grants to Customer a personal, nontransferable, and nonexclusive license
to Use Licensed Materials on a Designated Processor in the United States for its
own business operations. No license is granted
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to Customer to Use the Licensed. Materials outside the United States or to
sublicense such Licensed Materials furnished by Seller. Customer shall not
reverse engineer, decompile or disassemble Software furnished as, object code to
generate corresponding Source Code. Unless otherwise agreed in writing by
Seller, Customer, shall not modify Software furnished by Seller under this
Agreement. If the Designated Processor becomes temporarily inoperative, Customer
shall have the: right to use the Licensed Materials temporarily on a backup
processor, until operable status is restored, and processing on the backup
processor is completed;
(b) Customer shall not copy Software embodied in Firmware. Customer
shall not make any copies of any other Licensed Materials except as necessary in
connection with the rights granted hereunder. Customer shall reproduce and
include any Seller copyright and proprietary notice on all such necessary copies
of the Licensed Materials. Customer shall also mark all media containing such
copies with a warning that the Licensed Materials are subject to restrictions
contained in an agreement between Seller and Customer and that such Licensed
Materials are the property of Seller. Customer shall maintain records of the
number and location of all copies of the Licensed Materials. Customer shall take
appropriate action, by instruction, agreement, or otherwise, with the persons
permitted access to the Licensed Materials so as to enable Customer to satisfy
its obligations under this Agreement. If Customer's license is canceled or
terminated, or when the Licensed Materials are no longer needed by Customer,
Customer shall return all copies of such Licensed Materials to Seller or follow
written disposition instructions provided by Seller.
2.2 CHANGES IN LICENSED MATERIALS:
Prior to shipment, Seller at its option may at any time modify the
Specifications relating to its Licensed Materials, provided the modifications,
under normal and proper Use, do not materially adversely affect the Use,
function, or performance of the ordered Licensed Materials. Unless otherwise
agreed in writing, such substitution shall not result in any additional charges
to Customer with respect to licenses for which Seller has quoted fees to
Customer.
2.3 CANCELLATION OF LICENSE:
Notwithstanding any other section in this Agreement to the contrary, if
Customer fails to comply with any of the material terms and conditions of this
Agreement with respect to the Use of Licensed Materials, and such failure is not
corrected within thirty (30) days of receipt of written notice thereof by
Customer, Seller, upon written notice to Customer, may cancel any affected
license for Licensed Materials without further notification.
2.4 OPTIONAL SOFTWARE FEATURES:
Software provided to Customer under this Agreement may contain optional
features which are separately licensed and priced. Customer understands and
agrees that such optional features will not be activated without written
authorization from Seller and Customers payment of the appropriate license fees.
If, in spite of Customer's best efforts to comply with this restriction, such
features are activated, Customer agrees to so notify Seller within five (5)
business days from the date of Customer's knowledge that such features were
activated and to pay Seller the current license fees charged by Seller for the
activated features, as well as the
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reasonable cost of money for the period in which such features were activated.
If such features are inadvertently activated by either party, the features shall
be deactivated immediately when found and such licensees and the reasonable cost
of money for the period in which the features were activated shall not be
required.
2.5 ADDITIONAL RIGHTS IN LICENSED MATERIALS:
(a) Upon thirty (30) days advance written notice, Customer may relocate
the Software permanently to a new processor of Customer. This new processor
shall then become the Designated Processor in lieu of the former Designated
Processor.
(b) Customer may retain an archival copy of the Software for as long as
such Software is relevant to Customer's operations.
2.6 INSTALLATION OF SOFTWARE:
(a) Where Customer is responsible for Software installation, Seller's
sole responsibility is to deliver the Software to Customer on or before the
scheduled Delivery Date agreed to by Seller. However, if the order specifies
that Seller is responsible for such installation, Seller shall deliver the
Software to Customer in sufficient time for it to be installed on or before the
scheduled Installation Complete Date agreed to by Seller, and Seller shall
complete its installation and associated testing on or before such date.
(b) Where Customer has assumed responsibility for the installation of
newly licensed Software and in the event that Customer encounters installation
difficulties, at Customers request, Seller will, at the standard rate in effect
at the time of the request, provide technical assistance.
2.7 SOFTWARE ACCEPTANCE:
(a) Prior to Software acceptance by Customer, Customer has the right to
operate the Software furnished by Seller on the Designated Processor solely for
the purpose of conducting an Acceptance Test (means the test which may be
performed by Customer during the Acceptance Test Period to determine whether
Software will be free from defects which materially affect performance in
accordance with the Seller's Specifications). Unless otherwise agreed by the
parties, the Acceptance Test Period (means the period of time in days agreed to
by the parties and specified in this section) for Software shall be thirty (30)
consecutive calendar days from the ship date if Customer performs installation
or from the Installation Complete Date if Seller performs installation. The
Software shall be deemed accepted by Customer unless Customer notifies Seller in
writing to the contrary within the applicable Acceptance Test Period described
above. If Seller receives written notice from Customer during the Acceptance
Test Period that the Software failed the Acceptance Test, the Acceptance Date
(the date on which the Software successfully completes the Acceptance Test)
shall be extended on a day-to-day basis until such time as the Software passes
the Acceptance Test.
(b) If Customer elects in the order not to perform Acceptance Tests for
any Software, the Acceptance Date for such Software shall be the Delivery Date
if not installed by Seller or the Installation Complete Date if installed by
Seller, as, applicable.
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(c) For any Acceptance Test conducted by Customer on newly licensed
Software, and in the event that Customer encounters difficulties, Seller will,
at Customer's request and for the standard rate in effect at the time of the
request, provide technical assistance to Customer.
(d) If Customer performs installation and elects to perform applicable
tests for any Software, the warranty for such Software shall commence on the
Delivery Date.
2.8 MODIFICATIONS BY CUSTOMER TO USER CONTROLLED MODULES:
Customer may add to, delete from, or modify user controlled Software
modules or menus as contemplated in the Seller's Related Documentation. Such
changes or modifications, however extensive, shall not affect Seller's title to
the licensed Software. Seller shall have no liability for Customer's errors in
making such changes or modifications.
2.9 ADDITIONAL SOFTWARE RIGHTS FOR 5ESS(R) SWITCH LICENSED MATERIALS
The following provisions also apply to the granting of licenses by
Seller to Customer for 5ESS(R) Switch Licensed Materials.
(a) Customer may transfer its right-to-use 5ESS(R) Switch Software
furnished under this Agreement without the payment of an additional right-to-use
fee by transferee, except where size sensitive units are a factor. Such transfer
can be made to an end user for their own internal use and only under the
following conditions:
(i) Such software shall be used only within the United States;
however, Seller will not unreasonably withhold its consent to
Use outside the United States provided that, in the sole
opinion of the Seller, the proprietary information associated
with the Use can be adequately protected and any other
reasonable concerns of Seller are adequately addressed;
(ii) Except as otherwise provided in the Agreement, the right to
use such Software may be transferred only together with the
5ESS(R) Switch Product with which customer has a right to use
such Software, and such right to use the Software shall
continue to be limited to Use with such Product;
(iii) Before any such Software shall be transferred, Customer shall
notify Seller of such transfer and the transferee shall have
agreed in writing (a copy of which will be provided to Seller
at its request) to keep such Software in confidence and to
comply with corresponding conditions respecting Use of
Licensed Materials as those imposed on customer;
(iv) Within the United States, the transferee shall have the same
right to Software warranty or Software maintenance for such
Software as the, transferor, provided the transferee continues
to pay the fees, if any, associated with such Software or
Software maintenance; and
<PAGE>
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(v) In no event shall such transfer be made to any competitor of
Seller who is in the business of manufacturing comparable
systems or to any other party who presents a competitive or
strategic conflict to Seller.
(b) Upon advance written notice to Seller, Customer may remove 5ESS(R)
Switch Software or optional feature packages, which Customer has the right to
Use under this Agreement from one Customer-owned 5ESS(R) Switch Product and
relocate them to another Customer-owned 5ESS(R) Switch Product within the same
company as Customer. Customer shall not be required to pay additional
right-to-use fees as a result of such relocation, except where size sensitive
units are a factor. Seller may charge customer for services requested by
customer in support of such relocation. Such Software shall not be used or
transferred to Customer's affiliate that is a manufacturer of telecommunication
products in direct competition with Seller.
(c) If Seller ceases to maintain a standard, supported version of
Software for the 5ESS(R) Switch Product furnished pursuant to this Agreement,
and these support services are not available from another entity (either working
with or independently from Seller), then Seller shall furnish Customer, under a
confidentiality agreement acceptable to Seller, Sellers then existing Software
Source Code, Software development programs, and associated documentation for
such standard version to the extent necessary for Customer to maintain and
enhance for its own use the standard version of that Software which it has the
right to use under this Agreement.
ARTICLE III
PROVISIONS APPLICABLE TO ENGINEERING,
INSTALLATION AND OTHER SERVICES
GENERAL: The provisions of this Article III shall apply to the Services
ordered by Customer and furnished by Seller under this Agreement.
3.1 SITE REQUIREMENTS:
(a) Customer is solely responsible for ensuring that the installation
site is compliant with any site requirements identified by Seller for the
installation and/or operation of any Products, Licensed Materials, or Services
furnished by Seller under this Agreement. Such site requirements shall include,
without limitation, those site requirements set forth in this Section 3.1 below.
Seller agrees to cooperate with Customer to ensure compliance with all site
requirements, provided that such cooperation shall not require Seller to incur
any out-of-pocket costs unless the parties expressly agree otherwise in writing.
(b) Customer shall be solely responsible for ensuring that the
installation site complies with all applicable laws, orders, and regulations of
federal, state and local governmental entities including, without limitation,
those relating to environmental conditions.
(c) Notwithstanding anything contained in this Agreement to the
contrary, Seller shall have no liability to Customer, its employees, agents, and
customers for any delay by Seller in completion of any installation or other
Service to be provided by Seller under this Agreement
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if such delay is attributable to the failure by Customer to comply with any site
requirements or to provide any other items which are the responsibility of
Customer under this Article III.
(d) The site requirements which are solely the Customer's
responsibility shall include but are not limited to the following:
(i) Participate in a joint site survey with Seller
(ii) Interior Space - Clears ten feet (10') from floor to bottom of
lowest obstruction
(iii) Floor Loading(minimum requirements) Structural Analysis always
required
(iv) Power Room 150 lb. per sq. ft
(v) Switch Room 100 lb. per sq. ft.
(vi) Floor Thickness: In accordance with local seismic requirements
for the equipment
(vii) Conduit access to all floors in building
(viii) Local exchange carrier cable available
(ix) Commercial electrical current
(x) Existing building grounding is 5 ohm or less metered
(xi) Battery room ventilation in accordance with local requirements
(xii) Fire suppression system
(xiii) Freight access for a 48' trailer off loading equipment.
3.2 ADDITIONAL ITEMS TO BE PROVIDED BY CUSTOMER:
(a) Customer will also be responsible for furnishing the items
described in this Section 3.2 as required by the conditions of the particular
installation or other on-site Service at no cost to Seller and such items are
not included in Seller's price for the Services. Seller shall have the right to
invoice Customer for any costs or expenses incurred by Seller as a result of
Customer's failure to provide any of these items described in this Section 3.2
and all such invoices shall be paid by Customer in accordance with this
Agreement.
(i) Access to Building and Work Site. Customer shall provide
--------------------------------
employees of Seller and its subcontractors free access to
premises and facilities at all hours during the scheduled
Service or at such other times as are requested by Seller.
Customer shall obtain for, Seller's employees and its
subcontractors' employees any identification and clearance
credentials which are necessary to enable. Seller and its
subcontractors to have access to the work site.
(ii) Site Coordination. At Seller's request Customer shall
-----------------
coordinate with Customer's sub contractors, property managers,
Regional Bell Operating Company, Local Exchange Carrier and
any other parties and tenants having rights to the work site
or whose participation is necessary in order for Seller to
perform the applicable Services.
<PAGE>
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(iii) Environmental Conditions. Prior to the Services start date,
------------------------
Customer shall insure that the premises will be dry and free
from dust and Hazardous Material s, including but not limited
to asbestos, and that the premises are in such condition as
not to be injurious to Sellers or its subcontractors'
employees or to the Products and Licensed Materials to be
installed, Prior to Services start date and. during the
performance of the Services, Customer shall, it requested by
Seller, provide Seller with sufficient data to assist Seller
and its subcontractors in evaluating the environmental
conditions at the work site (including without limitation, the
presence of Hazardous Materials). The price quoted by Seller
for Services does not include the cost of removal or disposal
of the Hazardous Materials from the work site. Customer is
responsible for the removal and disposal in accordance with
applicable laws, rules and regulation of the Hazardous
Materials, including but not limited to asbestos, prior to
commencement of Services.
(iv) Sensitive Equipment. Prior to the Services start date,
-------------------
Customer shall inform Seller of the presence of any sensitive
equipment at the work site (e.g., equipment sensitive to
static electricity or light).
(v) Repairs to Buildings. Prior to the Services start date,
--------------------
Customer shall make such alterations and repairs to the work
site as are necessary for proper installation of Products and
Licensed Materials.
(vi) Building Readiness. Prior to the Services start date, Customer
------------------
shall provide extraordinary hauling and hoisting services such
as, rigging or crane services, if applicable, and shall
arrange for traffic control, if necessary for the delivery of
Products.
(vii) Openings in Buildings. Customer shall furnish suitable
---------------------
openings in buildings, including, without limitation,
elevators and windows as needed to allow Products to be placed
in position, and shall provide necessary openings and ducts
for cable and conductors in floors and walls as designated on
engineering drawings furnished by Seller. Customer shall
fireproof (with steel covers and as otherwise required by
applicable laws, rules, regulations, and codes) all unopened
paths throughout such buildings.
(viii) Surveys. Prior to the Services start date, Customer shall
-------
provide to Seller (and, if requested by Seller, to Seller's
subcontractors) surveys (describing the physical
characteristics, legal limitations, and utility locations for
the work site) and a legal description of the site.
(ix) Electrical Current, Heat, Light, and Water. Customer shall, in
------------------------------------------
amounts no less than that ordinarily furnished for similar
purposes in a working office, provide electric power, run all
leads to Sellers power board; provide temperature control and
general illumination (regular and emergency) in
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rooms in which services are to be performed or Products
stored, provide exit lights; and provide water and other
necessary utilities for the proper execution of Services.
(x) Building Evacuation. Prior to the Services start date,
-------------------
Customer shall provide building evacuation plans in case of a
fire or other emergency.
(xi) Ceiling Inserts. Provide ceiling inserts as required using
---------------
Seller's standard spacing arrangement for ceiling support
equipment.
(xii) Material Furnished by Customer. Unless expressly stated to the
------------------------------
contrary, Seller's prices do not include costs for any
Customer furnished material nor do they include any Seller
charges for engineering, installation, modification, or repair
Services to Customer furnished material. New or used material
furnished by Customer shall be in such condition that it
requires no repair and no adjustment or test effort in excess
of that normal for new equipment. Customer assumes all
responsibility for the proper functioning of such material.
Customer shall also provide the necessary technical assistance
and information for Seller to properly install such material.
(xiii) Floor Space and Storage Facilities. Customer shall provide,
----------------------------------
for the duration of Services, suitable and easily accessible
floor space and storage facilities to permit storing of
Products and other material, tools and other property of
Seller and its subcontractors in close proximity to where they
will be used. Where the Services are to be performed outside
of a building or in a building under construction, Customer
shall, in addition to the above requirements, permit or secure
any necessary permission for Seller and its subcontractors to
maintain at the work site, storage facilities for Products,
material, tools, and equipment needed to complete the
Services. As appropriate Customer shall provide Seller's and
its subcontractors' personnel access to toilet facilities.
(xiv) Easements, Permits, and Rights-of-Way. Customer shall secure
-------------------------------------
prior to the Service start date and shall maintain for the
duration of the Services all rights-of-way., easements,
licenses, and permits and such other rights and approvals as
are necessary to enable Seller to perform the Services
including, without limitation, all construction and building
permits for work to be performed at the work site and other
areas ancillary to the work site such as sidewalks, streets,
alleys, and highways.
(xv) Customer shall provide such levels of security as are
necessary to prevent admission of unauthorized persons to
building and other areas where installation Services are
performed and to prevent unauthorized removal of the Products
and other materials. Seller will inform Customer as to which
storage facilities at the work site Seller will keep locked.
Such storage facilities will remain closed to Customers
building surveillance.
<PAGE>
- 25 -
(xvi) Access to Existing Equipment. Customer shall permit Seller
----------------------------
reasonable use of such portions of the existing equipment as
are necessary for the proper completion of such tests as
require coordination with existing equipment. Such use shall
not interfere with the Customers normal maintenance of
equipment.
(xvii) Grounds. Customer shall provide access to suitable and
-------
isolated building ground as required for Sellers standard
grounding of equipment. Where installation is performed
outside or in a building under construction, Customer shall
also furnish lightning protection ground.
(xviii) Requirements for Customer Designed Circuits. Customer shall
-------------------------------------------
furnish information covering the proper test and readjust
requirements for apparatus and shall furnish requirements for
circuit performance associated with circuits designed by
Customer or standard circuits modified by Customer's drawings
such as alarm and environmental circuits.
(xix) Cross-Connecting Main Distributing Frames and Installing Heat
-------------------------------------------------------------
Coils. Customer shall install such cross-connections and heat
-----
coils as are necessary in connection with the Services.
(xx) Clearing Equipment for Modifications. Customer shall remove
------------------------------------
cross-connections, transfer service on trunks and sundry
working equipment, and make other arrangements required to
permit Seller to modify existing equipment.
(b) In the event the joint site survey conducted by the parties
pursuant to Section 3.3.2(a) determines that the necessary requirements are not
met at the commencement of the installation of the Products and the Customer
needs to arrange for alterations and/or repairs, the order will be placed on
hold until such time as requirements are met. During such interval, Seller
reserves the right to determine any schedule and price impacts to treat such
product as Bill and Hold, or to cancel such order. Customer shall be responsible
for and agrees to pay the applicable cancellation fee if such order is canceled
by Seller.
3.3 ITEMS TO BE FURNISHED BY SELLER
3.3.1 ENGINEERING:
(a) General Review. Seller will review the following items as Seller
--------------
deems appropriate; switching Products (Products and Software); transmission
Products (Products and Software); power/energy equipment hardware; engineering
drawings; site survey; grounding of the switch; appliance outlets; front and
rear aisle lighting as required; timing cables; distributing frame engineering
and equipment; cable rack and hardware; stanchions; end guards auxiliary
framing; existing cable holes; fiber cable protection systems.
<PAGE>
- 26 -
(b) Needs Analysis. Seller will perform a needs analysis of the
--------------
Telephone Equipment Order (TEO) and the Customer's specified requirements to
determine the equipment solution that meets those requirements.
(c) Records. Upon Installation Complete, Seller will turn over to
-------
Customer a complete set of records. Such records include but are not limited to
wiring lists, front equipment drawings, assignment drawings, and interface
schematics.
3.3.2 INSTALLATION:
(a) Site Survey. Prior to the commencement of installation Services,
-----------
Seller and Customer will perform a joint site survey to determine whether the
installation site meets the site requirements referenced in Section 3.1 and
whether Customer has provided the items in Section 3.2. Should Seller reasonably
determine that the site does not comply with such site requirements or that
Customer has not provided any item required under Section 3.2, Seller shall
specify such deficiencies to Customer in writing. Seller and Customer shall
jointly agree on a course of action to correct such deficiencies prior to the
start of installation Services. During the joint site survey, Seller and
Customer shall also jointly agree upon the layouts and arrangements for the
Products and Licensed Materials to be installed. Upon the start of installation
all changes shall be subject to additional charges.
(b) Method of Procedure. Seller shall prepare a detailed Method of
-------------------
Procedure ("MOP") and review with Customer before starting work. Customer shall
review the MOP prepared by Seller and shall give Seller written acceptance of
the MOP by signing a copy thereof prior to the Services start date. Any changes
to the MOP requested by Customer shall be agreed upon subject to the Change
Order process.
The MOP shall contain the following details:
(i) A concise statement that covers the installation. Services to
be performed including the equipment that will be affected and
the hours that such Services are to be performed;
(ii) Specific responsibilities of Seller and Customer;
(iii) Service protection procedures that include, general service
protection rules and special service precautions for the
specific project;
(iv) A time and release schedule of the work operations involving
working equipment and/or circuits in service;
(v) A method of identifying equipment and cabling to ensure that
the circuits are "cleared" before start of work;
(vi) A detailed account of the work operations that the installer
will follow;
(vii) The methodology to be used to halt installation Services if
trouble occurs and a general procedure to correctly resume
work operations;
(viii) Provide environmental safety concerns, if applicable; and
(ix) Obtain Customer signature.
(c) Warehousing, Delivery, Receipt & On-site Storage of Equipment, and
------------------------------------------------------------------
General Cleaning. Seller will stage the delivery of Products. Seller's personnel
- ----------------
will be on-site at the
<PAGE>
- 27 -
time the Products are delivered. Such personnel will accept the Products, unpack
for inventory purposes and inspect such Products for damage. Seller will resolve
all shipping errors inventory discrepancies and damage issues. This function
shall be performed in an area previously designated for the storage and
unpacking of equipment and Product(s). Such area will be selected based on a
location that minimizes movement of material and personnel through the, work
site. In the event storage is limited or inadequate, as determined by Seller,
temporary storage facilities such as trailers or containers may be required. Any
fees associated with the procurement of temporary storage facilities are not
included in Seller's quoted prices and shall be solely the responsibility of the
Customer. Materials such as plywood or, masonite will be utilized as necessary,
to prevent cable reels, iron work and other heavy objects from damaging floors,
walls and doors. Seller shall perform general cleaning of the equipment and
storage areas (e.g. clearing floors of debris, packing material, etc.) on a
regular basis throughout the installation period. Rubbish shall be disposed of
at Seller's expense and in compliance with local requirements.
(d) Hardware Assembly. Hardware assemblies and overhead cable rack,
-----------------
iron work and conduit (collectively "Components") will be delivered for specific
bays and cabinets as identified in the firm price quote provided or in the
Statement of Work, attached hereto. Unless included in the SOW, additions of
these components to provide access to other locations (i.e. power rooms,
computer rooms, distributing frames not located with Products, or Products
located on separate floors) will be specifically excluded from the installation
Services. Such additions will only be included in the installation Services for
an additional charge. Seller will place and secure all ordered Products in the
location specified in the engineering specifications. Such activity includes but
is not limited to:
(i) Mark and drill floors
(ii) Assemble and place floor mounted Products
(iii) Assemble distribution frames
(iv) Erect frames
(v) Align and junction frames
(vi) Install end guards and covers
(vii) Assemble and install fiber protection ductwork
(viii) Mount units and apparatus
(ix) Place batteries
Seller will also erect supporting hardware compatible with purchased
Products. Such activity includes but is not limited to:
(i) Fabricate and install cable racks, bars, rod or stations as
identified in Statement of Work attached hereto
(ii) Erect ladder rack and ladders
(iii) Open and close existing cable holes and slots. Any new cable
holes to facilitate Product designs are the responsibility of
the Customer
(iv) Fabricate and install framing aisle lighting conduit and
fittings
In addition, Seller will place and designate connecting appliances (MDF
terminal blocks, DSX panels, etc.) provided with order. Such as but not limited
to:
<PAGE>
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(i) Stamp and/or affix aisle, shelf and unit designations
(ii) Mount and stencil terminal strips
Seller will also extend lighting, AC circuits and grounding to include
added Products if Products are ordered in Statement of Work. Such activities
include but are not limited to:
(i) Assemble and install lighting fixtures
(ii) Install switches and receptacles
(e) Cable and Wire For cable and wire to be installed by Seller, Seller
--------------
will run, tag, and secure metallic and fiber optic cables in an unobstructed
environment a maximum of one hundred (100) feet and power cables a maximum of
fifty (50) feet for the Products and apparatus (this specifically excludes
primary power cables, except on power equipment orders) identified in the
Product order or Statement of Work attached hereto. Seller will wire, attach,
terminate and affix all cable and wire including fiber optic cables supplied
with purchased Products. This may include but is not limited to mechanical wire
wrapping, soldering, crimping, plugging in of pre-terminated cables or polishing
of fiber optics for purchased Product. Seller will run alarm cabling, terminate
and test for the identified equipment including Customer provided environmental
scan points of fire detection and door entry which are less than fifty (50) feet
away and pre-terminated. Seller will verify all copper wiring placed by the
Seller for continuity to detect and analyze opens, shorts, reversals, and
incorrect wiring. Where pairs, quads or groupings are indicated, the grouping
will be verified. Seller will ensure the functionality and integrity of all
fiber directly associated with the installed Products and the fiber optic cables
installed by Seller within the building structure. Seller will "Dress" all
cabling and wiring and provide physical protection. Seller will properly protect
cables at all "break-off" locations, such as the vertical turns from the
overhead cable rack to bay frame work.
(f) Testing Specific test procedures are dependent upon the type of
-------
Product installed and are identified in the installation guide for the particula
Product. To ensure that technical design and performance criteria are being met,
testing shall be performed by Seller to obtain an evaluation of the functional,
operational, electrical and mechanical integrity of all Products installed by
Seller. In general the following tests are required for all Product types
furnished and installed by Seller: Seller's activities associated with testing
will include, but not be limited to the following:
(i) Turn on and verify power to installed Products
(ii) Load product software and default parameters required to
conduct local unit loop-back testing to demarcation points.
(iii) Run and connect test specific cross-connects. Remove upon
completion of test(s).
(iv) Perform all unit and system-level tests to ensure Products
pass system and technician evoked diagnostics
(v) Test functionality of circuit packs required by job, at time
of original installation, within the installed unit. Testing
of spares is specifically excluded and will be included only
for an additional charge.
(vi) Test functionality and integrity of Seller installed local
alarms.
<PAGE>
- 29 -
(vii) Resolve troubles encountered with Products purchased on order.
Refer to Customer any trouble found in Customer provided
equipment.
(viii) Maintain test logs and trouble reports and turn over to
Customer.
(g) Seller will perform the following Turnover procedures for all
installation Services provided by Seller:
(i) Inform Customer of completion of installation cycle.
(ii) Provide Customer with all drawings, invoices, logs and test
results per the contract. (iii) Remove from Customer premises
tools and scrap generated from installation effort.
(iv) Issue job completion notice to Customer.
3.4 ACCEPTANCE
(a) All installation Services shall be considered complete and ready
for acceptance by Customer on Turnover. Upon completion of the installation,
Seller will submit to Customer a notice of completion or, if Customer has
elected advance-turnover of subsystems, a notice of completion of
advance-turnover.
(b) Customer shall promptly make its final inspection of substantial
conformance with the Specifications and do everything necessary to expedite
acceptance of the job. Seller will promptly correct any defects for which it is
responsible. All work will be considered as fully accepted unless Seller
receives notification to the contrary within thirty (30) days after submitting
its notice of completion. Notwithstanding the foregoing, Customer shall be
deemed to have accepted any Products and Licensed Materials upon the placement
of the same into service.
3.5 WORK OR SERVICES PERFORMED BY OTHERS:
Work or services performed at the site by Customer or its other vendors
or contractors shall not interfere with Seller's performance of Services. Seller
shall have no responsibility or liability with respect to such work or services
performed by others. If Customer or its other vendors or contractors fail to
timely complete the site readiness or if Customer's or its other vendors' or
contractors' work interferes with Seller's performance, the scheduled completion
date of Seller's Services under this Agreement shall be extended as necessary to
compensate for such delay or interference.
ARTICLE IV
ENTIRE AGREEMENT
4.1 ENTIRE AGREEMENT
The terms and conditions contained in this General Agreement supersede
all prior oral or written understandings between the parties with respect to the
subject matter hereof and
<PAGE>
- 30 -
constitute the entire agreement between the parties with respect to such subject
matter. The preprinted terms and conditions on Customer's purchase orders or
Seller's sales forms are deleted. The typed or handwritten provisions of an
order which are consistent with the terms of this General Agreement along with
the terms of the General Agreement shall constitute the entire Agreement between
the parties relating to said order.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their duly authorized representatives on the date(s) indicated.
Choice One Communication Inc. Lucent Technologies Inc.
By: /s/Steve M. Dubnik By: /s/Gerard T. Cafaro
------------------ -------------------
Name: Steve M. Dubnik Name: Gerard T. Cafaro
Title: President and CEO Title: Assistant Vice President
Date: July 17, 1998 Date: July 20, 1998
<PAGE>
EXHIBIT 10.24
SERVICE BUREAU AGREEMENT
Saville:
SAVILLE SYSTEMS INC. Effective Date: September 30, 1998
One Van de Graaff Drive Term of Agreement: 39 months
Burlington, MA 01803
Customer:
CHOICE ONE COMMUNICATIONS INC.
333 West Commercial Street
Suite 2500
East Rochester, NY 14445
CHOICE ONE COMMUNICATIONS INC. (the "Customer") agrees to purchase and
SAVILLE SYSTEMS INC. ("Saville") agrees to furnish on the following terms and
conditions the Services described herein.
1. INTERPRETATION
1.1 Definitions
Unless otherwise defined, the words and phrases defined in this
Agreement shall have the meanings ascribed to them herein, and the following
words and terms shall have the respective meanings ascribed to them as follows:
(a) "Base Software" means Saville's Convergent Billing Platform (CBP)
AS/400 billing and record keeping computer software in existence at the date of
this Agreement, but not less than Release 3.2.2, and includes any Maintenance
Release (including Release 3.5 no later than when such release is first provided
to any other customer of Saville) used on behalf of Customer.
(b) "Business Day" means any day excepting a statutory holiday in the
Province of Ontario, Canada, which holidays are set forth in Schedule E attached
hereto, or a Saturday or a Sunday.
(c) "Confidential Information" means all information marked
"confidential", "restricted" or "proprietary" by either party and information
disclosed orally, visually or otherwise by either party which is considered
proprietary by such party and delivered to the party receiving such proprietary
information, including, without limitation, source codes, other Software owned
or licensed to, or used by either party, security measures adopted or used by
either party, data processing ideas, techniques, concepts, know-how, Customer
Data, and business practices which are proprietary and confidential to either
party and the terms and conditions of this Agreement and all Schedules hereto.
<PAGE>
-2-
(d) "Critical Operation Problems" means problems with the delivery of
the Services that will likely have a material negative financial impact to the
Customer if not resolved and that must be resolved on an expedited basis.
(e) "Customer Data" means all data and information, however recorded,
provided to Saville by Customer to enable Saville to provide Services under this
Agreement and includes computer databases and computer related data.
(f) "Customer Site" means the site owned, controlled or leased by
Customer at which the Customer Systems are located. The Customer Site is
presently located at the address first written above. Customer may add, delete
or change Customer Sites in the United States with Saville's prior written
consent, which consent shall not be unreasonably withheld or delayed.
(g) "Customer Systems" means the computer facilities of Customer and
includes all Software and Equipment including all minicomputers, front-end
processors, workstations, computers, terminals, local area network ("LAN")
servers and associated peripheral equipment, lines and cabling used for data
communication between the Customer Site and the Data Center or any third party
necessary to the solution.
(h) "Data Center" means the data center of Saville described in
Schedule A.
(i) "Effective Date" in relation to this Agreement means the date first
written above.
(j) "End-User" or "End-Users" means any person or persons that Customer
has authorized to access any part of the Host System.
(k) "Equipment" means all equipment, hardware, computers and devices,
whether for use for data processing or to provide telecommunications services,
tools and associated operating system Software.
(l) "Host System" means the IBM AS/400 computer and related operating
system software, peripherals, and communications equipment used by Saville at
the Data Center to provide Processing Services under this Agreement.
(m) "Hours of Service" means 6:00 a.m. to midnight Eastern Standard
Time or Eastern Daylight Time, as applicable, 365 days per year during which the
Host System will be available to End Users in accordance with the Service Levels
agreed to by the Customer and Saville.
(n) "Maintenance Release" means any updates, changes, modifications, or
enhancements made to the Base Software by Saville that are made generally
available to customers of Saville at no additional charge, under Saville's
maintenance program and any correction of a documented Programming Error made
specifically for Customer.
(o) "Message" or "Messages" means the Customer Data representing
billable or non-billable telecommunication or other services, such as long
distance messages contained on the message toll tapes or other media received
from time to time from Customer.
<PAGE>
-3-
(p) "Processing Services" means the services described in Schedule A
under the heading "Processing Services".
(q) "Programming Error" means any error in the Base Software that
materially and adversely affects the operation of the Base Software due to a
failure of the Base Software to conform to the Specifications therefor.
(r) "Saville Consulting Rates" means the applicable rates and charges
established by Saville from time to time for the provision of services. Such
rates and charges will increase no more than eight percent (8%) per calendar
year and will not exceed the rates charged by Saville to its most favored
customer in the United States who purchases similar services, in similar
quantities, under similar circumstances.
(s) "Service Levels" means the service levels for Processing Services
specified in Schedule B, as amended from time to time as provided for in this
Agreement.
(t) "Services" means the Processing Services, Support Services,
Technical Services and such other services as Saville shall perform or be
required to perform under this Agreement, as more fully described on Schedule A,
but not including Software Development Services.
(u) "Software" means computer programs and related documentation and
includes application programs, operating system programs, utilities, templates,
parameter tables and settings, interfaces to external programs, tools, program
related data, and local area network management software and related
documentation.
(y) "Software Development Services" means the services described in
Schedule C attached to this Agreement.
(w) "Specifications" means, the associated user and operations
documentation for the Base Software.
(x) "Support Services" means the services described in Schedule A under
the heading "Support Services".
(y) "Technical Services" means the services described in Schedule A
under the heading "Technical Services".
(z) "Initial Network" means the five (5) switch network to be used by
Customer to support its initial entry into the marketplace, with such network
and markets to be confirmed during the Specification Study to be performed under
the Customization Agreement.
(aa) "Future Network" means that network which Customer may put into
place to address new markets, which network shall not include any switch that is
or was used in the Initial Network until such time as may be permitted under
Section 8.3(a) hereof.
<PAGE>
-4-
1.2 Incorporation of Schedules
(a) The following Schedules (the "Schedules"), annexed hereto, are
incorporated in this Agreement and are deemed to be a part hereof:
Schedule A - Services Description
Schedule B - Service Levels
Schedule C - Customization Services Agreement
Schedule D - Pricing
Schedule E - Ontario Holidays
(b) The parties intend that Schedules will be amended and updated as
necessary or appropriate during the term of this Agreement.
2. PROVISION OF SERVICES
2.1 Services
During the term of this Agreement, Saville will provide Customer and
Customer will obtain from Saville the Services, subject to the provisions
hereof.
2.2 Documentation
Saville agrees to supply Customer with three (3) copies of the
Specifications for the Base Software for use in connection with the Processing
Services. Customer may make a reasonable number of copies of the Specifications
for its internal use subject to the confidentiality provisions hereof.
2.3 Capacity Planning
From time to time, Customer and Saville shall meet to review issues
pertaining to capacity planning. Customer will use reasonable efforts to provide
Saville with projections concerning future traffic volumes, number of customers,
and number of Messages to be processed.
2.4 Software Development Services
Software Development Services will not be performed by Saville unless
and until Saville and Customer enter into a separate written Customization
Services Agreement in the form which is attached as Schedule C hereto.
2.5 Customer Responsibilities
Subject to the provisions of Schedules A or B, or any other written
agreement between the parties, Customer also agrees to:
(a) provide support and training to End Users;
(b) provide Customer Data to Saville in a form and pursuant to a
schedule to be mutually agreed to by the parties;
(c) follow standards and security procedures reasonably required by
Saville for the turnover of Customer Data to the Data Center as furnished by
Saville;
(d) not make any changes to the Customer Systems which may affect the
delivery of the Services or Service Levels;
(e) be responsible for creation and administration of application-level
user access and password management security programs, and comply with Saville
security procedures regarding same; and
(f) provide all paper forms and supplies required to provide the output
services described in Schedule A.
(g) select, provide, operate, configure, support and maintain the
Customer Systems.
2.6 Customer Assistance
Customer shall assist Saville in the performance of the Services by
making available an Equipment, Software, documentation, Customer Data,
information and personnel reasonably required by Saville on a timely basis.
Customer shall also ensure that those of its personnel who are assigned to
assist Saville are familiar with Customer's requirements and have the expertise
and capabilities necessary to permit Saville to undertake and complete the
Services.
2.7 Security of Data
During the term of this Agreement, Saville agrees to use security
measures as such measures exist as at the Effective Date in respect of the
facilities at the Data Center used to deliver the Processing Services, or such
other measures as Saville determines will improve security in respect of such
facilities. All Saville data centers currently have card controlled security
access and are manned seven (7) days a week twenty-four (24) hours per day.
<PAGE>
-5-
All Customer Data is also duplicated off site for additional security.
Disaster recovery services shall be provided by a nationally recognized provider
(i.e., Comdisco).
2.8 Inspection by Customer
Subject to Saville's reasonable access, security, and confidentiality
requirements, Customer shall have the right to make visits to the Data Center to
review security measures relating to Customer Data, with reasonable prior
written notice during normal business hours. If deficiencies are identified by
Customer, Saville shall implement such additional security practices as Saville,
after due consideration, deems necessary or desirable to eliminate such
deficiencies.
2.9 Records
Saville will keep, in accordance with U.S. generally accepted
accounting principles, books and records pertaining to the Processing Services
(the "Service Records"). Saville shall preserve the Service Records for a period
of three (3) years after the expiration or termination of this Agreement.
Saville agrees, upon request of Customer, to permit Customer to have access to
the Service Records on Business Days, not more than four (4) times in any
calendar year, on five (5) days' prior written notice, to determine the adequacy
and accuracy thereof. Customer's right to inspect any year's Service Records
shall continue for a period of two (2) years following the end of the year for
which those records relate. All costs associated with such audit and storage
shall be the responsibility of Customer. Notwithstanding the foregoing, Saville
shall be entitled to provide copies of the Service Records in a mutually agreed
to format to Customer following the expiration or termination of this Agreement.
Upon doing so, Saville shall have no further obligations to Customer under this
Section.
2.10 Changes
At any time during the term of this Agreement, Customer or Saville may
request changes by submitting such requests in writing. Within a reasonable
time, but in any event not more than fifteen (15) days after receiving written
notice of a Customer request Saville will advise Customer whether the change can
be made and the effect the change will have on this Agreement. Within a like
period after receiving Saville's request for a change, Customer will notify
Saville whether it authorizes the implementation of the change under the revised
terms or rejects the change proposed. Pending authorization to implement
changes, Saville shall proceed in accordance with the latest authorized terms of
this Agreement. However, notwithstanding the foregoing, Saville shall implement
changes on an equitable basis if such change requests are reasonably requested
by Customer, are within the general scope of Services and do not increase
Saville's costs in providing the Services, unless Customer agrees to pay all
such increased costs.
3. PRICE AND PAYMENT
3.1 Price
Other than charges relating to Software Development Services, which
shall be governed by the Customization Services Agreement attached hereto as
Exhibit C, if and when executed, Customer agrees to pay Saville's transaction
fees for the Services pursuant to Schedule D hereto,
<PAGE>
-6-
including any minimums provided therein. If Customer requests Saville to
provide Services at a place other than Saville's premises, then Customer shall
be responsible for and shall reimburse Saville for all travel (coach class),
lodging, meals and other reasonable out-of-pocket expenses incurred by Saville.
3.2 Invoicing
(a) Any payments due Saville from Customer will be invoiced and
will be due and payable thirty (30) days after Customer's
receipt of such invoice, which may be sent by facsimile and
deemed received with confirmed answerback. If payment is
delayed by Customer, other than in accordance with Section
3.2(b) below, Saville shall be entitled to charge interest at
a rate equal to the lesser of: (i) eighteen (18%) per annum;
or (ii) the maximum lawful interest rate under applicable law.
(b) All payments under this Agreement shall be made in U.S.
Dollars, and Customer shall have the right to withhold
payments for any amounts under dispute by Customer, but shall
pay any other amounts invoiced that are not in dispute. If
such dispute is resolved in favor of Saville, Customer shall
pay interest on such disputed amount from the date it
originally became due until the date it is paid to Saville at
a rate equal to the lesser of (i) eighteen percent (18%) per
annum; or (ii) the maximum lawful interest rate under
applicable law.
3.3 Estimated Price
Where an estimated price is specified, it is not warranted by Saville,
and it represents Saville's commercially reasonable efforts, based on
information made available, to estimate the Services which will be required to
accomplish the tasks described.
3.4 Accountability
Whenever a Saville charge is to be based on Saville's cost (such as
pass-through expenses), Saville will provide to Customer, if so requested,
information and documentation sufficient to substantiate Saville's costs with
respect to such charge.
3.5 Proration
All periodic charges are to be computed on a calendar month basis, and
will be prorated for any partial month, unless specifically stated otherwise.
3.6 Taxes
Prices are exclusive of all taxes and Customer shall pay any sales,
use, goods and services, personal property, consumption, value-added or other
tax and any duties or tariffs that may be assessed whether based upon the
delivery, possession, sale or use of the Services or otherwise, except for tax
based on the income of Saville.
<PAGE>
-7-
4. OWNERSHIP
All Customer Data, Customer Systems and Customer's Confidential
Information shall be and remain the property of Customer. The Base Software,
Host System, and Saville's Confidential Information shall be and remain the
property of Saville.
5. CONFIDENTIAL INFORMATION
5.1 Confidential Obligation
Each party acknowledges that Confidential Information will be exchanged
between the parties in the course of performance of the Services hereunder. Each
party shall use no less than the same means it uses to protect its similar
confidential and proprietary information, but in any event not less than
commercially reasonable means, to prevent the disclosure and to protect the
confidentiality of the Confidential Information of the other party. Except as
otherwise provided herein, each party agrees that it will not use the
Confidential Information of the other party except for the purposes of this
Agreement and will not disclose such Confidential Information or make it
available to third persons other than to its full-time employees or consultants
having a need for access to such Confidential Information in connection with
their employment with such party and with respect to whom such party takes
steps, no less rigorous than those it takes to protect its own proprietary
information, but in any event not less than commercially reasonable means, to
prevent such employees from acting in a manner inconsistent with the terms of
this Agreement.
5.2 Publicly Known Information
Section 5.1 shall not prevent either party from disclosing or using
Confidential Information which is (i) already known by the recipient party
without an obligation of confidentiality, provided that the recipient party can
establish that such information was already known to the recipient party, (ii)
publicly known or becomes publicly known through no unauthorized act of the
recipient party, (iii) rightfully received from a third person, (iv)
independently developed by the recipient party without use of the other party's
Confidential Information, provided that the recipient party can establish that
the applicable Confidential Information was independently developed by the
recipient party without use of the other party's Confidential Information, (v)
approved by the other party for disclosure, or (vi) required to be disclosed
pursuant to a requirement of a governmental agency, regulation or law so long as
the disclosing party provides the other party with notice of such requirement as
soon as practicable prior to any such disclosure.
5.3 Return of Confidential Information
Upon written request or at the termination or expiration of this
Agreement, each party will return to the other all documents and information and
all copies thereof, however recorded, including but not limited to drawings,
specifications, descriptions, or other papers, tapes, or any other media marked
or stamped as being confidential, which contain any of the other's Confidential
Information.
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5.4 Third Party Information
Each party agrees not to disclose or deliver to the other any
proprietary, confidential, secret or private information or intellectual
property (including any Software) of any third person which it is under a duty
or has contracted not to disclose, without the prior written consent of such
third person.
5.5 Loss of Confidential Information
In the event of any unauthorized disclosure or loss of, or inability to
account for, Confidential Information of the furnishing party, the receiving
party will notify the furnishing party promptly.
5.6 Right to Perform Services for Others
Customer recognizes that Saville is in the business of providing
computer and information technology services and may perform services for other
persons similar to the Services. Saville retains the right to use, and nothing
shall prevent Saville from using, the ideas, concepts, methods, processes,
know-how, organization, techniques or any Software or Equipment owned, leased or
licensed by Saville in providing services to any third person, provided no
Confidential Information of Customer is made available or released to such third
person, except as may be allowed under Section 5.2.
5.7 Enforcement of Confidentiality Obligation
Each of Customer and Saville acknowledges and agrees that irreparable
injury may result to the other party if such party breaches the provisions of
this Agreement relating to Confidential Information and that damages may be an
inadequate remedy in respect of such breach. Each party hereby agrees in advance
that, in the event of such breach, the other party shall be entitled, in
addition to such other remedies, damages and relief as may be available under
applicable law, to the granting of injunctive relief in such party's favor.
6. OBLIGATIONS OF CUSTOMER
6.1 Customer Personnel
Customer shall from time to time provide Saville with a list of
Customer employees to whom Saville may deliver data or information in the
provision of Services.
6.2 Customer Data
Customer shall provide all Customer Data to Saville in the manner
prescribed herein, in the Specifications or as the parties may agree. Saville
will not be responsible or liable for any loss, damage or inconvenience suffered
by Customer or by any third person arising out of Saville's inability to perform
the Services to the extent due to failure of Customer to provide all necessary
Customer Data when required or by reason of any deficiencies in such Customer:
Data.
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6.3 Space
Customer agrees to provide reasonable facilities and security for
Saville Equipment and Software which must reside on Customer premises, at no
charge, and Customer will ensure that Saville has sufficient access to such
Equipment and Software. Customer will also provide reasonable work space on
Customer premises for employees of Saville who require work space to furnish the
Services under this Agreement.
7. WARRANTIES
7.1 Quality of Services
Saville warrants that the Services will be performed by qualified
persons authorized by Saville to perform the Services, in a professional,
workmanlike manner, with its reasonable best skill, diligence and care in
accordance with the applicable standards currently recognized in Saville's
profession and industry. To the extent not otherwise set forth herein, Saville
shall be solely responsible for all means, methods, and procedures in performing
the Services and for coordinating the performance of all of its obligations
hereunder, whether performed by Saville or others under Saville's direction or
control. In performing the Services hereunder, Saville shall comply with all
applicable laws, rules, and regulations. Saville will use its reasonable best
efforts to minimize any disruption or interference with the Services. For any
breach of this warranty or the failure of Saville to perform Services as
required by this Agreement (a "Claim"), Customer's sole and exclusive remedies
and Saville's entire obligations hereunder and under this Agreement shall be to
perform or re-perform the Services that are the subject of the Claim, or, if
Saville is unable to re-perform the Services within a reasonable time period, to
provide Customer with a refund of an amount not to exceed the lesser of the
amount paid by Customer for the Services during the last twelve calendar months
or $1,000,000.. The remedies in this Section 7.1 are expressly in lieu of any or
all other remedies which may be available to Customer resulting from the
furnishing, the failure to furnish or the quality of any Service. Saville does
not wan-ant the accuracy of any data or information furnished to Customer which
is created from Customer Data or Software supplied by Customer.
7.2 Year 2000 Readiness
Saville represents and warrants that the Base Software through which
Saville shall provide the Services under this Agreement are designed to be used
prior to, during, and after the calendar year 2000 A.D., and without human
intervention will correctly recognize, calculate, process, sequence, store and
transmit Date Data without error or interruption, including leap years, and
including errors or interruptions from functions which may involve Date Data
from more than one century. The term "Date Data" shall mean any data or input
which includes an indication of or reference to date and that is stored
information and internal to functionality. Date calculations involving either a
single century or multiple centuries will neither cause an abnormal ending nor
generate incorrect or unexpected results. When sorting by date, all records will
be sorted in accurate sequence and when the date is used as a key, records will
be read and written in accurate sequence. As used in the previous sentence,
accurate sequence means, by way of example, that records will be read, written,
and sorted in ascending order so that the year 1999 is before the year 2000. The
Base Software will calculate, process, and display leap year
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information according to the following algorithm: (i) a leap year will have
twenty-nine (29) days in the month of February; and (ii) a leap year occurs in
all years divisible by 400 and all years evenly divisible by 4 and not evenly
divisible by 100.
7.3 Disclaimer
THE WARRANTIES CONTAINED IN THIS AGREEMENT ARE IN LIEU OF ANY OTHER
WARRANTIES OR CONDITIONS EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO,
IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABLE QUALITY, FITNESS FOR A
PARTICULAR PURPOSE, AND THOSE ARISING BY STATUTE OR OTHERWISE IN LAW OR FROM A
COURSE OF DEALING OR USAGE OF TRADE.
7.4 Limit on Liability
(a) FOR BREACH OR DEFAULT BY SAVILLE OF ANY OF THE PROVISIONS OF THIS
AGREEMENT, SAVILLE'S ENTIRE LIABILITY, REGARDLESS OF THE FORM OF ACTION, WHETHER
BASED ON CONTRACT OR TORT, INCLUDING, WITHOUT LIMITATION, NEGLIGENCE, OR THE
FURNISHING, THE FAILURE TO FURNISH, OR THE QUALITY OF ANY SERVICE, SHALL IN NO
EVENT EXCEED THE LESSER OF THE AMOUNT PAID BY CUSTOMER FOR THE SERVICES DURING
THE LAST TWELVE CALENDAR MONTHS OR $1,000,000. NOTHING IN THIS AGREEMENT SHALL
EXCLUDE OR RESTRICT SAVIELLE'S LIABILITY FOR DEATH OR PERSONAL INJURY ARISING
FROM EITHER THE NEGLIGENCE OF SAVILLE OR ITS EMPLOYEES WHILE ACTING IN THE
COURSE OF THEIR EMPLOYMENT.
(b) IN NO EVENT WILL SAVILLE BE LIABLE FOR DAMAGES HEREUNDER IN RESPECT
OF SPECIAL, INCIDENTAL, INDIRECT, PUNITIVE, OR CONSEQUENTIAL LOSS (EVEN IF
SAVILLE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS) INCLUDING, BUT NOT
LIMITED, LOST BUSINESS REVENUE, LOSS OF PROFITS, LOSS OF DATA, FAILURE TO
REALIZE EXPECTED PROFITS OR SAVINGS OR OTHER COMMERCIAL OR ECONOMIC LOSS OF ANY
KIND OR ANY CLAIM AGAINST CUSTOMER BY ANY OTHER PERSON.
(c) A party shall not be responsible or liable for any loss, damage or
inconvenience suffered by the other party or by any third person, to the extent
that such loss, damage or inconvenience is caused by the failure of the other
party to comply with its obligations under this Agreement.
7.5 Limitation Period
Neither party may bring an action (other than by Saville to collect
charges due hereunder) against the other party arising out of or related to the
Services to be provided under this Agreement more than three (3) years after the
cause of action has arisen.
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8. TERM AND TERMINATION
8.1 Term
The term of this Agreement will commence on the Effective Date and will
continue for the term of Agreement set out on the first page hereof. The
agreement will continue following the expiration of such time period until
terminated by either party by giving the other no less than six (6) months prior
written notice. However, regardless of the reason for any termination or
expiration of this Agreement, Saville shall in good faith support the transition
of Customer to a new service provider for not less than 12 months after such
expiration or termination pursuant to Section 8.4 hereof, provided that Customer
pays any applicable transaction fees during such period.
8.2 Termination for Cause
(a) In the event either party:
(i) materially breaches any of its duties, obligations or
responsibilities under this Agreement, unless (A) the breaching party cures such
breach within thirty (30) days after written notice is given to such breaching
party specifying the breach, or, (B) in the event such breach is not so cured,
the breaching party has used best efforts (and no less thm industry standards)
during such 30-day period and thereafter continues to use best efforts to cure
such breach, or
(ii) repeatedly materially breaches any of its duties,
obligations or responsibilities for payment under this Agreement and fails to
cure and cease committing such repeated breaches within thirty (30) days after
being given written notice specifying the breach, or
(iii) commits an Act of Insolvency (as defined below),
then the party not in breach or insolvent as the case may be, may, by promptly
giving notice thereof to the other party, terminate this Agreement as of the
date specified in such notice of termination. Saville shall have the right, at
its sole option in lieu of giving notice to terminate this Agreement for cause
under this Section, to delay or suspend its performance of the Services until
such material breach by Customer is remedied.
(b) For the purposes of this Section 8.2, a party shall be deemed to
have committed an Act of Insolvency if (i) a receiver, trustee, administrator,
or administrative receiver should be appointed for the party or its property,
(ii) the party makes an assignment for the benefit of creditors, (iii) any
proceedings should be commenced. Against the party under any bankruptcy,
insolvency, or debtor's relief law, and such proceedings shall not be vacated or
set aside within thirty (30) days from the date of commencement thereof, or (iv)
the party should be liquidated or dissolved.
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8.3 Termination to Enter a License Agreement
(a) At any time on or before September 30, 2000, Customer may notify
Saville that it wishes to obtain a license to use the Base Software in a billing
system for the Future Network (the "Future Network System"). Upon such
notification, Saville and Customer shall enter into a license agreement for the
Base Software with terms and conditions mutually agreed upon by the parties,
including (i) a license fee based on the total number of subscribers to be
billed through the Future Network System, at Saville's then current published
license fee for such number of subscribers, (ii) payment of such license fee by
Customer at any time on or before September 30, 2000, (iii) a provision stating
that the Future Network System may not be put into production prior to April 1,
2000 (although Customer may use it for testing, development and other
pre-production functions prior to such date), and (iv) a provision stating that
no subscriber on the Initial Network may be billed through the Future Network
System prior to October 1, 2000. Any and all customization services necessary
for the Future Network System shall be developed pursuant to mutually agreed
upon statements of work as Future Software Developments under the Customization
Services Agreement, provided that Saville shall provide Customer with a copy of
the Software Developments and Future Software Developments developed for
Customer under the Customization Services Agreement. Upon such notification,
Saville and Customer shall also enter a maintenance and support agreement for
the Base Software with terms and conditions mutually agreed upon by the parties,
including a term of thirty six (36) months from a date no earlier than September
30, 2000, at fees equal to Saville's then current fees for providing
maintenance, the fees for the first twelve (12) months of which shall be payable
by Customer at any time on or before September 30, 2000. For the absence of
doubt and provided that the license and maintenance agreements as described
above are executed, (x) Customer shall not pay Service Bureau transaction fees
hereunder for subscribers billed through the Future Network System and (y)
Customer shall pay Service Bureau transaction fees (and no less than the monthly
minimums set forth in Schedule D hereto) in respect of all subscribers and
transactions on the Initial Network until September 30, 2000, at which time
Customer may migrate all subscribers from the Initial Network to the Future
Network System (provided any additional license fee owed in respect of such
additional subscribers is paid), and, notwithstanding Section 8.1, terminate
this Service Bureau Agreement.
(b) Provided Customer has given no notice under Section 8.3(a) above,
on or after October 1, 2000, notwithstanding Section 8.1, Customer may terminate
this Agreement upon thirty (30) days prior written notice to Saville provided
that Customer enters into (i) a license agreement for the Base Software with
terms and conditions mutually agreed upon by the parties, including a license
fee based on the total number of subscribers to be billed through the Base
Software, at Saville's then current published license fee for such number of
subscribers, and (ii) a maintenance and support agreement for the Base Software
with terms and conditions mutually agreed upon by the parties, including a term
of thirty six (36) months from the date of the license agreement and fees equal
to Saville's then current fees for providing maintenance. Upon notification by
Customer pursuant to this Section 8.3, Saville shall, as soon as practicable,
produce a statement of work setting forth the steps required to convert the
existing service bureau to a Base Software license with all work to be done
relating to such conversion considered Future Software Developments under the
Customization Services Agreement. During this conversion period, Customer may
bill end user customers both on the service bureau provided hereunder and under
the license of the Base Software described above, provided that
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Customer pay the applicable service bureau transaction fees provided
hereunder during such conversion period and Customer pays the applicable license
fee within thirty days of the execution of the license agreement described
above.
(c) Upon execution of a license agreement pursuant to Sections 8.3(a)
or 8.3(b) above, Saville will designate Customer as a Preferred Beneficiary
under its Master Preferred Software Escrow Agreement with DSI Technology Escrow
Services.
8.4 Termination Assistance
(a) It is the intent of the parties that at the expiration or
termination of this Agreement, regardless of the reason, Saville shall cooperate
with Customer and provide Customer with assistance in moving to a substitute
provider to have its message processing performed with minimal disruption.
Therefore, upon any notice of termination or expiration, Saville will, to the
extent possible, upon written request by Customer, provide Customer promptly
(and in any event within fourteen (14) days) with a copy of the most recent
Customer Data in its possession in a non-proprietary format agreed to by Saville
and Customer or the new service provider, and provide such other services as may
be mutually agreed to by the parties (the "Transitional Services"). Saville
shall also inform Customer of the format or organization of the transferred
Customer Data, and no such information shall be considered confidential.
(b) If any Transitional Services require the utilization of additional
resources or cause Saville to incur expenses that Saville would not otherwise
use or incur, as the case may be, in the performance of this Agreement, Customer
will pay Saville for such usage at the then prevailing Saville Consulting Rates
and reimburse Saville for the expenses incurred. All Transitional Services shall
be provided in accordance with a statement of work to be agreed upon by the
parties in accordance with the Customization Services Agreement.
9. GENERAL
9.1 Headings
The division of this Agreement into Articles and Sections and the
insertion of headings are for convenience of reference only and shall not affect
the construction or interpretation of this Agreement. The terms "this
Agreement", "hereof," "hereunder" and similar expressions in this Agreement
refer to this Agreement and not to any particular Article, Section or other
portion and include any agreement supplemental hereto. Unless something in the
subject matter or context is inconsistent therewith, references herein to
Articles and Sections are to Articles and Sections of this Agreement.
9.2 Extended Meanings
In this Agreement, words importing the singular number only shall
include the plural and vice versa, and words importing persons shall include
individuals, partnerships, associations, trusts, unincorporated organizations
and corporations. The terms provision and provisions in this Agreement refer to
terms, conditions, provisions, covenants, obligations, undertakings, warranties
and representations in this Agreement.
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9.3 Notices
All notices shall be in writing and shall be sent by personal delivery,
by a reputable nationwide overnight courier service prepaid, or by facsimile
with confirmed answerback. Notices shall be sent to the respective addresses set
forth above, attention President, with a copy to General Counsel. Notices shall
be deemed received and effective upon delivery in the case of personal delivery,
on receipt in the case of facsimile, and one day after it is sent via overnight
courier. No change of address shall be binding upon the other party hereto until
written notice thereof is received by such party at the address shown above.
9.4 Accounting Terms
All accounting terms not specifically defined herein shall be construed
in accordance with U.S. generally accepted accounting principles.
9.5 Currency
All references to currency herein are deemed to mean lawful money of
United States unless expressed to be in some other currency.
9.6 Force Majeure
To the extent the performance of this Agreement, or any obligations
hereunder (except the making of payments hereunder) is prevented, restricted, or
interfered with by reason of fire, flood, earthquake, explosion or other
casualty or accident or act of God; strikes or labor disputes; inability to
procure or obtain delivery of parts, supplies, power, Equipment or Software from
suppliers, war or other violence; any law, order proclamation, regulation,
ordinance, demand or requirement of any governmental authority; or any other act
or condition whatsoever beyond the reasonable control of the affected party, the
party so affected, upon giving prompt notice to the other party, shall be
excused from such performance to the extent of such prevention, restriction or
interference; provided, however, that the party so affected shall take all
reasonable steps to avoid or remove such cause of non-performance and shall
resume performance hereunder with dispatch whenever such causes are removed; and
provided further that, in the event such cause is not removed within a period of
two (2) weeks, the other party may terminate this Agreement for cause. Customer
and Saville shall make best efforts to comply with the disaster recovery program
to be agreed prior to excusing performance under this Section 9.6.
9.7 Severability
If any provision of this Agreement is declared or found to be illegal,
unenforceable or void, then both parties shall be relieved of all obligations
arising under such provision, but only to the extent that such provision is
illegal, unenforceable or void and does not relate to the payments to be made to
Saville. If the remainder of this Agreement shall not be affected by such
declaration or finding and is capable of substantial performance, then each
provision not so affected shall be enforced to the extent permitted by law.
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9.8 Insurance and Risk of Loss
When this Agreement requires performance by Saville's or Customer's
employees on the other party's premises, the performing party shall carry and
maintain worker's compensation and employer's liability insurance covering its
employees engaged in such performance. Each party shall bear the risk of loss or
damage to Equipment and Software of the other while in the care, possession or
control of such party and shall carry insurance against such loss. Each party
shall also carry insurance which is required against losses or damages caused by
the performing party's negligence.
9.9 Assignment
Neither party may, without the other party's prior written consent,
which consent shall not be unreasonably withheld or delayed, assign or transfer
this Agreement, or any of its rights or obligations under this Agreement to any
third person (in this Section, an "Assignee") except to an affiliate wholly
owned by, or that wholly owns, or that is under common control with, such party,
or as part of the sale, merger, or other transaction involving all or
substantially all of the assets of the party, provided that the Assignee
undertakes to the party not making the assignment to fully perform and be bound
by the provisions of this Agreement. Saville may delegate to affiliates of
Saville and to agents, suppliers and contractors of Saville any of the
obligations herein imposed upon Saville and Saville may disclose to any such
persons any information required by them to perform the duties so delegated to
them, but such delegation shall not relieve Saville of its performance
obligations hereunder.
9.10 Waiver
No modification, addition to or waiver of any rights, obligations or
defaults shall be effective unless in writing and signed by the party against
whom the same is sought to be enforced. One or more waivers of any right,
obligation or default shall not be construed as a waiver of any subsequent
right, obligation or default. No delay or failure of Saville in exercising any
right hereunder and no partial or single exercise thereof shall be deemed of
itself to constitute a waiver of such right or any other rights hereunder.
9.11 Governing Law
This Agreement shall be governed by and construed in accordance with
the laws of the Commonwealth of Massachusetts, excluding its conflict of laws
principles.
9.12 Dispute Resolution
(a) All controversies or claims arising out of or relating to this
Agreement or breach thereof, including any billing dispute (a "Dispute"), shall
be resolved in accordance with the procedures set forth in this Section.
(b) Initially the Dispute shall be referred to the Customer's Vice
President familiar with the Services pursuant to this Agreement and a Saville
Vice President to resolve the Dispute.
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(c) In the event that one of the individuals specified above is
unavailable, the Dispute shall be referred to that individual's immediate
superior or designee.
(d) If the Dispute cannot be resolved by such individuals within thirty
(30) days, it shall be finally settled by expedited arbitration by one
arbitrator chosen-by the American Arbitration Association and in accordance with
the commercial arbitration rules of the American Arbitration Association, and
judgments upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereover. The arbitrator shall be ethically neutral and
agree to be bound by the American Bar Association's rules of ethics in this
regard. Both parties shall bear equally the cost of the arbitration (exclusive
of legal fees and expenses, all of which each party shall bear separately). The
place of arbitration shall be Albany, New York and the language of arbitration
will be English.
9.13 Survival
Articles 3, 4, 5, 7, 8 and Sections 2.9, 9.11, 9.12, 9.13, and 9.15
shall survive the expiration or termination of this Agreement.
9.14 Independent Contractor
Saville employees shall be deemed not to be at any time employees or
servants of Customer. Saville is and shall remain an independent contractor for
all purposes. Unless otherwise agreed to, Saville does not undertake to perform
any obligation of Customer, whether regulatory or contractual, or to assume any
responsibility for Customer's business or operations.
9.15 Solicitation of Employees
In the event that either party directly or indirectly hires, whether as
an employee, independent contractor, or in any other capacity, any person who
was, within six months prior to the hiring, an employee of the other party or
any of its subsidiaries, such party agrees to pay the other party a finder's fee
equal to 26 times that employee's bi-weekly gross compensation at the time he or
she left the employment of the other party or its subsidiary. This provision
shall apply only to those employees who either worked on Customer's account in
some capacity or worked with software or applications which were in some fashion
generally similar to any offered or provided to Customer.
9.16 Further Assurances
Each of the parties hereto shall from time to time execute and deliver
all such further documents and instruments and do all acts and things as the
other party may reasonably require to effectively carry out or better evidence
or perfect the full intent and meaning of this Agreement.
9.17 Incorporation of Schedules
Schedules A, B, C, D and E annexed hereto are incorporated in this
Agreement and are deemed to be a part hereof and any references to this
Agreement shall mean this Agreement and include Schedules A, B, C, D and E.
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9.18 English Language
The parties have requested that this Agreement and all communications
and documents relating hereto be expressed in the English language.
9.19 No Relationship
Nothing in this Agreement shall be construed to constitute or create a
joint venture, partnership, or formal business organization of any kind and the
rights and obligations of each party shall be only those expressly set forth
herein. Neither party shall have authority to bind the other, and neither party
assumes any liabilities of the other party.
9.20 Entire Agreement
This Agreement constitutes the entire Agreement between the parties
hereto with respect to the subject matter hereof and cancels and supersedes any
prior understandings and agreements between the parties hereto with respect
thereto. There are no provisions, representations, undertakings, agreements, or
collateral agreements between the parties other than as set out herein and the
parties agree that no obligations or duties not set out expressly herein shall
be imposed upon the parties or implied by law. Unless otherwise agreed to in
writing by the parties, Customer's orders for Services shall be governed by the
terms of this Agreement and nothing contained in any purchase order shall in any
way modify, vary, change or add any term or condition hereto.
9.21 Publicly
All media releases, public announcements and public disclosures by the
parties or their employees or agents relating to this Agreement or its subject
matter, including without limitation widely disbursed promotional or marketing
material, but not including any announcements intended solely for the internal
distribution of either party, or any disclosure required by legal, accounting or
regulatory requirements beyond the reasonable control of either party, shall be
sent in advance to the other party at least five (5) days before it is released.
Any further publicity of substantially the same import need not be sent in
advance to the other party.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of September 30, 1998.
CHOICE ONE COMMUNICATIONS INC. SAVILLE SYSTEMS INC.
By: /s/ Kevin S. Dickens By: /s/ John J. Kiley
Name: Kevin S. Dickens Name: John J. Kiley
Title: Senior Vice President Title: Senior Vice President
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Schedule A
SERVICES DESCRIPTION
Within the scope of this Agreement and the Specifications, Saville
shall provide to Customer the following Services:
Processing Services
Support Services
Technical Support Services
1. Processing Services
Processing Services consists of the following:
(a) Data Center Facilities
Saville will provide the Data Center and the Host System used for the
message processing described below during the Hours of Service in accordance
with the Service Levels. Customer acknowledges that Saville makes no commitments
to any Service Levels outside of the Hours of Service, when Data Center and Host
System availability will be degraded due to backups and other maintenance tasks.
The Data Center will be located in Toronto, Ontario, or such other location as
Saville shall operate to provide Services to Customer hereunder. Saville shall
provide at least thirty (30) days prior written notice of the movement of the
Data Center.
(b) Message Processing
Saville shall process Message and Customer Data provided by Customer
using the Host System and the Base Software to meet the call processing, call
rating, billing, customer interface, and audit and control requirements as
agreed between the parties.
(c) Tape and Tape Librarian Operations
Saville will retrieve, mount and refile tape library volumes. All
deliveries coming into and leaving the Data Center are logged and will have
proper paperwork attached to facilitate correct delivery and to permit prompt
tracing.
(d) Back-up of Data
Saville shall provide backup and recovery of Customer Data as directed
by Customer to protect against damage or loss of integrity to Customer Data.
Saville will ship tapes to offsite storage as per Customer's defined procedures.
This is limited to one (1) courier run per day, five (5) days per week. Customer
is responsible for all other tape shipments to and from the Data Center and
related costs.
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(e) Output Production
Output production consists of the output production services as agreed
between the parties. Saville shall not provide any pre-printed form stock,
except as may be otherwise provided herein, or be responsible for any
transportation, courier or mail charges associated with the distribution of this
output. Customer is responsible for all report shipments to and from the Data
Center and related costs. Print jobs will be set up, scheduled and processed
according to Customer's specifications.
(f) Service Outages and Changes
Saville shall schedule and perform planned service outages outside
Hours of Service. Saville shall provide reasonable advance notice to Customer of
planned service outages.
2. Support Services
Support Services, which shall be provided in accordance with mutually
agreed upon Service Levels, consist of the following:
(a) Software Training
Saville will provide user application training for the Base Software.
Such training will consist of Saville providing employees of Customer with up to
an aggregate of three (3) man-weeks of training at location(s) to be mutually
agreed upon.
(b) Telephone Message Desk
From 2:00 a.m. to 7:00 p.m. Eastern Standard Time or Eastern Daylight
Time, as applicable, during Business Days, Saville will provide a telephone
message desk for Customer to report problems and answer "how-to" questions, to
the extent possible. The service will determine the nature of the problem and
handle the problem if possible, or direct the problem to appropriate personnel
who will attempt to handle the problem.
Outside the hours set forth in the immediately preceding paragraph,
Saville will make available a paging mechanism to report Critical Operation
Problems. The person so paged will determine the nature of the problem and
handle the problem if possible, or direct the problem to appropriate personnel
who will attempt to handle the problem.
If the problem reported by Customer is determined by Saville to have
been caused by Customer or a third party, Saville will inform Customer of such
fact and may charge Customer for such investigation, in accordance with the
Saville Consulting Rates then in effect for such investigation. Customer may
request that Saville make reasonable efforts to resolve such problem at such
Consulting Rates.
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3. Technical Services
Saville will answer how-to question as set forth above and will provide
technical services requested by Customer on a mutually agreed upon basis in
accordance with the Customization. Services Agreement.
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Schedule B
SERVICE LEVELS
Subject to the provisions of this Agreement, Saville shall use
reasonable best efforts to meet or exceed the following Service Level target:
Host System Availability of 99.5.% during the Hours of Service. In addition,
during the period of the Specification Study provided under the Customization
Agreement Customer and Saville shall agree upon additional Service Levels, in
accordance with which Saville shall provide the Services during the Hours of
Service.
For the purposes of this Schedule B, "Host System Availability" means
the number of hours during Hours of Service in any calendar quarter that the
Host System is scheduled to be available to perform Processing Services less the
amount of time in the calendar quarter the Host System cannot be so used due to
hardware failure of the AS/400 or Programming Errors, divided by the number of
hours during Hours of Service in the calendar quarter that the Host System is
scheduled to be available to perform Processing Services, expressed as a
percentage.
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Schedule C
Customization Services Agreement
Terms and Conditions
CHOICE ONE COMMUNICATIONS INC.
333 West Commercial Street
Suite 2500
East Rochester, NY 14445
Thank you for choosing SAVELLE SYSTEMS INC. ("Saville") to provide you
("Customer") with customization services (the "Project"). The terms appearing
below and on the attached appendices (Appendices 1 and 2), which are
incorporated by this reference, form our Agreement for developing software and
documentation. Please read carefully, and sign this Agreement in duplicate. Both
copies (including Appendices) should be returned to Saville for written
acceptance. Once accepted, Saville will sign both copies and then return one of
those copies to you.
Saville and Customer have also entered into a Service Bureau Agreement
commencing on September 30, 1998 (the "Service Bureau Agreement").
1. DEFINITIONS
When used in this Agreement, the following terms shall have the meaning
specified below:
1.1 "Base Software" means the Base Software, as that term is defined in
the Service Bureau Agreement.
1.2 "Billing System" means the Base Software and the Software Developments.
1.3 "Documentation" means any printed material in the English language
related to the Software Developments provided by Saville for use in
connection with the Billing System.
1.4 "Future Software Developments" means any future developments to the
Billing System specifically requested by Customer in accordance with
Section 2.2 hereof.
1.5 "Intellectual Property" means all intellectual and industrial property,
including copyright, trademarks, patents, industrial designs, mask
works and integrated circuit topographies, created, developed or
reduced by practice by a party under this Agreement.
1.6 "Project Plan" means the timetable for accomplishing the Project, as
set out in the Statement of Work.
1.7 "Software Developments" means the enhancements and developments made by
Saville in order to adapt the Base Software to the specific
requirements of Customer, all as listed in the Statement of Work.
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1.8 "Statement of Work" means the initial statement of work to be completed
and mutually agreed upon by Saville and Customer pursuant to Appendix 1
hereto.
1.9 "Technical Specifications" means the detailed design specifications for
the Software Developments as listed in the Statement of Work, as well
as the detailed description of the other services to be provided by
Saville under this Agreement.
2. SOFTWARE DEVELOPMENTS
2.1 Initial Implementation
(a) After acceptance of the Statement of Work by Customer, this Agreement
and the Statement of Work shall supersede all other definitions or
descriptions of the Software Developments, both written or oral,
whether made by Customer or Saville.
(b) Based on the Technical Specifications, Saville shall develop the
Software Developments. These will be done at Saville's premises and at
Customer's premises as required.
(c) Each party shall appoint a primary contact and a secondary contact who
shall be the contact point for every issue concerning the Project and
who shall be informed of the progress of the Project. The names of the
contacts will be exchanged in writing by the parties. Using the
contacts, the parties shall report to each other as mutually agreed
upon as to the progress being made by each of them in relation to their
various responsibilities set out in the Project Plan, any delays being
encountered and the actions being taken to recover from such delays.
(d) Any additions, modifications or changes to the Technical Specifications
contained in the Statement of Work shall be deemed Future Software
Developments and covered under Section 2.2 below.
2.2. Future Software Developments.
(a) Customer may in the future determine that Future Software Developments
should be made to the Billing System. Customer will initiate Future
Software Developments by delivering a draft set of user requirements to
Saville detailing the general functionality required of the Future
Software Developments and any other general requirements to be met.
(b) Saville shall respond within a reasonable timeframe (but not more than
thirty (30) days) to user requirements received by it under Section
2.2(a) above by providing Customer with a written best estimate of the
days of effort required to carry out the Future Software Developments,
together with any general comments on the user requirements that may be
appropriate. The days of effort estimate shall be inclusive of the time
required to produce Documentation as required under this Agreement,
project management, consultancy work and all Saville internal testing.
(c) Upon receipt of Saville's estimate under Section 2.2(b) above, Customer
will review the user requirements for the Future Software Developments
and shall make any changes that
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it deems necessary. Customer will then prepare a detailed
functional specification and a project timetable specifying dates for
completion of the relevant phases of the Future Software Developments
based on Saville's days of effort estimate. Customer, may, at its
discretion, request Saville to complete the project timetable on its
behalf based on Customer's delivery requirements.
(d) Upon receipt of the functional specification for the Future Software
Developments (as prepared under Section 2.2(c) above) and upon
completion of the project timetable, Saville shall review its days of
effort estimate and shall advise Customer of the extent to which it can
comply with the functional specification and the project timetable. The
parties shall then agree upon any changes to the functional
specification or to the project timetable which may be necessary to
enable Saville to complete the Future Software Developments in
accordance with both of those documents.
(e) Upon completion and written agreement by the parties of the
documentation referred to in Section 2.2(d) above in the form of a
statement of work Saville shall carry out and implement the Future
Software Developments in accordance with the agreed functional
specification and project timetable all as set forth in such statement
of work.
(f) The work carried out by Saville to produce a statement of work for
Future Software Developments will be charged to Customer on a time and
material basis at an hourly rate equal to Saville's then-current rate
for producing such statements of work.
3. DEVELOPMENTS AND TESTING EQUIPMENT - SPACE
Customer agrees to provide facilities for Saville, the equipment, Billing System
and the Future Software Developments, at no charge, and Customer will ensure
that Saville has sufficient access to such equipment, Billing System and Future
Software Developments, so long as the security requirements of Customer are met.
Each party will also provide reasonable work space on the other party's premises
for its employees who require work space to furnish the services to be provided
by Saville under this Agreement.
4. CUSTOMER ASSISTANCE
Customer shall assist Saville in the performance of its services under this
Agreement by making available all equipment, software, documentation,
information and personnel reasonably required for the execution of this
Agreement on a timely basis after Saville has provided Customer with any such
requirement. Customer shall also ensure that those of its personnel who are
assigned to assist Saville are familiar with Customer's requirements and have
the expertise and capabilities necessary to permit Saville to undertake and
complete the services under this Agreement.
5. OWNERSHIP OF SOFTWARE DEVELOPMENTS AND FUTURE SOFTWARE DEVELOPMENTS
5.1 Upon payment of the a-mounts specified in Section 7, the Software
Developments and all Intellectual Property related to them and, in accordance
with Section 2 of this Agreement, the Future Software Developments and all
Intellectual Property related to them, shall be jointly
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owned by Customer and Saville, i.e., each party shall grant the other a
royalty-free, perpetual license to use, modify and create derivative works of
all of the foregoing.
5.2 This ownership and grant of license by each party shall imply that each
party will be entitled to exercise all Intellectual Property rights on these
Software Developments and Future Software Developments (including without
limitation the rights to disclose, use, sell, license, and adapt) without any
interference of the other party or any duty to account to the other party,
except that Customer shall not license any third party to use any of the
Software Developments, the Future Software Developments or the Intellectual
Property rights related to them.
6. DELIVERY SCHEDULE
-----------------
6.1 Any Software Development or Future Software Development shall be tested and
implemented according to the time schedule provided in the applicable statement
of work, with the understanding that if any of the time-frames in such statement
of work are delayed, the other time-frames will be postponed by an equal number
of days.
6.2 On the date of the delivery of the Software Developments and on the date of
delivery of any Future Software Developments, Customer will initiate user
acceptance testing. If Customer is satisfied with the results of the Billing
System on the date which is fifteen (15) business days after such delivery, a
statement of provisional receipt will be drawn up and signed by Customer and
delivered to Saville. In any event, Customer will certify full acceptance of the
Billing System no later than thirty (30) business days after delivery of the
Billing System or the Future Software Development, as the case may be, for user
acceptance testing.
7. PRICES, PAYMENT AND PENALTIES
-----------------------------
7.1 Fee for Software Developments
-----------------------------
Work to be performed by Saville on Software Developments pursuant to the
Statement of Work shall be charged to Customer based on Saville's then-current
hourly rates, plus reimbursement for materials and other related expenses
reasonably incurred by Saville in performing such work. Saville's current hourly
rates rates are set forth in Appendix 2 attached hereto.
7.2 Fee for Future Software Developments
------------------------------------
Work to be performed by Saville on Future Software Developments shall be charged
to Customer based on Saville's then-current hourly rates, plus reimbursement for
materials and other related expenses incurred by Saville in performing such
work.
7.3 Expenes
-------
(a) Customer agrees to reimburse Saville for the cost of travel, at coach class
or equivalent rate, and time involved in necessary visits to carry out
and/or to install the Software Developments and Future Software
Developments, subject to a maximum limit eight (8) hours for travel to and
from Saville to Customer. Travel time charges will be paid at Saville's
then-current hourly rate for travel related to customization services for
its other customers.
(b) All reasonable accommodation and subsistence expenses incurred by Saville
will also be reimbursed by Customer. Such expenses must be expressly
requested by Customer in relation to the Project and for the services
provided by Saville.
(c) All telecommunication expenses incurred by Saville in relation to the
Project and for services provided by Saville will also be reimbursed by
Customer upon presentation by Saville of sufficient written proof of
reasonable expenses incurred.
(d) These expenses, except telecommunication expenses, must receive Customer's
prior written authorization and will be reimbursed upon receipt of an
invoice with the related vouchers.
7.4 Taxes
Prices in this Agreement are exclusive of all taxes and Customer shall pay any
sales, use, goods and services, personal property, consumption, value-added or
other tax and any duties or tariffs that may be assessed whether based upon the
delivery, possession, sale or use of these customization services or otherwise,
except for tax based on the net or gross income of Saville.
7.5 Invoicing and Payment Terms
(a) Any payments due Saville from Customer will be invoiced and wil be due and
payable thirty (30) days after Customer's receipt of such invoice, which
may be sent by facsimile and deemed received with confirmed answerback. If
payment is delayed by Customer, other than in accordance with Section
7.5(b) below, Saville shall be entitled to charge interest at a rate equal
to the lesser of: (i) eighteen (18%) per annum; or (ii) the maximum lawful
interest rate under applicable law. Each such invoice delivered to Customer
will provide details of the charges to Customer, including Agreement
reference numbers, applicable rates and hours of Saville personnel
providing services to Customer and will be supported by proper invoices and
vouchers in respect of all expenses for which reimbursement is claimed.
(b) All payments under this Agreement shall be made in U.S. Dollars, and
Customer shall have the right to withhold payments for any amounts under
dispute by Customer, but shall pay any other amounts invoiced that are not
in dispute. If such dispute is resolved in favor of Saville, Customer shall
pay interest on such disputed amount from the date it originally became due
until the date it is paid to Saville at a rate equal to the lesser of: (i)
eighteen percent (18%) per annum; or (ii) the maximum lawful interest rate
under applicable law.
8. DURATION AND TERMINATION
8.1 This Agreement may be terminated forthwith by either party on written notice
if the other party is in significant breach of its obligations and fails to
remedy the breach within thirty (30) days of receipt of notice in writing
thereof. In the event that the terminating party can demonstrate that such
breach has involved it in additional costs, then it shall have the right to
recover such costs from the breaching party.
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8.2 Either party may terminate this Agreement forthwith on written notice if the
other party shall become insolvent or bankrupt or make an arrangement with its
creditors or go into liquidation.
8.3 Notwithstanding anything contained in this Agreement to the contrary, in no
event shall the Statement of Work be terminated once it has been accepted
pursuant to Section 2.1(a).
8.4 Upon termination of this Agreement, however occasioned, Saville shall
forthwith deliver to Customer (without retaining copies of the same) all
correspondence, drawings, specifications, accounts documents and papers of any
description relating to affairs and business of Customer (or any subsidiary or
associated company) whether or not the same were prepared by Saville, were
supplied by Customer (or any subsidiary or associated company), and all other
property of Customer or any subsidiary or associated company (other than
property jointly owned of Saville or Customer) within its possession or under
its control.
8.5 Termination of this Agreement shall not prejudice any rights of either party
which have arisen on or before the date of termination and shall not prejudice
the Service Bureau Agreement or any rights of either party thereunder.
9. WARRANTY
9.1 Saville warrants and represents to Customer that it has full right and
authority to enter into this Agreement.
9.2 Saville warrants that the Software Developments and the Future Software
Developments will perform the facilities and functions set out in their
respective statements of work (including all technical, functional and other
specifications contained therein) as of the date of acceptance, and shall
continue to provide such facilities and functions and shall be free from
programming errors for a period of ninety (90) days from the, date of acceptance
(the "Warranty Period"). Notwithstanding anything contained in this Agreement to
the contrary, Saville shall not be liable for any correction of programming
errors or non-conformity of the Billing System and/or the Future Software
Developments to the extent required because of:
(a) any changes made to the Billing System and/or the Future Software
Developments which were not authorized by Saville nor carried out under
the supervision and control of Saville; or
(b) any computer program created by Customer or any third party retained by
Customer, which computer program adversely affects the performance of
the Billing System and/or the Future Software Developments; or
(c) accident, neglect, misuse of the Billing System and/or the Future
Software Developments by Customer.
During the Warranty Period, Saville shall, at its own cost, immediately correct
and remedy any reported, reproducible programming errors, bugs or any other
problems because of which the Billing System and/or any Future Software
Developments do not conform to the applicable statement of work ("Problems")
notified to it by Customer and shall carry out modification to
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and/or correctionof the Billing System and/or any Future Software Developments,
such that these will be able to provide the facilities and functions set out in
the applicable statement of work. If Saville is unable, after using commercially
reasonable efforts, to correct any Problem with a Software Development or Future
Software Development under this warranty, Customer's sole remedy shall be the
refund of an amount not to exceed the actual payments received by Saville for
the hourly fees relating to such non-conforming Software Development or Future
Software Development. This shall constitute Customer's exclusive remedy for any
such Problem. Notification by Customer under the terms of this Section shall
include a listing of output and such data as Saville may reasonably require in
order to reproduce the operating conditions in which the Problem, the
programming error or non-conformity was discovered. All work carried out by
Saville under this warranty will be chargeable to Customer at Saville's
then-current hourly rate if it is found that no Problem or programming error
exists.
9.3 Saville warrants that the Software Developments and Future Software
Developments developed under this Agreement will be designed to be used prior
to, during, and after the calendar year 2000 A.D., and without human
intervention will correctly recognize, calculate, process, sequence, store and
transmit Date Data without error or interruption, including leap years, and
including errors or interruptions from functions which may involve Date Data
from more than one century. The term "Date Data" shall mean any data or input
which includes an indication of or reference to date and that is stored
information and internal to functionality. Date calculations involving either a
single century or multiple centuries will neither cause an abnormal ending nor
generate incorrect or unexpected results. When sorting by date, all records will
be sorted in accurate sequence and when the date is used as a key, records will
be read and written in accurate sequence. As used in the previous sentence,
accurate sequence means, by way of example, that records will be read, written,
and sorted in ascending order so that the year 1999 is before the year 2000. The
Software Developments and Future Software Developments will calculate, process,
and display leap year information according to the following algorithm: (i) a
leap year will have twenty-nine (29) days in the month of February; and (ii) a
leap year occurs in all years divisible by 400 and all years evenly divisible by
4 and not evenly divisible by 100. Saville, however, makes no representation or
warranty nor takes any responsibility for errors or omissions caused by third
party systems, devices, interfaces or software, or for errors or omissions
caused by functional or technical requirements specified by Customer.
9.4 Saville warrants that to the best of its knowledge, at the time of delivery,
no portion of the Software Developments or Future Software Developments as
delivered shall contain any software "Virus" as defined herein. For the purposes
of this Agreement, "Virus" shall mean a set of computer instructions which are
self-replicating or self-propagating and are designed to contaminate the
Software Developments or Future Software Developments, consume computer
resources, or modify, destroy, record or transmit data or programming without
the intent or permission of the user. Saville further warrants that prior to the
delivery of any Software Product to Customer, Saville will use reasonable
commercial efforts to detect and screen out any virus through the use of the
current version of one or more commercially available virus detection programs.
Saville warrants that to the best of its knowledge, at the time of delivery, no
portion of the Software Developments or Future Software Developments as
delivered shall contain any "Disabling Device," as defined herein. For the
purposes of this Agreement, "Disabling Device" shall mean any software routines
or hardware components designed by Saville to permit unauthorized access to, or
to disable or erase software, hardware or data, or to
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perform any other such actions which will have the effect of purposefully
materially impeding the normal and expected operation of the Software
Developments or Future Software Developments.
9.5 THE WARRANTIES CONTAINED IN THIS AGREEMENT ARE IN LIEU OF ANY OTHER
WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO,
IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABILITY, FITNESS FOR A PARTICULAR
PURPOSE, TITLE OR NON-INFRINGEMENT, AND THOSE ARISING BY STATUTE OR OTHERWISE IN
LAW OR FROM A COURSE OF DEALING OR USAGE OF TRADE.
10. LIABILITY
10.1 Saville is liable for the Software Developments and the Future Software
Developments performed under this Agreement. HOWEVER, EXCEPT FOR INDEMNIFICATION
PROVIDED UNDER SECTION 11 HEREOF, IN ANY CASE SAVILLE'S ENTIRE LIABILITY UNDER
ANY PROVISION OF THIS AGREEMENT WITH RESPECT TO A SOFTWARE DEVELOPMENT OR A
FUTURE SOFTWARE DEVELOPMENT SHALL BE LIMITED TO THE AGGREGATE AMOUNT OF HOURLY
FEES (EXCLUDING REIMBURSED EXPENSES) PAID TO SAVILLE FOR SUCH SOFTWARE
DEVELOPMENT OR FUTURE SOFTWARE DEVELOPMENT, AS THE CASE MAY BE, IN ACCORDANCE
WITH THIS AGREEMENT.
10.2 In no event shall Saville be liable for indirect damages (even if Saville
have been advised of the possibility of such loss) including, but not limited
to, lost business revenue, lost data, failure to realize expected profits or
savings or other commercial or economic loss of any kind.
11. INDEMNIFICATION
Saville or Customer, as the case may be ("Indemnitor"), will defend and
indemnify the other ("Indemnitee") against any claim or suit against the
Indemnitee based on the alleged violation of a copyright trademark, trade secret
or other proprietary right enforceable within the United States or Canada
through Indemnitee's use in Indemnitee's own internal operations or research and
development program or through Indemnitee's use in the Billing System, of a
portion of a Software Development or Future Software Development, the
responsibility for which was that of the Indemnitor, and will pay all costs,
settlements, or judgments finally awarded, and any reasonable costs or expenses
incurred by Indemnitee prior to any prompt and timely written notice of such
claim as provided below (including, but not limited to reasonable attorneys'
fees, whether required as a result of a third party claim or a claim to enforce
this provision) provided that (i) Indemnitor has the right to control the
defense of the litigation, (ii) Indemnitee takes such actions as Indemnitor may
reasonably request to assist in such defense, at Indemnitor's expense, and (iii)
Indemnitee gives Indemnitor prompt notice of any such claim. Indemnitee may have
its own counsel participate in, but not control, the defense of any such matter,
provided that the cost of such counsel shall be borne exclusively by Indemnitee.
Indemnitor will have no obligation to defend and indemnify Indemnitee hereunder
to the extent that any such claim is based upon modifications to such Software
Development or Future Software Development made by a party
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other than the Indemnitor or such Software Development or Future Software
Development is used in a way or in combination with software for which it was
not designed.
12. GENERAL
12.1 Confidentiality
Section 5 (confidentiality) of the Service Bureau Agreement shall also apply to
this Agreement.
12.2 Headings
The division of this Agreement into Articles and Sections and the insertion of
headings are for convenience of reference only and shall not affect the
construction or interpretation of this Agreement. The terms "this Agreement",
"hereof," "hereunder" and similar expressions in this Agreement refer to this
Agreement and not to any particular Article, Section or other portion and
include any agreement supplemental hereto. Unless something in the subject
matter or context is inconsistent therewith, references herein to Articles and
Sections are to Articles and Sections of this Agreement.
12.3 Extended Meaning
In this Agreement, words importing the singular number only shall include the
plural and vice versa, and words importing persons shall include individuals,
partnerships, associations, trusts, unincorporated organizations and
corporations. The terms provision and provisions in this Agreement refer to
terms, conditions, provisions, covenants, obligations, undertakings, warranties
and representations in this Agreement.
12.4 Notices
All notices shall be in writing and shall be sent by personal delivery, by a
reputable nationwide overnight courier service prepaid, or by facsimile with
confirmed answerback. Notices shall be sent to Customer at the address set forth
above, attention President, with a copy to General Counsel. Notices shall be
sent to Saville at 1 Van de Graaff Drive, Burlington, Massachusetts 01803,
attention President, with a copy to General Counsel. Notices shall be effective
upon delivery in the case of personal delivery, on receipt in the case of
facsimile, and one day after it is sent via overnight courier. No change of
address shall be binding upon the other party hereto until written notice
thereof is received by such party at the address shown above.
12.5 Accounting Terms
All accounting terms not specifically defined herein shall be construed in
accordance with U.S. generally accepted accounting principles.
12.6 Currency
All references to currency herein are deemed to mean lawful money of United
States unless expressed to be in some other currency.
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12.7 Force Majeure
To the extent the performance of this Agreement or any obligations hereunder
(except the making of payments hereunder) is prevented, restricted, or
interfered with by reason of. fire, flood, earthquake, explosion or other
casualty or accident or act of God; strikes or labor disputes; inability to
procure or obtain delivery of parts, supplies, power, Equipment or Software from
suppliers, war or other violence; any law, order proclamation, regulation,
ordinance, demand or requirement of any governmental authority; or any other act
or condition whatsoever beyond the reasonable control of the affected party, the
party so affected, upon giving prompt notice to the other party, shall be
excused from such performance to the extent of such prevention, restriction or
interference; provided, however, that the party so affected shall take all
reasonable steps to avoid or remove such cause of non-performance and shall
resume performance hereunder with dispatch whenever such causes are removed, and
provided further that, in the event such cause is not removed within a period of
two (2) weeks, the other party may terminate this Agreement for cause.
12.8 Severability
If any provision of this Agreement is declared or found to be illegal,
unenforceable or void, then both parties shall be relieved of all obligations
arising under such provision, but only to the extent that such provision is
illegal, unenforceable or void and does not relate to the payments to be made to
Saville. If the remainder of this Agreement shall not be affected by such
declaration or finding and is capable of substantial performance, then each
provision not so affected shall be enforced to the extent permitted by law.
12.9 Assignment
Neither party may, without the other party's prior written consent, which
consent shall not be unreasonably withheld or delayed, assign or transfer this
Agreement, or any of its rights or obligations under this Agreement to any third
person (in this Section, an "Assignee") except to an affiliate wholly owned by,
or that wholly owns, or that is under common control with, such party, or as
part of the sale, merger or other transaction involving all or substantially all
of the assets of the party, provided that the Assignee undertakes to the party
not making the assignment to fully perform and be bound by the provisions of
this Agreement. Saville may delegate to affiliates of Saville and to agents,
suppliers and contractors of Saville any of the obligations herein imposed upon
Saville and Saville may disclose to any such persons any information required by
them to perform the duties so delegated to them, but such delegation shall not
relieve Saville of its performance obligations hereunder.
12.10 Waiver
No modification, addition to or waiver of any rights, obligations or defaults
shall be effective unless in writing and signed by the party against whom the
same is sought to be enforced. One or more waivers of any right, obligation or
default shall not be construed as a waiver of any subsequent right, obligation
or default. No delay or failure of Saville in exercising any right hereunder and
no partial or single exercise thereof shall be deemed of itself to constitute a
waiver of such right or any other rights hereunder.
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12.11 Governing Law
This Agreement shall be governed by and construed in accordance with the laws of
the Commonwealth of Massachusetts, excluding its conflict of laws principles.
12.12 Dispute Resolution
(a) All controversies or claims arising out of or relating to this
Agreement or breach thereof, including any billing dispute (a
"Dispute"), shall be resolved in accordance with the procedures set
forth in this Section.
(b) Initially the Dispute shall be referred to the Customer's Vice
President familiar with the Services pursuant to this Agreement and a
Saville Vice President to resolve tile Dispute.
(c) In the event that one of the individuals specified above is
unavailable, the Dispute shall be referred to that individual's
immediate superior or designee.
(d) If the Dispute cannot be resolved by such individuals within thirty (30)
days, it shall be finally settled by expedited arbitration by one arbitrator
chosen by the American Arbitration Association and in accordance with the
commercial arbitration rules of the American Arbitration Association, and
judgments upon the award rendered by the arbitrator may be entered in any court
having jurisdiction thereover. The arbitrator shall be ethically neutral and
agree to be bound by the American Bar Association's rules of ethics in this
regard. Both parties shall bear equally the cost of the arbitration (exclusive
of legal fees and expenses, all of which each party shall bear separately). The
place of arbitration shall be Albany, New York and the language of arbitration
will be English.
12.13 Independent Contractor
Saville employees shall be deemed not to be at any time employees or servants of
Customer. Saville is and shall remain an independent contractor for all
purposes. Unless otherwise agreed to, Saville does not undertake to perform any
obligation of Customer, whether regulatory or contractual, or to assume any
responsibility for Customer's business or operations.
12.14 Solicitation of Employees
In the event that either party directly or indirectly hires, whether as an
employee, independent contractor, or in any other capacity, any person who was,
within six months prior to the hiring, an employee of the other party or any of
its subsidiaries, such party agrees to pay the other party a finder's fee equal
to 26 times that employee's bi-weekly gross compensation at the time he or she
left the employment of the other party or its subsidiary. This provision shall
apply only to those employees who either worked for the other party or its
subsidiary on the Project in some capacity or worked with software or
applications which were in some fashion generally similar to any offered or
provided to Customer.
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12.15 Further Assurances
Each of the parties hereto shall from time to time execute and deliver all such
further documents and instruments and do all acts and things as the other party
may reasonably require to effectively carry out or better evidence or perfect
the full intent and meaning of this Agreement.
12.16 English Language
The parties have requested that this Agreement and all communications and
documents relating hereto be expressed in the English language.
12.17 No Relationship
Nothing in this Agreement shall be construed to constitute or create a joint
venture, partnership, or formal business organization of any kind and the rights
and obligations of each party shall be only those expressly set forth herein.
Neither party shall have authority to bind the other, and neither party assumes
any liabilities of the other party.
12.18 Entire Agreement
This Agreement constitutes the entire Agreement between the parties hereto with
respect to the subject matter hereof and cancels and supersedes any prior
understandings and agreements between the parties hereto with respect thereto.
There are no provisions, representations, undertakings, agreements, or
collateral agreements between the parties other than as set out herein and the
parties agree that no obligations or duties not set out expressly herein shall
be imposed upon the parties or implied by law. Unless otherwise agreed to in
writing by the parties, Customer's orders for Services shall be governed by the
terms of this Agreement and nothing contained in any purchase order shall in any
way modify, vary, change or add any term or condition hereto.
IN WITNESS WHEREOF, Customer and Saville have executed this Agreement under
seal.
CHOICE ONE COMMUNICATIONS INC. SAVILLE SYSTEMS INC.
By: /s/ Kevin S. Dickens By: /s/ John J. Kiley
Name: Kevin S. Dickens Name: John J. Kiley
Title: Senior Vice President Title: Senior Vice President
Date: September 30, 1998 Date: September 30, 1998
<PAGE>
Exhibit 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ ARTHUR ANDERSEN LLP
Rochester, New York,
January 3, 2000
<PAGE>
Exhibit 23.3
CONSENT OF ERNST & YOUNG LLP
We consent to the reference to our firm under the caption "Experts" and to the
use of our reports dated November 10, 1999, with respect to the financial
statements of Atlantic Connections, Inc. and Atlantic Connections, Ltd.,
respectively, and our report dated June 4, 1999 (except for Note 9, as to which
the date is November 3, 1999) with respect to the consolidated financial
statements of Atlantic Connections, LLC included in the Registration Statement
(Form S-1 No. 333-91321) and related Prospectus of Choice One Communications,
Inc. for the registration of shares of its common stock.
/s/ ERNST & YOUNG LLP
Boston, Massachusetts
January 3, 2000
<PAGE>
EXHIBIT 23.4
I N T E R N A T I O N A L D A T A C O R P O R A T I O M
---------------------------------------------------------
Morgan Stanley
11/17/99
To whom it may concern:
Per our discussion, you have approval to use the following statistics as stated
below:
1. According to International Data Corporation, or IDC, the overall market of
regulated, switched and unswitched data and voice traffic is estimated to have
generated a total of $212.8 billion in revenues in 1998 and is expected to grow
to $252.2 billion by 2002 (Report #18004)
2. The number of switched network access lines is expected to grow from 187.5
million lines in 1998 to 232.6 million by 2002 and CLEC market 5.6% by 2002
(Report #18004, #18020)
3. According to IDC, total DSL line revenue is expected to increase in the U.S.
from $14.5 million in 1998 to $5.7 billion in 2003, for a 229% compounded annual
growth rate. By 2003, IDC estimates that there will be 12.6 million DSL lines,
up from approximately 100,000 DSL lines in 1998 (Report #20328)
4. The number of Internet users worldwide is estimated to have reached
approximately 86.6 million in 1997 and is forecasted to grow to approximately
398.6 million by 2002 (Report #19262)
5. It is also estimated that the value of goods and services sold worldwide
through the Internet will increase from $15.4 billion in 1997 to over $733.6
billion by 2002 (Report #19262)
Sincerely,
/s/ Alexa McCloughan
Alexa McCloughan
Senior Vice President
5 Speen Street . Framingham, MA 01701
(508) 872-8200 . Fax (508) 935-4015
IDC LOGO
http://www.idc.com
